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





DEFINED BENEFIT PENSION PLAN FUNDING LEVELS AND INVESTMENT ADVICE RULES

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

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 1, 2009

                               __________

                           Serial No. 111-31

                               __________

         Printed for the use of the Committee on Ways and Means


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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, NEW YORK, Chairman

FORTNEY PETE STARK, California       DAVE CAMP, Michigan
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            SAM JOHNSON, Texas
JOHN LEWIS, Georgia                  KEVIN BRADY, Texas
RICHARD E. NEAL, Massachusetts       PAUL RYAN, Wisconsin
JOHN S. TANNER, Tennessee            ERIC CANTOR, Virginia
XAVIER BECERRA, California           JOHN LINDER, Georgia
LLOYD DOGGETT, Texas                 DEVIN NUNES, California
EARL POMEROY, North Dakota           PATRICK J. TIBERI, Ohio
MIKE THOMPSON, California            GINNY BROWN-WAITE, Florida
JOHN B. LARSON, Connecticut          GEOFF DAVIS, Kentucky
EARL BLUMENAUER, Oregon              DAVID G. REICHERT, Washington
RON KIND, Wisconsin                  CHARLES W. BOUSTANY, JR., 
BILL PASCRELL, JR., New Jersey       Louisiana
SHELLEY BERKLEY, Nevada              DEAN HELLER, Nevada
JOSEPH CROWLEY, New York             PETER J. ROSKAM, Illinois
CHRIS VAN HOLLEN, Maryland
KENDRICK B. MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
DANNY K. DAVIS, Illinois
BOB ETHERIDGE, North Carolina
LINDA T. SANCHEZ, California
BRIAN HIGGINS, New York
JOHN A. YARMUTH, Kentucky

             Janice Mays, Chief Counsel and Staff Director

                   Jon Traub, Minority Staff Director

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.










                            C O N T E N T S

                               __________
                                                                   Page

    Advisory of September 24, 2010, announcing the hearing.......     2

                               WITNESSES

Craig P. Rosenthal, Principal, Mercer............................     6
Norman Stein, Senior Legislative Counsel, Pension Rights Center..    10
Bill Nuti, Chairman and Chief Executive Officer, NCR, on behalf 
  of the American Benefits Council...............................    18
Judith F. Mazo, Senior Vice President, Director of Research, The 
  Segal Company, on behalf of the National Coordinating Committee 
  for Multiemployer Plans and the Multiemployer Pension Plan 
  Consortium.....................................................    26
Damon Silvers, Associate General Counsel, AFL-CIO................    34
Mark Warshawsky, Director of Retirement Research, Watson Wyatt 
  Worldwide, Arlington, Virginia.................................    38

                                 ______

LeRoy Gilbertson, Member, National Policy Council, AARP..........    62
Mark A. Davis, Vice President, CAPTRUST Financial Advisors, on 
  behalf of the National Association of Independent Retirement 
  Plan Advisors, Westlake Village, California....................    73
Robert G. Chambers, Partner, McGuireWoods, on behalf of the 
  American Benefits Council, the Profit Sharing/401k Council of 
  America, and the Society for Human Resource Management 
  Charlotte, North Carolina......................................    79
Christopher Jones, Executive Vice President of Investment 
  Management and Chief Investment Officer, Financial Engines, 
  Palo Alto, California..........................................    93
Edmund F. Murphy, III, Managing Director, Putnam Investments, 
  LLC, Boston, Massachusetts.....................................   105
Jim McCarthy, Managing Director, Morgan Stanley, on behalf of the 
  Securities Industry and Financial Markets Association..........   108

                       SUBMISSIONS FOR THE RECORD

American Council of Life Insurers, Statement.....................   132
Defined Benefit Funding Relief Working Group, Letter.............   134
Department of Labor's Advisory Council on Employee Welfare and 
  Pension Benefit Plans, Statement...............................   138
Nicholas Paleveda, MBA J.D. LL.M, Statement......................   141
Girl Scouts of the USA, Statement................................   145
Illinois Education Association, Statement........................   147
Independent Sector, Statement....................................   148
Investment Company Institute, Statement..........................   149
Maryland State Education Association, Letter.....................   155
Matthew D. Hutcheson, Statement..................................   156
National Association of Insurance and Financial Advisors, 
  Statement......................................................   159
National Council of Farmer Cooperatives, Statement...............   162
New Jersey Education Association, Letter.........................   163
Oklahoma Education Association, Letter...........................   163
ERISA Industry Committee, Statement..............................   164
Michigan Education Association, Statement........................   167
National Education Association, Statement........................   168
North Dakota Education Association, Statement....................   170
Pennsylvania State Education Association, Statement..............   171
Investment Advice and Defined Benefit Plan Funding, Statement....   173
United Jewish Appeal-Federation of New York, letter..............   175
United Jewish Communities of Metro West New Jersey, letter.......   176
YRC Worldwide, Inc., Statement...................................   178

 
                       HEARING ON DEFINED BENEFIT
        PENSION PLAN FUNDING LEVELS AND INVESTMENT ADVICE RULES

                              ----------                              


                       THURSDAY, OCTOBER 1, 2009

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:12 a.m., in Room 
1100, Longworth The Capitol, the Honorable Charles B. Rangel 
[Chairman of the Committee] presiding.
    [The advisory of the hearing follows:]

HEARING ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                  Chairman Rangel Announces Hearing on

Defined Benefit Pension Plan Funding Levels and Investment Advice Rules

September 24, 2009

By (202) 225-1721

    House Ways and Means Committee Chairman Charles B. Rangel today 
announced that the Committee on Ways and Means will hold a hearing on 
the funding levels of defined benefit pension plans and the rules that 
apply to investment advice that is provided to participants in defined 
contribution plans. This hearing will take place on Thursday, October 
1, 2009, in 1100 Longworth House Office Building, beginning at 10:00 
AM.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.
      

BACKGROUND:

      
    Congress enacted the Pension Protection Act, Public Law 109-280 
(``PPA''), in 2006. Among the provisions of the Act were significant 
revisions to the minimum funding rules for defined benefit pension 
plans. The minimum funding rules specify the minimum amount that a 
sponsoring employer must contribute each year to the trust that funds 
the pension plan. Benefits promised under a defined benefit pension 
plan are funded through contributions and earnings on those 
contributions. For many plans, the changes made by PPA first became 
effective in 2008, just prior to the world-wide economic meltdown. As a 
result, employers who sponsor defined benefit pension plans may find 
themselves simultaneously struggling to navigate an economy during a 
severe downturn with decreased cash flow and less access to credit 
while having to make up for significant investment losses incurred in 
the pension trusts that fund their workers' pension benefits. While 
some relief modifications were made to the minimum funding rules in the 
Worker, Retiree, and Employer Recovery Act of 2008, Public Law 110-458, 
many employers believe that additional relief is necessary.
      
    For many Americans, a defined contribution retirement plan (such as 
a 401(k) plan) may be the only retirement savings plan that their 
employer offers. The benefits provided under such a plan are equal to 
the participant's account balance, which is increased by contributions 
made on behalf of the employee and earnings on those contributions. 
Under many plans, employees direct the investment of their account 
balance. This prevalence of employee-directed investments in defined 
contribution plans has underscored the need for investment advice for 
plan participants. PPA provided rules under which entities that were 
previously prohibited from providing investment advice on account of 
the prohibited transaction rules in the Internal Revenue Code and the 
Employee Retirement Income Security Act of 1974, Public Law 93-406 
(``ERISA''), could provide advice, subject to a number of conditions. 
The Bush Administration issued final regulations implementing the PPA 
investment advice provisions and provided a new class exemption related 
to investment advice from the prohibited transaction rules of the 
Internal Revenue Code and ERISA. The Obama Administration has delayed 
the effective date of both the final regulations and the class 
exemption to allow for evaluation of the legal and policy questions 
reflected in the rules.
      
    In announcing the hearing, Chairman Rangel said, ``Defined benefit 
funding and the regulation of investment advice are important issues 
for American workers and employers. Defined benefit pension plans have 
been the bedrock of retirement security for millions of Americans and 
we must ensure that workers continue to have access to stable pension 
benefits. The pension funding rules are a crucial component of that 
goal. The millions of other American workers in defined contribution 
plans who are responsible for investing their retirement savings 
accounts need advice when making that decision and such advice must be 
unbiased.''
      

FOCUS OF THE HEARING:

      
    This hearing will focus on two issues currently facing employer 
sponsored retirement plans. First, with respect to defined benefit 
pension plans, the hearing will focus on the impact of the financial 
crisis on the funding levels of such plans and whether additional 
funding relief is necessary. Second, with respect to defined 
contribution plans, the hearing will focus on plan participant access 
to investment advice and whether such advice is unbiased.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://democrats.waysandmeans.house.gov, 
select ``Committee Hearings''. Select the hearing for which you would 
like to submit, and click on the link entitled, ``Click here to provide 
a submission for the record.'' Once you have followed the online 
instructions, complete all informational forms and click ``submit'' on 
the final page. ATTACH your submission as a Word or WordPerfect 
document, in compliance with the formatting requirements listed below, 
by close of business Thursday, October 15, 2009. Finally, please note 
that due to the change in House mail policy, the U.S. Capitol Police 
will refuse sealed-package deliveries to all House Office Buildings. 
For questions, or if you encounter technical problems, please call 
(202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission listing the name, 
company, address, telephone, and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://democrats.waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
                                 

    Chairman RANGEL. The hearing will come to order. It has 
been too long since our committee has gotten together, but we 
will try to make up for it.
    The purpose of the hearing today is to hear private sector 
recommendations on two critical topics confronting our Nation's 
retirement plan.
    The administration is not here today; they are developing 
proposals on these two critical topics, and we will hear from 
them in the future. Meanwhile, we will hear from the private 
sector on these critical issues.
    The first topic is the impact of the financial crisis on 
the funding rules that apply to private sector defined benefit 
pension plans.
    Today, over 30,000 private sector pension plans provide 
benefits to almost 40 million Americans. The Tax Code contains 
rules that require employers to periodically contribute money 
to pension funds to make sure that promised funds and benefits 
are paid.
    The impact of the global financial crisis on the level of 
pension funding has been very severe. By some accounts, private 
sector U.S. pension plan assets fell by $734 million in 2008, 
or about 27 percent. Employers are faced with the struggle of 
making up significant pension plan losses while operating their 
businesses in a challenging economy, with reduced cash flow and 
with reduced access to credit. Unions and employees are worried 
about the security of their retirement benefits and cuts to 
benefits.
    Today we will hear from private sector stakeholders on the 
impact of the global financial crisis on pension funding. These 
witnesses will present data on the impact of the financial 
crisis on pension funding, and these witnesses will also 
provide recommendations on how to provide relief to employers 
from the perspective of individuals who participate in plans, 
unions who negotiate retirement pensions for their workers, and 
sponsoring employers.
    The second topic of today's hearings involve defined 
contribution plans, such as 401(k) plans, where participants 
get to choose how to invest their account balances. Today, 
approximately 460,000 plans permit investment direction by 
participants. These plans cover an estimated 70 million 
participants and hold an estimated $2 trillion in assets.
    Most participants are not experts on financial investment 
and could use help in selecting their retirement investments. 
However, some industry surveys indicate only 50 percent of the 
retirement plans provide investment advice and assistance to 
participants.
    The retirement plan rules should encourage employers to 
offer investment advice to plan participants. However, the 
rules must also ensure that the advice is not biased by the 
financial interests of those who provide the advice.
    Today's hearing will focus on whether the present law rules 
provide for unbiased advice. We will hear testimony from the 
perspective of plan participants, employers, and plan service 
providers that want to provide investment advice.
    Chairman RANGEL. I look forward to hearing from our 
witnesses and yield to my friend, Ranking Member Dave Camp, for 
any remarks he may wish to make.
    Mr. CAMP.
    Mr. CAMP. Well, thank you, Mr. Chairman. Thank you for 
yielding, and thank you for holding this important hearing.
    As many know, we enacted many improvements to our Nation's 
pension laws in 2006. The Pension Protection Act was a 
bipartisan piece of legislation that garnered the support of 
many current and former Democrats on this committee, including 
that of now White House Chief of Staff Rahm Emanuel. I think it 
is important that we continue that bipartisanship as we move 
forward on an issue that is so critical to the retirement 
security of working Americans.
    Earlier this year, I and several of my Republican 
colleagues on this committee introduced the Savings Recovery 
Act to help Americans rebuild their retirement, college and 
savings accounts. Among the provisions we offered was an effort 
to stabilize worker pensions and help employers invest in the 
future by temporarily providing a softer glide path for 
recognizing losses in defined benefit plans and provide 2 
additional years to resolve pension funding shortfalls.
    The issues surrounding the funding of future retirement 
benefits are complex for employers, for Congress, and certainly 
for workers. Given the severity of the economic downturn, 
Congress should proceed carefully in order to find the right 
balance between the concerns of workers, retirees, employers, 
and taxpayers.
    While giving companies additional breathing room to meet 
their pension obligations may make sense on the surface, we 
must also recognize that too much latitude could erode the 
likelihood of workers receiving the full benefits they were 
promised and could further expose taxpayers to the cost of 
bailing out the PBGC.
    On the other hand, a failure to provide temporary relief to 
these plans from the chokehold the global economic downturn and 
credit crisis have placed on American employers could result in 
more bankruptcies and the dumping of pension plans on the 
Pension Benefit Guaranty Corporation, which is already on a 
precarious financial footing and could easily be pushed over 
the edge.
    Clearly, we have our work cut out for us. I am sure the 
excellent witnesses today will help us better understand the 
narrow tightrope we need to walk.
    Before I yield back, I want to take just a moment to 
discuss the issue of investment advice. Access to high-quality 
professional investment advice is crucial, especially given the 
recent upheaval in the stock market. And while proper 
safeguards should be maintained to protect against potential 
conflicts involving the compensation of participants' financial 
advisors, Congress should not impose unwarranted restrictions 
that limit the availability of that investment advice.
    According to some estimates, the proposed restrictions on 
investment advice contained in the Education and Labor 
Committee's bill, H.R. 2989, could cause as many as 20 million 
401(k) participants to lose access to investment advice these 
working families rely on to help them save for the future in 
this very unsettled economy.
    So Americans don't need less help getting through these 
turbulent times, they need more help; and it is our job to 
ensure Americans have access to the quality financial advice 
that they need.
    With that, I yield back the balance of my time.
    Chairman RANGEL. Thank you for your statement.
    Chairman RANGEL. At this time, I ask my friend, Richard 
Neal, who has had hearings and has covered this subject matter 
for several months, to start the hearing off by introducing our 
first panel.
    Mr. NEAL. [Presiding.] Thank you very much, Mr. Chairman. 
And thank you for the timeliness of this hearing as well.
    I would like to acknowledge Mr. Craig Rosenthal, Mr. Norman 
Stein, Mr. Bill Nuti, Judith Mazo, Damon Silvers and Mark 
Warshawsky. These individuals will all, I hope, offer a 
perspective to us that will help us in the deliberations for 
the months and years to come.
    You have heard me say many times that given what happened 
here with the Social Security debate a couple of years ago, we 
need to be mindful of what the American people see down the 
road in terms of retirement security.
    So with that, I would like to recognize Mr. Craig Rosenthal 
to be the first witness.

STATEMENT OF CRAIG P. ROSENTHAL, PRINCIPAL, MERCER CORPORATION, 
                       NEW YORK, NEW YORK

    Mr. ROSENTHAL. Mr. Chairman and Members of the Committee, 
thank you for the opportunity to discuss the findings of 
Mercer's recently completed report on the funded status of 
defined benefit pension plans.
    I am a principal at Mercer, who has advised clients on 
funding issues for more than 20 years. Our report is based on 
survey data from 874 of our clients' calendar-year plans, and 
we hope that it will be a useful resource to the committee as 
it considers pension plan funding levels.
    We conducted this survey with an eye towards addressing two 
important questions. First, to what extent are required 
contributions for 2009 higher than they were for 2008? And 
second, to what extent are credit balances available to help 
meet those 2009 required contributions?
    We have drawn four basic conclusions from the survey 
analysis.
    First, many calendar-year pension plans are in good 
position to meet their 2009 required contributions after taking 
into account the funding relief already provided by Congress 
and the IRS, as well as available credit balances.
    Second, some calendar-year plans are still facing 
significantly higher required contributions.
    Third, the IRS-provided interest rate relief will not help 
most noncalendar-year plans for 2009. So many of these plans 
will be facing higher required contributions than calendar-year 
plans.
    Finally, looking forward to 2010, sponsors of both 
calendar-year and noncalendar-year plans are likely to face 
significant increases in their required contributions.
    Regarding the funded status of plans, there were major 
declines in the latter half of 2008 due to both investment 
market performance and falling interest rates. Looking back to 
2008, only about 3 percent of surveyed plans had funded ratios 
below 80 percent, which, as you know, is the funding level 
necessary to avoid benefit restrictions under the Pension 
Protection Act. Without any funding relief for 2009, that 3 
percent of plans funded below 80 percent would have instead 
stood at 39 percent. However, factoring in both the IRS-
provided relief and the relief provided by the committee and 
Congress in the Worker, Retiree, and Employer Recovery Act of 
2008, our survey indicates that only 7 percent, instead of 39 
percent, of plans would have funded ratios below 80 percent.
    Despite these improved 2009 funding ratios, however, 
sponsors of many calendar-year plans are still facing 
significantly higher required contributions. This is the case 
even if sponsors take advantage of both relief provisions. For 
example, our survey shows that approximately 21 percent of 
calendar-year plans still face required contributions that are 
substantially--and in many cases more than 50 percent--higher 
than the corresponding 2008 amounts. So while the relief has 
been very helpful for many plans, some calendar-year plans 
still face both significant and unanticipated contribution 
increases for 2009. In addition, most plans that operate on a 
noncalendar-year basis will not benefit as much from the relief 
in 2009.
    While we excluded these plans from our survey because full 
data were not available at the time we conducted the survey, 
most of these plans will not be able to use the October 2008 
yield curve, as October 2008 is beyond the 4-month lookback 
period for most noncalendar-year plans.
    Interest rates during 2009 have been well below their 
October levels, and until just recently, asset values have been 
below their year-end 2008 levels. This suggests that many of 
these noncalendar-year plans could face both benefit 
restrictions and sharply higher required contributions for 
2009.
    Looking at credit balances. As you know, contributions in 
excess of the minimum required amounts can give rise to so-
called credit balances which can be used to satisfy required 
contributions in later years. These available credit balances 
have declined significantly since year-end 2007.
    The plans in our survey had approximately $52 billion in 
credit balances at year-end 2007. The amount available for use 
in 2009 will be reduced to slightly over $20 billion as a 
result of the treatment of credit balances under PPA. It is 
also important to note that roughly 25 percent of surveyed 
plans have no credit balances remaining for use towards their 
2009 required contribution amounts.
    Looking ahead to 2010, we expect that many plan sponsors 
will face substantial increases in their required 
contributions. While the investment returns this year for most 
plans should be positive, they haven't come close to reversing 
the dramatic investment losses suffered by most plans in 2008. 
In addition, interest rates are much lower than they were in 
October 2008, which will drive up plan liabilities. Plan 
sponsors are, therefore, likely to face major increases in 
required contribution amounts for 2010, and, at the same time, 
we expect that plans will have little or no credit balance 
amounts available to help pay for these contributions.
    Thank you again for the opportunity to discuss these 
findings with the committee. I will be pleased to answer your 
questions.
    Mr. NEAL. Thank you very much, Mr. Rosenthal.
    [The prepared statement of Mr. Rosenthal follows:]
      Prepared Statement of Craig P. Rosenthal, Principal, Mercer
    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to discuss with you one of the most important domestic 
policy issues confronting American workers and employers--the funded 
status of employer-sponsored defined benefit pension plans.
    My name is Craig P. Rosenthal. I am a Principal in Mercer's 
retirement, risk and finance business. I am a credentialed actuary who 
has been practicing in the pension field for more than 20 years, 
advising a number of Fortune 500 companies on a wide variety of funding 
issues and serving as an internal technical resource for other pension 
consultants.
    Mercer is a leading global provider of consulting, outsourcing and 
investment services. Mercer works with clients to solve the most 
complex benefit and human capital issues. We design and help to manage 
health, retirement and other benefit programs and we are a leader in 
benefit outsourcing. Mercer investment services include investment 
consulting and multi-manager investment management. Mercer's 18,000 
employees are based in more than 40 countries. The company is a wholly 
owned subsidiary of Marsh & McLennan Companies, Inc. which lists its 
stock (ticker symbol: MMC) on the New York, Chicago and London stock 
exchanges. For more information, visit www.mercer.com.
    I am pleased to share with the Committee the findings of Mercer's 
recently completed report (``Estimated 2009 Required Contributions and 
Credit Balances'') on the funded status of employer-sponsored pension 
plans, which we trust and hope will be a helpful resource to the 
Committee as it considers pension plan funding levels and whether 
additional funding relief is necessary. The report is based on an 
internal Mercer survey that yielded data from 874 of our clients' 
calendar-year plans. I ask that the report be inserted in to the 
hearing record as a part of my statement.
    We conducted this survey with an eye to addressing two important 
questions: first, to what extent are required contributions for 2009 
higher than the corresponding required contribution amounts for 2008, 
and second, to what extent are credit balances available to help meet 
those 2009 required contributions.
    Based on the survey data we collected and our analysis, we have 
reached the following conclusions:

          After taking into account the recent economic 
        experience in investment returns, movements in interest rates, 
        and the important funding relief that Congress and the Internal 
        Revenue Service (IRS) have already provided, many calendar-year 
        defined benefit plans are in a good position (taking into 
        account their credit balances) to meet their required 
        contributions for 2009.
          Nevertheless, some calendar-year plans face 
        significantly higher required contributions for 2009 even after 
        taking into account their credit balances.
          Because the interest rate relief will not help non-
        calendar plans for 2009, many of these plans will face 
        significantly higher required contributions for 2009 even after 
        taking into account their credit balances.
          Based on the data and analysis we've already 
        undertaken, many calendar-year and non-calendar-year defined 
        benefit plans will face significantly higher required 
        contributions for 2010 even after taking into account whatever 
        credit balances remain for next year.

    Funded status. With regard to the surveyed plans' aggregate funded 
status, we found significant declines in the latter half of 2008 due to 
lower investment returns and falling interest rates. The surveyed plans 
had an aggregate funded ratio (the ratio of total assets to the total 
funding target of surveyed plans) of about 110% as of January 1, 2008 
and relatively few had funded ratios under 80%. Our estimates suggest 
that as of January 1, 2009, the aggregate funded ratio will have been 
93% based on plan sponsor elections in place when we conducted the 
survey in April of 2009. Further, about 39% of plans will have 2009 
adjusted funding target attainment percentages--or AFTAPs--of less than 
80%.
    The funding relief provided to date by Congress and the IRS is 
substantial for most calendar-year plans.
    Many plan sponsors very much appreciate the relief provided by the 
Committee and Congress in the Worker, Retiree and Employer Recovery Act 
of 2008, which made a number of helpful corrections to Pension 
Protection Act (PPA), including the ability to determine the value of 
pension assets by using asset smoothing that takes into account 
anticipated investment returns. If all sponsors of surveyed calendar-
year plans elect to adopt (for 2009) asset smoothing with anticipated 
returns, but maintain their 2008 interest rate elections, the aggregate 
funded ratio for the surveyed plans would be 95%. Still, more than 33% 
of the plans would have 2009 AFTAPs under 80%.
    The IRS provided a second piece of relief on March 31st of this 
year when it clarified that plan sponsors may elect to determine their 
2009 PPA funding targets using the full PPA yield curve with a look-
back period of up to four months. This latter relief is especially 
helpful for calendar-year plans for 2009, as bond yields peaked in 
October 2008, and high interest rates translate into lower pension 
liabilities and, in turn, lower required contribution amounts by plan 
sponsors.
    Assuming all of these plan sponsors adopt both asset smoothing with 
anticipated returns and the yield curve look-back for 2009, the 
aggregate funding ratio for surveyed calendar-year plans for 2009 would 
further increase from 95% to 111%, and only 7% of plans (instead of 33% 
of plans) would have AFTAPs below 80%.
    Required contributions. In spite of these improved 2009 funding 
ratios, sponsors of some calendar-year plans are still facing 
significantly higher contributions in 2009. This is the case even if 
the sponsors take advantage of both of the relief provisions noted 
above.
    For example, approximately 21% of surveyed calendar-year plans 
still face 2009 required contributions that are substantially (in many 
cases more than 50%) higher than the corresponding 2008 contributions.
    The main drivers of higher 2009 required contributions despite the 
available relief are:

          the investment losses during 2008 were too 
        significant to be offset by the 10% margin in assets (due to 
        permissible asset smoothing) and the approximately 20% drop in 
        liabilities from using the full yield curve for October 2008, 
        and
          the funding rules were changed to require the 
        inclusion of expenses in the 2009 required contribution 
        calculation.

    So, while the aggregate numbers for calendar-year plans indicate 
that the relief has been very helpful for most of these plans, certain 
individual calendar-year plans still face significant unanticipated 
contribution increases for 2009.
    Most plans that operate on other than a calendar year basis will 
not benefit as much from the relief in 2009. We excluded these plans 
from our survey because full data were not available when we conducted 
the survey. These plans won't be able to use the October 2008 yield 
curve (October 2008 is beyond the four-month look-back period for most 
non-calendar-year plans) and, since October, interest rates have 
remained well below their October levels. Also, asset values have been 
below their year-end 2008 values for a good portion of 2009, meaning 
that many of these non-calendar-year plans could face benefit 
restrictions and sharply higher required contributions for 2009.
    Credit balances. Whether plan sponsors have enough credit balances 
to substantially offset their higher required contributions for 2009 
has of course been a key topic in the debate. As you know, 
contributions in excess of the minimum required amounts in earlier 
years can give rise to credit balances which can be used to satisfy the 
required contribution amounts in later years.
    The aggregate year-end 2007 credit balance amount for the surveyed 
calendar-year plans was $52 billion. This amount was reduced to 
approximately $42 billion due to mandatory and voluntary waivers as of 
January 1, 2008. In addition, an additional $3 billion was utilized to 
satisfy 2008 required contribution amounts, leaving $39 billion to be 
carried forward to 2009.
    PPA changed the way credit balances are carried from one year to 
the next by applying the actual asset returns. As such, we estimate 
that approximately one-third of the remaining 2008 credit balance will 
be lost to 2008 asset returns, leaving only $26 billion to be available 
at January 1, 2009. After factoring in mandatory and anticipated 
voluntary waivers as of January 1, 2009, we anticipate that depending 
on the plan sponsor elections, only $20-23 billion would be available 
to use towards 2009 funding requirements. It is important to note that 
even if all plans make use of the available relief, approximately 25% 
of surveyed plans will have no credit balances remaining for use 
towards their 2009 required contribution amounts. The chart below shows 
how the aggregate credit balance for surveyed plans is developed.
    Current relief will have little effect in 2010. Looking ahead to 
2010--barring an enormous market recovery or another spike in interest 
rates comparable to those in October 2008--we expect that many defined 
benefit plans will face significantly increased required contributions. 
While investment returns through August 31, 2009 for most plans should 
be positive, they are far from being sufficient enough to reverse the 
dramatic investment losses suffered by most plans during 2008. In 
addition, current interest rates are substantially lower than they were 
in October 2008, which means that regardless of the interest rate 
elections made for 2010, it is anticipated that most plans will be 
faced with substantially lower interest rates.
    As such, plan sponsors will likely face significantly higher 
liabilities and required contribution amounts for 2010. At the same 
time, we expect that plans will have little or no credit balance 
available for use in satisfying these higher 2010 contributions due to 
mandatory and voluntary waivers that will be made.

                                 

    Chairman RANGEL. The Chair would recognize Mr. Norman 
Stein, Senior Legislative Counsel at the Pension Rights Center. 
You are welcome to begin your testimony.

STATEMENT OF NORMAN STEIN, SENIOR LEGISLATIVE COUNSEL, PENSION 
                         RIGHTS CENTER

    Mr. STEIN. Good morning, Mr. Chairman, and Members of the 
Committee. My name is Norman Stein, and I teach law at the 
University of Alabama. Thank you for inviting me here to speak 
with you today on the important subject of defined benefit plan 
funding.
    I am testifying today on behalf of the Pension Rights 
Center, a nonprofit consumer organization that has been working 
since 1976 to promote and protect the retirement security of 
American workers and their families.
    There is currently an ongoing discussion in the pension 
community, and today here on Capitol Hill, on whether to grant 
emergency defined benefit funding relief to some companies, 
which companies should qualify for any such relief, and what 
conditions should be imposed on such relief. My testimony today 
presents our views on these issues.
    My written testimony also touches on other topics, 
including the PPA provisions that result in automatic cessation 
of new benefit accruals in certain defined benefit plans, the 
inadequate PPGC guarantees to participants in multiemployer 
plans, and the need to prohibit so-called Q-SERP arrangements. 
Although I will not be further addressing these questions in my 
oral statement, they are important issues and deserve 
consideration from your committee.
    To summarize our position at the outset, we support funding 
relief for companies that maintain defined benefit plans where 
workers continue to earn new benefits. While we are sympathetic 
to the financial stresses that other companies are currently 
facing, we do not believe that blanket relief for every company 
with a frozen defined benefit plan is appropriate.
    As I just noted, we support funding relief for companies 
that sponsor defined benefit plans where employees continue to 
earn benefits. We do so for two related reasons. First, as the 
economic recession has reminded us, defined benefit plans are 
the best retirement vehicles for assuring a secure source of 
income in retirement. Such plans provide retirees with a 
guaranteed stream of income for life and are not subject to the 
kind of catastrophic failures that have decimated the 
retirement prospects of so many Americans who rely primarily on 
their section 401(k) plans. It is appropriate and necessary for 
Congress to take action to ensure the continued existence of 
these plans. Without funding relief, some companies may freeze 
or terminate their plans.
    Second, the companies who stood by their defined benefit 
programs, while others abandoned them, deserve Congress to 
stand by them now. The type of relief we favor is an extended 
amortization period for losses attributable to the recession. 
The risk of employer default, though, falls on employees and 
the PPGC. Thus, we support limiting funding relief to companies 
that, first, agree that participants will continue to receive 
benefit accruals during the extended amortization period; 
second, agree to amend their plan to prohibit reversion of 
excess assets if the plan becomes overfunded in the future; and 
third, secure the consent of any unions whose members 
participate in the plan.
    In addition, funding relief should be conditioned on the 
company not contributing new assets to quasi-funded executive 
deferred compensation plans, such as rabbi trusts. 
Contributions to these plans, no less than contributions to 
qualified plans, result in fewer operating assets to the 
company. Moreover, payments from executive compensation plans 
strip the company of assets that could help fund the company's 
qualified plan. We thus would recommend conditioning funding 
relief on companies amending executive deferred compensation 
plans so that they cannot receive new funding, or quasi-
deferred compensation plans, so they cannot receive new 
funding, and amending all executive deferred compensation plans 
so that they delay payment of benefits until the company has 
fully funded its qualified plan.
    Funding relief is not free. It is essentially an unsecured 
debt forced upon participants and the PBGC. If the plan is not 
eventually brought up to fully funded status, it is the 
participants and PBGC who will bear the financial burden of 
funding relief. Thus, we do not believe that emergency funding 
relief should be made available to plans in which employees are 
no longer earning new benefits.
    We know that some have argued that extending relief to such 
plans will save jobs, but there is nothing in any of the 
proposals we have seen that would ensure that the assets freed 
up by new funding relief would be used for preserving jobs. The 
assets could be used for any purpose, including moving jobs 
overseas, automation, or even executive compensation.
    Also, the argument that funding relief is necessary to 
preserve jobs ignores the fact that pension plans invest 
company contributions in the capital markets, creating long-
term investment capital that ultimately is the most effective 
way to expand the economy, preserve jobs, and create new jobs.
    We also note that there are provisions in law that allow 
employers to request a funding waiver by showing temporary 
substantial business hardship, and a failure to grant a waiver 
would be adverse to the interest of the plan participants. We 
would support providing the IRS with the resources to 
streamline the waiver process perhaps by setting up a temporary 
funding review board and requiring that the IRS rule on waiver 
requests within 60 days.
    Thank you.
    Mr. NEAL. Thank you, Mr. Stein.
    [The prepared statement of Mr. Stein follows:]


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    Mr. NEAL. We recognize Mr. Bill Nuti, who is the Chairman 
and Chief Executive Officer of NCR, on behalf of the American 
Benefits Council.
    Mr. Nuti.

STATEMENT OF WILLIAM NUTI, CHAIRMAN AND CHIEF EXECUTIVE OFFICER 
OF NCR CORPORATION, ON BEHALF OF NCR AND THE AMERICAN BENEFITS 
                            COUNCIL

    Mr. NUTI. Good morning. My name is Bill Nuti. I am the 
Chairman and CEO of NCR Corporation. Chairman Rangel and 
Ranking Member Camp, thank you for allowing me to testify today 
about the urgent need for pension relief.
    I am here today on behalf of the American Benefits Council. 
The Council has over 300 member companies, representing a 
variety of sectors, including technology, retailers, 
manufacturers, energy and media, and represents plans that 
cover or service more than 100 million Americans.
    NCR is a 125-year old technology company with 22,000 
employees worldwide, operating in more than 100 countries. We 
are the worldwide leader in self-service solutions. In the last 
few days, you have probably withdrawn cash from one of our 
ATMs, checked in for a flight at one of our kiosks, checked out 
of a supermarket at one of our self-service checkout systems, 
scheduled a medical appointment at one of our medical kiosks, 
or rented a DVD from one of our entertainment kiosks.
    I want to state something at the outset; we are fully 
committed to funding our pension plan and meeting our pension 
obligations. The American Benefits Council and NCR are 
categorically not requesting a bailout; we are requesting a 
timeout. We need more time to deal with an unprecedented market 
downturn that nobody foresaw when the Pension Protection Act 
was approved, a downturn that has affected pension plan 
sponsors in every industry.
    Congressman Pomeroy has put forth a legislative proposal 
that would allow more time to amortize losses from the 
financial crisis. This is a reasonable solution to a difficult 
and rapidly approaching problem, and we strongly support it. It 
would give reasonable and responsible companies the tools that 
they need to support their pension funds, without sacrificing 
current operations.
    I want to make two important points about this legislation. 
First, this isn't just about pensions, it is about jobs and 
investing in America. Second, we need the legislation now.
    Why is this about jobs? Many companies are going to have to 
make catch-up contributions to their pension funds, in excess 
of $100 million a year, for several years. That is a major 
drain on any company's resources. In the current economy where 
growth is more difficult to achieve, companies don't have a lot 
of financial flexibility. Some companies are going to have to 
lay off employees or cancel investments that would create jobs 
and help our economy recover.
    These decisions have a snowball effect. If a retailer has 
to close stores, it orders fewer goods from suppliers, it 
orders less equipment from companies like mine, and there are 
fewer shipping orders for trucking companies and railroads. If 
we want the economy to grow, we need a solution that allows the 
employers to bring their plans back to full funding, without 
sacrificing current investments. The Pomeroy bill strikes the 
right balance.
    Why is it urgent? The recent IRS regulations have helped a 
great deal this year; however, this is still very time-
sensitive. Our next round of funding obligations, which are 
going to be very large, will be locked in on January 1, 2010. 
That is just 3 months away. Even though these payments won't 
come due until 2011, most plan sponsors are still going to be 
in a difficult position.
    For instance, NCR's own pension was 110 percent funded at 
the beginning of 2008, but only 75 percent funded at the 
beginning of this year, purely as a result of the financial 
downturn.
    Other companies in our coalition are in the same boat. For 
example, another company's projected contributions for the next 
7 years have jumped from $200 million to $1.5 billion due to 
the economic downturn, an astounding increase of 650 percent.
    With unplanned obligations of this magnitude, companies 
have to begin preparing now. Just to give you an idea of the 
scale we are talking about, a $100 million pension obligation 
is equivalent to 2,000 workers earning $50,000 a year.
    These are choices nobody wants to make, and the Pomeroy 
bill would allow us to bring our funds back to 100 percent and 
make critical investments to support our businesses and our 
employees.
    I would like to close by saying a few words about something 
we are doing that I am excited about. NCR is creating a new 
manufacturing facility in the United States. We are creating 
approximately 900 new jobs in Columbus, Georgia, to manufacture 
our next innovative generation of ATMs.
    This was a huge investment for us, but it is going to help 
us to bring new technologies to market faster and be more 
responsive to our customers. If we had to make a $100 million 
payment to our pension fund this year, we probably wouldn't 
have been able to do this. That is the kind of tradeoff we are 
talking about, the kind of tradeoffs other companies across the 
country are going to have to make.
    The Pomeroy bill is good and balanced legislation. It will 
allow us to bring our pension funds back to full funding, while 
ensuring all of us stay focused on our pension obligations. 
That is something we are all committed to doing. At the same 
time, it will give us breathing room so we can continue to 
invest, create jobs, and generate economic growth.
    Although I am sure few CEOs come before you to recommend 
proposals that raise revenue, I was also glad to hear that the 
CBO estimates that Chairman Miller's bill, which is quite 
similar to Congressman Pomeroy's proposal, raises $10 billion 
over the next 10 years. On behalf of the American Benefits 
Council and all of our member companies, I urge you to act on 
this this year. Thank you.
    Mr. NEAL. Thank you, Mr. Nuti.
    [The prepared statement of Mr. Nuti follows:]

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    Mr. NEAL. The Chair would recognize Judith Mazo, Senior 
Vice President, Director of Research, Segal Company.

 STATEMENT OF JUDITH MAZO, SENIOR VICE PRESIDENT, DIRECTOR OF 
RESEARCH, SEGAL COMPANY, ON BEHALF OF THE NATIONAL COORDINATING 
               COMMITTEE FOR MULTIEMPLOYER PLANS

    Ms. MAZO. Mr. Chairman, Ranking Member Camp, Members of the 
Committee, I am very happy to be here today. I am a 
representative of the Segal Company, which is the largest 
actuarial firm in this country specializing to a great extent 
with multiemployer plans. I am here on behalf of the National 
Coordinating Committee for Multiemployer Plans--you have to 
take a breath between the words, so we tend to say NCCMP. But 
beyond that organization, a multiemployer coalition of 
employers, employer associations, unions, employee benefit 
funds, and others in the benefit community. That really covers 
the spectrum to all of whom are united, as we were in 2006 and 
in the years leading up to 2006, in looking for some continued 
solutions for our plans.
    I will give you a little bit of a preview. I think we could 
use some of that $10 billion, so we appreciate that.
    My written statement goes in some detail into what a 
multiemployer plan is. Many people are not familiar with them 
although, again, you probably run into the results of them, 
just like NCR's products, on a daily basis. They are union-
negotiated plans covering, by definition, people working for at 
least two employers, often could be 20 employers, could be 100, 
could be 1,000 employers. They range very dramatically in size. 
They represent, often, people in very mobile employment, 
working for companies that are very small. And without banding 
together to provide these benefits as a group, as a pool, they 
couldn't provide them at all, particularly in the construction 
trades, in trucking, in retail trades, in entertainment. The 
actors you see on television, Harry and Louise, are covered by 
multiemployer plans, as well as others.
    There are, I think, probably three very important key 
principles about multiemployer plans to keep in mind. One is 
they are not single-employer plans, they are stand-alone plans 
covering a lot of employers. They are not directly hooked into 
any employer's database to help keep track of who the 
participants are. And every nickel spent on running the plans 
comes from the money that is contributed by all of the 
employers and earned when we earn it in the market otherwise to 
pay benefits.
    The second really important thing is it is collectively 
bargained. And we say this over and over again. That means it 
is not discriminatory. There is no concern about a lot of the 
money being targeted primarily to highly paid people within the 
group? These are egalitarian groups. There is no tax 
manipulation going on. No employer is trying to put extra money 
into a trust fund that the employer will have no control over 
and can't get any of it back. They are not trying to manipulate 
or increase tax deductions by giving money to cover their 
union-represented people. They are really benefit trusts and 
funds designed to take care of working people.
    They are jointly trusteed. They are often called union 
plans, but in fact they are employer-union plans because the 
law requires that they be run by boards that are jointly 
employer and union. So there is a lot of counterweight and 
counterpoise and check and balance going on in the design and 
operation of the plan. They kind of have, to a great extent, 
built-in oversight going on.
    I want to give you just a few facts about where 
multiemployer plans as a group stand as a result of the 
investment catastrophe that we encountered last year. They are 
the same investors in the same market as the single-employer 
plans. But over time--in 1980, there were about 2,200 
multiemployer defined benefit plans. In 2008, there were about 
1,500 of them. Where did they go; did they all terminate? No. 
In fact, in 1980, there were about 8 million participants in 
these plans, and now there are 10 million of them. What they 
did was merged. The multiemployer plans kind of take care of 
one another, and if a small plan falters it has, at least in 
the past, been able to be taken care of by the bigger ones.
    One other important number, the median actual investment 
return for multiemployer plans, based on a survey of 400-some 
plans covering 6 million people, for 2007 the median investment 
return was about 8 percent. For 2008, the median was about 
minus-21 percent. That is really what we are here to talk about 
today or to answer your questions about today.
    We can live with PPA, we just need some help in two ways; 
getting over some of the hard places, just as the single-
employer plans do, and for some plans, there may not be any 
recovery without more dramatic help, and we need to focus on 
those as well as the majority that will continually help 
thrive. Thank you.
    Mr. NEAL. Thank you, Ms. Mazo.
    [The prepared statement of Ms. Mazo follows:]
      Prepared Statement of Judith F. Mazo, Senior Vice President,
  Director of Research, The Segal Company, on behalf of the National 
         Coordinating Committee for Multiemployer Plans and the
                 Multiemployer Pension Plan Consortium
    Mr. Chairman and Members of the Committee, it is an honor to speak 
with you today. I am Judith F. Mazo, Senior Vice President of The Segal 
Company, an actuarial and benefits consulting firm with the country's 
largest concentration of multiemployer plan clients. I am here on 
behalf of the National Coordinating Committee for Multiemployer Plans 
(the ``NCCMP'') \1\ and the Multiemployer Pension Coalition, a broad 
group that comprises employers, employer associations, multiemployer 
pension funds, and unions from across the spectrum of the multiemployer 
community.
---------------------------------------------------------------------------
    \1\ The NCCMP is the premier advocacy organization for 
multiemployer plans, representing their interests and explaining their 
issues to policy makers in Washington since enactment of ERISA. Its 
more than 200 affiliates include pension and health plans as well as 
employers and labor unions whose workers and members participate in 
multiemployer plans.
---------------------------------------------------------------------------
    The Multiemployer Pension Coalition, which is coordinated by the 
NCCMP, came together early in this decade to harness the efforts of all 
multiemployer-plan stakeholders toward the common goal of benefit 
security for the working people who rely on these plans. We pressed for 
the multiemployer funding rules that were adopted in the Pension 
Protection Act of 2006, because we know that benefit security rests on 
rules that demand responsible funding and discipline in promising 
benefits. And now we are here again to talk with you about the 
multiemployer funding challenge, as the plans work to reconstruct their 
reserves after last year's universal investment catastrophe.
    Sophisticated funding requirements, by themselves, will not pay 
workers' pensions. For that, the industries that sponsor the plans must 
survive and be strong enough to provide the support needed to meet 
those obligations. What we are seeking now is the temporary infusion of 
a little more flexibility in the multiemployer funding rules, to enable 
the employers and unions to muster the resources that the plans need to 
recover and flourish once again.
    To understand what we need and why it is not the same as what 
single employer pension plan sponsors are seeking, it may help to go 
back to basics.
I. What Are Multiemployer Plans and Why Do They Need Special Rules?
    The core definition is straightforward: a multiemployer plan is one 
to which two or more employers are required to contribute, under one or 
more collective bargaining agreements.
    Beyond that simple statement lies a world of variations. The funds 
may range, for instance, from 50-100 workers and 2-4 contributing 
employers in a locality to hundreds of thousands of participants and 
thousands of employers covering large geographic regions. Similarly, 
assets may range from, say, $25 million to $20 billion. The typical 
size is probably in the range of 1,000-5,000 participants, with assets 
of about roughly $100 to $250 million.
    Ordinarily the covered workers are all represented by the same 
Local Union, or by Locals affiliated with the same International Union. 
Multiemployer plans are found throughout the economy, notably in the 
construction industry, entertainment, trucking and transportation, 
longshore, retail, mining and manufacturing, food service, hospitality, 
health care, building service, communications and the garment trades. 
More than half of the funds are in the construction trades, which, 
according to PBGC data, cover roughly 35% of the participants.
    Understanding that there are exceptions at each general point, here 
are some general characteristics of multiemployer funds that have led 
to the development of special rules to accommodate their special 
circumstances:

          Virtually all multiemployer plans are set up as 
        trusts structured under the Taft-Hartley Act, operated by a 
        joint management-labor Board of Trustees as stand-alone 
        entities that are independent of the contributing employers and 
        the unions that represent their participants. The Trustees, as 
        plan sponsor, have full responsibility for managing the assets 
        and administering the benefits, including the duty to make sure 
        the plan meets all applicable legal requirements.
          Typically, the employers contribute the amounts 
        negotiated under their bargaining agreements, say $2 for each 
        hour that participants work in covered service. The trustees, 
        working with their professional advisors, determine and set the 
        benefits, while the unions and employers independently 
        negotiate over the flow of contributions.
          While the employers' most salient obligation is to 
        contribute as defined in their labor contracts, because the 
        plans promise a fixed benefit these are classified as defined 
        benefit plans under ERISA and the Internal Revenue Code.
          The contributing employers are often small businesses 
        that could not provide pension or health coverage on their own, 
        whose employees often work for short periods before moving on 
        to similar jobs with different contributing employers. They 
        compete with each other and with non-contributing companies for 
        contracts and customers.
          Regardless of which or how many employers a 
        participant worked for, his or her pension is owed by the plan, 
        backed by the industry. Contributing employers may come and go, 
        but whoever is obliged to contribute in a given year is funding 
        a portion of the plan's accumulated liabilities to all of its 
        participants over time, not just the benefits being earned by 
        its own workers.
          Benefits are rarely based on employees' pay. The 
        pension is a specified dollar amount per year of covered 
        service, or a specified percentage of the contributions 
        required on the participant's work, say $80/month times year of 
        service, or a monthly benefit equal to 2% of total 
        contributions. Few multiemployer plans pay benefits before 
        early retirement age or offer a lump sum as an alternative to a 
        life annuity.
          Most multiemployer groups have defined benefit plans, 
        many also have defined contribution plans (called ``annuity 
        funds'') and a fairly small subset of those are 401(k) plans. 
        Many multiemployer pension plans facing financial problems have 
        reduced future benefit accruals, but so far very few have 
        frozen accruals.

    Several pertinent points emerge from this overview:

        1.  Because multiemployer plans are creatures of collective 
        bargaining, the funding and other regulatory requirements must 
        accommodate bargaining realities, where stability in pension 
        costs is paramount. Thus:

                a.  Since employers cannot be compelled to contribute 
                beyond what they have agreed to in collective 
                bargaining, the required funding cannot change during 
                the term of a collective bargaining agreement;
                b.  As many plans have a multitude of bargaining 
                agreements that expire and renew at varying times, and 
                as the bargaining process cannot accommodate sharp or 
                unanticipated expense shocks, predictability in pension 
                funding demands over time is essential beyond the 
                standard 3-year duration of a single bargaining 
                agreement, and
                c.  When the parties negotiate pension contributions, 
                the amounts are explicit alternatives to increases in 
                wages, health contributions or other elements of 
                compensation, so the employees often view the 
                contributions as ``their money.'' If they do not 
                believe the trade-off is worth it, they might reject 
                the agreement, which could throw the plan's funding 
                arrangements into disarray.

        2.  The fact that the plans are run for union-represented 
        groups also means that:

                a.  There is little or no opportunity for tax 
                manipulation by contributing employers--they have no 
                opportunity to benefit from the plan's assets (except, 
                of course, by having the plan meet their employees' 
                needs);
                b.  The plans are egalitarian, providing essentially 
                the same benefits for all employees with the same 
                patterns of service under the plan, so there is no 
                question of discrimination in favor of the highly paid, 
                and
                c.  Due to the Taft-Hartley structure, with an 
                independent operation run by a Board on which the 
                employers and the employees have equal representation, 
                the entire cost of plan administration must be paid out 
                of the plan's assets, with funds that would otherwise 
                be dedicated to paying benefits.

        3.  Multiemployer plans are typically far more stable than 
        single employer plans because of their broader contribution 
        bases: they do not depend on the fortunes of one company. Often 
        when a local multiemployer plan does begin to falter it is 
        merged into a larger, stronger plan covering people represented 
        by the same International Union. On the other hand, if a 
        multiemployer plan fails that tends to be because of the 
        failure of the industry that has supported it, and the losses 
        to participants and to the pension guarantee system can be very 
        large.

II. How Do the Pension Funding Rules Address This Now?
    Distinctions for multiemployer plans have been part of the ERISA 
minimum funding rules and termination insurance program since the 
start. As experience under ERISA has developed, the differences between 
the regimes governing single employer and multiemployer plans have 
broadened. That history can be instructive.
    1974-1980: ERISA. From the start, the Internal Revenue Code has 
included special rules to allow multiemployer plans to function as 
pools rather than a cluster of individual employers, and to rely on 
negotiated contribution rates for funding and deduction purposes, see, 
e.g., IRC s. 413(b).
    Although pension plan termination insurance was at the core of 
ERISA's retirement income security promise, Congress was initially 
uncertain whether it was needed by or appropriate for multiemployer 
plans. When ERISA was passed, no multiemployer plan had ever 
terminated, and, because of their broad contribution bases, they were 
expected to be able to cover all of the benefits they promised. 
Accordingly, the initial multiemployer guarantee program was an 
experiment: from 1974-77, the PBGC had discretion to insure benefits 
under terminated multiemployer plans, and very little financing for it 
($0.50/participant annual premiums, vs. $1.00/participant for single 
employer plans).
    Early Experience. Then three multiemployer plans sought PBGC 
protection (compared with several hundred terminated single employer 
plans). They were from three failed industries, covering milkmen in New 
York, milkmen in New Jersey, and cap makers in St. Louis. This made 
clear that there was a role for a government guarantee of multiemployer 
pensions, and although it was rarely likely to be invoked the pension 
claims would be large. Experience during that discretionary period also 
disclosed one of most serious threats to the plans' survival and to the 
guarantee program: like the employers sponsoring single employer plans, 
employers contributing to multiemployer plans could be liable to the 
PBGC for the underfunding of a terminated plan that PBGC took over, so 
it was in an employer's interest to leave a multiemployer plan when its 
funding first showed signs of weakening. This, of course, would 
aggravate the plan's problems as fewer and fewer employers were left to 
carry the funding load. It would also stress established labor 
relations, as employers had only three ways to get out of a 
multiemployer plan: with the union's agreement (which was likely to 
mean an agreement to close out the pension plan and substitute a 
defined contribution plan), by ousting the union, or by going out of 
business.
    Multiemployer Funding Reform, Version 1.0. Congress extended the 
discretionary-coverage period to allow for the in-depth study of 
multiemployer pension plans that had not been done in the lead-up to 
enactment of ERISA. It concluded that adapting the PBGC guarantee 
program to fit multiemployer plans would be futile unless the law also 
addressed the ``last-man's-club'' psychology that was propelling 
employers to exit multiemployer plans or press for their termination.
    Accordingly, the Multiemployer Pension Plan Amendments Act of 1980 
(``MPPAA'') introduced the concept of withdrawal liability. Highly 
complex and highly controversial--for obvious reasons--in general this 
imposes liability on an employer that withdraws from a multiemployer 
plan for a pro rata share of the plan's underfunding. The more 
underfunded the plan is when the employer leaves, the higher its 
withdrawal liability is likely to be.
    Withdrawal liability created a major incentive for the employers to 
push to get their multiemployer plans well funded and to keep them 
there. MPPAA also revamped the pension guarantee program for those 
plans, to make PBGC the financier of very last resort. Instead of 
guaranteeing unfunded benefits when a multiemployer plan terminates, 
the PBGC does not step in with financial support until the plan becomes 
insolvent and does not have enough cash to pay benefits at the 
guaranteed level.
    The multiemployer benefit guarantees themselves were redefined and 
re-set at a low level. Initially this was a maximum of $234/year for 
each year of service, or an annual pension of $7020 for a retiree who 
had worked under the plan for 30 years. This is not indexed for 
inflation. Congress has increased the guarantee level once, and now the 
maximum is $429/year for each year of service, or $12,870 a year for 
someone with a 30-year career under the plan.
    The other especially notable MPPAA change was the introduction of 
special funding rules for multiemployer plans nearing or at bankruptcy 
(IRC ss. 418-418E), which authorized benefit reductions and required 
that benefit payments be cut down to guaranteed levels. As it turned 
out, this plan reorganization concept hardly ever came into play. When 
multiemployer plans started running short of funds, it was for reasons 
other than those identified in MPPAA.
    1980-2006: MPPAA. While the single employer funding and guarantee 
programs were changed repeatedly over the next quarter century, the 
multiemployer rules stayed essentially the same. The 1976 ERISA rules 
still governed multiemployer plans' minimum funding requirements. After 
a flurry of protest and litigation, including several trips to the U.S. 
Supreme Court, employers adapted to withdrawal liability and learned to 
take it into account in business planning. Only a few small plans 
applied for PBGC assistance and the multiemployer guarantee fund 
consistently ran a surplus. During the 1990s, most plans faced the 
challenge of overfunding, and looked for ways to be sure the employers 
could take a tax deduction for their pension contribution.
    MPPAA helped establish this period of repose. After the intensity 
of the 1979-1980 legislative battles, neither Congress nor the 
Administration had much appetite for re-igniting the withdrawal 
liability controversy, so multiemployer plans were routinely exempted 
from whatever funding changes were enacted. But the real reason why the 
MPPAA reforms seemed to work so well was that multiemployer plans were 
prominent among those benefiting from the general prosperity of the 
1990s. In the main, plans' investments were doing well, there was 
plenty of work for participants and profits for their employers, so 
neither withdrawal liability nor statutory minimum funding requirements 
drew much attention.
    This era of general contentment came to an abrupt stop when the 
investment markets crashed in 2000 and 2001. Mature multiemployer plans 
with many retirees and declining numbers of active participants, had 
been living off the earnings from the very considerable reserves they 
had built up. When those investment gains turned into losses, funding 
levels declined and withdrawal liability flared back up, reawakening 
employer suspicions. Some plans saw funding deficiencies looming and 
turned to IRS for help, but it was swamped with pleas from troubled 
single employer plans and relatively unfamiliar with the intricacies of 
multiemployer funding.
    The Pension Funding Equity Act of 2004 provided a little breathing 
room for single employer plans but not for multiemployer plans. Because 
they seemed to be treading water well enough to avoid the catastrophic 
terminations that workers and the PBGC had faced in the airline and 
steel industries, they could not command the policy makers' immediate 
attention.
    And so the multiemployer community pulled together, establishing 
the Multiemployer Pension Coalition to work in concert with the NCCMP 
for a substantive update to the multiemployer funding rules. The need 
to would protect the employers from ruinous contribution obligations 
and tax penalties was becoming urgent, as was the community's 
conviction that multiemployer plans could not survive under the kinds 
of rules that were being considered for single employer plans. The 
Coalition's work with Congress led to the development of the 
multiemployer provisions of the PPA.
    2006-Present: PPA'06. As in 1980, the PPA made few changes in the 
mechanics of the ERISA funding standard account and related rules, 
which continue to apply to multiemployer plans. New benefits and 
benefit increases must now be amortized over 15 rather than 30 years, 
and short-term benefit increases must be funded as quickly as they will 
be paid. Unlike single employer plans, multiemployer pension plans can 
continue to use long-term interest assumptions chosen by their 
actuaries and actuarial methods of smoothing changes in asset values to 
temper the impact of investment market fluctuations. PPA also increased 
the limits on deductible contributions, to help pension plans can build 
reserves without penalizing contributing employers.
    Longer-Term Perspective: The Zones. For multiemployer plans, the 
PPA's principal innovation was to impose a clear requirement that the 
trustees and bargaining parties look past the plan's financial status 
as of a given valuation date, to take the measure of where it is 
headed. If the funding is projected to deteriorate to specified levels, 
they are required to adopt a formal corrective plan, with annual 
monitoring and adjustments required if needed to stay on course. The 
law provides new tools to help bring plan liabilities and assets into 
balance. Additional reporting to participants and employers, as well as 
to the government, provides extra accountability.
    Specifically, the law characterizes a multiemployer plan as 
``endangered'' if its funding percentage is below 80%, or if it is 
projected to have a funding deficiency within 7 years. If both are 
true, the plan is ``seriously endangered.'' ``Critical status'' 
indicates more serious problems: a projected funding deficiency within 
four or five years or pending cash-flow difficulties. Colloquially, 
endangered status is called the ``yellow zone'' and critical status is 
the ``red zone.'' Following this Homeland-Security theme, a plan that 
is neither endangered nor critical is said to be in the ``green zone,'' 
although there is no official classification for a plan that looks 
healthy.
    When a plan goes into the yellow zone, contribution reductions and 
benefit increases are restricted. The trustees must come up with a 
Funding Improvement Plan (``FIP'') designed to improve the plan's 
underfunding by at least 30% over a ten-year period (for most seriously 
endangered plans, the goal is a 20% improvement over 15 years). This 
has to include schedules of benefit cuts and, if necessary, 
contribution increases, to be presented to the employers and unions so 
that they can choose a solution for their group through collective 
bargaining. The FIP must be re-evaluated each year, and adjusted if 
needed to stay on schedule.
    The red zone indicates a more serious problem, and may be addressed 
with more serious solutions. When a plan goes into the red zone, in 
addition to enforcing restrictions on reducing contributions and 
increasing benefit, the plan must stop paying lump sums and similar 
front-loaded benefits to new retirees. The trustees must adopt a Rehab 
Plan that, like the FIP, aims at getting the fund out of critical 
status over a 10-year period. This includes offering the bargaining 
parties schedules of benefit cuts and contribution increases that are 
calibrated to achieve this improvement, for them to select through 
bargaining.
    Benefit reductions under a Rehab Plan can include the reduction or 
elimination of recent benefit increases, early retirement subsidies and 
other benefit features--other than the accrued benefit payable at 
normal retirement age--that are ordinarily protected from cutbacks. 
These benefit reductions are ignored when computing withdrawal 
liability. For active workers, future accrual rates cannot be cut below 
1% of contributions unless the union and employers negotiate a deeper 
reduction as part of a package that is acceptable to the trustees.
    The employers that contribute to a red-zone plan are subject to a 
5% contribution surcharge (going up to 10% after the first year) until 
they agree to an acceptable schedule of contributions and related 
benefit adjustments under the Rehabilitation Plan. However, there are 
no penalties on employers if a red zone plan actually has a funding 
deficiency, as long as the parties are living up to their red-zone 
obligations and the fund makes progress as expected under the Rehab 
Plan. The Rehab Plan benchmarks can be revised if it turns out that the 
original program was too ambitious, but the ultimate goal remains the 
same: financial recovery by the end of the rehabilitation period.
    If the trustees determine that, after exhausting all reasonable 
measures, the plan will not be able to recover within the statutory 
time frame, they must adopt recovery program that may take longer but 
is likely to work. If they believe that nothing will turn the situation 
around, they must design a plan to forestall insolvency.
III. How Is PPA Working? Why Do Multiemployer Plans Want More Relief?
    Early Results. PPA became law late in August of 2006. Its funding 
changes took effect at the start of the 2008 plan year, which was 
January 1 for most plans. For the most part, trustees and bargaining 
parties whose plans had been struggling were alerted by their actuaries 
that they should expect to be in endangered or critical status, and 
many had already come up with a way to deal with by the time it became 
official. The resulting additional sacrifices imposed on the 
participants and employers were not pleasant, and the many ambiguities 
in the law left many important questions open for interpretation and 
dispute, but through the first half of 2008 the process was working 
fairly smoothly.
    Among Segal Company multiemployer pension clients, the actual zone 
determinations were a little better than had been predicted. Through 
July 2008, about 80% were green, 12% were yellow and 8% were in the red 
zone. Then the September market crash hit. For all of 2008, the 
breakdown for about 400 multiemployer plans whose zone status was 
determined by The Segal Company was 78% green, 12% yellow and 10% red.
    The severity of the impact of the asset losses really began to show 
up when calendar-year plans' zone status was re-certified for 2009. The 
pattern has completely reversed. By late March 2008, The Segal Company 
had determined that 83% of its multiemployer clients that operated on a 
calendar-year basis were in the green zone, 10% were yellow and 7% were 
red. By the same point in 2009, after a number of those plans that were 
in a zone had begun carrying out their correction programs and others 
that were on the brink had cut benefits or requested contribution 
increases in an effort to avoid troubled status, the breakdown was 39% 
green, 29% yellow and 32% red.
    This covers about 230 plans; determinations made later in 2009 have 
shown consistent results.\2\
---------------------------------------------------------------------------
    \2\ The published results of these surveys are attached to this 
statement.
---------------------------------------------------------------------------
    From January 1, 2008 to January 1, 2009, multiemployer plan assets 
dropped an average of more than 20%, most of it in the last 3 months of 
2008. Suddenly, problem plans that were on their way to recovery were 
knocked back farther than before; traditionally strong plans that had 
been fully funded for decades were faced projected funding 
deficiencies, critical status and, for the first time ever, benefit 
reductions. None were prepared for such an abrupt and dramatic 
reversal.
    WRERA. Like other financial institutions, pension plans called for 
help. In its second special session after the Presidential election, 
Congress threw them a rope--the Worker, Retiree, and Employer Recovery 
Act of 2008 (``WRERA'')--to stay afloat while more substantial 
solutions could be developed. WRERA offered multiemployer plans two 
options for short-term relief: for the 2009 plan year, they could 
either keep the zone status they had had for 2008 (a ``freeze'') or, if 
their status was already endangered or critical, add three more years 
to their recovery period.
    Both approaches give the plans' stakeholders some extra time to 
sift through the components of their dilemmas and look for ways to 
resolve them. Ironically, the challenge is often hardest for those 
plans that have been the strongest, whose trustees and bargaining 
parties have little experience in working through financial adversity. 
On the other hand, the severe asset losses may have closed off the 
avenue to recovery for some plans in shrinking industries with high 
proportions of retirees.
    PPA gives multiemployer plan stakeholders a clear mission: to 
monitor their plans' financial outlook and take action to counter 
emerging problems. But after the 2008 market meltdown, even PPA is not 
flexible enough to enable them to devise and implement approaches that 
could work for their specific problems.
IV. What Is Needed Now?
    At this point what worries multiemployer stakeholders most is that 
the yellow and red zone mandates could force them to cut benefits or 
raise contributions--or both--beyond what their industries can 
tolerate. Once a contribution increase or benefit reduction is put in 
place for an endangered or critical plan, it cannot be undone until the 
plan recovers, so acting too quickly could cause years of unnecessary 
loss for employers and participants.
    The Goldilocks recommendation--do not do too much or too little, 
make sure it is just right--is not practical. What the multiemployer 
community is looking for now is some tweaking of the funding rules to 
make them more forgiving, on the one hand, and, for plans with little 
chance of growing their way out, financial assistance to contain and 
minimize the damage. The Coalition has proposed a two-pronged approach 
to help multiemployer plans facing these two quite different sets of 
difficulties, plus some general program clarifications and 
improvements.\3\
---------------------------------------------------------------------------
    \3\ The proposal is described in an attachment to this statement.
---------------------------------------------------------------------------
    In brief, for plans that are basically solvent but need some help 
to get through this especially rough patch, we are asking for some 
temporary tweaks to the funding rules to give them more time to absorb 
the 2008-2009 losses. The proposal includes a list of options, to deal 
with the variety of technical issues that different plans face. These 
include:

          starting new 30-year amortization periods, either for 
        all of the outstanding charges and credits to the funding 
        standard account, or just for the 2008-2009 market value 
        losses;
          further buffering the impact in any single year by 
        allowing the asset losses incurred in those two years to be 
        smoothed over 10 years (instead of than the current 5) before 
        amortization, as long as the asset values taken into account 
        are no more than 30% above or below current market value;
          lengthening to 10 years (from the current 5) the 
        automatic amortization extensions introduced in PPA and 
        clearing away bureaucratic barriers so they can be used 
        efficiently, and preserving pre-PPA IRS-granted relief 
        notwithstanding the recent investment losses, and
          For all plans that are or become endangered or 
        critical, extending the recovery periods by 5 years, or 2 years 
        on top of the 3-year extensions that some plans elected in 
        2009.

    More direct financial help is proposed for severely troubled plans:

          To promote the rescue of troubled plans through 
        mergers as long as participants' benefits are not put at risk, 
        clarify the applicable fiduciary standards; create a new type 
        of multiemployer plan merger called an ``alliance'' that would 
        insulate the stronger plan from the weaker plan's funding 
        problems, and direct the PBGC to facilitate productive mergers, 
        including by contributing seed money;
          Turn the existing concept of plan partition into an 
        active vehicle for saving multiemployer plans that are in sharp 
        decline because of employer bankruptcies and uncompensated 
        withdrawals, by giving those plans the right to transfer the 
        liabilities that those departed employers left behind to the 
        PBGC,\4\ and
---------------------------------------------------------------------------
    \4\ Because plan partitions could assign vary large liability 
amounts to the PBGC's multiemployer guarantee fund, the proposal calls 
for this to be financed with funds outside of the premiums paid by 
multiemployer plans.
---------------------------------------------------------------------------
          Provide a short-term federal tax credit to help 
        employers cover the incremental contributions required under 
        the Funding Improvement or Rehabilitation Plan for a seriously 
        endangered or critical-status multiemployer plan.

    Generally applicable improvements for multiemployer plans endorsed 
by the Coalition's proposal are:

          An increase in the maximum PBGC guarantee for 
        multiemployer plan benefits, from the current $429 a year times 
        years of service to $669 a year for each year of service 
        (raising the guarantee for someone with 30 years of service 
        from less than $13,000/year to slightly more than $20,000);
          Federal guarantees for pension compliance bonds 
        issued by employers, the proceeds of which would be earmarked 
        for contribution to a multiemployer plan to retire its 
        outstanding unfunded liabilities, and
          Several technical adjustments to the endangered plan 
        rules, to resolve inconsistencies and ambiguities.
                               * * * * *
    We know that this is an ambitious agenda and that the subject 
matter looks both complex and arcane. But underlying the algorithms, 
actuarial notations and tax jargon is the retirement security of real 
rank-and-file workers. With them in mind, we hope that you will 
consider these proposals seriously. The Multiemployer Coalition will be 
happy to answer any questions or provide any additional information 
available to it that might help you with this task.

                                 

    Mr. NEAL. The Chair would recognize Damon Silvers, who is 
associate general counsel, AFL-CIO.

                 STATEMENT OF DAMON A. SILVERS,
               ASSOCIATE GENERAL COUNSEL, AFL-CIO

    Mr. SILVERS. Good morning, Chairman Rangel, Ranking Member 
Camp, Congressman Neal. My name is Damon Silvers, and I am an 
associate general counsel of the AFL-CIO. Our 55 member unions 
and 12 million members participate in both single and 
multiemployer plans. I obviously appreciate the opportunity to 
appear before the committee.
    Defined benefit pension plans have a number of features 
that make them particularly effective structures for providing 
retirement income security. The first of them is significant 
sustained employer funding of these plans. Features 
additionally include insurance against longevity--outliving 
your benefits, insurance against investment risk, professional 
investment management, and economies of scale.
    You are going to be taking up the problems that are 
associated with plans that don't have these features in the 
second half of this hearing.
    The Pension Protection Act, however, has at its heart a 
fundamental misunderstanding about the nature of defined 
benefit pension plans. That act is built on the assumption that 
a pension plan is like a deposit-taking institution where all 
funds can be withdrawn at any time, and thus the plan must be 
in the position to meet most or all of its benefit obligations 
at any moment. The PPA undid a funding regime that was based on 
averaging assets over time and spreading funding obligations 
and replaced it with one based on arbitrary snapshots.
    Now, the PPA's approach adds volatility to pension funding 
requirements, even in relatively favorable market conditions, 
as do recent changes to the pension accounting rules by FASB. 
In conditions such as we have seen in the last 24 months that 
the other witnesses have referred to, this volatility is so 
extreme that it threatens the very survival of what remains of 
the private sector pension system.
    During market downturns, PPA requires employers to 
radically increase their funding to make up for large, 
unrealized market losses. Employers must make these payments 
just at the moment when employers themselves are likely to be 
weakest. While some tightened funding requirements may be 
necessary to prevent a downward spiral in weaker plans during a 
market crisis--Judy alluded to this a moment ago--funding 
obligations should not be based on one-time asset valuations or 
one-time discount rates.
    In this environment, employers that are providing 
retirement for their employees' retirement security--
responsible employers--are under great pressure to cease doing 
so from multiemployer plans. Each employer that does so creates 
greater pressures on the next employer to follow suit.
    The long-term implications for the provision of retirement 
security across our economy and the ability of retired 
Americans to contribute to our consumer economy are very 
serious.
    Consequently, the AFL-CIO urges Congress to address the 
retirement security crisis in two steps. First, pension funds 
need immediate relief from the provisions of the PPA that force 
funds to behave as if they had to pay out all benefits at any 
one time. This relief should generally take the form of a 
return to a smoothing approach to pension valuation. This 
return should be understood as a return to the proper approach 
to pension valuation, not as a deviation from that approach.
    We should also recognize the extent to which interest 
rates, which are driving the liability side in a negative 
direction against funds, interest rates since 2008 are in fact 
a product of public policy, of Federal Reserve interventions, 
for good reasons, to protect our banking system and our housing 
markets; but they have the consequence of inflating the 
liability side, just as the asset side is collapsing.
    At the same time, Congress should consider a number of more 
temporary measures to ease the procyclicality of the current 
pension regulatory system, to preserve active plans, and 
prevent pension fund weakness from contributing to downward 
pressure on the economy as a whole.
    Here, as has been indicated by a prior witness, Congress 
should provide relief only to those plans where participants 
are accruing benefits, and should require continued benefit 
accrual during the period the relief is in effect.
    However, undoing the destructive aspects of the PPA will 
not be sufficient to stabilize America's private pension 
system. For that, Congress should look in the long term to the 
principle of universal shared responsibility for retirement 
security; government, through Social Security; individuals 
through savings; and employers through minimum retirement 
benefit funding obligations for all employers.
    Congress should act and act fast, as a prior witness has 
stated, to ensure that the system of pension regulation does 
not act as one more headwind retarding economic recovery.
    I hope I have given in this testimony broader context for 
understanding this action as part of an approach to regulating 
pension funds for what they are: financial intermediaries with 
long-term time horizons.
    Thank you very much for the opportunity to appear before 
you today and I welcome your questions.
    Mr. NEAL. Thank you, Mr. Silvers.
    [The prepared statement of Mr. Silvers follows:]
Prepared Statement of Damon Silvers, Associate General Counsel, AFL-CIO
    Good morning Chairman Rangel and Ranking Member Camp. My name is 
Damon Silvers, and I am an Associate General Counsel of the American 
Federation of Labor and Congress of Industrial Organizations (AFL-CIO). 
On behalf of the AFL-CIO, our 55 member unions and 12 million members, 
I appreciate the opportunity to appear before this Committee to discuss 
the critical issue of pension funding in the context of the current 
economic and financial crisis and the long term crisis of declining 
retirement security for American workers.
    In this testimony, I hope to give the Committee a framework for 
taking up the issue of pension funding in the midst of the economic 
crisis. I want to make two basic points. First, the last thing we 
should be doing now is shutting down viable retirement vehicles. Absent 
funding relief, plan sponsors may have no alternative but to freeze 
viable pension plans, cutting retirement incomes just when our economy 
is most vulnerable to demand side shocks. Second, and more profoundly, 
putting pressure on what remains of the defined benefit pension system 
will worsen the long-term retirement security crisis by removing plan 
structures without proposing any viable replacement. The short term 
approach the Pension Protection Act takes to the valuation of pension 
assets is both mistaken as an analytical matter and is a powerful 
accelerant to these fundamentally destructive trends.
    I'd like to begin with a brief survey of the recent history of 
retirement in the United States. Prior to World War II, pensions were 
unusual, and generally only managers, relatively privileged white-
collar employees, and public sector workers received them. Following 
World War II and the growth of the labor movement, pension coverage 
increased dramatically. By 1980, 50% of the private sector workforce 
was covered by a defined benefit pension plan. In the public sector, 
pension coverage was close to universal, as it remains today.
    This growth in pension coverage, combined with the creation of 
Social Security and Medicare, created retirement as a time of life the 
typical American could look forward to, rather than fear.
    Defined benefit pension plans have a number of features that make 
them particularly effective structures for providing retirement income 
security.
    1) Funding levels: In the United States, defined benefit pension 
plans have typically been funded at levels averaging around 8% of 
payroll. Funding at this level provides a retirement benefit that, when 
combined with Social Security, is enough to maintain a pre-retirement 
standard of living.
    2) Insurance against longevity: Defined benefit pensions typically 
pay a lifetime benefit. They are structured with an insurance feature 
that protects retirees from outliving their income.
    3) Insurance against investment risk: Defined benefit pension plans 
function as financial intermediaries for the participants. While the 
plans are exposed to investment risk, they provide a guaranteed 
benefit, sheltering individuals from the timing risk associated with 
volatile assets, regardless of investment performance.
    4) Professional investment management and economies of scale: 
Defined benefit plan assets are professionally invested as a pool under 
a prudent expert standard. As a result, participants benefit from 
greater expertise and economies of scale not associated with individual 
accounts. Not surprisingly, defined benefit plans have generally been 
found to outperform self-directed individual account plans by 
significant margins.
    Despite these benefits, private sector employers have retreated 
from providing defined benefit pension plans since Congress created the 
401(k) plan in the late 1970s. While employers often cite the 
regulatory burdens associated with defined benefit plans as a reason 
for their interest in other plan types, I believe the real issue is 
simply the substantial cost savings employers may realize by moving 
from defined benefit plans, where employer contributions average 8% of 
payroll, to defined contribution plans where employer contributions are 
in the range of 0-3% of payroll. This employer retreat from 
responsibility coincides with the decline of trade union bargaining 
strength in the private sector.
    In this environment, it is hardly surprising that those employers 
maintaining defined benefit plans have looked for ways to minimize 
contributions to them. In particular, the period of explosive 401(k) 
growth in the 1990s coincided with a prolonged bull market during which 
plan sponsors generally did not make cash contributions. Here, public 
policy played a destructive role. In a misguided effort at preventing 
employers from sheltering profits from taxes through pension 
contributions, Congress prevented employers from making tax deductible 
contributions to funds that appeared to be overfunded.
    Alarmingly, the growth in 401(k) and other defined contribution 
plans and the decline in defined benefit coverage in the private sector 
have not increased overall retirement plan coverage. Nor have the 
retirement assets of American workers increased. Even before the 2008 
stock market crash, median 401(k) account balances for families with 
income earners in their fifties were less than $60,000. Consequently, 
the private sector workforce today is significantly less well prepared 
for retirement than it was in 1980. Of course, this decline in secure 
retirement income has happened as the baby boomers approach retirement 
age. With the passage of time, if no action is taken, we will almost 
certainly be living in an aging society where retirement security is 
out of reach for more and more of our fellow citizens, with serious 
consequences for the strength of our consumer economy.
    It was against this backdrop that Congress sought in 2006 to 
strengthen pension funding by passing the Pension Protection Act (PPA). 
While well intentioned, the Act, at its heart, reflects a fundamental 
misunderstanding about defined benefit pension plans. The Act assumes 
that a pension plan is like a deposit-taking institution, where all 
funds can be withdrawn at any time, and thus the plan must be in a 
position to meet all of its benefit obligations at any one time. The 
PPA undid a funding regime based on averaging assets over time and 
replaced it with one based on arbitrary snapshots.
    The result is a regulatory structure fundamentally at odds with the 
institutions being regulated. Modern pension funds, as financial 
intermediaries, invest in a mix of assets--some of these assets, such 
as high grade corporate bonds, are relatively stable, income producing 
assets. But, a pension fund's real value to participants from the 
perspective of managing investment risk, is its ability to invest in 
more volatile, and thus higher yield investments, most importantly 
public equities or stocks. While returns on stocks, historically, have 
been significantly higher than returns on bonds, stocks go through 
periods, even long period, of low returns--such as the period that 
began in 2000 and continues today.
    During these periods, pension fund assets must be sufficient to pay 
benefits and to avoid a downward asset spiral. However, it is simply 
inconsistent with the nature of defined benefit pension funds to 
require full funding at all times for pension plans with a healthy 
demographic profile. Such a requirement amounts either to a requirement 
to invest exclusively in short term fixed income obligations or to be 
so over-funded that the real rate of return on funds set aside for 
retirement in terms of benefits paid will be uncompetitively low. Such 
an approach forfeits one of the core strengths of defined benefit 
plans. It is also at odds with the federal courts' interpretation of 
trustees' fiduciary duties under ERISA in relation to investment 
management.
    The PPA adds volatility to pension funding even in relatively 
favorable market conditions (as do recent changes to the pension 
accounting rules by FASB). In conditions such as we have seen in the 
last twenty-four months, this volatility threatens the very survival of 
what remains of the private sector pension system. Under PPA, during 
market downturns, employers are required to radically increase their 
funding to make up for large unrealized market losses. Employers must 
make these payments just at the moment when employers themselves are 
likely to be weakest. While some tightened funding requirements may be 
necessary to prevent a downward spiral in weaker plans during a market 
crisis, funding obligations should not be based on one-time asset 
valuations.
    The effect of the PPA is to shorten the investment time horizons of 
pension funds. This fundamentally is not in the national interest. A 
wide range of commentators have noted that the short term orientation 
of our capital markets and our financial institutions was a major 
contributor to our current economic crisis. Recently, the newly elected 
President of the AFL-CIO, Richard Trumka, joined with Warren Buffett, 
Pete Peterson, and a number of business leaders in calling for public 
policy measures that would lengthen the time horizons of America's 
capital markets.
    There is no question that even with a more rational approach to 
regulating funding levels, defined benefit pension plans are under 
serious economic pressure. Such pressure is inevitable when there are 
no effective minimum requirements for employers, generally, to 
contribute to their employees' retirement security.
    In this environment, employers that are providing for their 
employees' retirement security are under great pressure to cease doing 
so--to freeze single employer plans or to withdraw from multiemployer 
plans. Each employer that does so creates greater pressures on the next 
employer to follow suit.
    The AFL-CIO urges Congress to address the retirement security 
crisis in two steps. First, pension funds need immediate relief from 
the provisions of the Pension Protection Act that force funds to behave 
as if they had to pay out all benefits at any one time. This relief 
should take the form of a return to a smoothing approach to pension 
asset valuation. This return to a smoothing approach should not be 
understood as a temporary adoption of a less appropriate approach, but 
rather a return to a more appropriate approach to pension asset 
valuation that should be made permanent.
    At the same time, Congress should consider a number of more 
temporary measures to ease the procyclicality of the current pension 
regulatory system to preserve active plans and prevent pension fund 
weakness from contributing to downward pressure on the economy as a 
whole. Here, Congress should provide relief to those plans where 
participants are accruing benefits. To protect participants, Congress 
should condition such relief on participants' continued accrual of 
benefits during the period of relief.
    However, the undoing of the destructive aspects of the Pension 
Protection Act will not be sufficient to stabilize America's private 
pension system. For that Congress needs to look to the principle of 
universal shared responsibility for retirement security--government 
through Social Security, individuals through savings, and employers 
through minimum retirement benefit funding obligations. Such an 
approach would not require that employers all participate in any 
particular plan, just that they set aside enough for funds for all 
their employees to accumulate sufficient retirement assets to be able 
to achieve modest financial security in retirement. Variants of this 
type of approach to broad based retirement security are currently in 
place in Australia, the Netherlands and Switzerland. A recent GAO study 
that looked in particular at the Dutch and Swiss experiences found 
their programs for universal private pension coverage should be of 
interest to policy makers seeking to address the lack of meaningful 
private retirement plan coverage for American workers.\1\
---------------------------------------------------------------------------
    \1\ Government Accountability Office, Alternative Approaches Could 
Address Retirement Risks Faced by Workers but Pose Trade-offs, July, 
2009, revised September, 2009. Found at http://www.gao.gov/new.items/
d09642.pdf.
---------------------------------------------------------------------------
    I have attached to this testimony a more lengthy paper submitted to 
the University of Pennsylvania's Wharton School addressing in more 
detail the challenges of risk management in the context of retirement 
security provision. This paper contains detailed sources for this 
testimony.
    Other witnesses before you today will address in more detail 
specific forms of relief needed to protect what remains of the private 
pension system, and to ensure the system of pension regulation does not 
act as one more headwind retarding economic recovery. I hope on behalf 
of the AFL-CIO through this testimony to give a broader context for why 
it makes sense conceptually to regulate pension funds for what they 
are--financial intermediaries with long term time horizons. Thank you 
for the opportunity to appear before you today and I welcome your 
questions.

                                 

    Mr. NEAL. I would like to recognize now Mr. Mark 
Warshawsky, Director of Retirement Research at Watson Wyatt 
Worldwide.

STATEMENT OF MARK J. WARSHAWSKY, PH.D., DIRECTOR OF RETIREMENT 
                RESEARCH, WATSON WYATT WORLDWIDE

    Mr. WARSHAWSKY. Chairman Rangel, Ranking Member Camp, and 
Members of the Committee, I appreciate the opportunity to 
present testimony on funding relief for single-employer defined 
benefit pension plans.
    Although single-employer pension plans have declined in 
importance over recent years, they still represent an important 
source of retirement benefits to millions of workers and 
retirees. They are also a significant financial responsibility 
for major employers.
    If there is to be a good chance of a renewal of interest in 
defined benefit plans, which I know is supported by many 
committee members--and here, in particular, I commend 
Representative Pomeroy for his leadership--it is important that 
there be a supportive public policy environment for their 
continuation and creation.
    Perhaps of more immediate impact at this sensitive time in 
the economic cycle when weakness is still widespread, 
particularly in the job market, and the recovery apparently is 
just coming forth, we must be sensitive to the broad economic 
implications of the timing and amount of pension funding 
requirements.
    From 2004 through 2006, I was Assistant Secretary for 
Economic Policy at the Treasury Department, and I participated 
actively in the Bush administration's formulations of policies 
in this area, ultimately leading to the passage of the Pension 
Protection Act. Although not perfect and somewhat incomplete, 
we believe that PPA is an important improvement over old law in 
many ways; in particular, to lead to fuller plan funding and 
more accurate measurement.
    PPA provided plan sponsors with some of the tools and 
incentives to ultimately better manage their funding risks, 
either to go with a liability-directed investment approach and 
smaller exposer to equities, or to build an asset cushion to 
reduce the need to make sudden large contributions and pay 
increased PBGC premiums. These are good ideas, and in more 
normal times will improve benefit security for workers and 
retirees, and also reduce risk exposure at the PBGC.
    Yet, at the exact time that the somewhat stricter funding 
regime of PPA was coming online, we experienced an almost 
unprecedented financial meltdown and deep recession. If the 
financial troubles had come later, I believe that corporate 
plans would have been in a better position, with new investment 
policies, or perhaps larger asset cushions; but the timing 
could hardly have been worse, and huge funding contributions 
would have been required when corporate cash flows were low and 
capital markets closed.
    So it was appropriate and timely that Congress passed last 
year, on a bipartisan basis, the Worker, Retiree and Employer 
Recovery Act, and that the IRS and Treasury provided this year 
some pieces of guidance that reduced the funding burden for the 
2009 plan year.
    Our estimate is that for the 2008 plan year, the average 
regulatory funded status was about 96 percent, and required 
funding payments for all single-employer defined benefit plans 
was just under $40 billion. With no changes, the average 
funding status would have declined to 75 percent, and required 
funding payments would have increased to $110 billion for the 
2009 plan year. But because of the combined impact of 
legislative and regulatory relief through September 25, we now 
estimate that the funding status will be nearly 94 percent and 
required funding payments of about $32 billion for the 2009 
plan year. That required funding will decline in 2009 from 2008 
is a good result for the economy, giving plan sponsors some 
breathing room.
    But the 2010 plan year is upon us, and corporate plan 
sponsors are considering its implications. Our estimate, even 
considering some recovery in the stock market thus far this 
year, is that the funding status will decline to 84 percent, 
and required funding payments will increase to almost $90 
billion in 2010 under current law.
    And the 2011 plan year looks worse, even assuming some 
positive returns, as the funding status is projected to decline 
to 77 percent and the required funding payments will increase 
to $146 billion, a heavy burden by any measure and 
consideration. So it is, again, appropriate and important that 
Congress is considering further relief.
    In my written testimony, I have some details about our 
estimates of modeling the three legislative proposals which are 
before Congress: Representative Miller's bill, approved by the 
Education and Labor Committee; key aspects of Representative 
Pomeroy's bill, circulated in draft discussion form; and House 
Minority Leader Representative Boehner's bill. Although they 
employ different technical mechanisms, each of the bills would 
reduce required funding payments somewhat in both 2010 and 
2011. Over the 3 years, Representative Boehner's bill gives the 
most relief, but the overall approach in all three bills of 
increasing requirements over time is reasonable.
    As a simple suggestion, in the spirit of all three bills 
but with the intent to give more relief, a cap could be imposed 
on current law required funding payments for the 2010 and 2011 
plan years of progressively increasing percentages based on the 
2009 required contributions.
    In closing, we believe that further legislative relief for 
single-employer defined benefit plans is both good economic and 
retirement plan policy. In particular, we want to emphasize 
that funding relief is not just a pension issue, but with cash 
flows still tight and borrowing difficult, for many plan 
sponsors it is a matter of jobs and even survival.
    I would be happy to answer your questions. And also, on 
behalf of Watson Wyatt Worldwide, I offer our technical 
assistance to the committee if you decide to pursue funding 
relief.
    In that regard, the committee acting quickly and positively 
on this important issue, on a bipartisan basis, would send the 
most positive signal to the plan sponsor community.
    Mr. NEAL. Thank you, Mr. Warshawsky.
    [The prepared statement of Mr. Warshawsky follows:]
Prepared Statement of Mark Warshawsky, Director of Retirement Research, 
              Watson Wyatt Worldwide, Arlington, Virginia
    Gaobo Pang and Brendan McFarland of the Research and Innovation 
Center at Watson Wyatt Worldwide provided valuable input in helping to 
prepare the analyses upon which most of this testimony is based.
    Chairman Rangel, Ranking Member Camp and Members of the Committee 
on Ways and Means, I appreciate the opportunity to present testimony on 
funding relief for single-employer defined benefit pension plans. The 
testimony represents the views of Watson Wyatt Worldwide, a global firm 
focused on providing human capital and financial management consulting 
services, doing business in the United States and in 32 other 
countries.
    Although they have declined in importance over recent years as the 
primary retirement vehicle for active workers in the private sector in 
the United States, single-employer defined benefit pension plans still 
represent an important source of retirement benefits to millions of 
workers and retirees. They also are a significant financial 
responsibility for major employers. Moreover, as experienced in the 
recent financial meltdowns and market volatility, the main alternate 
retirement plan type--defined contribution such as 401(k) plans--did 
not perform so well in providing retirement security and peace-of-mind 
to retirees and workers, or, by preliminary indications, a smooth and 
orderly flow of retirements for employers.
    If there is to be a good chance of a renewal of interest in defined 
benefit plans, for the mutual advantages of employers, workers, 
retirees, and society, it is important, at a minimum, that there be a 
supportive public policy environment for their continuation and 
creation. Perhaps of more immediate impact, at this sensitive time in 
the economic cycle, when weakness is still widespread, particularly in 
the job market, and the recovery, apparently, is just coming forth, we 
must be sensitive to the broad economic implications of the timing and 
amount of pension funding requirements.
    From 2004 through 2006, I was Assistant Secretary for Economic 
Policy at the Treasury Department. Because of my long and extensive 
research background in retirement plans in prior positions, at the 
Federal Reserve Board, the IRS, and TIAA-CREF, I participated actively 
in the Bush Administration's formulation of policies in this area, 
ultimately leading to the passage of the Pension Protection Act of 2006 
(``PPA''). Although not perfect and somewhat incomplete, we believe 
that PPA is an important improvement over old law in many ways, in 
particular, to lead to fuller plan funding and more accurate 
measurement.
    In the funding area, my modeling results indicate that, across many 
different economic circumstances, PPA would produce less volatile 
outcomes than old law.\1\ Old law was based on a knife-edge funding 
approach and Treasury bond yields which tended to go quite low in 
recessions, increasing pension liabilities somewhat artificially. Also, 
PPA provided plan sponsors with some of the tools and incentives to 
ultimately better manage their funding risks--either to go with a 
liability-directed investment approach, and smaller exposure to 
equities, or to build an asset cushion, to reduce the need to make 
sudden large contributions and pay increased PBGC premiums. These are 
good ideas and in more normal times will improve benefit security for 
workers and retirees, and also reduce risk exposure at the federal 
guaranty agency, the PBGC.
---------------------------------------------------------------------------
    \1\ See Mark J. Warshawsky, ``The New Pension Law and Defined 
Benefit Plans: A Surprisingly Good Match,'' Journal of Pension 
Benefits, Spring 2007, 14(3), pp. 14-27.
---------------------------------------------------------------------------
    Yet, at the exact time that the somewhat stricter funding regime of 
PPA was coming on line, we experienced an almost unprecedented 
financial meltdown and deep recession. If the financial troubles had 
come later, I believe that corporate plans would likely have been in a 
better position--with new investment policies or perhaps larger asset 
cushions. But the timing could hardly have been worse, and huge funding 
contributions would have been required when corporate cash flows were 
low and capital markets closed.
    So it was appropriate and timely, that Congress passed, last year, 
on a bipartisan basis, the Worker, Retiree and Employer Recovery Act of 
2008, and that the IRS and Treasury provided this year some pieces of 
guidance that reduced the funding burden for the 2009 plan year. Our 
estimate (see the attached article and sources indicated in the 
footnotes there for more details) is that for the 2008 plan year, the 
average regulatory funded status was about 96 percent and required 
funding payments for all single-employer defined benefit plans just 
under $40 billion. With no changes, the average funded status would 
have declined to 75 percent and required funding payments increased to 
around $110 billion for the 2009 plan year. Because of the combined 
legislative and regulatory relief through September 25, 2009, we now 
estimate that the average funded status will be nearly 94 percent and 
required funding payments about $32 billion for the 2009 plan year. 
That required contributions will decline in 2009 from 2008 is a good 
result for the economy, giving plan sponsors some breathing room.
    But the 2010 plan year is upon us, and corporate plan sponsors, 
with their long planning and budgeting horizons, are considering its 
implications. Our estimate, even with some recovery in the stock market 
thus far this year, is that the average funding status will decline to 
84 percent and required funding payments increase to almost $90 billion 
in 2010, under current law and regulations. And the 2011 plan year 
looks worse, even assuming positive returns in the stock and bond 
markets, as funding status is projected to decline to 77 percent and 
required funding payments to increase to $146 billion, a heavy burden 
by any measure and consideration.
    So it is again appropriate and important that Congress is 
considering further relief. We have modeled three legislative 
proposals--Representative Miller's bill approved by the Education and 
Labor Committee, keys aspects of Representative Pomeroy's bill 
circulated in draft discussion form, and House Minority Leader 
Representative Boehner's bill. Although they employ different technical 
mechanisms, each of the bills would reduce required funding payments 
somewhat in both 2010 and 2011 plan years. Representative Boehner's 
bill would also reduce 2009 funding payments significantly, while 
Representative Pomeroy's approach would increase them somewhat. The 
funding status of plans would improve significantly in 2009 under 
Representatives Pomeroy's and Boehner's bills, but would not change 
much thereafter in any of the bills.
    More specifically, our estimate is that under the Education and 
Labor Committee bill, funding payments would be $30 billion for the 
2009 plan year, $71 billion for 2010, and $130 billion for 2011. Under 
Representative Pomeroy's approach, funding payments would be $41 
billion in 2009, $79 billion in 2010, and $121 billion in 2011. Under 
Representative Boehner's bill, funding payments would be $10 billion in 
2009, $71 billion in 2010, and $125 billion in 2011. Over the three 
years, Representative Boehner's bill gives the most relief, but the 
overall approach in all three bills of increasing the requirements over 
time is reasonable. I should note that these estimates are based on a 
particular assumed set of future asset returns and interest rates; with 
more time, we could produce estimates for a few other sets to determine 
sensitivity to different economic conditions.
    As a simple suggestion, in the spirit of all three bills, but with 
the intent to give more relief, a cap could be imposed on current law 
required funding payments of increasing percentages of the 2009 
required contributions for the 2010 and 2011 plan years, respectively.
    Because of its many features, we did not model all of the 
provisions of Representative Pomeroy's draft discussion bill. For 
example, his bill would offer employers an alternative amortization 
approach of funding recent shortfalls over 15 years, a good idea. But 
the maintenance of effort provisions contained in the bill represent a 
tricky challenge to modelers because we do not know whether they would 
cause plan sponsors to pass on the funding relief to avoid the burdens 
and intrusions of the retirement plan benefit requirements. More 
fundamentally, it is an open question whether the twin purposes of 
temporary economic relief for plan sponsors and governmental support of 
defined benefit plans are well-served by the maintenance of effort 
provisions.
    If other than temporary narrowly drawn provisions are to be 
considered now, a supportive stance to consider to encourage full and 
ample funding for defined benefit plans in the long run and to 
discourage freezes and closes would be to reform the punitive asset 
reversion tax, with due protections for plan participants and the PBGC, 
as I have proposed and modeled elsewhere.\2\ In a more administrative 
vein, it would help policymakers and budget experts if the PBGC's 
financial statements and projections used the law's corporate bond 
market yield curve in valuing pension liabilities rather than a survey 
of group annuity prices that cannot be audited.
---------------------------------------------------------------------------
    \2\ See Gaobo Pang and Mark Warshawsky, ``Reform of the tax on 
reversions of excess pension assets,'' Journal of Pension Economics and 
Finance, 2009, 8(1), pp. 107-30.
---------------------------------------------------------------------------
    In closing, we believe that further legislative relief for single-
employer defined benefit pension plans is good economic and retirement 
plan policy. In particular, we want to emphasize that funding relief is 
not just a pension issue, but with cash flows still tight and borrowing 
difficult, for many plan sponsors it is a matter of jobs and even 
survival.
    I would be happy to answer your questions. On behalf of Watson 
Wyatt Worldwide, I also offer our technical assistance to the Committee 
if you decide to pursue funding relief. In that regard, the Committee 
acting quickly and positively to this important issue on a bipartisan 
basis would send the most positive signal to the plan sponsor 
community.
Attachment: An article forthcoming in the Watson Wyatt Worldwide 
        Insider newsletter.
Funding for DB Pension Plans in 2010 and 2011 Under Relief Proposals
    While recent legislative and regulatory measures have given defined 
benefit (DB) plan sponsors some funding relief for 2009, required 
contributions for 2010 and 2011 have loomed large.\3\ In this analysis, 
Watson Wyatt projects funded status and required contributions for 
single-employer DB plans using an updated version of its comprehensive 
and realistic model of plan funding.\4\ It considers five scenarios: 
(1) the law prior to Sept. 24, 2009, including the Pension Protection 
Act of 2006 (PPA), the Worker, Retiree and Employer Recovery Act of 
2008 (WRERA) and the March 2009 IRS guidance; (2) current law, 
including the IRS guidance released on Sept. 25, 2009; (3) House 
Education and Labor Committee bill (H.R. 2989) introduced in June 2009; 
(4) the main provisions of Representative Earl Pomeroy's (D-N.D.) 
discussion draft released in August 2009; and (5) House Minority Leader 
John Boehner's (R-Ohio) bill (H.R. 2021) introduced in April 2009.
---------------------------------------------------------------------------
    \3\ See ``New Relief From IRS Reduces Required DB Plan 
Contributions for 2009, but Large Increase Looms for 2010,'' Watson 
Wyatt Insider, 19(4), 1-3, April 2009.
    \4\ For details of the original model, see ``The Future of DB Plan 
Funding Under PPA, Recovery Act and Relief Proposals,'' Watson Wyatt 
Insider, 19(1), 1-6, January 2009.
---------------------------------------------------------------------------
    Our results indicate that the most recent IRS guidance eases the DB 
funding schedule through 2010. The legislative relief proposals further 
lighten the DB funding schedule and extend it into 2011, freeing up 
financial resources--currently in short supply generally--for other 
corporate purposes, including jobs and investment in plant and 
equipment.
Relief proposals
    Figure 1 summarizes the major provisions in current law and the 
relief proposals. The Sept. 25 IRS Employee Plans News confirms that 
``the final regulations will provide automatic approval for a new 
choice of interest rates for the first plan year beginning in 2010.\5\ 
Two of the relief proposals also provide this relief. Sponsors that 
have the option of electing a liability valuation method will likely 
switch from mark-to-market methods to smoothed-value methods for 2010--
the latter approaches are more advantageous for 2010 and 2011 plan 
years under the normal economic and financial conditions assumed.\6\
---------------------------------------------------------------------------
    \5\ Employee Plans News, Special Edition, IRS, Sept. 25, 2009.
    \6\ See the Appendix.
---------------------------------------------------------------------------
    All three legislative proposals include a ``2+7'' rule, which 
allows sponsors to make up any 2009 and 2010 shortfalls with interest-
only payments in the first two years, followed by normal seven-year 
amortization of the shortfall amount. Representative Pomeroy's 
discussion draft additionally mandates that contributions for 2009, 
2010 and 2011 must exceed 2008 minimum contributions by specified 
percentages increasing over time. A wider asset smoothing corridor in 
the proposals from Representatives Pomeroy and Boehner would make the 
smoothing method more attractive for asset valuation and cushion market 
losses.

              Figure 1: Summary of funding relief proposals
------------------------------------------------------------------------
               Law prior   Current    Education       Rep.
                to Sept.  law as of   and Labor    Pomeroy's      Rep.
                24, 2009  Sept. 25,   Committee    discussion  Boehner's
                             2009        bill        draft        bill
------------------------------------------------------------------------
Amortization   Generally  Generally  2+7 rule:    2+7 rule;    2+7 rule
 relief         7-year     7-year     interest-    additional
                amortiza   amortiza   only for 2   ly, the
                tion       tion       years,       minimum
                                      then 7-      contributi
                                      year         ons for
                                      amortizati   2009, 2010
                                      on of the    and 2011
                                      2009 and     must be at
                                      2010         least
                                      shortfalls   105%, 110%
                                                   and 115%
                                                   of 2008
                                                   minimum
                                                   contributi
                                                   ons,
                                                   respective
                                                   ly
------------------------------------------------------------------------
Asset          10%        10%        Current law  20% for      20% for
 smoothing                                         2009 and     2009 and
 corridor                                          2010         2010
------------------------------------------------------------------------
Interest rate  IRS        Allow a    Proposed to  Proposed to  Not
 elections      allowed    switch     allow a      allow a      addresse
                changes    from       switch       switch       d;
                in 2009.   spot       from spot    from spot    current
                The rule   yield      yield        yield        law in
                for 2010   curve      curve for    curve for    effect
                was        for 2009   2009 to      2009 to
                unknown    to         segment      segment
                prior to   segment    rates for    rates for
                Sept.      rates      2010;        2010;
                24, and    for 2010   current      current
                ``not                 law in       law in
                allowed'              effect       effect
                ' is
                modeled
                here
------------------------------------------------------------------------
Note: Representative Pomeroy's discussion draft allows plan sponsors to
  choose between applying the 2+7 rule and amortizing the shortfalls
  over 15 years under various conditions. The latter is not modeled
  here. The draft also includes various ``maintenance of effort'' plan
  requirements, opposed by the employer community.
Source: Watson Wyatt summary and assumptions.

Funding model results
    Average regulatory funded status is projected to decline from 96.4 
percent in 2008 to 93.8 percent in 2009 (see Figure 2).\7\ The modest 
decline, despite horrific investment losses, is attributable to the 
asset value smoothing provided under WRERA and use of the most 
favorable spot rate for liability valuation allowed by the March 2009 
issue of the IRS's Employee Plans News (the composite corporate bond 
rate, CCBR, which is used as a proxy for spot yield curve, peaked in 
October 2008). Without the Sept. 25, 2009, IRS guidance allowing 
interest rate election, average funded status, however, would have 
plummeted to about 78 percent in 2010 and to 77 percent in 2011, 
thereby driving required contributions up to roughly $121 billion in 
2010 and to $145 billion in 2011. Moreover, some sponsors would 
contribute more to avoid benefit restrictions at the 80 percent funded 
threshold--the model conservatively projects another $7 billion and $12 
billion extra contributions for 2010 and 2011, respectively.
---------------------------------------------------------------------------
    \7\ The Appendix gives a brief description of the methodology and 
assumptions.
---------------------------------------------------------------------------
    The IRS's automatic approval of interest rate elections in 2010 is 
projected to boost average funded status to nearly 84 percent in 2010 
and 77 percent in 2011. This scenario lowers required contributions to 
$89 billion for the 2010 plan year but requires $147 billion of 
contributions for 2011.
    The Education and Labor Committee bill would increase measured 
funded status in 2009, reduce required contributions in 2009 and 2010, 
and postpone a large part of the funding obligations to 2011. Compared 
with the Sept. 25 IRS guidance, the two-year interest-only rule here 
provides further funding relief in terms of lower contributions for the 
2009-2011 plan years.
    Representative Pomeroy's discussion draft would afford the biggest 
gains in funded status for 2009 and 2010, both because the draft 
permits a wider asset smoothing corridor and because contributions for 
new plan years must exceed 2008 minimum contributions by certain 
margins. Note that contributions in 2009 exceed current law 
requirements. In this scenario, contributions for 2009-2011 jump from 
roughly $41 billion to $121 billion, the funded status of nearly 77 
percent in 2011 remains close to the level produced by current law, and 
fewer plans face the 80 percent funding threshold for benefit 
restrictions.
    Representative Boehner's bill provides the greatest funding relief 
for 2009--total contributions would be only around $10 billion. In 
later years, the bill results in higher contributions and funded status 
similar to the other legislative proposals.
    Note that the interest rate elections and/or the proposed wider 
asset corridors reduce the shortfalls recognized for 2009 and 2010 plan 
years. This in turn would make the amortization payment significantly 
smaller than otherwise in 2011 when the 2+7 rule reached its seven-year 
amortization component for these specific shortfalls.

               Figure 2: Measured funded status and contributions under current law and proposals
----------------------------------------------------------------------------------------------------------------
                                                                    Current    Education     Rep.
                                               Plan    Law prior   law as of   and Labor   Pomeroy's     Rep.
                                               year    to Sept.    Sept. 25,   Committee  discussion   Boehner's
                                                       24, 2009      2009        bill        draft       bill
----------------------------------------------------------------------------------------------------------------
Average measured                                2007      95.9        95.9        95.9        95.9        95.9
----------------------------------------------------------------------------------------------------------------
funded status (%)                               2008      96.4        96.4        96.4        96.4        96.4
----------------------------------------------------------------------------------------------------------------
                                                2009      93.8        93.8        93.8       102.3       102.3
----------------------------------------------------------------------------------------------------------------
                                                2010      77.7        83.8        83.7        84.5        82.5
----------------------------------------------------------------------------------------------------------------
                                                2011      77.4        76.8        75.7        77.1        74.5
----------------------------------------------------------------------------------------------------------------
Contributions                                   2007      53.1        53.1        53.1        53.1        53.1
----------------------------------------------------------------------------------------------------------------
($b)                                            2008      37.9        37.9        37.9        37.9        37.9
----------------------------------------------------------------------------------------------------------------
                                                2009      32.4        32.4        30.4        40.8        10.4
----------------------------------------------------------------------------------------------------------------
                                                2010     120.5        89.0        70.9        79.0        71.4
----------------------------------------------------------------------------------------------------------------
                                                2011     145.2       146.5       130.0       120.8       124.9
----------------------------------------------------------------------------------------------------------------
Extra contributions
----------------------------------------------------------------------------------------------------------------
($b)                                            2008       0.5         0.5         0.5         0.5         0.5
----------------------------------------------------------------------------------------------------------------
                                                2009       0.9         0.9         0.9         0.2         0.2
----------------------------------------------------------------------------------------------------------------
                                                2010       7.0         3.1         3.4         4.0         7.5
----------------------------------------------------------------------------------------------------------------
                                                2011      11.7        11.6         4.2         6.7         3.9
----------------------------------------------------------------------------------------------------------------
Notes: Contributions are the minimum required by law. Extra contributions by certain plans are to avoid benefit
  restrictions at the 80 percent funded status level.
Source: Watson Wyatt calculations.

    These results indicate that the funding relief in the September 
2009 IRS guidance enables DB plan sponsors to avoid burdensome 
contribution obligations for 2010. The 2011 funding obligations, 
however, remain large. These obligations could divert financial 
resources that companies would otherwise spend on hiring workers--or 
continuing to employ them--and on increasing their compensation and 
paying for other benefits,\8\ thus escalating the risk of a jobless 
economic recovery. The funding relief proposals would further alter the 
schedule and magnitude of DB contributions, in varying patterns. Like 
past relief actions, further relief would signify bipartisan 
congressional and administration support for keeping DB plans viable 
for American workers and employers.
---------------------------------------------------------------------------
    \8\ One criticism of our model has been that, in the absence of 
data and plan-specific information, credit balances are ignored. Market 
value declines, past use and forfeitures (both voluntary and required) 
have likely significantly reduced credit balances outstanding. 
Moreover, from the perspective of employers making job decisions, 
credit balances are largely as valuable as cash, so reducing credit 
balances should have essentially the same economic impact as making 
cash contributions.
---------------------------------------------------------------------------
Appendix: Methodology and assumptions
    We use a comprehensive model to simulate the dynamics of DB plans. 
The model codes in the shortfall amortization schedules of the PPA, the 
provisions of WRERA and IRS guidance. It uses 2007 initial funded 
status, 2007 aggregate liabilities of $1.857 trillion, matrices of 
asset allocations by funded status and plan size for 2007-2009 as data 
allows, and market conditions as of Sept. 15, 2009. This analysis 
assumes that by the end of 2011, market interest rates will have 
reached year-end 2007 levels. The data sources include the IRS, Form 
5500 and Global Financial Data. Average returns for equity and bond 
assets in 2010 and 2011 are based on the forward-looking projections of 
Watson Wyatt Investment Consulting (WWIC), which incorporates higher 
market volatilities in the near term and assumes a gradual convergence 
to equilibrium over a five-year period. Figure A-1 lists the basic 
economic and financial assumptions.

                   Figure A-1: Economic and financial assumptions at end of calendar year (%)
----------------------------------------------------------------------------------------------------------------
                                                         2007        2008        2009        2010        2011
----------------------------------------------------------------------------------------------------------------
Equity return                                            5.5       -37.0        18.7         9.7         9.5
Bond return                                              5.2         1.8        15.5         4.4         4.3
CCBR                                                     6.28        7.90        6.03        6.16        6.28
2nd segment rate                                         5.90        6.38        6.73        6.29        6.16
3rd segment rate                                         6.41        6.68        6.82        6.29        6.16
----------------------------------------------------------------------------------------------------------------
Notes:

1. The most favorable CCBR (as a proxy for spot yield curve) for the 2009 plan year was 7.90 percent in October
  2008, while December 2008 had the highest segment rates.
2. CCBR and segment rates for 2009 are as of August and September 2009, respectively. The end-of-2011 CCBR is
  set to the year-end 2007 level, the 2nd and 3rd segment rates (assumed to be equal in 2010 and 2011) are
  correspondingly calculated as 24-month moving averages.
3. Asset returns for 2009 are based on S&P500 and Dow Jones corporate bonds total return indexes as of Sept. 15,
  2009. Annual equity and bond returns for 2010 and 2011 are based on WWIC forward-looking (July 2009)
  projections. Monthly returns are log-linearly interpolated.

Source: Watson Wyatt calculations and assumptions.


                                 

    Mr. NEAL. I would now like to recognize Chairman Rangel.
    Chairman RANGEL. Before I turn the panel back over to you, 
I would like to ask Mr. Nuti if he would describe the expected 
size of your company's expected minimum contribution for the 
2009 plan year and the 2010 plan year. How do these minimum 
contributions vary from your company's contribution in 2008 and 
earlier years?
    Mr. NUTI. The best way to think about this, Chairman 
Rangel, is over the next--NCR is approximately $1 billion 
underfunded today, based on the market downturn, the third 
worst market downturn in the last nearly 100 years that we have 
suffered over the last 12 months. That $1 billion, if you just 
used straight-line amortization, would be approximately $150 
million a year of additional cash we would need to use to fund 
the plan over that time period. That breaks down for us, using 
the simple math I used before at $50,000 per employee, to about 
3,000 employees that we may need to lay off as a result of that 
issue alone. So that gives you a sense of the magnitude.
    And if you looked at the other companies in the ABC that we 
are talking about, some are significantly larger and have even 
larger burdens than our own significant burden I just 
discussed.
    Chairman RANGEL. Thank you.
    Mr. Neal.
    Mr. NEAL. Thank you very much, Mr. Rangel.
    The Chair would now recognize Mr. Camp from Michigan.
    Mr. CAMP. Thank you very much. I appreciate that.
    Mr. Warshawsky, as we think about relief for defined 
benefit plans, obviously balancing the competing interests we 
have heard other people mention today--workers, retirees, 
employers and taxpayers--we need to make sure pension plans are 
fully funded so workers can be confident they get the benefits 
they are entitled to, and we need to protect the financial 
health of the PBGC; but at the same time, with this lingering 
recession and the credit crisis, declining stock prices and 
other items, it is appropriate to provide some temporary relief 
from the stricter funding rules Congress enacted in 2006.
    How can Congress best strike this balance?
    Mr. WARSHAWSKY. Mr. Camp, I believe the best way of 
striking a balance is to give temporary relief in the context 
of the preservation of PPA. I think that is the right balance 
in terms of the competing interests which you correctly noted.
    Mr. CAMP. So your view is that, given that some relief 
should be necessary, that it makes more sense to provide 
temporary relief from those 2006 rules as opposed to 
permanently changing the rules themselves?
    Mr. WARSHAWSKY. Yes. And I would note that we probably will 
need more relief--some of the bills indicate the relief as 
applied to the 2009 and 2010 plan years, but unfortunately the 
depth of the problem indicates that it might be necessary to 
include the 2011 plan year as well.
    Mr. CAMP. Last Friday, the Treasury Department announced 
that it will be providing guidance regarding interest rates 
that plans may use going forward. Can you discuss the 
significance of the Treasury's announcement on plan funding 
requirements?
    Mr. WARSHAWSKY. The Treasury has been very helpful in this 
area, both earlier in the year in March, and recently. In 
particular, it relates to the use of interest rates that are 
used to measure liabilities for plans. And both for 2009 and 
2010, they provided flexibility within the context of PPA and 
within the context of the regulations, which have a major 
impact in reducing 2009 contributions.
    Mr. CAMP. Smoothing allows plans to deal with unusually 
large declines in asset values by adjusting those values in a 
particular range. Can you describe for the committee in 
laymen's terms how each of the major proposals--Boehner, Miller 
and Pomeroy--deal with that issue of smoothing and the merits 
of each approach?
    Mr. WARSHAWSKY. That is a tall order to describe in 
laymen's terms. Maybe the one way of approaching it is there 
are different technical aspects of each of the bills. In both 
Representative Boehner's bill and Representative Pomeroy's 
bill, if my memory serves me correct, one way in which they 
accomplish the temporary relief is by allowing a wider corridor 
of asset smoothing for the losses in 2009 and 2010. There are a 
lot of ways of accomplishing that. I would almost characterize 
those as technical matters. I think the important thing is that 
there be the relief, and that it be temporary. And there are a 
lot of ways of accomplishing that.
    Mr. CAMP. Are you familiar with the Miller bill on that 
issue?
    Mr. WARSHAWSKY. The Miller bill does not expand the asset 
smoothing corridor.
    Mr. CAMP. All right. Thank you very much.
    Mr. NEAL. Thank you, Mr. Camp.
    Mr. Warshawsky, let me drill down a bit with you on some of 
the assumptions that you discuss in your study. If we were 
sitting here 2 years ago, I presume that your assumptions would 
have been very different than the assumptions you would offer 
today for the next 2 years. Do you want to talk a little bit 
about the assumptions in your study for the next couple of 
years?
    Mr. WARSHAWSKY. We used the assumptions that Watson Wyatt 
uses for its investment advice. For 2009, basically we assume 
market advance through September 15, and no further advance 
through the remainder of the year. And then for 2010 and 2011, 
we assume about an 8 to 9 percent positive return. So not 
gangbuster returns, but neither a decline, sort of a middle-of-
the-road approach. And on interest rates, we assumed a gradual 
decline in interest rates that are used to value liabilities as 
conditions, as the economy settles down.
    So those are middle-of-the-road assumptions. I think it 
would be very valuable, if you have an interest, to do a little 
bit of sensitivity testing of the model, and we could easily do 
that.
    Mr. NEAL. How does this compare to assumptions that have 
been made in the past, considering this atmosphere?
    Mr. WARSHAWSKY. I think these are very standard assumptions 
and would have been made in the past as well.
    Mr. NEAL. Mr. Rosenthal, you have indicated in your 
testimony that the IRS relief provided earlier this year has 
been fairly helpful. I understand that businesses have 
flexibility in selecting the relevant discount rate which can 
impact the present value of their liabilities.
    Does that mean that the true financial picture of private 
pension plans in the United States could be worse than your 
testimony has suggested?
    Mr. ROSENTHAL. The IRS relief allowed companies to look 
back to interest rates that were in effect in October 2008, 
which are substantially higher and, therefore, derived lower 
liabilities than interest rates in effect at the beginning of 
2009. So that lookback, while very helpful for plans, did 
reduce plan liabilities by approximately 10 to 20 percent, 
based on our study.
    Mr. NEAL. Let me recognize the gentleman from Michigan, Mr. 
Levin, to inquire.
    Mr. LEVIN. Thank you very much.
    You know, as we read the materials, and now hearing your 
testimony, it did bring back some memories of our debate of a 
few years ago, and it involved real technical issues. I think 
the bottom line--and some of us objected to parts of the 
legislation as being too stringent.
    I take it from the testimony of most, if not all of you, it 
is turning out that in retrospect, what was written then is not 
working now. And there is a serious problem facing these 
pension plans.
    Mr. Warshawsky, when I read your testimony, I kind of came 
to that conclusion. You essentially said what was done a few 
years ago was better than what was replaced, but we face a 
basic issue today. And I think all of you agree we have to do 
something; is that right? Does anybody think we should do 
nothing? I know there is disagreement as to under what 
conditions, but I think all of you agree we need to act; is 
that true? When you nod--yes. So in other words, what was done 
several years ago isn't meeting the requirements of today.
    But none of the bills, at least what we have before us, 
doesn't make a basic change in the structure. Mr. Pomeroy's 
bill, which is still in the process of being worked out, I 
think more effectively addresses some of these issues. So the 
difference of opinion, I think, is under what conditions this 
relief for these years should be provided; is that correct? And 
we then get into the important issue as to what should be done 
with plans that have frozen benefits, reduced benefits, or 
frozen out people from being covered; is that true?
    So to try to boil this down in this important but somewhat 
technical area, what we are facing is not whether, but how much 
and under what conditions. I have just a couple minutes.
    Mr. Stein, you take the position that there are conditions 
that should apply here, right, relating to frozen plans?
    Mr. STEIN. Yes.
    Mr. LEVIN. And that is where your disagreement is.
    Mr. Silvers, you talked about some of the basic issues, so 
spend a couple minutes telling us what you think the 
disagreements are in terms of what we do right now, not redoing 
this. And I think the administration is taking some time 
because it faces this dilemma of a bill that is not adequate 
for yesterday, today, and near tomorrow, right? So they are 
trying to wrestle with this.
    So, Mr. Silvers, in the minute or two I have, why don't 
you--because I think you talk about something a little more 
basic.
    Mr. SILVERS. Yes. Congressman, I think there are two 
longer-term agendas, and then there is the immediate. And you 
asked what the disagreement was here. I think that the 
disagreement is whether or not we ought to craft the relief not 
just to prevent a catastrophe immediately, but to ensure the 
continued health of the actual provision of benefits to 
employees. The business community would like the relief to be 
unconditional to any plan, regardless of whether the plan 
continues to be a living plan.
    I think the position of the advocates here for American 
workers and for pension participants is that we should not be 
giving relief to companies who are essentially withdrawing 
from, retreating from the obligation to provide retirement 
security to their employees. That is the disagreement.
    Now, more longer term, I think there is a disagreement 
about whether or not there needs to be ongoing change to the 
Pension Protection Act.
    And finally, I am sure there would be a disagreement, if we 
got into it, as to whether or not employers really ought to be 
responsible, in part, for the retirement security of their 
employees.
    Mr. LEVIN. I hope there would not be much disagreement 
about that. We have enough to disagree about.
    My time is up, so I think it would be helpful, as we 
proceed, that we try to flesh out where we are and what the 
issues are in terms of immediate action so that we can act. 
Since all of you agree we need to act, we need to act.
    The administration, I think, Mr. Chairman, is going to come 
to forth with some recommendations in the near future. Thank 
you.
    Mr. NEAL. [Presiding.] Thank you, Mr. Levin.
    Consistent with that suggestion, this committee has 
received a letter signed by almost 200 companies and trade 
organizations representing employers, asking for immediate 
relief on the pension funding issue.
    I would like to enter it into the record at this point--
without objection--and ask that the staff continue to 
distribute a copy to the Members of the Committee.
    With that, I would like to recognize the gentleman from 
California, Mr. Herger, to inquire.
    Mr. HERGER. Thank you very much, Mr. Chairman.
    [The information follows:]

       ******** COMMITTEE INSERT ********

    Mr. HERGER. Mr. Warshawsky, some have proposed that 
additional funding relief be conditioned on employers accepting 
a maintenance of effort obligation or certain limitations on 
executive compensation. I understand that employer groups view 
additional funding relief as absolutely imperative, so much so 
that some of them are willing to accept these kinds of 
conditions in exchange for this relief.
    Is it possible that some employers might be unwilling to 
accept relief tied to these kinds of conditions, effectively 
limiting the breadth of relief that Congress is considering?
    Are you concerned that linking these kinds of conditions to 
funding relief for the first time may set a precedent for the 
future, possibly undermining the voluntary nature of employer-
sponsored retirement plans?
    Mr. WARSHAWSKY. Mr. Herger, I am concerned on both counts.
    First of all, the maintenance of efforts and provisions do 
undercut the economic relief that funding relief represents 
because $146 billion for 2011 is a massive number, and would 
have very bad implications for the broad economy.
    When we talk about relief, you know, in general terms--
certainly the stimulus package earlier in the year--generally, 
we do not do a lot of conditioning because we are interested in 
the economic impact, and if that is the main purpose here, 
which I believe it should be, there really should not be a lot 
of conditioning.
    The second point relates to more of a pension policy issue, 
which, of course, takes time to consider, and it therefore, in 
and of itself, I think, delays the immediacy of what relief is 
needed. I think the quicker we act on this, the stronger signal 
it sends, and therefore, doing a lot of conditioning, leads to 
unnecessary delays, and it also represents a very significant 
policy change.
    Mr. HERGER. Again, Mr. Warshawsky, I believe that, as we 
consider defined benefit funding relief, we need to carefully 
balance a number of competing interests--those of workers, 
retirees, employers, and taxpayers.
    On the one hand, it is important for Congress to ensure 
that pension plans are fully funded so that workers and 
retirees can be confident that they will receive their promised 
retirement benefits. It is also important to protect the 
financial health of the PBGC, which ensures private pension 
plans, to avoid a situation where American taxpayers are forced 
to bail out the PBGC.
    At the same time, given the lingering recession, the 
ongoing credit crisis and a decline in stock prices as compared 
to pre-recession levels, it may be appropriate to provide 
employers some temporary relief from the stricter funding rules 
Congress enacted in 2006.
    Can you, please, share your thoughts about how Congress 
should strike this balance?
    Mr. WARSHAWSKY. Mr. Herger, as I said in my testimony, I 
think the problem here is the matter of timing, that the onset 
of PPA and the somewhat stricter regime that it represented 
came exactly at the time that the stock market declined in 
almost an unprecedented manner, not just the level but the 
rapidity of it, and therefore, the temporary relief is 
necessary.
    Even with as large a decline as what we saw, if we had had 
more years in the development of response to PPA, either in 
terms of investment changes or a development of funding 
cushions by employers, we would have been in a much better 
position to deal with this event.
    Mr. HERGER. I thank you.
    Thank you, Mr. Chairman.
    Mr. NEAL. Thank you, Mr. Herger.
    The gentleman from Georgia, Mr. Lewis, is recognized to 
inquire.
    Mr. LEWIS. Thank you very much, Mr. Chairman.
    Mr. Chairman, I want to thank you for holding this hearing 
today on this very important issue.
    I want to thank all of the members of this panel for being 
present and for your contribution. We all know and understand 
that one of the main reasons companies offer pension plans is 
to stay competitive and to attract employees, but for many 
employers, it is more than just the business reasons.
    Can you tell us more about the moral obligation of an 
employer to offer retirement benefits to their workers?
    Any of you may respond.
    Ms. MAZO. Mr. Chairman, I would like to talk a little bit 
from the perspective of the multi-employer community that I am 
representing and, first of all, take the time to just point out 
that the issues that we are raising about funding and the 
temporary assistance that we are asking for is quite different 
than what the community needs.
    In part, that is because PPA was, in some ways, more 
adaptable for the multi-employer plans than it was for the 
plans, but the multi-employer plans represent a commitment by 
the employers and the unions that represent the workers. They 
are part of a package. Typically, they are part of a package 
that includes health benefits and retirement benefits and 
sometimes other benefits where, because these promises are 
being made by everybody in the industry, they do represent a 
moral commitment by the entire industry to take care of the 
people who have been generating the wealth within that 
industry.
    These groups are remaining committed to defined benefit 
plans, committed to ongoing defined benefit--not to freezing 
the plans if they can possibly afford not to--and committed to 
keeping the employers viable to avoid not having plans and 
their pension and health commitments be so strenuous that they 
strangle the employers who are the lifeblood of the industry, 
the jobs and the future of the workers who are covered by the 
plans.
    Mr. LEWIS. Yes, sir.
    Mr. SILVERS. Congressman Lewis, first, let me just say that 
it is an honor to discuss moral issues with you, sir, and that 
my written testimony goes into this issue in some detail.
    We inherited in the postwar world a pension system that 
provided coverage through defined benefit plans that leveraged 
an employer's capacity to be able to manage money expertly, and 
that involved substantial employer contributions. We had 
defined benefit pension funds covering 50 percent of the 
American workforce. Since 1980, that number in the private 
sector has declined to under 20 percent.
    The consequence of that decline has been the wholesale 
deterioration of retirement security for American workers such 
that the typical defined contribution balance for families in 
their 50s is around $60,000. It was that before the collapse of 
2008. That represents a societal moral failing.
    We are here today--and the substance of the disagreement 
that exists between the employee advocates and the employers 
here is a disagreement about whether or not there is a moral 
obligation on the part of the Congress to ensure that, in the 
course of providing the relief, we bolster pension plans that 
can actually provide retirement security or whether we 
essentially provide relief to employers who are running away 
from that moral obligation. That is the fundamental issue 
facing the Congress.
    Mr. LEWIS. Thank you.
    Mr. NUTI. Congressman Lewis, I will be short, but I want to 
be clear as well with you with regard to how we at NCR and, 
candidly, the members of the American Benefits Council view 
pensions. We view them as a moral obligation and very 
important.
    Over the last 10 years, my company has paid benefits of 
$1.5 billion into our pension plan, and we were fully funded as 
of the 1st of January 2008. The Pomeroy bill also holds us 
accountable to fully funding that plan on schedule and on time 
and maintaining our commitments to our employees--our 
pensioners--and that moral obligation.
    The 2 and 7 method that is being recommended--what it does 
is recognizes that, over the past year to a year and a half, 
there has been an incredible event in the marketplace that has 
occurred and with respect to the global economic crisis and the 
impact it has had on our return on assets and on our pension 
portfolios, and it allows us simply to recover but does not 
allow us to disregard our commitment in that same time period 
to fully funding the pension plan, which we intend to do and 
which all of the members of our council intend to do.
    Mr. LEWIS. Thank you very much.
    Mr. NEAL. Thank you, Mr. Lewis.
    Let me advise our members and witnesses that we have three 
votes on the House floor. The committee will recess until after 
the last vote, and I think that we can speed this up so that we 
can resume testimony very quickly.
    [Recess.]
    Mr. NEAL. With that, the gentleman from Texas, Mr. Johnson, 
is recognized to inquire.
    Mr. JOHNSON. Thank you, Mr. Chairman.
    Mr. Rosenthal, are you ready?
    Mr. ROSENTHAL. I am, sir. I will even turn the microphone 
on.
    Mr. JOHNSON. In your testimony, you claim many ``defined 
benefit plans are going to face significant higher required 
contributions in 2010.'' Absent any legislative relief, would 
you know what percentage would be able to meet their 
requirements in 2010?
    Mr. ROSENTHAL. That I do not know, sir. I do know that 
interest rates are well below where they were in October 2008, 
which will make liability significantly higher for plans come 
2010.
    Mr. JOHNSON. Okay. In your testimony, you contend `` . . . 
many calendar year defined benefit plans are in a good position 
to meet their required contributions for 2009.''
    In terms of investment return and legislative and 
regulatory relief, what has helped these plans the most in 
being in a ``good position''?
    Mr. ROSENTHAL. Mostly the ability to use that October 2008 
full yield curve where interest rates, in a sense, peaked in 
2008 back in October. So the ability to look back, which came 
from the IRS guidance provided in March of this year, helped 
most of those plans.
    Mr. JOHNSON. Notwithstanding the extra percentage we gave 
them?
    Mr. ROSENTHAL. Of course.
    Mr. JOHNSON. Yes. Thank you, sir.
    Mr. Warshawsky, compared to defined benefit plans, you 
state defined contribution plans, such as 401(k)s, ``did not 
perform so well in providing retirement security and peace of 
mind to retirees and workers'' during the recent downturn.
    With that in mind, do you have any suggestions or ideas in 
terms of what can be done to provide a more secure retirement 
for workers who have defined contribution plans as their 
primary retirement vehicle?
    Mr. WARSHAWSKY. Mr. Johnson, I think there are a number of 
elements that can be put together that would make defined 
contribution plans more effective.
    One is the steady stream of contributions over a worker's 
life. I think that is an important element. Certainly, an 
important aspect is the investment strategies that workers use, 
and also, as workers approach retirement, they need to consider 
that that money that they have accumulated is not just a lump 
sum, but is something that they will then need to support them 
in retirement as an income flow.
    So, although, you know, a lot of people have talked about 
annuitization, I think it is a little more sophisticated than 
that. Basically, they need help in getting strategies for 
distributing assets in a regular and steady way into their 
retirement.
    So those are elements of a package, which need to be added 
to defined contribution plans, which a lot of plans do not have 
right now.
    Mr. JOHNSON. Well, that kind of leads into our next deal; 
but investment advice, in your opinion then, is important?
    Mr. WARSHAWSKY. Well, I think there are a lot of elements--
both the investment advice and also the products and services 
that are offered to both the participants and the plan 
sponsors.
    Mr. JOHNSON. Thank you.
    Thank you, Mr. Chairman.
    Mr. NEAL. Thank you, Mr. Johnson.
    The Chair will recognize the gentleman from North Dakota, 
Mr. Pomeroy, to inquire.
    Mr. POMEROY. Mr. Chairman, thank you.
    I want to begin by saying how much I am enjoying this 
hearing. I believe that the issue of pensions is urgently 
important, and I just think the panel has been terrific 
relative to bringing important information about the need for 
funding relief to our Ways and Means Committee.
    I want to begin, I think, with Mr. Nuti. Am I pronouncing 
that correctly? I want to thank you for being here. Often we 
have the HR department's representative or some other 
department's representative, but to have the CEO of a global 
company come to talk about the importance of pension funding 
issues relative to employment ramifications across your firm or 
across the marketplace is extremely valuable information, and 
because it has been a while since your initial testimony, I 
would like to get you back to essentially what you have already 
covered so well, but let's emphasize it some more.
    This is a jobs issue, Mr. Nuti, is it not?
    Mr. NUTI. It is, indeed. It is a very serious jobs issue, 
and I think it is important that we understand the implications 
of your decisions relative to jobs.
    The reality is--and I said this before--if we do not move 
forward with pension reform, we and hundreds of other companies 
are going to have to cut jobs. Let me be very clear on that. 
There is no other way for us to cover the cost of providing the 
pension benefits we will need to, which, by the way--I want to 
be clear on this--will be amortized over, you know, 30 years.
    So the money we are putting into a pension today or next 
year or the year after is to pay benefits over a 30-year period 
while, now, we sit here today, making a very critical decision 
on this, knowing full well, with the stimulus ending in 2010, 
coming to a halt, at a time when jobs will be a much more 
important issue to our country.
    We have a very uncertain economy we are still navigating, 
and that all of our CEOs are navigating through. This has to be 
of paramount concern to you because you will see jobs 
eliminated, and you will see investment eliminated in this 
country, which impacts our competitiveness, U.S. 
competitiveness, in the marketplace.
    Mr. POMEROY. Importantly, right across the panel, there 
seems to be agreement that some funding relief is appropriate. 
We have got different ways of doing it. Some would revise a bit 
the provisions of the Pension Protection Act. Some would give 
temporary relief. There seems to be agreement across the panel 
that some relief is appropriate.
    Mr. Warshawsky, you have spoken to that very clearly. I 
want my friends on the other side of the dais to hear you 
clearly. Some pension funding relief is appropriate under these 
extraordinary circumstances; is that correct?
    Mr. WARSHAWSKY. Yes, Mr. Pomeroy, because of the 
extraordinary circumstances in asset markets.
    Mr. POMEROY. Thank you. We have to take that agreement and 
really internalize it. We have got some work to do as a 
committee. Jobs and retirement security are at stake.
    For purposes of argument now--we do not see the world 
entirely similarly--Mr. Warshawsky would have temporary relief. 
That is better than nothing; but I believe the prospect is, if 
you do temporary relief, well, maybe you have to do temporary 
relief again, and maybe you have to do temporary relief again; 
and pretty soon you have got companies that face extraordinary 
funding exposure, and they do not know whether the temporary 
relief is going to come or not. They really need to know what 
the rules are on a permanent, going-forward basis.
    Mr. Nuti, as a CEO, what is your comment on that?
    Mr. NUTI. The predictability is critical to us. We must 
have it.
    If I can just divert your attention to another important 
matter that is similar in scope, it is the issue of--because I 
think this is on the table--whether or not you do this for 
companies who have a defined benefits program in place today, 
or for one who has been frozen, and I think, to make that 
choice is a difficult one.
    First of all, I do not think that would be prudent in terms 
of your decision, because the impact it would have on the 
supply chain on an overall basis would be massive. To penalize 
those companies who have frozen defined benefit plans penalizes 
those employees, those companies and those companies' supply 
chains. Let me give you an example:
    If you chose, as an example, to not give pension relief to 
a company who has frozen their defined benefits plan as a 
retailer, let's remember that retailer also buys clothing, 
garments and general merchandise from a supply chain. They also 
have truckers working for them who truck this supply around the 
world. They have employees who work for the company who will be 
greatly impacted, and there are hundreds of companies who have 
chosen this as a method to control costs, particularly at a 
time when this economy is so uncertain and has damaged our 
companies.
    Let's not forget that, while profits over the course of the 
last few quarters have improved, they have improved based on 
cost-cutting, not based on growth. Further cost-cutting would 
only damage this economy further, in my view, and that is 
exactly where we are headed if pension reform is not passed.
    Mr. POMEROY. If I hear you correctly, with credit remaining 
tight, if you take cash out of a business to fund under an 
extraordinarily conservative funding regimen, the pension plan, 
there are consequences----
    Mr. NUTI. Huge.
    Mr. POMEROY [continuing]. The investment in a business, the 
layoff of the existing workforce, and that occurs relative to 
whether the plan is still present or whether the plan is 
frozen. Now, I did notice that, even though you indicated you 
would have to freeze your plan at NCR, as you took that step, 
you also froze the accruals for the exempt plan, for the 
executive suites plan.
    Mr. NUTI. That is correct, we did. We froze our senior 
executive retirement plans at the same time.
    Mr. POMEROY. Another area--and I know my time is up, Mr. 
Chairman. I will just conclude with this statement, and we can 
ponder this in the future--is whether or not some maintenance 
of effort provisions would be appropriate.
    I would think that NCR, representing best practices, set 
out in their executive suite: what our employees live with, the 
executive suite lives with, and I think that is just matter of 
fundamental fairness.
    Thank you, Mr. Chairman. I yield back.
    Mr. NEAL. We thank the gentleman for his many years of good 
work on this issue. As I told him earlier this morning, 
Congressman Pomeroy is the only Member of Congress I know who 
can excite a crowd of actuaries.
    With that, I would like to recognize the gentlelady from 
Florida, Ms. Ginny Brown-Waite.
    Ms. BROWN-WAITE. Thank you very much.
    First of all, Mr. Nuti, I want to thank you. It was very 
refreshing to hear you start off your statement by saying you 
are not here for a bailout. That was very, very refreshing. 
Believe me, having served on the Financial Services Committee 
prior to Ways and Means, it was like, oh, yes, I have not heard 
that in the 6 years I served on Financial Services.
    I appreciate each and every one of you who came here today 
to testify. I do have a question, however, for Ms. Mazo.
    By the way, Ms. Mazo, I find, when there is a group of 
males testifying, the female very seldom gets asked any 
questions, so I am going to ask you a question.
    At a May 2007 Education and Labor hearing, you stated that 
a major achievement of the PPA was the recognition of the 
special context--and I am going to read this because I do not 
want to misquote you. Believe me, everyone sitting up here and 
probably those of you testifying have been misquoted in your 
lifetimes.
    You said: The major achievement of the PPA was the 
recognition of the special context of multi-employer plans and 
accommodating the collectively bargained framework in which the 
plans operate. The distinctive funding rules that were 
established by PPA will, we think, allow our plans to flourish. 
That is the end of your quote.
    Well, we all know that the economy has changed a whole lot 
since May of 2007; but could you provide any additional insight 
as to why multi-employer plans continue to struggle rather than 
flourish even as compared to single-employer DV plans that are 
facing the same, very tough economy.
    Ms. MAZO. Thank you, ma'am. It is a pleasure, with the 
committee largely full of men, to have a question from a woman.
    The answer is very simple. The money that they thought 
would be there is not there because it disappeared somewhere in 
the market. Nobody can flourish when they have lost 20 percent 
of their assets. Nobody who is made up of just being a big fund 
full of invested money to be paid out to people in the future 
can survive--can flourish readily by losing that amount of 
money.
    The one thing that was really insightful, as I said--and I 
completely believe this, and I think I emphasized it here, too 
was recognizing the special collectively bargained context for 
the multi-employer plans was crucial. We are hearing how 
fundamental it is for single-employer plans, whether the plan 
year begins or ends in time to take advantage of interest rates 
in October, a 1-month's difference or a 3-months' difference 
could make all the difference in terms of what the cost could 
be for a company.
    What PPA did for multi-employer plans was, to a very great 
extent, allow them to avoid that sort of, if you will pardon 
the expression, arbitrary and abrupt, sudden and volatile 
demand for funding so that they could negotiate out, work out 
the needs for benefits and the needs for assets. One of the 
things PPA does for multi-employer plans if they are in serious 
trouble is it allows them to cut benefits more deeply than they 
would ever be allowed to before or they would under any other 
circumstances--to take away the vested benefit rights of 
people. That is something nobody wants to do if they can 
possibly avoid it, but they have that as a tool, too.
    The problem was, in many plans which were working their way 
towards a, really, kind of hopeful solution, they designed very 
careful recovery plans based on assuming they would make, 
maybe, 6 or 7 percent per year, something conservative. All of 
a sudden, they lost 20 percent, and when you lose 20 percent 
and you have built a long-term plan assuming you are going to 
make 7, what you have lost is 27 percent that you have to make 
up. So it was basically they got knocked back on their heels. 
It was not PPA's fault.
    What we are looking at now are some adaptations to PPA to 
give the plans the chance under this chain of circumstances to 
bring themselves back to soundness so that they can continue on 
that----
    Ms. BROWN-WAITE. So is it because you have all of these 
differing years that you are working with and contracts as 
opposed to a single-employer type benefit?
    Ms. MAZO. Thank you for helping me clarify that.
    It is because the employers contribute what they have 
agreed to contribute in their bargaining agreement. They 
negotiate an amount. That is their deal.
    One of the things PPA did was enable the employers in the 
union to live up to their deal otherwise, if there were a big 
crash, we could not live up to that. If employers who had built 
their business plan around a promise to the union to pay $2 an 
hour suddenly had somebody call up and say, Oh, it is going to 
have to be $40 an hour, even if they call up and say it is 
going to be $2.50, that is not the basis on which the employer 
made other contracts, built their business plans, made bids on 
contracts, et cetera. We are talking about small employers 
here.
    I think, you know, in listening to the concern about jobs 
and to Mr. Nuti's explanation of how this translates in a very 
large company, something like in the construction trades that 
these plans cover, 80 percent or more of the employers have 
less than 15 employees. They would not lose jobs. They would 
not have to lay people off if the funding had to increase 
dramatically. They would just go out of business. So workers 
would lose their jobs. Owners would lose their jobs. Families 
would lose their businesses if they had to quickly adapt to the 
kind of dramatic changes that PPA lets us avoid. We are asking 
for a little bit more room, in light of what happened last 
year, to work through.
    Ms. BROWN-WAITE. So, just as a follow-up question, Mr. 
Chairman, even if Congress does decide to grant the very 
substantial and somewhat unprecedented relief that the multis 
are requesting, does this crisis suggest that maybe the multi 
rules ought to be thoroughly reviewed as we move forward?
    Ms. MAZO. Well, that was another, actually, very good thing 
that PPA recognized.
    The answer is I think that the whole pension system 
deserves a very careful and thorough reexamination because I 
share the goals of a number of us here that we can find a way 
to keep the defined benefit system going. PPA calls on the 
Internal Revenue Service, PBGC and Labor Department to conduct 
a thorough study of the multi-employer funding rules, to report 
back to you all in 2012 and to impose discipline on Congress by 
making the multi-employer rules sunset in 2014. So I think they 
will get the thorough study that is worthwhile and that will 
develop useful information for all of us about what we really 
need to carry it forward.
    Ms. BROWN-WAITE. Thank you.
    Mr. NEAL. I thank the gentlelady.
    The gentleman from North Carolina, Mr. Etheridge, is 
recognized to inquire.
    Mr. ETHERIDGE. Thank you, Mr. Chairman.
    Let me thank you for the hearing and our panelists for 
being here this morning.
    I do not know if anything could be more timely given the 
current situation we find ourselves in in this economy and the 
nervousness that people have as it relates to not only their 
income but to their retirement income. Depending on their age, 
the intensity goes up, obviously, because they are closest to 
retirement. So let me follow up on a line of questioning--and I 
will just have one question--that Mr. Pomeroy touched on 
because I think it is critical.
    We really are talking about a system that we want to keep 
healthy, but at the same time, we want to make sure that we 
have health in the business sector, because I bump into people 
every day. My neighbor is one. I just talked to him over the 
weekend. He is still working, but his hours have been cut back, 
which means his income has been cut back. It tells me that 
business has got the same problem.
    If I understood you correctly--and I think I understand the 
bill Mr. Pomeroy has in--this is a temporary fix to a long-term 
problem; is that correct?
    Mr. NUTI. That is correct. Think about it as a time-out and 
not a bailout.
    Mr. ETHERIDGE. I think that is important for folks to 
understand, that you are really asking not to be taken out of 
the game.
    Mr. NUTI. Indeed.
    Mr. ETHERIDGE. It is like you are playing a basketball 
game. You need just a little time to take a break----
    Mr. NUTI. Indeed.
    Mr. ETHERIDGE [continuing]. And then you are going to come 
back in, and we are going to have a full court press after that 
because we do need to make sure that these systems are healthy, 
that they are there for workers over the long run and that the 
business community is going to continue to do their part but 
that they need those revenues now to employ people and expand 
this economy and get it going.
    Mr. NUTI. Congressman Etheridge, let me just give you a 
little more perspective because I think you have hit the nail 
right squarely on the head on the issue.
    None of us want to find ourselves in a position where we 
are not obligating our pensions. We intend to fully fund our 
pensions in the same time frame we originally intended to fully 
fund them. The difference is, over the course of the first few 
years, given the unprecedented drop in the markets--and one 
other item we did not discuss, which was interest rates, which 
have a more material impact on our cash flows--and giving us 
time to adjust to the realities of what has happened in this 
unprecedented market downfall, and giving interest rates an 
opportunity to adjust, it allows us to, in effect, smooth 
somewhat that cash exposure we all have and to enhance the 
impact it has on our ability to fund new investments and, most 
importantly, to fund the creation of new jobs.
    Mr. ETHERIDGE. Thank you. I think we all understand what 
you are doing is trying to take the spike out of it and do it 
over the long haul.
    Thank you. I yield back, Mr. Chairman.
    Mr. NEAL. I thank the gentleman.
    The gentleman from Nevada, Mr. Heller, is recognized to 
inquire.
    Mr. HELLER. Thank you, Mr. Chairman. I appreciate the 
opportunity for a few minutes to raise some questions.
    I want to also thank all of the panelists for being here 
and for being patient as we run back and forth from the Capitol 
building. I want to raise a couple of questions. I will be 
brief.
    Ms. Mazo, I have been just going through some of your 
testimony and through the comment that you made that, as an 
organization, you guys pressed for the multi-employer funding 
rules that were adopted under the PPA in 2006 because we know 
that benefit security rest on rules that demand responsible 
funding and discipline and promising benefits. I am sure you 
are aware of that.
    Ms. MAZO. Yes, sir.
    Mr. HELLER. Let's talk about green zone plans because you 
have some multi-employer pension plans like the Western 
Conference plan that is considered a green zone plan based on 
their asset to benefit ratios; whereas, there are other 
groups--and I believe it is the Central States or the Central 
Conference multi-employer pension plan that does not meet the 
criteria classification of a green zone plan.
    Can you explain to us how one can be so successful while 
the others are not?
    Ms. MAZO. Without going into specific plans, first of all, 
I appreciate--the changes that were made for multis in PPA were 
to create flags--a yellow flag, basically, and a red flag. If 
you are heading towards trouble, you are called endangered, or 
in the yellow zone, and you have to start doing certain things. 
If you head further into trouble, you are in the red zone--and 
this is based on Homeland Security--and you have to do more 
dramatic things.
    I think, from what I understand about those two different 
plans, they have had different sorts of governance over the 
years, but the Central States fund had lost a much--again, I do 
not know as much about the Western Conference, but a large 
number of their employers have gone out of business. Of the 
ones that they started with in ERISA, from what I gather of 
their 70 largest employers in 1980, there is only one such 
company still left, and it was due, in part, to trucking 
deregulation, which also, of course, affected the trucking 
industry in the West as it did in the Midwest. I suspect it was 
largely due as well to the fact that they were in the Midwest, 
and they were serving the rust belt markets where the whole 
economy of the region was declining.
    So, as Mr. Nuti said, the things to truck that come from 
the manufacturers--the auto manufacturers in Michigan and 
whatever--that the whole economy, I suspect in that area, just 
declined for their market. Central States built up a very large 
fund of assets, and during the 1990s--and I believe that 
certainly by around 2000, the Central States and the Western 
Conference were kind of alternating--in one year, one was the 
largest of the pension funds by assets. In another year, the 
other one was. They both had very large--$20 billion to $24 
billion worth of assets.
    The Central States investments are run by independent 
fiduciaries who are appointed by a court and overseen by a 
court. So, to the extent there is any difference in investment 
philosophy, I suppose we'd have to blame the Federal courts in 
Illinois; but as they lost employers and as they lost active 
workers, they needed--and they were very well-funded until just 
a few years ago, but like a number of multi-employer funds, not 
just them, they needed their earnings on their assets in order 
to pay benefits. They are like a giant retiree. Just as anybody 
who is no longer earning enough money but has a lot of savings 
put aside, they need that savings to live on. Then because they 
were so heavily dependent on their assets and their earnings, 
the big asset losses knocked them much harder, I gather, than 
the Western Conference. I do not know as much about Western 
Conference because, frankly, their fortunes over the past 15 
years or so have not been as colorful, and so they haven't 
gotten quite as much attention.
    Mr. HELLER. So was it the loss of participating groups in 
that region or was it the loss of assets and earning power?
    Ms. MAZO. Well, the loss of participating groups in that 
region led to a severe dependence on investment earnings--we do 
not have employers to come up with the money if we have a hole, 
so we had better build up as much in terms of our assets and as 
much in terms of our earnings as we can because they have a 
very--I think they have--cannot say this for sure, but they 
have something like--now they have 70,000 active workers, and 
they may have 150,000 or 200,000 retirees. There is no way they 
can increase contributions on the employers left and the 
employees to make up the hole that they need from their 
investments.
    I gather just--the Western Conference, among other things, 
services goods that are coming in from over the Pacific, and 
they just have had, I assume, other opportunities to replenish 
what is going on. I do not know that life is happy for them, 
but it is just not as stressful.
    Mr. HELLER. Ms. Mazo, thank you.
    I yield back.
    Mr. NEAL. We thank the gentleman.
    With the cooperation of the Members of the Committee and 
with our witnesses, given the fact that there are three votes 
coming up on the House floor, we can send this panel on their 
way after recognizing Mr. Meek and Ms. Sanchez for testimony.
    Mr. Meek is recognized to inquire.
    Mr. MEEK. Thank you, Mr. Chairman, and I am glad that you 
are holding this hearing.
    Being from Florida, I have a number of constituents who are 
very concerned and worried about the future of their life-long 
investments. Hearing Mr. Etheridge from North Carolina in his 
basketball analogy, we do know that basketball is alive and 
well in the great State of North Carolina. He kind of really 
boiled down why we are here and what you are asking for. You 
know, with my being Baptist, I feel like a singing pastor who 
is getting ready to deliver the message, and the minister got 
up and talked about the Scripture before I even hit the podium.
    Let me just say very quickly--and, Mr. Rosenthal, I have a 
question for you. As we start to look at this, do you feel 
extending the period of time in a single-employer pension plan 
can make up any shortfalls and that you think that is a 
solution to what we are dealing with here today?
    The second part of that is, since we are crunched for time 
and I want these other members to ask questions, you are aware 
of the time period being extended from 7 to 9, which, I 
believe, Education and Labor is looking at right now. I want to 
get your feelings on that piece of legislation also.
    Mr. ROSENTHAL. Yes, I do think an extension of period of 
time would be one of appropriate measures to help plans meet 
their obligations, starting this year or even in 2010. We have 
not measured the impact on the particular bills and what they 
would mean to individual plans, so I cannot really say that we 
have quantified anything with regards to the impact that that 
would have.
    Mr. MEEK. Well, let me just ask you this: As to the 
extension of time from 7 to 9, talk to me a little bit about 
it. Will that help? Will that not help?
    Mr. ROSENTHAL. It certainly would help, and it would be 
very helpful in that the first 2 years, as I understand the 
bills, would be an interest-only amortization. So with the 
payments, rather than being level over a period of 7 years 
normally under PPA, there would be 2 years of interest only but 
no principal, and then the full amortization would be the 
remaining 7-year period. So, yes, it would be very helpful, 
most helpful the first 2 years, but the payments would return 
to their, I will say, pre-relief levels starting in year 3.
    Mr. MEEK. Does anyone on the panel have an opposite or 
opposing view? I just want to kind of get a feel for it because 
I am paying attention to that legislation.
    Mr. Chairman, I also have H.R. 721 that is dealing with 
public workers and firefighters and their pension plans. I have 
been looking at all of this, but I am paying very close 
attention to what Education and Labor is doing, and I want to 
make sure that what we find as a ``solution'' or as a response 
to the present situation that we are talking about here today 
is actually a solution and is not creating a bigger problem or 
issue.
    With that, Mr. Chairman, I yield back my time.
    Mr. NEAL. We thank the gentleman.
    The gentlelady from California, Ms. Sanchez, is recognized 
to inquire.
    Ms. SANCHEZ. Thank you, Mr. Chairman.
    In light of the fact that we have votes that have been 
called, in the interest of time, I will submit my questions in 
writing, and will allow the panelists to respond in kind.
    I yield back.
    Mr. NEAL. Thank you very much, Ms. Sanchez.
    Mr. Tiberi is not here. Mr. Camp has asked that he might 
take Mr. Tiberi's time for the purpose of inquiry.
    Mr. CAMP. Just quickly, Ms. Mazo, in your testimony on page 
10, one of the relief proposals you suggest is to turn the 
existing concept of plan partition into an active vehicle for 
saving multi-employer plans that are in sharp decline because 
of the employer bankruptcies and uncompensated withdrawals by 
giving those plans the right to transfer the liabilities that 
those departed employers left behind in the PBGC.
    If I understand this correctly, it would put liability for 
the departed plans on the PBGC; but then in footnote number 4 
on the bottom of page 10, you state, because partitioning these 
plans off to the PBGC, in turn, taking the burden off the other 
companies remaining in the multi-employer plan, would have a 
large cost, this would need to be financed with funds outside 
the premiums paid by the multi-employer plans.
    Where, in your mind, would these funds come from?
    Ms. MAZO. Well, that is something that we are working on 
looking at. I was encouraged to hear that the changes might 
save just about enough or more money for the Federal 
Government, which would then translate into all of this being a 
package that could help these, actually, maybe, support what we 
are talking about.
    Mr. CAMP. Thank you very much, Mr. Chairman.
    Mr. NEAL. Thank you, Mr. Camp.
    Before we close on this panel, I want to note for the 
record that the nonprofit community has filed testimony today 
with their concerns about pension funding rules. Mr. Lewis and 
I share those concerns.
    With that, I want to thank our panelists for their very 
thoughtful commentary today. We have three votes scheduled on 
the House floor, and we will recess until the completion of 
those votes, and I would hope that Members of the Committee 
would return quickly so that we can move on to the next panel.
    Again, thanks to our panelists.
    [Recess.]
    Mr. NEAL. Let me welcome our panelists.
    First, LeRoy Gilbertson, who is a member of the National 
Policy Council at AARP; Mark A. Davis, who is the vice 
president of CAPTRUST Financial Advisers on behalf of the 
National Association of Independent Retirement Plan Advisers; 
Robert G. Chambers, a partner of McGuireWoods, on behalf of the 
American Benefits Council; Christopher Jones, executive vice 
president of Investment Management, and chief investment 
officer, Financial Engines; Edmund F. Murphy, managing 
director, Putnam Investments, Boston, Massachusetts; and Jim 
McCarthy, managing director of Morgan Stanley, on behalf of the 
Securities Industry and Financial Markets Association.
    To the members of our committee and to our panelists, we 
are going to have one more vote in about an hour, and I would 
like as best we can to move the proceeding along.
    With that, I would like to recognize Mr. Gilbertson to 
offer testimony, sir.

             STATEMENT OF LEROY GILBERTSON, MEMBER,
                 NATIONAL POLICY COUNCIL, AARP

    Mr. GILBERTSON. Mr. Chairman, my name is LeRoy Gilbertson. 
I am a member of the AARP National Policy Council. I want to 
thank you for convening this hearing. AARP appreciates the 
opportunity to discuss the important issues surrounding 
investment advice.
    A majority priority for AARP is to assist Americans in 
accumulating and effectively managing adequate assets in 
addition to supplement their Social Security benefits. Because 
the growth of the 401(k) plans places significant 
responsibility on individuals to make appropriate investment 
choices, AARP shares the goal of increasing access to 
investment advice so that the participants may achieve those 
goals. To that end, we have consistently asserted that such 
advice must be subject to the Employee Retirement Income 
Securities Act, or ERISA, as you know, fiduciary rules based on 
sound investment principles and protected from conflicts of 
interest. The recent financial turmoil scandals on Wall Street 
underscore, once again, the imperative that such investment 
advice be independent and non-conflicted.
    As a result of the shift to individually directed accounts, 
more to the individuals than before, we are responsible for 
investment decisions that will ultimately determine whether 
they have accumulated the savings necessary to ensure an 
adequate level of retirement benefits. Unfortunately, many 
individuals are simply not prepared to handle this investment 
responsibility and risk. Many plans, therefore, provide 
investment education to plan participants, including asset 
allocation examples, to inform them of available investment 
strategies in general and under the particular plan. Too often, 
however, this information has fallen short for many 
participants. To address this problem, some plans have begun to 
make available independent investment advice to the plan 
participants. In this regard, AARP has consistently believed 
that two important goals are necessary:
    First, the advisers should be qualified to provide the 
investment advice, and equally as important, the advisers 
should be independent, that is, free from financial conflict. 
ERISA has long recognized the financial conflict that 
investment advice will not be based on the sole interest of the 
participant. This is particularly relevant in the current 
uncertain financial environment where financial advisers may 
feel the greatest pressure to act solely in the best interest 
of individuals. Indeed, at the very heart of the financial 
scandals that have now rocked the Nation, scandals which began 
with Enron and Worldcom and have penetrated through much of 
Wall Street today are conflicts of interest.
    Although ERISA generally prohibits transactions between 
plans and parties, there are inherent conflicts of interest. 
The Pension Protection Act, unfortunately, carved an exemption 
to permit plan fiduciaries to other conflicted investment 
advice arrangements under certain circumstances. AARP 
consistently argued that this exemption was unnecessary and 
undercut ERISA's protections to ensure that all fiduciaries act 
solely in the interest of plan participants.
    Conflicts of interest are particularly disturbing when they 
impact a participant's retirement account. A review of the 
recent market upheaval and scandals should make it obvious that 
conflict-driven advice should be avoided and that common sense 
compels far more substantial and significant participant 
protection than PPA provides. The PPA leads us down a road of 
conflict of interest--the very problems that ERISA has long 
sought to prevent by ensuring that fiduciaries act solely in 
investment of plan participants.
    In addition, AARP submits that disclosures of conflicts of 
interest to a plan participant alone is no remedy. As a 
financial planner's standards of conduct states: Individual 
consumers possess substantial barriers resulting from 
behavioral biases to the provision of the informed consent even 
after full disclosure.
    Moreover, not only marketers who are familiar with 
behavioral research manipulate consumers by taking advantage of 
weaknesses in human comprehension, and competitive pressures 
almost guarantee that they will do so. Much of the literature 
suggests that investment advisers often push investments that 
may be suitable and risky for investors, and even sophisticated 
investors purchase investments which they claim not to have 
fully understood. Consequently, AARP submits that either the 
provisions of the PPA on investment advice should be repealed 
or the PPA should be significantly modified to make clear that, 
under the definition of an ``investment adviser,'' only 
independent, non-conflicted advice may be provided to the 
participants.
    In conclusion, AARP looks forward to continuing to work 
with Congress to promote independent investment advice in a way 
that insurance participants and beneficiaries are adequately 
protected from conflicts of interest. We prefer an approach 
that encourages plan sponsors to provide quality investment 
advice without the potential for conflicts of interest to 
increase the likelihood that plan participants have adequate 
income to fund their retirement years.
    Mr. Chairman, I want to thank you again for this 
opportunity for us to testify.
    Mr. NEAL. Thank you, Mr. Gilbertson.
    [The prepared statement of Mr. Gilbertson follows:]

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    Mr. NEAL. Mr. Davis is recognized to offer testimony.

  STATEMENT OF MARK DAVIS, VICE PRESIDENT, CAPTRUST FINANCIAL 
ADVISORS, ON BEHALF OF THE NATIONAL ASSOCIATION OF INDEPENDENT 
                    RETIREMENT PLAN ADVISORS

    Mr. DAVIS. Thank you, Mr. Chairman and Members of the 
Committee, for the opportunity to speak with you today.
    My name is Mark Davis. I am from Los Angeles, and I am vice 
president and financial adviser with CAPTRUST Financial 
Advisers, which is headquartered in Raleigh, North Carolina.
    CAPTRUST is an RIA. We are fiduciary to over 450 plans, $22 
billion in assets, something over 800,000 participants in our 
care. We provide fiduciary investment advisory services both to 
sponsors of qualified plans and to many participants within 
those plans. We are fully independent, and we fully disclose 
all fees.
    I speak to you today on behalf of the National Association 
of Independent Retirement Plan Advisers, or NAIRPA, an 
association of independent registered investment advisers who 
focus on delivering independent, conflict-free advice both at 
the plan sponsor and participant levels. It means our fees are 
the same regardless of the investments that are selected. Our 
members provide advice to plans covering millions of 
participants.
    I, personally, have practical experience on both sides of 
the independent investment advice issue, having worked as an 
education specialist for both a major mutual fund company and a 
major broker-dealer, and I also have served as an independent 
adviser for 10 years now.
    While most companies are highly ethical and most education 
specialists are true professionals, it is not wise to rely on a 
regulatory or legislative framework that presumes that these 
employees will always separate themselves completely from doing 
what is in the best interest of their employers. That is 
contrary to human nature. It is asking for trouble. It is why I 
am a strong supporter of independent investment advice.
    One of the basic problems with the current state of advice 
is that there really is not a clear set of laws and 
regulations. What we have are advisory opinions, prohibited 
transaction exemptions, information bulletins that leave room 
for practices, I think, that should be of concern to members of 
this committee. We have advice deliverers who are subject to 
multiple and very different compliance regimens and oversight. 
An example of the current confusion is the difference between 
the services plan sponsors think are being provided to their 
participants and what the deliverers of those services say they 
are giving.
    Based on the results of the 2007 annual survey of the 
Profit Sharing Council of America, more than 40 percent of 
small business retirement plan sponsors think advice services 
are being delivered to their participants as ``one-on-one 
counseling (in person).'' In reality, most of this counseling 
is provided by brokers who are not permitted to give advice 
because they are not independent. The brokers are meeting with 
participants, relying on DOL IB 96-1 which permits education or 
guidance to be provided without violating the fiduciary rules 
even though they cannot legally give advice.
    Whatever the reason, the outcome is that plan sponsors 
think participants are being advised; participants think they 
are being advised, but the vendors responsible for the service 
deny that advice is being provided.
    Many participants who do receive investment advice get it 
through a computer model based on the SunAmerica opinion. 
Independent computer model providers, such as Financial 
Engines, which is here today, provide cost-effective, 
unconflicted advice to plan participants, and the availability 
of this kind of service should be encouraged. However, the 
rules are sometimes stretched to the limit, and that, combined 
with a lack of clear guidance, leads to some questionable 
practices in the name of SunAmerica.
    We have heard of situations where all of the funds 
available under a plan are not included in the advice provided 
by a computer model when it is applied to the plan. The 
argument is that this limited set of funds in a model is 
permitted by SunAmerica. To me, it seems obvious that, when the 
funds that are included are proprietary and the excluded funds 
are not or when included funds pay for shelf space and omitted 
funds do not, the advice produced by the model is not 
independent. There is clearly a conflict in the selection of 
the funds, and that conflict carries through to the output of 
the model, and of course, it is the participant who is harmed 
by the conflict. Simply, that should not be permitted.
    The investment advice provisions in PPA did not help bring 
order to the chaos of rules and regs governing the provision of 
investment advice. If anything, it may have added to the 
confusion. The prohibited transaction exemption that was 
included in the PPA advice regulation would permit conflicts 
that even the authors of the regulation acknowledge went beyond 
PPA.
    With the new administration and this new Congress, we are 
hopeful that now is the time for new policy to be made. This 
Congress has a great opportunity to protect the interests of 
the American retirement investor. We need a set of clear rules 
that cannot be bent too far, rules that protect non-ERISA 
plans, like some 403(b) and 457 plans, as well as ERISA 
arrangements. NAIRPA urges this committee to act in support of 
conflict-free investment advice.
    Mr. NEAL. Thank you, Mr. Davis.
    [The prepared statement of Mr. Davis follows:]

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    Mr. NEAL. Mr. Chambers is recognized to offer testimony.

STATEMENT OF ROBERT CHAMBERS, PARTNER, McGUIREWOODS, ON BEHALF 
    OF THE AMERICAN BENEFITS COUNCIL, AND SOCIETY FOR HUMAN 
                      RESOURCE MANAGEMENT

    Mr. CHAMBERS. Thank you.
    My name is Robert Chambers, and I am a partner in the 
international law firm of McGuireWoods.
    While I have advised sponsors and financial service 
providers with respect to 401(k) issues since section 401(k) 
became law in 1978, I am also testifying today as a plan 
sponsor. McGuireWoods sponsors a defined contribution plan for 
about 2,600 participants, and it has provided them with access 
to investment advice since 2005.
    Again, I appreciate the opportunity to testify today.
    The events of the past year have highlighted the importance 
of increasing the availability of sound investment advice to 
the millions of Americans who rely on their defined 
contribution plans for their retirement security. There has 
been an active public policy discussion of the investment 
advice provisions enacted in the Pension Protection Act of 
2006. The Department of Labor has issued regulations under 
those provisions and a correlative class exemption. More 
recently, the Education and Labor Committee approved a bill 
that would have a powerful impact on both PPA and pre-PPA 
unconflicted advice arrangements.
    Now, interestingly, the PPA investment advice provision and 
the Education and Labor Committee's bill seem to share the same 
goal--the need to broaden the availability of unconflicted 
investment advice to participants, but the approaches that they 
took are dramatically different.
    Other members of this panel are going to speak on the 
preservation of the investment advice of those provisions in 
the PPA, but my focus today is different. I am going to make 
six pretty simple points regarding the preservation of pre-PPA 
investment advice alternatives, and here they are:

           Number one, plan participants need investment advice 
        now more than ever.
           Two, all investment advice programs must avoid 
        conflicts of interest, and also must adhere to the 
        prohibited transaction rules developed by the 
        Department of Labor and the IRS.
           Third, pre-PPA rules that have been approved by the 
        Department of Labor are not conflicted. They provide 
        valuable assistance for millions of Americans.
           Fourth, if legislation is enacted with respect to 
        the PPA investment advice provision, it is crucial that 
        the legislation neither change nor eliminate the pre-
        PPA rules.
           Fifth, our plan sponsor members have made things 
        very clear. If the legislation invalidates existing 
        pre-PPA advice programs or adds materially to their 
        cost, plan sponsors will abandon their programs rather 
        than revise them. They currently have neither the 
        resources nor the inclination to engage in the 
        expensive redesigns of these voluntary programs. 
        Millions of Americans will lose access to investment 
        advice at a very inopportune time.
           Finally, the bill extends its reach to the provision 
        of investment advice to plans. Now, this was very 
        surprising. It is a significant issue, but it was not 
        addressed by either the PPA or the 2009 class 
        exemption. It has not been the subject of extensive 
        public policy debate, so we believe that additional 
        constraints should not be added under these 
        circumstances. The pre-PPA rules were carefully drafted 
        to avoid conflicts of interest and to ensure that all 
        advice programs operate in the interests of 
        participants, and as I mentioned, they are highly 
        utilized.

    We understand that approximately 20 million participants in 
defined contribution plans are offered advice products based on 
the SunAmerica advisory opinion alone. Unfortunately, in the 
context of repealing the PPA investment advice provisions, the 
Education and Labor Committee approved a bill that goes much 
further. The bill's broad reach would reduce a sponsor's 
ability to provide sound, unconflicted advice by invalidating 
the pre-PPA arrangements, and this, of course, will harm plan 
participants. The bill would prohibit or make much more 
expensive several different types of pre-PPA investment advice. 
It is important to preserve all of them, and we discuss the 
impact of the bill on each of the individual ones in our 
written materials; but please remember this: Without them, 
there will be more expense or less advice with no corresponding 
benefit to employees.
    One way to gauge the soundness of any proposed change is to 
list the winners and the losers. Here is our assessment of the 
results of the Education and Labor Committee's bill if it is 
passed with the current provisions regarding pre-PPA advice.
    Mr. CHAMBERS. Here are the winners; investment advisors who 
currently have a small enough footprint to avoid 
disqualification as the term plan investment providers under 
the Advisors Act of 1940. Second, those firms that will provide 
the newly mandated audits and certifications, and of course--
and I speak personally as to this--lawyers who are going to be 
drafting copious disclosure materials.
    But more important, here are the losers under this bill:

           Number one, participants whose employers discontinue 
        access to investment advice under a pre-PPA method, of 
        whom there will be many.
           Number two, participants whose employers discontinue 
        access to investment advice under PPA, of whom there 
        are currently rather few.
           Third, investment advisors who are displaced under 
        the final interpretation of that term ``plan investment 
        provider.''
           And finally, and maybe most important, plan 
        sponsors, investment advisors, and participants who 
        have relied on 30 years of well-reasoned DOL exemptions 
        and advisory opinions.

    So please, consider the winners and the losers. Our 
assessment causes us to question the soundness of the bill as 
long as it continues to invalidate pre-PPA investment advice.
    [The prepared statement of Mr. Chambers follows:]

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    Mr. NEAL. Thank you, Mr. Chambers.
    Mr. Jones is recognized to offer testimony.

  STATEMENT OF CHRISTOPHER JONES, EXECUTIVE VICE PRESIDENT OF 
 INVESTMENT MANAGEMENT AND CHIEF INVESTMENT OFFICER, FINANCIAL 
                 ENGINES, PALO ALTO, CALIFORNIA

    Mr. JONES. Thank you, Mr. Chairman, Congressman Camp, and 
Members of the Committee.
    My name is Christopher Jones, and I am the Chief Investment 
Officer with Financial Engines.
    On behalf of my fellow employees at Financial Engines, we 
greatly appreciate your continuing efforts to make quality, 
independent investment advice broadly available to those who 
need it most and to protect retirement investors from conflicts 
of interest.
    Today, I would like to make three simple points in my 
remarks.
    First, through its innovative and powerful technology, 
Financial Engines has made personalized, independent investment 
advice broadly accessible to millions of people in the United 
States. Our company was founded on the belief that the best 
practices from modern economic theory and institutional money 
management should be available to all investors, even those 
with a few thousand dollars in their accounts, not merely the 
affluent and the privileged. This is critical to the success of 
401(k) participants whose median account balance today is only 
about $32,000. Without expert help, most of these people are 
unlikely to achieve retirement security.
    Today, Financial Engines provides independent advisory 
services to more than 7.6 million employees at over 115 Fortune 
500 companies. We give individuals specific recommendations on 
what to do with their retirement accounts, and we recommend the 
best combination of funds for them, selecting from the 
investment choices available from their employer.
    My second point is that from the beginning we have 
carefully structured our business to ensure that we have no 
conflicts of interest which could compromise the objectivity of 
our investment advice. Under ERISA and the Investment Advisors 
Act, we have a strict fiduciary obligation to the employees we 
serve. Our independence is critically important to the 
employers who hire us to provide advice to their employees.
    What does independence mean? Specifically, we do not sell 
any investment products of any kind. We do not receive 
differential compensation based on the investments we 
recommend. We do not receive commissions on any of the 
investments that we recommend. We do not vary our investment 
methodology across any of our customers. We are not affiliated 
with or controlled by any bank, broker-dealer, or any other 
type of company. And we play no role in the selection of a 
particular retirement plan fund lineup, nor do we accept any 
kind of compensation to recommend prospective funds to 
employers.
    What we do provide is personalized, independent, and 
consistent investment advice to millions of individuals of 
modest means who would otherwise not receive it. In fact, I 
have described this consistent methodology in great detail in a 
book I authored which was published by John Wiley and Sons in 
2008 titled, ``The Intelligent Portfolio: Practical Wisdom on 
Personal Investing from Financial Engines.''
    My third and final point is that getting effective 
investment advice into the hands of those who need it requires 
convenient and cost-effective access for employees. Today, 
Financial Engines reaches its customers in two different ways. 
In the first method, Financial Engines is directly hired by the 
employer, the plan sponsor, to advise its employee population. 
For example, we have been hired by such companies as Delta 
Airlines, IBM, Motorola, and PG&E under this structure.
    In the second method, Financial Engines is hired as a sub-
advisor, working with plan record keepers such as Vanguard or 
JPMorgan. We provide our services under the criteria defined by 
the Department of Labor's 2001 SunAmerica ERISA Advisory 
Opinion. This ruling permits the provision of investment advice 
based on an objective computer model developed and maintained 
by an independent financial expert. The SunAmerica ruling is 
important because record keepers are the portal to the 401(k) 
and play an important role in reaching plan participants. 
Employees benefit when investment advice is fully integrated 
into their 401(k) plan communications.
    More than 5 million employees, particularly those working 
for smaller organizations, have access to our independent 
advisory services through the SunAmerica model. It is important 
to emphasize that under either structure our investment advice 
is truly independent and completely consistent.
    We understand that some questions have been raised 
regarding the SunAmerica model. However, the SunAmerica 
structure provides substantial protections against conflicts of 
interest, and we strongly support the rigorous enforcement of 
these protections.
    It is important to preserve the ability to provide 
independent investment advice under the SunAmerica structure. 
And accordingly, we do not support passage of H.R. 2989 in its 
current form because it would eliminate this important method 
of providing independent investment advice to those who need it 
the most. Without the SunAmerica structure, we believe that 
employees will have fewer options for cost-effective 
personalized investment advice to help them reach their 
retirement goals.
    We thank you for your time.
    [The prepared statement of Mr. Jones follows:]

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    Mr. NEAL. Thank you very much, Mr. Jones.
    Mr. Murphy, you are recognized to offer testimony.

 STATEMENT OF EDMUND F. MURPHY, III, MANAGING DIRECTOR, PUTNAM 
            INVESTMENTS, LLC, BOSTON, MASSACHUSETTS

    Mr. MURPHY. Thank you. Good afternoon, Chairman Neal, 
Ranking Member Camp, and Members of the Committee. Thank you 
for inviting me to appear before you today.
    I am Edmund Murphy, Managing Director and Head of Defined 
Contributions at Putnam Investments, a leading global money 
management firm with $110 billion in assets under management. 
Prior to joining Putnam, I spent 17 years with Fidelity 
Investments in a variety of senior management roles in the 
defined contribution business.
    Putnam has long been a leader in the business of retirement 
through investment products to help individuals prepare for 
retirement, through bundled, open-architect 401(k) plans that 
offer investments from Putnam and other fund complexes, and 
through services we provide to plan sponsors and independent 
advisors.
    Today, I would like to offer my views on the provision of 
investment advice to participants in defined contribution 
plans, a service which we believe is vitally needed.
    With traditional pension plans and Social Security likely 
to provide a declining share of post-retirement income for 
America's workers in the future, it is critical that defined 
contribution plans be able to make up the difference. To do so, 
workers must make a lifetime of sound investment decisions. 
Many, if not most, workers require judicious, unbiased and 
professional advice and guidance to make such decisions. 
Investment managers, service providers, and others can and do 
provide such unbiased advice today, notably under the kinds of 
arrangements made possible by the SunAmerica advisory opinion.
    In our view, that model has provided a large number of plan 
participants with robust proven protection against conflicted 
advice. However, some proposals currently under discussion 
intended to ensure that investment advice is unbiased could 
have the unintended effect of ending many such existing advice 
arrangements. Moreover, by restricting who can provide 
professional investment advice, they might also have the effect 
of raising costs and limiting expansion of coverage in the 
future.
    The proposals under consideration would restrict the 
provision of advice to participants to fee-based financial 
advisors. They would bar asset managers and service providers 
who might offer cost-effective and scalable advice and package 
solutions to workplace savers unless that advice is solely 
generated by a computer program meeting detailed and 
potentially costly requirements.
    Blocking access to well qualified and capable competitors 
is apt to raise cost in any market; workplace savings is 
unlikely to be an exception. Among the surely unintended 
results could be to actually curb the rate of adoption services 
for advice to plan sponsors and lower the share of plan 
participants who have access to professional advice.
    Some of the language currently under discussion, in fact, 
would be a step backwards in that it could prohibit the kinds 
of advice that had been available before the passage of PPA. We 
at Putnam believe that sufficient safeguards already exist in 
the PPA and other laws and regulations. Rigorously enforced, 
they can provide workers with the protection they need. We do 
not believe that privileging a specific advice model and 
excluding whole classes of firms from the advice market are 
necessary to ensure unbiased advice. Instead, we believe that 
any new legislation or regulations should, number one, reaffirm 
the pre-PPA level advice rule, which, by definition, is non-
conflicted.
    Two, reaffirm the use of non-conflicted managed accounts in 
a way to provide advice.
    Three, permit the use of outside computer models, support 
the SunAmerica opinion, which enables service providers to 
offer advice to plan participants through an affiliated advisor 
if the investment advisors use an independently developed 
computer model. The SunAmerica opinion could be bolstered 
through rigorous disclosure, auditing, and monitoring developed 
in concert with the industry.
    Four, enable appropriate use of in-house computer models. 
Permit asset managers and service providers to continue 
offering unbiased advice based on in-house computer models 
independently certified as unbiased in accordance with the key 
Pension Protection Act requirements.
    Five, avoid any blanket dismissal of existing Department of 
Labor class and individual exemptions, letting the Department 
review exemptions on a case-by-case basis if it is so inclined.
    And finally, avoid any new limitations on non-conflicted 
advice to plans.
    We believe these measures, taken together, could provided 
adequate protection to investors while expanding access to 
affordable, unbiased, professional advice that America's 
workplace savers so clearly need. We would also be receptive to 
other proposals to protect participants' interests, provided 
they serve to expand competition and access to advice, not 
contract it.
    I have submitted a written statement which extends my 
remarks. I want to thank the committee for letting us share our 
views.
    [The prepared statement of Mr. Murphy follows:]
    Prepared Statement of Edmund F. Murphy, III, Managing Director,
             Putnam Investments, LLC, Boston, Massachusetts
    I am Edmund Murphy, Managing Director and Head of Defined 
Contribution at Putnam Investments. I am testifying on behalf of 
Putnam, a global money management firm and leader in the retirement 
industry.
    Prior to joining Putnam, I spent 17 years with Fidelity Investments 
in a variety of senior management roles within the defined contribution 
business. Those assignments included leading Fidelity's small market 
401(k) business and serving as Executive Vice President of distribution 
and client management for Fidelity's entire 401(k) business.
Putnam Investments and Retirement
    Putnam Investments is a global money management firm with more than 
70 years of investment experience. As of August 31, 2009, the firm had 
$110 billion in assets under management. Putnam has long been a leader 
in the business of retirement, through investment products aimed at 
helping individuals prepare for retirement; through bundled, open-
architecture 401(k) plans that offer investments from Putnam as well as 
other fund complexes; and through services we provide to retirement 
plan sponsors and independent financial advisors.
    Putnam currently offers a fully-bundled 401(k) plan solution to 
small, medium and large companies. This solution includes an open 
architecture investment platform with funds from Putnam and other fund 
complexes; plan sponsor communications; employee education and 
communications; and plan record-keeping services.
    Putnam sells into the 401(k) plan market through financial 
intermediaries including financial advisors and 401(k) consultants. 
These intermediaries work on behalf of the plan sponsors and generally 
act in a fiduciary capacity. They are not affiliated with Putnam.
Investment Advice in Defined Contribution Plans
    I appreciate the invitation of the Committee to testify. I would 
like to offer my views on the provision of investment advice to 
participants in defined contribution plans--a service which we believe 
is vitally needed by the nation's workers.
    Defined contribution plans will play an even more central role in 
the future as defined benefit plans decline and Social Security's 
ability to replace pre-retirement incomes is reduced by changes built 
into current law. For DC plans to successfully fill an expanded role, 
the amounts in worker retirement portfolios must grow--which means that 
workers must make a lifetime of sound investment decisions. Many, if 
not most, workers require judicious, unbiased and professional advice 
and guidance to make such decisions about complex investments--a need 
that last year's market events only underscored.
    Investment managers, service providers and others can and do 
provide such unbiased advice today. Several of these were codified 
under the SunAmerica advisory opinion, which the U.S. Department of 
Labor issued in 2001. About 20 million participants in 401(k) plans or 
similar savings vehicles are currently offered advice based on the 
SunAmerica opinion.
    In our view, the model originated by the SunAmerica opinion, as 
enhanced by subsequent Congressional legislation and regulatory 
guidance, provides plan participants with the investment advice they 
need for sound decisions and strong, robust and proven protection 
against conflicted advice and with no significant issues regarding lack 
of independence.
Impact of Alternative Proposals under Consideration
    However, some legislative and regulatory proposals currently under 
discussion in Congress and at the Department of Labor could have 
significant impacts on institutions' ability to provide advice to 
401(k) plan participants.
    Among the specific impacts of the proposed changes would be the 
effective repeal of the PPA's investment advice provisions (i.e., both 
the level-fee rule and the computer model rule); the elimination of 
most SunAmerica-based advice arrangements; the elimination of most 
managed accounts, whereby advice is automatically implemented in 
accordance with a participant's prior authorization; the elimination of 
many pre-PPA level-fee arrangements; the elimination of all or most 
class and individual exemptions granted by the Department of Labor; and 
the elimination of most plan-level advice, which is provided not to 
individuals but instead to plan sponsors such as small business owners 
about, for instance, which investment options should be offered to 
participants.
    Ironically, the proposals under consideration, meant to ensure that 
investment advice is unbiased, could have the unintended effect of 
ensuring that no investment advice is provided at all. They could have 
the effect of ending existing arrangements, including pre-PPA 
arrangements, that provide investment advice.
    The proposals under consideration would restrict advice to 
participants and employers to one of two types. First, ``fee-only'' 
advice--advisors cannot offer investments on the plan's menu and cannot 
receive any compensation from someone who manages or sells plan 
investments. Or second, advice provided solely through a computer model 
meeting requirements that are much more detailed than currently 
required by the Department of Labor's guidance.
    As a result, these proposals would effectively bar asset managers 
and service providers who might offer highly cost-effective and 
scalable advice and packaged solutions to workplace savers, unless that 
advice is solely generated by a computer program meeting detailed and 
potentially costly requirements.
    Blocking access to well-qualified and capable providers is apt to 
raise costs within any market, and workplace savings is unlikely to be 
an exception. Among the surely unintended results could be to actually 
curb the rate of adoption of advice services by plan sponsors; lower 
the share of plan participants who have access to professional advice; 
and limit the coverage of workplace savings plans.
    Some of the language currently under discussion, in fact, would be 
a step backwards in that it could prohibit the kinds of advice that had 
been available before passage of the PPA.
Recommendations
    We at Putnam believe that sufficient safeguards already exist in 
the PPA and other laws and regulations. Rigorously enforced, they can 
provide workers with the protection they need. We do not believe that 
privileging a specific advice model and excluding whole classes of 
firms from the advice market are necessary to ensure unbiased advice. 
Instead, we believe that any new legislation or regulations should:

        1.  Reaffirm the pre-PPA level-fee advice rule, and strengthen 
        it by requiring an ethical wall to insulate investment advisors 
        from undue influence attributable to variable fees received by 
        other parts of their organization. Such an ethical wall could 
        be similar to the internal policies and procedures that 
        investment bankers adopted in 2003 to provide unbiased research 
        by insulating their researchers from their underwriters.
        2.  Reaffirm the use of non-conflicted managed accounts as a 
        way to provide advice.
        3.  Permit the use of outside computer models by supporting the 
        SunAmerica opinion, which enables service providers to offer 
        advice to plan participants through an affiliated advisor if 
        the investment advisors use an independently developed computer 
        model. Because such advice is provided by an independently 
        designed computer model, and because that advice cannot be 
        modified by the plan advisor, the advice is not conflicted and 
        there is no violation of the ``prohibited transaction'' rule. 
        The SunAmerica opinion could be bolstered through rigorous 
        disclosure, auditing and monitoring developed in concert with 
        industry.
        4.  Enable appropriate use of in-house computer models. Permit 
        asset managers and service providers to continue offering 
        unbiased advice based on in-house computer models independently 
        certified as unbiased in accordance with the key Pension 
        Protection Act requirements (e.g., independent third-party 
        certification, annual audits and disclosure).
        5.  Avoid any blanket dismissal of existing Department of Labor 
        class and individual exemptions, letting the Department review 
        exemptions on a case-by-case basis if it is so inclined.
        6.  Finally, avoid any new limitations on non-conflicted advice 
        to plans and plan sponsors, as opposed to individual plan 
        participants.

Conclusion
    We believe these measures, taken together, could provide adequate 
protection to investors while dramatically expanding the availability 
of the affordable, unbiased, professional advice that workers need to 
make the right investment decisions for their retirement.
    We also would be receptive to other proposals to protect 
participants' interests, provided they serve to expand competition and 
access to advice--not contract it.
    Financial institutions are well-equipped and ready to help provide 
plan participants and plan sponsors with such advice, and have been 
doing so successfully under existing legislation and regulatory 
guidance. I hope that Congress and the nation's regulators will take 
positive steps that ensure the provision of needed professional 
investment advice continues.

                                 

    Mr. NEAL. Thank you, Mr. Murphy.
    Mr. McCarthy is recognized to offer testimony.

 STATEMENT OF JIM McCARTHY, MANAGING DIRECTOR, MORGAN STANLEY, 
  ON BEHALF OF THE SECURITIES INDUSTRY AND FINANCIAL MARKETS 
                          ASSOCIATION

    Mr. MCCARTHY. Thank you.
    Chairman Neal, Ranking Member Camp, Members of the 
Committee, I am Jim McCarthy, the Managing Director of 
Retirement Services at Morgan Stanley Smith Barney, and I am 
testifying on behalf of the Securities Industry and Financial 
Markets Association.
    SIFMA's member firms are engaged in every aspect of the 
retirement plan industry, including plan creation, investment 
management, record keeping, and advice and education.
    Morgan Stanley Smith Barney is a global financial services 
firm providing brokerage, custodial, and investment-related 
services to approximately 3.4 million retirement accounts, and 
approximately $370 billion in assets. Like many firms, Morgan 
Stanley Smith Barney advisors are actively engaged in helping 
plan sponsors select and monitor retirement plans, as well as 
assisting our 5 million individual clients with their savings 
and investment concerns. We do not manufacture record keeping, 
but rather we use a consultative approach to market the 
services of approximately 30 manufacturers of retirement 
platforms.
    Let me say at the outset that not a single 401(k) program 
that we sell has a proprietary fund requirement in favor of one 
of our affiliated asset managers.
    The policy proposals being discussed today would have a 
significant effect on 401(k) plan sponsors, plan participants, 
and potentially IRA owners in how they access professional 
advice to establish plans for their employees, help their 
employees navigate those plans, and obtain investment guidance.
    The need for advice is well-documented. Individuals who do 
not have access to advice are too risk adverse when they are 
young and take too much risk when they are nearing retirement. 
Studies have indicated that workers with access to investment 
advice earn higher returns and tend to save more.
    I hope we can agree that access to more investment advice 
and getting it into the hands of more workers is an important 
goal. The Pension Protection Act and the DOL guidance would 
increase the number of people who are getting investment 
advice. I would also encourage all types of financial services 
firms to offer personalized investment advice with appropriate 
safeguards and accountability and controls to make sure that 
the advice is competent and focused on the client's needs.
    Many participants seek in-person advice rather than just 
Web-based delivery systems, which work well for a portion of 
the population, but not for everyone. The PPA was a step in the 
right direction. It allowed a flexible system for not only 
401(k) plans, but IRAs, and carried with it a significant 
safeguard disclosure and accountability to protect plan 
participants. It puts the lion's share of the burden of 
ensuring compliance where it belonged, on the shoulders of the 
advisors seeking to provide advice, not on the employers who 
want to do what's best for their employees by hiring advisors, 
and imposes significant penalties on those entities for any 
failures.
    The DOL has been thorough in its consideration of the 
perspectives and open to the views during the comment period, 
is carefully calibrated to minimize conflict, disclose 
potential conflict, and audit conflict as an added protection. 
Repealing the PPA provisions before they have been given a 
chance to work and tested and practiced is misguided. We think 
this is bad policy, especially in light of the record and the 
need for participants to have greater availability to advice.
    Policymakers should not rush to discard the PPA, the 
regulations, or the class exemption out of a belief that 
stamping out all conflicts, even potential conflicts, is 
warranted absent finding that the advice coverage ratio is not 
growing--as we are confident it will under PPA and the related 
regulations--or finding that conflicts have moved beyond the 
theoretical possibility and are in fact manifesting themselves.
    So if H.R. 2989 moves forward, what gets thrown out in the 
process? As others have mentioned, not just the PPA, but the 
possibility of having tens of thousands of trained advisors 
actually take the accountability and provide specific advice in 
the setting sought by the participants with the proper 
compliance safeguards. If this is adopted, our own 18,000 
financial advisors who are continually trained, backed up by 
systems for compliance, lawyers, overseen by auditors, risk 
managers and other controlled personnel, and are the subject of 
over $30 million a year in professional development spending, 
are effectively stopped from providing any advice to 
participants and IRA owners.
    What is also eliminated is the protection that employers 
want in hiring a competent PPA-governed advisor, the assurance 
that they are not a co-fiduciary with the advisor for every 
investment recommendation made.
    If enacted as defined, H.R. 2989 would create a totally new 
framework which would automatically disqualify hundreds of 
firms from providing advice, even those that had no financial 
conflicts. Banks, for example, would be categorically 
disqualified. As a result, plan sponsors, instead of a 
competitive market, may only be able to select from advisors 
from thinly capitalized companies which don't have the capacity 
and personnel and geographic diversity, let alone the resources 
to address problems when they occur.
    The PPA included a significant number of safeguards. The 
DOL added additional safeguards as part of its regulatory 
process. Yet, these provisions have not been allowed to take 
effect, and we have not seen the positive result that would 
have been delivered.
    We are concerned that the provisions of H.R. 2989 would 
vastly reduce the number of professionals able to provide one-
on-one investment advice and to discourage plan sponsors from 
delivering any advice at all. Surely, this will not create more 
educated and confident plan participants, nor will it 
strengthen workers' retirement security.
    We urge the committee to reject the approach taken in 2989 
and carefully monitor the actions that the DOL will take in the 
coming weeks with respect to the final regulations in the class 
exemption, which would expand advice to millions of more 
workers.
    Thank you to the committee for inviting us to testify 
today.
    [The prepared statement of Mr. McCarthy follows:]

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    Mr. NEAL. Thank you, Mr. McCarthy. I want to thank our 
panelists.
    Mr. Murphy, you state in your testimony that pending 
legislation on investment advice may have the unintended effect 
of ensuring no investment advice is provided at all. Why is 
this? Is it the complexity or the cost of the rules 
contemplated by the legislation, or perhaps the time lag in 
transitioning to a new system of regulating advice?
    Mr. MURPHY. I would say it is both, Congressman. I 
certainly believe that with the requirements that would be 
placed on the plan fiduciary, and with the added burdens that 
would come back to providers to provide advice, I just think it 
is one of those situations where you are going to have less 
advice players or participants in the marketplace to give 
advice at a time when clearly right now we need more advice 
being given in the marketplace, not less.
    Mr. NEAL. As you know, that was the answer I was looking 
for.
    Mr. Gilbertson, you mention in your testimony that an 
investment advisor chosen by an employer assumes an air of 
credibility for the employee. Some advocate disclosure of any 
conflicts cures the conflict.
    What do you think the average participant reaction would be 
to such a disclosure when the participant is coming to the 
advisor for expertise in an area that the participant may not 
fully understand in the first place?
    Mr. GILBERTSON. I think most plan participants appreciate 
any investment advice that they can get, but they have to have 
some confidence that that advice is coming, first of all, from 
someone that is qualified to give that advice, and then 
secondly, to make sure that there is no conflict of interest 
going on between the person giving the advice and the advice 
that is being given. So I think overall, the more advice that 
you can give to plan participants, the better off in the long 
run they are going to be. But like I said, it has to be 
unbiased and free from any kind of a conflict.
    Mr. NEAL. Thank you, Mr. Gilbertson.
    The Chair would recognize the gentleman from California, 
Mr. Herger, to inquire.
    Mr. HERGER. Thank you, Mr. Chairman.
    Mr. Gilbertson, as you are aware, health care is a major 
component of retirement security for senior citizens and those 
nearing retirement. Many seniors in my district have expressed 
to me their concern that AARP is not advocating for their 
interests in the health care legislation currently being 
debated in Congress. Let me ask you about some of the positions 
included in AARP's policy book for 2009 and 2010.
    It is my understanding that AARP uses the policy book 
recommendation as a guide for staff and its advocacy efforts. 
Page 39, chapter 7, states that ``Congress should limit 
increases in out-of-pocket costs, including increases in 
Medicare's overall cost-sharing requirements and premiums for 
current benefits.''
    The Congressional Budget Office estimated that under H.R. 
3200, seniors' Medicare Part D premiums will increase by 20 
percent and their Part B premiums will increase by $25 billion. 
Mr. Gilbertson, do you view these significant premium increases 
as violating AARP's policy of limiting increases in premiums 
for current benefits? And based on your background in pensions, 
do you think such increases would be viewed as significant for 
seniors on fixed incomes?
    Mr. GILBERTSON. Mr. Chairman, Congressman, the National 
Policy Council of AARP is broken down into three distinct 
areas. One is economics, which I serve on, another is health 
care, and then a third component that deals with community 
living and so on. So I am not prepared to answer your question 
because I have been placed on the Economic Council to give that 
kind of advice to the AARP board, but I will convey your 
concerns to the board and to my counterparts on the Health 
Policy Committee.
    [The information follows:]

       ******** COMMITTEE INSERT ********

    Mr. HERGER. And Mr. Gilbertson, if this is an area that you 
feel you don't have the expertise, I would appreciate maybe in 
writing an answer, if we could, from AARP.
    My next question is, AARP's policy book for 2009. When 
analyzing Medicare Advantage cuts found in the House Democrats' 
bill, H.R. 3200, the CBO stated that the cuts ``could lead many 
plans to limit the benefits they offer, raise their premiums, 
or withdraw from the program.'' Similarly, MedPAC stated that 
these Medicare Advantage cuts would rob one in five seniors of 
the choice to receive Medicare benefits through a Medicare 
Advantage plan, and that the value of additional benefits 
seniors receive through Medicare Advantage would be cut by $252 
per year. Yet, again, AARP's Web site claims that it is a myth 
that health care reform will hurt Medicare, and that it is a 
fact that ``none of the health care reform proposals being 
considered by Congress would cut Medicare benefits or increase 
your out-of-pocket costs for Medicare services.''
    Mr. Gilbertson, is AARP suggesting that CBO and MedPAC are 
spreading falsehoods or lies about the Democrats' health care 
reform bill?
    Mr. GILBERTSON. Congressman, once again, I was selected to 
testify on investment-related issues, investment advice, and I 
don't feel qualified to even attempt to answer your question. 
But I will relay your concerns to the board, the AARP board and 
staff, to get back to you answers on those.
    Mr. HERGER. In writing. Thank you very much, Mr. 
Gilbertson.
    Thank you, Mr. Chairman.
    [The information follows:]

       ******** COMMITTEE INSERT ********

    Mr. NEAL. Thank you, Mr. Herger.
    With that, I would like to recognize Mr. Pomeroy.
    Mr. POMEROY. Thank you, Mr. Chairman, for this very 
interesting hearing.
    I want to acknowledge Mr. Gilbertson, who was the Director 
of State Investment Funds back when I was on the State 
Investment Board, a long, long time ago back in the State of 
North Dakota. We haven't seen one another for more than a 
decade. It is good to see you again, Leroy.
    I believe that AARP has not appropriately reflected upon 
the fiduciary standard that attaches in the providing of 
investment advice under the PPA language. Now, in that 
situation, I believe there is a clear legal obligation to 
provide advice solely in the interest of plan participants, and 
a means to take action against someone that would not do that. 
I would encourage AARP to reflect upon that language and would 
love to visit further with you and AARP personnel if they find 
that language wanting.
    It seems to me--and I want to be to polite about this--that 
the Ed and Labor bill is a solution in desperate search of a 
problem. I simply have not seen from this panel, including 
advocates of repeal of PPA language relative to investment 
advice, a demonstration of massive abuses occurring. And Mr. 
Davis, let's talk specifically about your testimony. You 
indicate that economic self-interest inherently is going to 
skew advice. Well, I might observe that there is an economic 
interest to you and the members of your organization if a lot 
of the advice presently occurring under the fiduciary standards 
of PPA would go away. So I believe that you have a financial 
interest at stake relative to the testimony you have provided 
us. That doesn't mean the testimony is not completely honest as 
you see the world, but it certainly reflects a standard as you 
note those standards should apply otherwise.
    In your testimony you note that there have been rules 
proposed by the Labor Department that may have gone beyond what 
was envisioned by the PPA language, those rules pulled back now 
by the existing Labor Department. You indicate that is a 
problem with the statute. I believe it is a natural part of 
administration. One administration was stretching. They didn't 
get it in place. If they had, they would have been sued. This 
administration pulled that language back, and I guarantee you 
are not going to see language like the prior administration 
advanced under investment advice as they sought to expand 
SunAmerica to my view of inappropriate dimensions.
    So let's really get down to the crux of it. Under defined 
contribution retirement savings, people have been given an 
awful lot of responsibility for their own fate, but I don't 
believe we have taken sufficient steps to make sure they have 
the information so they can exercise that new responsibility 
well. This is a very important point in time.
    Today's U.S. News and World Report captures the cover, Yes, 
you can still retire. Your portfolio took a hit, here is how 
you can get back on track. I believe the cover of this major 
news magazine reflects we are in a major national teachable 
moment.
    My 401(k) took a hit, a hellish hit. I rebounced somewhat 
ignorantly, I am now wondering what to do. I need help. This is 
the cry of millions across the marketplace. And wouldn't it be 
unfortunate if, in the means of protecting--for the goal, and 
sincere goal by advocates of the Ed and Labor legislation, the 
goal of protecting people, we were to snatch away the very 
advice they need to figure out what they do in light of what 
the market has been through.
    I would like to ask, I guess, Mr. Chambers, representing 
the Benefits Council, and Mr. Jones' Financial Engines--and I 
see I have probably filibustered most of my time here, so we 
are going to have to be brief about it--will moving forward 
with the kind of legislation proposed by Ed and Labor 
dramatically impact the availability of advice that the 
marketplace presently offers to plan participants? And what do 
you think would be the consequence if that would occur?
    Mr. CHAMBERS. Thank you for the question.
    In the interest of time, I think that there will be a 
significant adverse effect if this legislation, in its current 
form, goes through. And I see the progression in the following 
way: As I mentioned in my oral testimony, and also in the 
written testimony, our advice from our members of all three 
organizations who I am representing today is that there will be 
a significant number of employers who will decide to back off 
from providing access to investment advice for their 
participants. There is just too much else going on in their 
worlds. You heard that in the first panel today from the CEO of 
NCR. There is just too much going on. This is not something 
that, frankly, is high on their agendas.
    So what is the result of that? It seems to me that as 
employers back away, the natural sort of--there are two 
choices. You have a participant who once again is back being 
responsible for investing his or her own assets among a 
panorama of different investments without any investment 
advice, or they have to go out and they have to find someone on 
their own--which, by the way, they are free to do today--but 
they are going to have to go out and find someone on their own 
who also will be subject to all of the fairly draconian rules 
that the proposed legislation would provide.
    Now, in my view, if you are really concerned about 
conflicted advice, and if there are people here who think that 
every rock has people under it who will have nefarious 
intentions of harming participants, these are people from the 
employer's perspective who have been vetted. There are 
presumably sophisticated people at the employer who have been 
vetting one provider versus another, and who are fiduciaries 
and have a responsibility to monitor that. But if you put the 
individual out on his or her own, who is going to be in the 
marketplace and who, in my case, would go to my brother-in-
law--God help me--what would happen, now my brother-in-law is, 
in theory, supposed to be subject to the same rules, and I 
guarantee you there is going to be a lot more conflict under 
those circumstances than there is today.
    One final point if I may, which is this, which is we have 
an existing set of rules. And we have heard discussions today 
from other people on this panel that say, well, we hear rumors 
of conflicts out there. Well, we also have a Department of 
Labor that is very interested in hearing about those conflicts. 
My suggestion is that rather than create a whole new series of 
additional layers of compliance, let's try to focus on what we 
already have and get compliance from that perspective. If there 
is somebody who is out there who is stretching beyond this, 
they are outside of the bounds of the exemption, bring them to 
the attention of the Department of Labor and then other people 
who might be similarly inclined are not going to be following 
that course.
    Mr. JONES. I would just add a couple of points. I would 
agree with my co-panelist on many of the major points there.
    We do believe that if this legislation were to proceed in 
its current form, that it would have a negative impact on the 
availability of advice. One of the things that we are very 
concerned about in the current environment is the lack of 
legislative and regulatory clarity on hiring investment 
advisors, whether they are conflicted under the PPA model or 
unconflicted, is causing paralysis among plan sponsors, even 
large ones, where people are saying we are just not sure how 
the world is going to turn out, we are going to pause and see 
what happens. This is clearly restricting the availability of 
advice to folks who really need it. And as you point out, the 
current point in time is very important in terms of getting 
advice into the hands of those folks.
    I would say that on the margin, the people that are likely 
to suffer the most are individuals that work for smaller 
organizations. The big, sophisticated plan sponsors have been 
hiring independent advisors for many years. I would say it is 
unlikely that they will choose not to do so even if the 
legislation were to proceed. However, there are many plan 
sponsors that receive advice under the SunAmerica model, and if 
that were to go away, I think the net effect would be a 
substantial reduction in the amount of advice available.
    Mr. POMEROY. Mr. Chairman, thank you for allowing the 
extension of time.
    Basically, as I see it, the SunAmerica model allows a 
platform for the delivery of independent advice comporting with 
fiduciary standards to the planned participant. And those with 
an understanding of the marketplace know this is simply the 
cheapest way to get a lot of advice out there. Now, some would 
prefer a one-to-one sit-down model--much more expensive, and 
there are an awful lot of employers that are not going to do 
it. So is SunAmerica better than no advice through that kind of 
platform? In my opinion, clearly yes.
    Thank you, Mr. Chairman.
    Mr. NEAL. We thank you, Mr. Pomeroy.
    We recognize the gentleman from Michigan, Mr. Camp.
    Mr. CAMP. Thank you, Mr. Chairman.
    Thank you all for your testimony; it is very helpful today.
    Mr. Chambers, I think clearly you said we don't want to 
back off investment advice, we certainly want to make sure that 
people have an opportunity to get and receive investment 
advice.
    Mr. CHAMBERS. Correct.
    Mr. CAMP. In fact, I think in your testimony you say that 
today more than ever participants need advice to get them back 
on course toward retirement security. And I think from what I 
hear from your testimony, your opinion is basically, with 
regard to SunAmerica, that if it ain't broke, don't fix it. But 
you believe Ed and Labor Committee's version would really hurt 
the goal of having access to investment advice. Can you just 
elaborate why you think that is the case?
    Mr. CHAMBERS. Sure. As I mentioned a few minutes ago, I 
think that the problem with this particular legislation, as 
drafted--and remember, I am here focusing really exclusively on 
the pre-Pension Protection Act, SunAmerica and other level fee 
issues that are out there--I believe that this is going to 
cause a lot of employers to draw back from providing the 
opportunity for their employees from vetting providers of that 
advice. And therefore, that is going to put people in a 
position where they will either not be getting advice or they 
will be doing it on their own.
    Furthermore, for those employers who do decide that this is 
a very significant thing for them to do, I actually think that 
it is going to limit the number of people that are out there 
who they can actually bring in to provide advice for their 
plan.
    Mr. CAMP. Thank you.
    Mr. McCarthy, I think at some place in your testimony you 
say that as many as 20 million participants in 401(k) plans 
could lose their access to professional investment advice if 
the Ed and Labor bill were to become law. Why do you think that 
is a cause for concern given the recent upheaval in the stock 
market?
    Mr. MCCARTHY. The 20 million number comes from a PSCA--
Profit Sharing Council of America--study about the number of 
people covered currently under SunAmerica arrangements.
    So our belief is, as has been echoed by others, that with 
the invalidation of SunAmerica, you will create a freeze in the 
marketplace where people will not be willing to move forward, 
employers will say I have many more things on my plate, and I 
will put this off at a time where volatility--it is not just 
that markets are down, they have recovered somewhat, but 
volatility and the demography that we are facing right at the 
age wave needs to be dealt with. The number of people whose 
decision making needs to be good because they have less runway 
to make corrective action before they leave the workforce and 
have to be entirely reliant on their accumulated savings is 
growing.
    The last point I would make is, to echo Mr. Chambers' 
comments, if the belief is that all of the conflicts--and I am 
not saying that the conflicts are not potential conflicts and 
they don't exist, but if the belief is that those conflicts are 
resulting in some conspiratorial plan that is manifesting 
itself in harm--the harm that Mr. Pomeroy does not see--I would 
agree with Mr. Pomeroy that the harm is not happening. So Mr. 
Murphy, to my right, is a vendor of which we distribute his 
product. We have approximately $270 million between our two 
firms in that product. And to his chagrin, we have 4/100ths of 
1 percent of that asset base in an affiliated asset manager, 
which is significantly lower than our overall market share in 
the asset management business. And the only thing I could say 
to cheer him up is, we have other providers who are actually 
doing worse, so his 4/100ths isn't even the bottom of the list. 
So if we were running this conspiracy, you should sleep tight 
because we are incredibly inept at actualizing the harm.
    Mr. CAMP. Thank you.
    Thank you, Mr. Chairman.
    Mr. NEAL. Thank you, Mr. Camp.
    Let me recognize the gentleman from North Carolina, Mr. 
Etheridge, to inquire.
    Mr. ETHERIDGE. Thank you, Mr. Chairman. And I will be 
brief. I just have one question.
    Let me thank all of you for being here. This is a 
critically important issue, and a lot of people depend on this. 
And as you have heard today, employees really do need access to 
help with investment advice. You have heard that from a Member 
of Congress--I suspect if you ask every Member of Congress, 
they would probably say they need it too, it would be helpful 
after what we have been through. But we need to make sure that 
the advice that they receive is unbiased. I think we can all 
agree with that.
    So Mr. Davis, let me ask you a question, if I could, 
please, sir. Can you elaborate on your testimony regarding plan 
sponsors who may think they are receiving advice, but actually 
are not. My question is, could this issue be addressed by 
requiring a plan service provider to disclose in plain 
English--that the average person can read--whether they are 
acting as a fiduciary to the plan sponsor when giving 
investment options?
    Mr. DAVIS. Thank you, sir. That would absolutely be a 
positive step in the right direction.
    What I was directly commenting on in my comments with those 
proportions was the disconnect and the different rules that 
govern different parts of our business that create confusion. 
ERISA won't let a fiduciary give conflicted advice, yet a 
broker in a typical situation dealing with a participant doing 
education is incented to recommend one thing rather than 
another. So, by definition, the broker-dealer for whom that 
broker works is going to say we are not giving advice, while 
the employer hired that person thinking that is exactly what 
they are doing. That dysfunctionality is simply a picture of 
the cloudiness of the regulatory and legislative environment in 
which we function today.
    I certainly agree that we need more investment advice. And 
you are right, Mr. Pomeroy, nothing would feed my family better 
than to have more of that be delivered by independent advise 
providers such as our firm.
    That being said, I would rather see the rules in the 
regulatory and legislative environment incent the behavior that 
you want, which is independence across investment advice. If 
everyone is self-motivated or self-interested, hopefully that 
self-interest is enlightened and we will reward those who are 
doing the thing that you want done, which is independent 
investment advice, rather than accept some iteration of 
investment advice simply because it is the best we can do given 
the construct that we have.
    We have a new retirement system for the 21st century funded 
through defined contribution instead of defined benefit. We 
need a new education and advice delivery mechanism to reach 
those needs.
    Mr. ETHERIDGE. Thank you, Mr. Davis. I yield back, Mr. 
Chairman.
    Mr. NEAL. Thank you, Mr. Etheridge.
    I want to thank our panelists for their good testimony 
today. We may have follow-up or questions, and I hope you will 
answer us promptly.
    In addition, you can note that this issue is not going to 
die in the immediate future, and I hope that we will all remain 
vigilant as we continue this conversation.
    Hearing no further comments, the hearing stands adjourned.
    [Whereupon, at 2:09 p.m., the committee was adjourned.]
    [Questions for the Record follow:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    [Submissions for the Record follow:]
           Statement of the American Council of Life Insurers
    The American Council of Life Insurers (ACLI) appreciates the 
opportunity to present its views to the Committee with respect to the 
investment advice rules for defined contribution plans. The ACLI is a 
national trade association of 340 member companies that account for 93 
percent of the life insurance industry's total assets in the United 
States, 94 percent of life insurance premiums, and 94 percent of 
annuity considerations. In addition to life insurance and annuities, 
ACLI member companies offer pensions, including 401(k)s, long-term care 
insurance, disability income insurance and other retirement and 
financial protection products, as well as reinsurance.
    The ACLI appreciates the Committee's attention to this important 
subject and we urge the Committee to continue to support SunAmerica 
(and similar advisory opinions) as well as the investment advice 
provisions in the Pension Protection Act (PPA). Over the last two 
decades, there has been a sizeable shift away from defined benefit 
pension plans in favor of ``participant directed'' defined contribution 
plans in which each participant manages the investment of his or her 
plan account.\1\ To make these investment decisions, it is important 
for participants to have access to both investment information and 
investment advice. With last year's market decline as well as continued 
economic uncertainty, professional investment advice is more important 
than ever.
---------------------------------------------------------------------------
    \1\ Government Accountability Office, GAO-07-355, ``Employer 
Sponsored Health and Retirement Benefits: Efforts to Control Employer 
Costs and the Implications for Workers,'' page 36, March 2007, 
Available at: http://www.gao.gov/new.items/d07355.pdf.
---------------------------------------------------------------------------
Current Investment Advice Environment: SunAmerica and Other Advisory 
        Opinions
    Employers and service providers have relied on long-standing 
Department of Labors (DOL) advisory opinions, in particular Advisory 
Opinion 2001-09A, a.k.a. ``SunAmerica'' (2001) and Advisory Opinion 97-
15A, a.k.a. ``Frost Bank'' (1997), as a cost-efficient way to get non-
biased advice to American workers.
    Under SunAmerica, a service provider uses a third party's computer 
model to provide participants with investment advice. This opinion 
includes several important conditions to ensure the investment 
recommendations are not biased in favor of the service provider or its 
affiliates. For example, the third party, who designed the computer 
program, must be totally independent of the service provider and its 
affiliates and retain control of the development and maintenance of its 
program. The service provider must not be able to change or affect the 
output of the computer program and must exercise no discretion over the 
communication to, or implementation of, investment recommendations 
provided under the arrangement. The third party's compensation from the 
service provider must not be related to the fee income that the service 
provider or its affiliates receive from investments made pursuant to 
any recommendations. These opinions have allowed more advice to enter 
the workplace, and should continue to be upheld. If there are concerns 
that advice arrangements are not complying with these opinions, the DOL 
has broad authority to investigate and explore how plan sponsors are 
implementing these opinions.
Increasing Investment Advice in the Workplace: PPA's Investment Advice 
        Provisions
    The ACLI continues to support the investment advice provisions 
enacted as part of the PPA.
    These provisions permit other ``non-biased'' advice solutions into 
the marketplace. Recognizing the benefits of expanding advice 
availability, the PPA provided a new statutory exemption that would 
permit advice to be provided as follows: (1) through a proprietary 
computer model certified by an independent expert or (2) under a level 
fee arrangement.
    There are numerous safeguards that apply to an advice arrangement 
under the exemption. First, only individuals who are otherwise subject 
to the securities laws, insurance regulation, or banking rules may 
utilize the provisions. Second, there is an obligation to disclose to 
participants information ranging from fees and compensation to material 
relationships. Third, the advisor must affirmatively accept the 
fiduciary status which requires acting in the best interest of the 
participant or account holder. Fourth, the participant must take the 
initiative to implement the advice. Fifth, on an annual basis, the 
fiduciary advisor must retain an independent auditor to sample the 
advice provided and evaluate compliance by the fiduciary advisor. 
Finally, upon failure to follow the requirements of the rules, an 
advisor must reverse the transaction, make the plan whole, pay a 
substantial excise tax, and be subject to civil liability under ERISA. 
These significant costs and potential liabilities for noncompliance are 
powerful incentives for any financial services firm to comply with the 
conditions of the exemption. Again, these provisions would be enforced 
by the DOL.
    Although the PPA was passed in 2006, the DOL issued regulations 
implementing the investment advice provision of PPA on January 21, 
2009. However, the Obama Administration delayed implementation of the 
final regulation for its own review. Recently, the DOL has publicly 
stated it will re-propose this regulation by mid-November. Final 
regulations will be an important step in the process of increasing the 
availability of advice to plan participants.
H.R. 2989 Will Roll Back the Amount of Investment Advice That Is 
        Currently Available
    H.R. 2989, ``The 401(k) Fair Disclosure and Pension Security Act of 
2009,'' as reported by the House Education and Labor Committee, would 
eliminate the PPA's investment advice provisions and longstanding DOL 
guidance permitting ``non-biased'' advice. The ACLI is concerned that 
this step would significantly limit the amount of advice options 
available to plan sponsors. Second, it is not clear that there is a 
sufficient number of ``independent advisors'' available to support the 
investment planning needs of American workers. Third, ``independent'' 
investment advice may be cost prohibitive to many small employers--
resulting in a decline in advice available to workers generally. While 
we agree that conflicted advice should be prohibited, the ``non-
biased'' advice approach undertaken by PPA and SunAmerica provides 
workers with an important source of investment information in these 
difficult economic times.
    Of particular note, H.R. 2989 would add additional costs to 
SunAmerica by requiring the fiduciary to ensure that the third party's 
computer model be initially certified and audited annually by a fourth 
party. This step is unnecessary and redundant because the computer 
model is entirely controlled and maintained by a third party already 
independent of the service provider or its affiliates. As such, this 
requirement would only serve to discourage employers currently 
utilizing such a model by adding significant costs to employers.
    The ACLI would urge Congress to delay action on H.R. 2989 until it 
has had time to review the new Administration's work.
    We would reaffirm our support for the investment advice provisions 
enacted as part of the PPA. As previously stated, the DOL is in the 
process of reviewing and reissuing the PPA investment advice 
regulations. We would urge Congress to let that process continue before 
considering new legislation. The ACLI shares the Committee's interest 
in ensuring Americans have access to useful, non-biased investment 
advice.
                                 
          Defined Benefit Funding Relief Working Group, Letter
TO THE MEMBERS OF THE UNITED STATES CONGRESS:

    The undersigned organizations, which provide retirement benefits to 
millions of workers, urge you to enact legislation this year to provide 
much needed relief for both single employer and multiemployer pension 
funds. Ensuring pension contributions are not out of proportion to 
those required before the market downturn and that benefit restrictions 
are not allowed to go into place simply because of the recession and 
sudden market downturn is critical.
    We strongly urge Congress to move swiftly to adopt follow-up, 
temporary provisions that will ease cash flow constraints and make 
contributions more predictable and manageable. We believe that 
relatively modest temporary changes can provide greater stability and 
improved chances of economic recovery for many companies, non-profits, 
and charitable organizations.
    While the Worker, Retiree, and Employer Recovery Act of 2008 
(WRERA) provided needed technical corrections and modifications to the 
transition rule and asset valuation rule, we remain extremely concerned 
about the viability of defined benefit pension plans during the current 
economic situation. Because of the importance of this issue to workers' 
retirement security and the overall U.S. economy, we strongly urge 
Congress to address this issue immediately.
    Even with the relief provided by WRERA and the Treasury Department, 
minimum contribution requirements for 2010 will still far exceed the 
minimum contribution requirements for 2008; in addition, many companies 
are not eligible for the relief and thus face daunting contribution 
obligations for 2009.\1\ To meet these 2009 and 2010 obligations, many 
employers will be forced to divert cash needed for current job 
retention and creation and investment in their organizations to their 
pension plans to fund long-term obligations. For most companies, 2010 
funding obligations become fixed as of January 1, 2010, making the 2010 
challenge imminent as creditors pressure companies regarding how they 
plan to meet this looming obligation. Therefore, without further 
legislative action, these unexpected funding requirements could cause 
an increase in unemployment and slow economic recovery.
---------------------------------------------------------------------------
    \1\ According to a Watson Wyatt study, plans that used the relief 
under both WRERA and the Treasury Department guidance will have minimum 
contribution requirements in 2010 that will be almost triple of 2008 
minimum contribution requirements. For plans that cannot use the 
Treasury relief, the minimum required contributions are more than 
double for both 2009 and 2010. (Watson Wyatt Insider, April 2009--
http://www.watsonwyatt.com/us/pubs/insider/
showarticle.asp?ArticleID=20942).
---------------------------------------------------------------------------
    Thank you in advance for your support for this important effort. We 
appreciate the work and support from both the House and the Senate to 
move this issue forward, including a hearing to be held in the House 
Ways and Means Committee and the mark-up in the House Education and 
Labor Committee, and we stand ready to work now with you and your staff 
to advance legislation that will promote our nation's economic recovery 
and reinvestment, while securing sound long-term pension plan funding.

Sincerely,

Agricultural Retailers Association
Alcatel-Lucent
Allegheny Energy
ALLETE/Minnesota Power
Alliance for Children and Families
Alliant Energy Corporation
Alpha & Omega Financial Management Consultants, Inc.
Alston & Bird, LLP
AM General LLC
Ameren Corporation
American Benefits Council
American Electric Power
American Institute of Certified Public Accountants
American Society of Association Executives
Aon Corporation
ArcelorMittal
ASPPA College of Pension Actuaries
Associated Benefits Corporation
Association for Financial Professionals
Avaya Inc.
Avista Corporation
B. Braun Medical Inc.
Ball Corporation
Belo Corp. and A. H. Belo Corporation
Black & Decker
Black Hills Corporation
BP America
Buck Consultants LLC
Buffalo Supply, Inc
Business Roundtable
Caraustar Industries, Inc.
Central Vermont Public Service Corporation
CH Energy Group Inc.
CMS Energy
College & University Professional Association for Human Resources
Committee on Investment of Employee Benefit Assets
Con-way Inc.
ConAgra Foods, Inc.
Conoco, Inc.
Connecticut Hospital Association
Consolidated Edison, Inc.
Constellation Energy
Crawford & Company
Dean Foods
Direct Marketing Association
DTE Energy
Duke Energy
DuPont
Eastern Connecticut Health Network, Inc.
Edison Electric Institute
Edison International
El Paso Corporation
Elford, Inc.
Eli Lilly and Company
Energy Future Holdings Corporation
Entergy Corporation
Exelon Corporation
Fabri-Kal Corporation
Financial Executives International's Committee on Benefits Finance
FirstEnergy Corp.
FMC Corporation
Food Marketing Institute
Fox Entertainment Group
FSG Pension Services, Inc.
General Devices Co., Inc.
Girl Scouts of the USA
Goodrich Corporation
Graphic Packaging International, Inc.
Great Plains Energy Incorporated
Greyhound Lines, Inc.
Hallmark Cards, Incorporated
Hawaiian Electric Company, Inc.
Hillside Family of Agencies
Hooker & Holcombe, Inc.
Hospital for Special Surgery
HR Policy Association
HSBC-North America
Indiana Chamber of Commerce
Indianapolis Power & Light Company
Ingram Industries Inc.
Kansas City Power and Light
King Kullen Grocery Co., Inc.
Kraft Foods
Lockheed Martin Corporation
Lockton Companies, LLC
Lord Corporation
Machine & Welding Supply Company
Manchester Memorial Hospital
Maritz
MassMutual Financial Group
McGuireWoods LLP
MD Helicopters, Inc.
MDU Resources Group, Inc.
Meridian Health
MetLife
Morgan Services, Inc.
Motor & Equipment Manufacturers Association
Motorola, Inc.
National Association of Manufacturers
National Association of Waterfront Employers
National Association of Wholesaler-Distributors
National Council of Chain Restaurants
National Council of Farmer Cooperatives
National Education Association
National Federation of Independent Business
National Grid
National Gypsum Company
National Mining Association
National Retail Federation
Navistar, Inc.
Newell Rubbermaid
Newspaper Association of America
NiSource Inc.
NMB (USA) Inc.
Northeast Utilities
NorthWestern Energy Corporation
NSTAR
Nuclear Energy Institute
OfficeMax, Incorporated
OGE Energy Corp.
Olan Mills, Inc.
Otter Tail Corporation
P-Solve Asset Solutions
Pactiv Corporation
Paul, Hastings, Janofsky & Walker LLP
Peabody Energy
Peerless Machine & Tool Corporation
PenChecks, Inc.
Pepco Holdings, Inc.
PG&E Corporation
Pietzsch, Bonnett & Womack, P.A.
PNM Resources
Portland General Electric
PPG Industries, Inc.
Principal Financial Group
Printing Industries of America
Progress Energy
Public Service Enterprise Group, Inc.
Qwest
Rayonier Inc.
Republic Services, Inc.
Retail Industry Leaders Association (RILA)
Rhodes-Joseph & Tobiason Advisors, LLC
Rockville General Hospital
RSM McGladrey, Inc.
Ryder System, Inc.
RR Donnelley
Safeway Inc
Saint Barnabas Health Care System
Sears Holdings Corporation
Small Business Council of America
Smurfit-Stone Container Corporation
Society for Human Resource Management
Sony
Southern Company
Southern States Cooperative
Spectra Energy
SUPERVALU
TECO Energy, Inc.
Tenneco Inc.
Textron Inc.
The American Public Power Association
The Associated General Contractors of America
The Dayton Power and Light Company
The E. W. Scripps Company
The Empire District Electric Company
The ERISA Industry Committee
The Financial Services Roundtable
The Goodyear Tire & Rubber Company
The Kroger Co.
The Segal Company
The Wagner Law Group
Towers Perrin
UniSource Energy Corporation
Unisys
United Illuminating Company
United Jewish Communities/The Jewish Federations of North America
United Jewish Communities of Metrowest (NJ)
United Neighborhood Centers of America
United Plan Administrators, Inc.
U.S. Chamber of Commerce
Vectren Corporation
Venable LLP
Vought Aircraft
Westar Energy
Westfield Group
Whirlpool Corporation
Willis HRH, North America Inc.
Windstream Communications
Woods Hole Oceanographic Institution
WorldatWork
Xcel Energy, Inc.
Xerox Corporation
YRC Worldwide Inc.

                                 
         Statement of Department of Labor's Advisory Council on
               Employee Welfare and Pension Benefit Plans
    I am a second generation Sheet Metal Worker, and am currently 
serving my third term as General President of the Sheet Metal Workers' 
International Association. I direct 157 Local Unions throughout the 
United States, Canada and Puerto Rico whose 150,000 members provide 
skilled services to the sheet metal and air conditioning industry, the 
kitchen equipment industry, the transportation industry, and to other 
related manufacturing and service operations. I also serve, among other 
positions, as a Vice President of the AFL-CIO Executive Council; a 
Director on the ULLICO Board of Directors; a Vice President of the 
Building and Construction Trades Department of the AFL-CIO; the Labor 
Co-Chairman of the Democratic Governors' Association; and President of 
the Eugene Debs Foundation. I am also a proud Board member of the 
National Coordinating Committee for Multiemployer Plans (NCCMP). I 
began my sheet metal career in Indianapolis, IN, completing my 
apprenticeship in 1969. I have served in union leadership positions 
since 1973, and during this time I have been a trustee on many pension 
and welfare plans.
    Crisis begets legislation, particularly when it comes to pensions. 
Studebaker shut down in 1963 and thousands lost pensions. I was a boy 
then, but I remember the stark effect it had on many of my fellow 
Hoosiers. In response, President Kennedy formed a cabinet level 
committee on corporate pension funds. Yet, more than a decade would 
pass before the Employee Retirement Income Security Act of 1974 (ERISA) 
became law. To many scholars, ERISA is a major event of American social 
welfare legislation dwarfed only by Social Security and Medicare.\1\ 
This landmark law created a complex regulatory scheme for pensions. 
Despite 10 years of study, ERISA's passage was rushed by the impending 
impeachment of President Nixon. I am told by old Congressional hands 
that ERISA originally would have taken on health care; imagine that, 
over 30 years ago.
---------------------------------------------------------------------------
    \1\ Christopher Howard, The Hidden Welfare State, Princeton 
University Press, 1999.
---------------------------------------------------------------------------
    ERISA spurred interest group advocacy. It also created whole new 
careers and lines of business. New groups formed, which this Council 
knows well, like the NCCMP, the Pension Rights Center, Employee 
Benefits Research Institute, the ERISA Industry Council, to name just a 
few.
    The volume and complexity of pension regulations created new 
experts--like many of you. The investment of assets under prudent man 
rules have led to increasing reliance on banks, investment managers, 
insurance companies and other financial services companies. In my 
experience, few trustees can make sense of federal pension law without 
actuaries, accountants, and lawyers. Their guidance through the 
bureaucratic maze is indispensable. Yet, it does not improve our 
ability to meet our fundamental responsibility--secure retirement 
income. Moreover, these experts often comment on proposed legislation 
and regulations and nudge the process in one direction or another.
    After the first economic downturn of this century in 2000 through 
2002, Congress passed limited relief in the Pension Funding Equity Act 
of 2004. This limited bill reflected the inability of stakeholders and 
politicians to agree on more substantive reform. By 2006, employers, 
unions, and others--still reeling from the 2000-2002 market downturn--
put aside our differences and managed to enact the Pension Protection 
Act of 2006 (PPA), which was the most sweeping pension reform 
legislation since ERISA's enactment. Unfortunately, the PPA's reforms 
were no match for the current ``economic tsunami'' (as our President 
describes it) which has pension plans and their sponsors reeling again. 
By the way, my Union supported PPA's multiemployer reforms, but we did 
not support the single employer changes.
    PPA, like almost all pension legislation since 1974, only addresses 
problems caused by the latest crisis. It was not designed for the 
current one. Like most legislation, it was written by bright, well-
intentioned, young staffers with little experience or expertise in 
pension plan design.
    Understandably, the President and Congress have been preoccupied 
with our troubled economy and health care reform. Fixing both the 
economy and health care are daunting challenges that demand urgent 
action. These efforts will ultimately not succeed and the nation will 
not achieve lasting economic growth, unless the President and Congress 
do something to ensure permanently the economic security of America's 
current and future retirees. Medical science has significantly extended 
life expectancies. Aging baby-boomers will further strain our economic 
resources and the health care system. Retirees can help pay for these 
resources and help fund health care if they have financial security. 
Past generations who reaped the benefits of our traditional private 
sector pension system had such security. Over the past few decades, our 
society's shortsighted dismantling of this private source of income 
will shift these costs directly onto the taxpayer with crippling 
economic consequences.
    It is past time to overhaul our private pension system. Despite the 
2008 market and ``economic tsunami,'' some in Congress say we gave 
pension relief last year. Certain band-aid approaches are suggested--
give plans longer to fund this or that, or give temporary relief from 
funding standards. Reactive legislation again is supposedly all we 
should expect. Most significantly, current law does nothing to promote 
new and better pension plan designs or reduce the risks posed to 
participants and to employers. Still, I am heartened that the 
President's emphasis on seeking long-term structural reform to our 
economy can be focused on retirement security.
    Americans are hard workers. We deserve some semblance of leisure in 
our later years. Over the past 20 years, most employers, but not most 
union employers, have phased out their traditional defined benefit 
pension plans, which provide a reliable monthly pension check. Instead, 
to the extent retirement benefits are provided at all, employers have 
shifted to defined contribution plans in which a worker's retirement 
income is determined at the end of the day by the losses or gains in 
his/her account. This latest ``unprecedented'' economic downturn 
starkly illustrates how woefully inadequate a retirement system is that 
is limited to defined contribution plans. Most workers, including those 
who save religiously, have seen their retirement accounts decimated in 
just one year. Just look at the folks who thought 2010 would be their 
retirement year. One large provider's 2010 ``target date'' fund lost 
41% in 2008; most others lost at least 25%. The situation is most dire 
for middle age and older workers--the baby boomers moving through the 
latter stage of life like the proverbial pig through a python. It is 
unlikely that they will recoup their losses before the time that they 
hoped to retire (if ever). Moreover, many workers may be disinclined to 
contribute to defined contribution plans in the future, if they fear 
their money may be gone when they are ready to retire.
    We encourage employees to save more, be patient, wait the market 
out. But employers in the DC Plans have made their decisions. As the 
Economic Policy Institute's Monique Morrissey has written, ``Employers 
ranging from AARP to Zygo Corporation have suspended their 401(k) 
matches during the current downturn.'' \2\
---------------------------------------------------------------------------
    \2\ Policy Memorandum #143, ``Obama Retirement Policy Falls 
Short,'' Monique Morrissey, June 26, 2009, Economic Policy Institute, 
Washington, DC.
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    Despite medical advances and better habits, our bodies inevitably 
decline, making some tasks more difficult and prolonged. Yet, every day 
we hear of retirement-age folks who have to keep working, or who return 
to work, because their retirement savings have collapsed or their 
pensions were dumped on the Pension Benefit Guaranty Corporation (PBGC) 
and they cannot live on the amount guaranteed by the PBGC. Lacking a 
secure source of retirement income, a growing number of older workers 
are now forced to continue working in jobs that younger workers could 
fill. In some arenas, workforce productivity will suffer if older 
workers must stay put and younger workers are left out, or their 
advancement is delayed. Employer provided health insurance will become 
more expensive as an older workforce demands more medical care. For 
people that simply are unable to perform their job as they age, 
additional strains will be placed on our already strained Social 
Security system. Social Security is not meant to be, nor should it be, 
the main source of income for our aging population. Especially in light 
of current high unemployment, we risk fanning the flames of 
intergenerational conflict as younger workers have fewer job prospects 
and those that are working have fewer advancement opportunities.
    Others may disagree, but it is clear to me that these DC plans do 
not provide retirement security. In fact, it is clear that defined 
benefit pensions play a critical role in reducing the risk of poverty 
and hardship among older Americans. According to a recent study, 
poverty rates for older households lacking pension income were about 
six times greater than those with such income.\3\ The analysis also 
finds that pensions reduce, and in some cases eliminate, the risk of 
poverty and public assistance that women and minority populations 
otherwise would face. Dr. Frank Porell, one of the lead authors, has 
said the following:
---------------------------------------------------------------------------
    \3\ This finding is reported in ``The Pension Factor: Assessing the 
Role of Defined Benefit Plans in Reducing Elder Hardships.'' The report 
was authored by Dr. Frank Porell, Professor of Gerontology at the 
McCormack Graduate School of Policy Studies at the University of 
Massachusetts-Boston, and Beth Almeida, Executive Director at the 
National Institute on Retirement Security. The analysis used the U.S. 
Census Bureau's Survey of Income Program Participation (SIPP) panels 
from 1996, 2001, and 2004. The study sample included respondents age 60 
or older and all households with a head age 60 and older, who had 
records in both the Pension and Adult Well-Being topical modules of the 
survey. This totaled 10,259 households.

           ``Evidence that pensions contribute to the retirement 
        readiness of older American households has been noted by 
        experts and academics. With our analysis, we now have hard 
        numbers on the people and budget impacts of pensions. The 
        bottom line: pensions help older Americans escape poverty, 
        especially women and minorities who we know are most 
---------------------------------------------------------------------------
        vulnerable.''

    Because they have pensions, many older Americans have adequate 
food, shelter, and health care, and avoid public assistance.\4\
---------------------------------------------------------------------------
    \4\ The study's key findings are compelling. Pensioners in 2006 
were associated with:

        1.72 million fewer poor households and 2.97 million 
fewer near-poor households
        560,000 fewer households experiencing a food hardship
        380,000 fewer households experiencing a shelter 
hardship
        320,000 fewer households experiencing a health care 
hardship
        1.35 million fewer households receiving means-tested 
public assistance
        $7.3 billion in public assistance expenditures savings, 
representing about 8.5 percent of aggregate public assistance dollars 
received by all American households for the same benefit programs.
---------------------------------------------------------------------------
    The latest economic downturn demonstrates that reform measures such 
as the PPA may be expedient, but they do not address the system's 
fundamental problems. Whatever immediate dangers our pension plans face 
can be addressed--in the short-term--by modifications to the PPA, a few 
of which Congress already is considering. A solution to our pension 
woes, however, cannot be addressed in the short-term. Nor can we 
continue only to seek pension reform in times of crisis. In 2014, much 
of the PPA will expire. Pre-PPA laws had already been inadequate. We 
cannot return to old models. We must use this time wisely to develop 
new forms of lifetime retirement security or risk revisiting today's 
economic woes on future generations.
    I have been around Washington, almost full-time for over 15 years 
and a frequent visitor before that. From my layman's perspective, 
incoherence is a primary characteristic of retirement legislation and 
regulations. National retirement policy has veered in multiple 
directions. Access to benefits has expanded and contracted. Congress 
simultaneously tightened nondiscrimination rules, forcing employers to 
cover more lower-paid workers while it made voluntary retirement plans, 
now known as 401(k)'s, more attractive to employers. The government 
made it easier for workers to retire early by allowing withdrawals at 
59 and in-service distributions at 62 while ``preserving'' Social 
Security by raising the age for full benefits from 65 to 67 and 
creating incentives to work even longer.
    There are overlapping Congressional jurisdictions among the 
revenue, labor, and governmental operations committees. Administrative 
and regulatory authority is distributed among the Treasury Department, 
Labor Department and PBGC who often work at cross-purposes and which 
produce conflicting demands on sponsors.\5\
---------------------------------------------------------------------------
    \5\ Christopher Howard, The Hidden Welfare State, Princeton 
University Press, 1999, p. 132.
---------------------------------------------------------------------------
    The problems with our current pension system are complex and 
demanding, but not insoluble. The right solutions, however, require 
careful thought and analysis, and the input of many diverse sectors of 
our economy. No one official or department possesses the requisite 
knowledge and experience to address the enormity of pension reforms. As 
with other challenges, the nation should turn to a panel of experts to 
marshal research and make recommendations to elected officials.\6\
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    \6\ See, ``Inside the Black Box: The Politics of Presidential 
Advisory Commissions,'' Liz Clausen, School of Economic, Political and 
Policy Sciences, University of Texas at Dallas.
---------------------------------------------------------------------------
    The best way forward is a Presidential Commission, chaired by a 
high-level administration executive, whose task would be to recommend, 
within a two-year period, a new policy and legislative framework for 
ensuring long-term retirement security for all Americans. Its members 
should represent a broad cross section of employers, participants, 
unions, and benefit and investment professionals. The Commission should 
investigate and recommend new forms of pensions where risk is fairly 
borne both by participants and plan sponsors, but also in which a 
reasonable monthly benefit is fully funded. We need to replace the 
byzantine rules, which measure funding, tax consequences and required 
contributions and greatly decrease the exposure of the PBGC. Rather 
than providing a minimum benefit in the event of plan insolvency, we 
should have a system that removes obstacles to private sector plan 
sponsorship. The appropriate Congressional Committees should then 
examine the Commission's recommendations and retain experts to draft 
the actual legislation. But we have to do this in two years, to ensure 
that those whose vision helps shape a new comprehensive retirement 
policy are in a position to promote and enact the changes that are 
called for.
    This is not a partisan suggestion. A commission is not a solution 
or even a start to a solution, unless it is followed by action. Who 
here remembers President Carter's Commission on Pension Policy which 
recommended sweeping changes to ERISA, including immediate vesting, 
full portability and mandatory coverage by all employers? The report 
was issued, the administration changed and nothing happened.
    It is time to create a new ERISA and a new retirement structure. 
Our best and brightest must be called to serve. Thank you for your 
attention.

                                 
             Statement of Nicholas Paleveda, MBA J.D. LL.M
    My name is Nicholas Paleveda MBA J.D. LL.M, I am a tax attorney, 
licensed before the U.S. Tax Court for 25 years, and CEO of Executive 
Benefits Design Group.
    Executive Benefits Design Group is one of the largest pension 
service providers in the United States, servicing more defined benefit 
plans than Merrill Lynch, T.Rowe Price and Putnam (in terms of numbers 
of plans). This committee needs to be aware of what is taking place in 
the Defined Benefit area especially as it relates to small plans, less 
than one hundred employees. Many plan sponsors are interested in 
setting up plans for their employees and funding the defined benefit 
plans with guaranteed annuity contracts. This prevents the plan from 
losses that take place if the funds were invested in the stock market. 
At the same time, the IRS has created a campaign to wipe out these 
plans using 6707A, a penalty that is non-reviewable before any court 
and creates fines in excess of $200,000 for each plan.
    The plan sponsors, in many cases never entered into any ``listed 
transaction'' or in some cases fall into inadvertent ``listed 
transactions.'' The IRS audits in many cases are time consuming and 
expensive for the small business owner. The taxes and law in the 
pension area can be, in many cases, misstated and misrepresented by the 
IRS.
    This whole process creates an atmosphere where the small companies 
do not want to set up pension plans for their employees. This 
atmosphere will in turn create less savings for retirement and shift 
more of a burden on the social security system.
    The solution needs to come from Congress by:

        1.  Establishing a small plan audit and compliance section of 
        the IRS where ``substantial compliance'' becomes the rule. This 
        will encourage small businesses to set up plans and lessen the 
        burden of social security.
        2.  Amend 6707A to allow for Judicial review of plans and 
        impose a tax or penalty relative to the error that the plan 
        created such as 10% of the amount deducted as opposed to 
        $200,000 on a $20,000 deduction.
        3.  Make this law retroactive to 2004 where the American Jobs 
        Creation Act was passed.

    Please find a sample battle in Tax Court that is a waste of time 
for the taxpayer and the small business owner.
    1. This can happen to any small business.
    2. The notice of deficiency, a copy of which including its annexed 
computation and explanation pages, is attached hereto as Exhibit A, was 
mailed to Any small business on March 9, 2009 by the Department of the 
Treasury Internal Revenue Service.
    3. The deficiency as determined by the Commissioner is in income 
tax for the calendar year 2005 in the amount of $56,000 and in the year 
2006 of $25,665 of which part of this amount is attributable to the 
denial of a deduction to a qualified retirement plan is in dispute.
    4. In 2005, Any small business Inc. decided to create a retirement 
plan for the benefit of all their employees. The employees were in 
their 40s and 50s and did not want to take risk in the stock market. 
The corporation set up a fully insured defined benefit plan under 
section 412(i).
    5. A section 412(i) plan is a defined benefit plan that is exempt 
from the minimum funding standard under Section 412 as the plan is 
funded with guaranteed annuity and life insurance contracts.
    6. A defined benefit pension plan provides a participant at 
retirement with the benefit stated in the plan. The cost of benefits 
payable from such plans are funded on an annual basis over the 
preretirement period I.R.C. Sec. 404, 412 Contributions made to the 
plans, within certain limits, are deductible. Sec. 404(a)(1) Earnings 
on the contributions are not taxed as they accumulate. Sec. 501(a) Plan 
assets are taxed to participants only as they are paid out as benefits. 
Sec. 402(a)(1) The payments of benefits under a qualified plan are 
limited. Sec. 415 Lear Eye Clinic Ltd. et al. v. Commissioner of 
Internal Revenue 106 T.C. 23 (1996).
    7. The Any small business plan was for the benefit of all their 
employees and funded the plan with guaranteed annuity contracts and 
guaranteed whole life contracts which built up cash value for 
retirement and provided a death benefit to the survivors if an untimely 
death. The annuity and insurance contracts were obtained from A+ Life 
Insurance Company. The plan (exhibit 1) established a Trust that 
purchased the annuity and insurance contracts, and the plan had a trust 
agreement in place with a favorable determination letter (exhibit 2) 
from the Internal Revenue Service. The Trust (exhibit 3) was a volume 
submitter plan and participants were given summary plan descriptions 
describing the lifetime income retirement benefits, death and 
disability benefits from the plan. The Trust met the rules of the 
Internal Revenue Service including plan amendments such as The Final 
401(a)(9) amendment, (exhibit 4), the Pension Funding Equity Act 
amendment (exhibit 5), the Code 401(a)(9) Model amendment pursuant to 
announcement 2001-82 (exhibit 6), the EGTTRA ``good faith'' plan 
amendment (exhibit 7), the Regulation Section 1.401(a)(4)-3(b)(5)(iv) 
plan compliance agreement (exhibit 8) and corporate resolution (exhibit 
9) ratifying the plan. The plan owned the annuities and life insurance 
policies (exhibit 10) and filed 5500 returns as required under ERISA 
(exhibit 11). The plan is also a PBGC plan (exhibit 12) after receiving 
a determination status letter from the PBGC on medical technicians.
    8. The Commissioner's determination that a plan did not exist and 
the income tax set forth in the deficiency is owed is based upon 
misstatements of facts and errors of law including but not limited to 
the following:

          The Commissioner erred in determining the defined benefit 
        plan set up by the corporation did not satisfy the requirements 
        of section 412(i). Section 412(i) is the code section that 
        provides an exemption for the minimum funding standards of 
        Section 412 as the plan is funded and maintained based upon the 
        guaranteed interest and crediting rate of a major insurance 
        company as opposed to risk taken in the stock market. In the 
        determination letter issued by the Internal Revenue Service, 
        the Service stated the plan did not satisfy all of the 
        following requirements. The Service states as follows Section 
        412(i):

        (1)  The plan is funded exclusively by the purchase of 
        individual insurance contracts.
        (2)  Such contracts provide for level annual premium payments 
        to be paid extending not later than the retirement age for each 
        individual participating in the plan, and commencing with the 
        date the individual became a participant in the plan, (or in 
        the case of an increase in benefits commencing at the time such 
        increase becomes effective).
        (3)  Benefits provided by the plan are equal to the benefits 
        provided under each contract at normal retirement age under the 
        plan and are guaranteed by an insurance carrier . . . to the 
        extent premiums are paid. This is the area under dispute.
        (4)  The benefits for each participant provided under the 
        412(i) plan that holds individual insurance contracts must be 
        equal to the benefit provided under the participant's 
        individual contracts at the participant's normal retirement age 
        under the plan.

    This was placed in the deficiency letter and is a misstatement of 
law.
    Section 412(i)(4) does not say this at all. In fact Section 4 
states:

        (5)  Premiums payable for the plan year, and all prior plan 
        years, under such contracts have been paid before lapse or 
        there is reinstatement of the policy.

    The Service also misstates 412(i) Section 5. Section 5 actually 
states:

        (6)  No rights under such contracts have been subject to a 
        security interest at any time during the plan year.

    The Service also misstates 412(i) Section 6.

    Section 6 actually states:

        (7)  No policy loans are outstanding at any time during the 
        year.

    412(i) Section 1, 2, 4, 5, and 6 have all been met by the taxpayer. 
The only section in dispute is 412(i) Section 3 and misstated Section 
4. Since Section 4 is not part of the statute, (and appears to be made 
up), the court should determine if the plan meets 412(i) Section 3.
    The Service argues that the life insurance and annuity contracts 
provide benefits which exceed the benefits under the plan; the premiums 
to the excess benefits are not deductible. Assuming there are 
contributions that exceed the benefits these excess contributions 
should not be allowed. Petitioner agrees with this statement--excess 
premiums are not deductible. Petitioner disagrees that the entire 
contribution to the trust should be disallowed. In the instant case, 
Respondent disallowed all the deductions under 404(j) which is legally 
not correct. 404(j) states:
    (1) NO DEDUCTION IN EXCESS OF SECTION 415 LIMITATION.
           I.R.C. Code Section 404(j) does not say there will be no 
        deduction for the entire plan if plan contributions exceed 
        Section 415. The plain wording of the statute makes this clear 
        as the statute refers to ``no deduction in excess of the 415 
        limit''. In construing a statute, courts generally seek the 
        plain and literal meaning of its language. United States v. 
        Locke, 471 U.S. 84, 93, 95-96 (1985); United States v. American 
        Trucking Associations, Inc. 310 U.S. 534,543 (1940). For that 
        purpose, courts generally assume that Congress uses common 
        words in their popular meaning. Commissioner v. Groetinger, 480 
        U.S. 23, 28 (1987); see also Addison v. Holly Hill Fruit 
        Prods., Inc. 322 U.S. 607,618 (1944). Moreover, words in a 
        revenue act generally are interpreted in their `ordinary, 
        everyday sense' ''. Commissioner v. Soliman 506 U.S. 168, 174 
        (1993). In the instant case, the statute is not ambiguous, 
        Congress intended to disallow only deductions that exceed the 
        415 limit-not the entire contribution.

    Congress has affirmed this position in the House Committee Report 
H. R. Rep. No. 107-51 pt. 1 in granting relief to excise taxes on 
Defined Benefit plans

           ``The Committee believes that employers should be encouraged 
        to adequately fund their pension plans. Therefore, the 
        committee does not believe that an excise tax should be imposed 
        on employer contributions that do not exceed the accrued 
        liability full funding limit''.

    The deficiency letter ignores the intent of Congress to encourage 
employers to fully fund their defined benefit plans by disallowing the 
entire plan if contributions are made in excess of allowable limits 
when the remedy is clearly to make the contributions that are excess-
non-deductible.
    The deficiency letter from the service goes on to say ``Under 
Section 404(a) (1), the limitation on deductions for a defined benefit 
plan is calculated using the same funding method and actuarial 
assumptions that are used for the purpose of funding the plan under IRC 
Section 412.'' This is not a correct statement of Section 404(a) (1) 
which actually states:

        (1)  PENSION TRUSTS.--

                   (A) IN GENERAL- In the taxable year when paid, if 
                the contributions are paid into a pension trust (other 
                that a trust to which paragraph 3 applies), and if such 
                taxable year ends within or with a taxable year of the 
                trust for which the trust is exempt under section 
                501(a), in an amount determined as follows:

                          (i) the amount necessary to satisfy the 
                        minimum funding standard provided by section 
                        412(a) for plan years ending within or with 
                        such taxable year (or for any prior plan year), 
                        if such amount is greater than the amount 
                        determined under clause (ii) or (iii) 
                        (whichever is applicable with respect to the 
                        plan).
                          (ii) the amount necessary to provide with 
                        respect to all of the employees under the trust 
                        the remaining unfunded cost of their past and 
                        current service credits distributed as a level 
                        amount, or a level percentage of compensation, 
                        over the remaining future service of such 
                        employee, as determined under regulations 
                        prescribed by the Secretary, but if such 
                        remaining unfunded cost with respect to any 3 
                        individuals is more than 50% of such remaining 
                        unfunded cost, the amount of such unfunded cost 
                        attributable to such individuals shall be 
                        distributed over a period of at least 5 taxable 
                        years.
                          (iii) an amount equal to the normal cost of 
                        the plan, as determined under regulations 
                        prescribed by the Secretary, plus if past 
                        service or other supplementary pension or 
                        annuity credits are provided by the plan, an 
                        amount necessary to amortize the unfunded costs 
                        attributable to such credits in equal annual 
                        payments (until fully amortized) over 10 years, 
                        as determined under regulations prescribed by 
                        the Secretary.

           In determining the amount deductible in such year under the 
        foregoing limitations the funding method and the actuarial 
        assumptions used shall be those used for such year under 
        Section 412, and the maximum amount deductible for such year 
        shall be an amount equal to the full funding limitation for 
        such year determined under Section 412.
           The Service makes a legal error that the taxpayer followed 
        none of the requirements of section 412--and should be 
        following Section 412. Taxpayer is not required to follow 
        Section 412. In fact section 412(h) specifically states, 
        ``412(h) EXCEPTIONS--This section shall not apply to any 
        insurance contract plan described in subsection (i).''
           The Service made a factual error stating that the taxpayer 
        did not use an enrolled actuary to certify the funding. An 
        enrolled actuary is not needed to certify the funding, however 
        the taxpayer did use an enrolled actuary to determine the 
        funding. The remaining statements by the service are without 
        merit as they apply to traditional defined benefit plans. The 
        taxpayer did use a reasonable method for calculating the amount 
        of funding to provide the benefits. The funding provided for 
        level annual premiums to normal retirement age and the benefits 
        of the plan equaled the guaranteed cash surrender value of the 
        life insurance and annuity converted to a lifetime income using 
        the annuity conversion rates from the annuity contracts 
        purchased under the plan. Contributions are reduced to the 
        extent any excess dividend or interest is paid to the contracts 
        and the plan is correctly funded. As this is a traditional 
        section 412(i) plan, established by Congress in 1974 and 
        reaffirmed in 2006, the remainder of the service's argument 
        that it is a non-qualified plan is without merit. In any event, 
        if the plan did not meet the qualifications of section 412(i), 
        the plan would lose 412(i) status and become a traditional 
        defined benefit plan. It is nearly factually impossible for a 
        plan funded solely with annuity and insurance contracts, as in 
        the instant case, not to meet section 412(i) as the contracts 
        themselves demonstrate the guaranteed cash value build up and 
        guaranteed lifetime income. It is factually possible for this 
        plan to contain more assets than allowed under Section 415, or 
        be operationally non-compliant

           Delinquency Penalty-failure to File. Section 6651(a)(1). 
        Petitioner's Counsel is unaware of the time the tax return was 
        filed and requests the penalty to be reduced to reflect the 
        allowable deduction to the retirement plan.
    Civil Fraud Penalty. Section 6663
           Petitioner's Counsel is unaware of the alleged Fraud in 
        connection with certain previously agreed and assessed 
        adjustments. Fraud must be pleaded with particularity and in 
        fact was not plead at all. Petitioner request the Fraud penalty 
        should be abated.
    Accuracy Related Penalty Section 6662.
           Petitioner request this penalty be abated as the deduction 
        for the retirement plan was properly taken on the return. No 
        facts have been pled that would impose 6662. There was no 
        substantial underpayment of income tax, there were no valuation 
        misstatements nor did taxpayer disregard the rules and 
        regulations. In fact taxpayer followed the rules as promulgated 
        by Congress in Section 412(i) and did not ``misstate the law'' 
        as the Service did to this court either intentionally or 
        unintentionally by adding a section to 412(i) that does not 
        exist. Taxpayer created a qualified plan document, had an 
        approval letter from the service and funded the plan to meet 
        the objectives of the plan.
           Similarly, and with respect to the previously agreed and 
        assessed adjustments, Petitioner reasonably and justifiable 
        relied on its tax advisor and return preparer in connection 
        with the preparation of its Form 1120 for the years ended 
        December 31, 2005 and December 31, 2006. Consequently, there 
        was reasonable cause for the underpayment of tax associated 
        with and resulting from the previously agreed and assessed 
        adjustments.
    The Accuracy Related Penalty 6662A.
           The Service incorrectly determined the plan to be a listed 
        transaction. The Service originally stated that all three 
        participants had ``excess insurance'' and the entire plan was a 
        listed transaction. Upon further review, the Internal Revenue 
        service stated only one participant created a listed 
        transaction. In a review of the computations by enrolled 
        actuaries it was discovered that, the area auditor from the IRS 
        incorrectly used a lower salary than was actually paid to the 
        participant and incorrectly used an annuity conversion rate 
        that was not in the plan for this one participant. If the lower 
        salary and higher annuity conversion rate was used, the plan 
        met the guidelines for a ``listed transaction''. A penalty of 
        $200,000 was sent to the taxpayer in addition this penalty was 
        imposed.

        (2)  Whereas Petitioner respectfully request this court and 
        prays for relief as follows:

                  1. Determine that this plan is a Section 412(i) plan 
                and the contributions are deductible under Section 404.
                  2. Determine that the commissioner erred in 
                disallowing the deduction to the retirement plan.
                  3. If there were excess deductions, the deduction for 
                the plan remains in tact and only the excess deductions 
                are disallowed as per section 404(j).
                  4. Abate any penalties and deem this plan, a 
                traditional 412(i) plan, not to be a ``listed 
                transaction''.
                  5. In the alternative, if the plan does not meet the 
                standards of section 412(i), the plan would become a 
                traditional defined benefit plan not a non-qualified 
                plan as proposed by the Service.
                  6. Abate imposition of the penalty under Section 
                6663.
                  7. Abate imposition of the penalty under Section 
                6662.
                  8. Abate imposition of the penalty under Section 
                6662A.
                  9. Give such other and further relief or recovery to 
                which any small business may be entitled.

    Please enact legislation that stops this nonsense.

                                 
                  STATEMENT OF GIRL SCOUTS OF THE USA
OVERVIEW
    On behalf of the Girl Scouts of the USA, its 109 councils across 
the country, 13,000 active and former employees and 3.5 million girl 
and adult members, we are pleased to submit the following statement 
about the Pension Protection Act, the recent economic downturn and 
their combined impact on the Girl Scouts' defined-benefit pension plan. 
We commend the Ways and Means Committee for its attention to this issue 
and look forward to working with Congress to enact legislative relief 
for plan sponsors.
    For more than 35 years, Girl Scouts of the USA has partnered with 
Girl Scout councils across the country to provide a defined-benefit 
pension for approximately 13,000 active, past, and retired employees. 
Even as many corporations have moved away from defined-benefit plans, 
Girl Scouts has remained committed to providing this important form of 
retirement security for our employees, 90 percent of whom are women.
    Unfortunately, implementation of the Pension Protection Act, when 
coupled with the unprecedented economic downturn and the increasing 
liabilities of our pension, has created a ``perfect storm'' that is 
significantly impacting Girl Scouts' ability to continue providing a 
defined-benefit pension to our employees. Absent prompt Congressional 
relief, Girl Scouts will have to freeze its plan, cut programs, lay off 
staff, and engage in other cost-cutting measures that will 
significantly inhibit our ability to achieve our mission of creating 
girls of courage, confidence and character who make the world a better 
place.
ABOUT GIRL SCOUTS
    Girl Scouts is the world's preeminent organization dedicated solely 
to girls, serving 3.5 million girl and adult members in every corner of 
the United States, Puerto Rico, the Virgin Islands, and ninety-five 
countries worldwide. For almost 100 years, Girl Scouts has helped girls 
discover the fun, friendship, and power of girls together. Girl 
Scouting helps girls develop their full individual potential; relate to 
others with increasing understanding, skill, and respect; develop 
values to guide their actions and provide the foundation for sound 
decision-making; and contribute to the improvement of society through 
their abilities, leadership skills, and cooperation with others. More 
than 50 million American women enjoyed Girl Scouting during their 
childhood--and that number continues to grow as Girl Scouts continues 
to inspire, challenge, and empower girls everywhere.
    As an employer, Girl Scouts offers flexible benefits packages to 
suit our employees' needs. We truly believe in investing in our 
employees, and our benefits and compensation packages reflect that 
commitment. In addition to our defined-benefit pension plan, many Girl 
Scout councils offer our employees a range of benefits such as Medical/
dental, vision, life, short- and long-term disability insurance, 403B/
401K, a variety of alternative work arrangements and many other 
benefits. This approach allows us to attract, recruit and retain 
talented, qualified, and dedicated staff.
    This issue is important to us, not just as an employer, but as an 
organization that is dedicated to protecting the interest of girls and 
women. In general, older women are at greater risk of poverty than men 
because they typically live longer, earn less, and spend less time in 
the workforce than men do. As a result, they are more reliant on the 
income security offered by a defined-benefit pension plan.
    As it is, too few women have access to a defined-benefit plan. 
Women receive about half the pension benefits retired men count on.\1\ 
Furthermore, women rely on their employers to help with retirement 
planning--almost a third of working women cite lack of a retirement 
plan at work as a barrier to saving.\2\ At a time when women are 
projected to account for 49 percent of the increase in total labor 
force we should be working toward policies that promote and protect 
their retirement security--not threatening a critical safety net.
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    \1\ CRS: Older Workers Employment and Retirement Trends, Sept 7, 
2007.
    \2\ National Center on Women and Aging 2002 National Poll Women 
50+, National Center on Women and Aging, The Heller School for Social 
Policy and Management Brandeis University November 2002.
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THE PENSION PROTECTION ACT AND ITS IMPACT ON GIRL SCOUTS
    The Pension Protection Act of 2006 (PPA) was enacted in response to 
the default in recent years of several large defined-benefit pension 
plans and the increasing deficit of the Pension Benefit Guaranty 
Corporation (PBGC). The PPA established new rules for determining 
whether a defined-benefit pension plan is fully funded, the 
contribution needed to fund the benefits that plan participants will 
earn in the current year, and the contribution to the plan that is 
required if previously earned benefits are not fully funded.
    Defined-benefit plans like Girl Scouts' were never the intended 
target of this new law. Congress enacted the law in an effort to stem 
abuses by corporations who were try to shirk their pension 
responsibilities, or companies that were on the verge of collapse. As 
Girl Scouts is approaching its 100th year, it is in no danger of 
closing its doors. Even as we merge and realign some of our smaller 
councils, the Girl Scouts Movement continues to be a thriving, vibrant 
part of our communities and our nation.
    Moreover, Girl Scouts has always been a responsible, conservative 
steward of our pension plan. As recently as January 1, 2007, the 
National Girl Scouts Council Retirement Plan (NGSCRP) was funded at 142 
percent. Even after implementation of the Pension Protection Act, which 
modified the way plans calculate assets and liabilities, our NGSCRP was 
funded at 112 percent in early 2008. Thanks to our strong fiscal 
management, Girl Scouts was able to fund the NGSCRP in part by using 
carry-over balances (i.e., savings generated from larger-than-necessary 
contributions in prior years, as well as income generated from 
investments). This practice allowed councils to keep their pension 
costs relatively low--approximately 3.8 percent of payroll in 2008.
    With the economic downturn in late 2008, however, the NGSCRP 
experienced significant losses. This affected both our pension balance, 
as well as the carry-over balance we had accrued over the years. 
Overall, our assets lost almost 30 percent of their value in the last 
year. At the same time, an aging workforce and increased liabilities 
are making it more and more difficult for Girl Scouts to maintain this 
benefit. Combined with the more stringent requirements of the Pension 
Protection Act, this confluence of events has resulted in a ``perfect 
storm,'' that will have a devastating effect on our councils.
THE HUMAN TOLL
    Absent further Congressional relief or a sharp, near-term rebound 
in investment markets, under existing PPA rules, it is projected that 
Girl Scout councils will be required to contribute on average $60 
million per year--or 25 percent of covered payroll and 7.7 percent of 
Girl Scout revenue beginning in 2011--for several years. The unfunded 
liability is projected to increase to $195 million in that same 
timeframe, as compared to an overfunding position of $58 million we 
held at the beginning of 2008. This reflects the more stringent PPA 
rules to fully fund the plan in a shorter time period, as well as to 
make up for market losses incurred in 2008, and lower interest rates 
used to value liabilities.
    Girl Scout councils are ill-equipped to manage this significant 
increase in operating expenses in such a short timeframe. The attached 
spreadsheet clearly defines, on a state-by-state basis, the financial 
impact this situation will have on councils in the next few years. To 
make up for this funding shortfall, councils will need to cut programs, 
scale back activities, and lay off staff.
    In more human terms, consider that it costs approximately $280 per 
girl to provide a year of Girl Scouting. Girl Scout dues, however, 
remain very affordable to our members at $12 per year. The remainder of 
these costs must be covered through fundraising, corporate 
contributions, merchandise sales, and other revenue generators. Any 
shift in revenue to cover pension costs comes directly from sources 
that would otherwise be spent on girl programming. In short, this 
increase translates into approximately 214,000 girls losing the 
benefits of Girl Scouting.
LEGISLATIVE RELIEF
    Girl Scouts of the USA commends the Ways and Means Committee for 
its attention to this important issue. We share your commitment to 
protecting the viability of defined-benefit pension plans generally, 
and the NGSCRP specifically. We are especially grateful to Congressman 
Earl Pomeroy (ND) for his outstanding leadership on this issue. His 
draft legislation offers much-needed relief to defined-benefit plans.
    Furthermore, the need for relief is urgent. Without immediate 
relief, Girl Scouts will have to freeze our plan, and even then, will 
have to find revenue savings to meet ongoing requirements of the PPA. 
As the law requires that plan sponsors must notify participants of 
changes in the plan by November 15, 2009, Congress must act quickly to 
provide legislative relief.
    During these difficult economic times, Girl Scouts' mission is more 
critical than ever. Girls are struggling with the impact of the 
economic downturn in their families, schools and communities. The 
benefits of Girl Scouts--programming that helps them build their 
skills, confidence, financial literacy, and career possibilities--are 
more critical than ever. We must ensure that Girl Scouts has the 
resources, through its benefits structure and its staff, to continue 
delivering on that mission. We encourage Congress to promptly enact 
legislation that provides relief from this economic crisis.
                                 
            Statement of the Illinois Education Association
    As an employer sponsoring a Defined Benefit plan for a large number 
of our employees, we appreciate the opportunity to comment on the above 
issue.
    During the last economic downturn (2000-2002), our association's 
defined benefit plan portfolio sustained major losses. Instead of 
following the lead of many other organizations and eliminating or 
``freezing'' our plan, we addressed the challenge by raising membership 
dues by over fifty dollars, by cutting staff, and by reducing services 
to our members. Our staff assisted in the effort through the collective 
bargaining process by accepting reductions in benefits. Through these 
means, and by contributing millions of dollars in excess of the minimum 
requirements over the past five years, our plan became funded at nearly 
100%.
    Despite all of these efforts, which involved significant sacrifice 
from both our members and our staff, the 2008-2009 market decline has 
severely impacted our funding situation. We are once again planning on 
dues increases, service reductions and compensation reduction in order 
to rebuild our portfolio, but we strongly feel that help from Congress 
in the following areas is necessary in order for us to ensure that our 
plan continues to be financially viable:

        1.  Allowing a longer smoothing period for the plan's 
        investment gains and losses. A 3 to 5 year smoothing makes 
        sense in a period of volatile market conditions.
        2.  Allow a special ``set aside'' amortization for the five 
        month period of extraordinary losses by pension plans across 
        the country due to the stock market collapse in 2008-2009. 
        Giving plans the flexibility to amortize those losses over a 
        period of 15 years will allow sponsors time to recover without 
        threatening the stability of plans, ensure that obligations are 
        met, and require the losses (if not completely covered with 
        future positive investment results) to be funded in a way that 
        allows sponsors sufficient time to budget and fund the plan 
        properly.

    These two actions will give sponsors needed flexibility without 
compromising the stability and viability of their plans. In fact, these 
actions will make it easier for employer sponsors like ourselves to 
responsibly meet our obligations, continue to offer a Defined Benefit 
plan, and do so while looking out for the financial wellbeing of our 
organization. These changes are a positive action for the protection of 
DB pension plans and sponsors. That should be the goal which guides all 
congressional action regarding pension security and we strongly urge 
Congress to take these positive steps as soon as possible.
    Thank you for your attention to this urgent matter.

                                 
                    Statement of Independent Sector
    Independent Sector thanks Chairman Rangel and members of the House 
Ways and Means Committee for using this important hearing to look for 
ways to avoid the looming threats to the vital services provided by the 
countless nonprofit organizations throughout our nation that offer 
their employees defined benefit pension plans. These organizations are 
on the front lines in helping millions of families who are suffering 
through our ongoing financial crisis and who come to our nation's 
nonprofits for food, shelter, medical care, and financial and crisis 
counseling.
    Many nonprofit organizations that offer defined benefit pension 
plans are striving to meet the growing need for their services despite 
diminishing private contributions, increasing delays in state and local 
government reimbursements for contracted services, and reduced access 
to credit. These nonprofits include both large and small human service 
agencies, educational institutions, and arts organizations that operate 
at the local, national, and international level. All have long-standing 
presences in their home towns. They provide pensions not as an 
opportunity to take a tax deduction--they are already tax exempt--but 
as a cost-effective means for attracting and retaining qualified 
employees committed to serving their communities.
    These nonprofits have endeavored to meet the significantly 
increased minimum funding obligations imposed by the Pension Protection 
Act of 2006 while maintaining programs upon which individuals and 
communities rely. The abrupt market decline last year turned those 
pension funding obligations into a severe problem never anticipated 
when the act was drafted. The funding rules now threaten not just the 
viability of the pension plans, but the survival of the organizations 
themselves. Consider the following examples:

          Family Service of Greater Boston, a 174-year-old 
        human service agency that serves over 5,800 mostly poor and 
        working poor families each year, offers a defined pension plan 
        to employees responsible for carrying out programs for healthy 
        child development, structured residential programs for teen 
        mothers and their children, and intense behavioral health 
        programs for severely abused and neglected children. The 
        funding status of Family Service's pension plan dropped to 72 
        percent as a result of the market decline, creating projected 
        future minimum annual contributions of almost $500,000 for this 
        small agency. The agency has already significantly reduced or 
        eliminated other benefits, increased the employee share of 
        health insurance premiums, frozen wages for a 2-year period, 
        eliminated positions through attrition and consolidated 
        administrative functions. Now it is facing further actions that 
        could impede its ability to sustain critical services.
          A human services agency in the Midwest with fewer 
        than 400 employees saw its pension funding level decline by 30 
        percent in 2008. The organization has been unable to secure 
        bridge loans due to its $5.5 million pension funding shortfall, 
        further limiting its ability to meet pension funding 
        obligations, much less its ongoing operational costs.
          A large Northeastern nonprofit maintains a multiple-
        employer pension plan that provides retirement security to 
        approximately 10,000 current and former employees. Due to the 
        severe recession, the plan is facing an increased contribution 
        of $5.3 million this year, and annual increases of $11 million 
        in the following several years, 70 percent more than its base 
        contribution of previous years. Without legislative relief and 
        other cutbacks, the organization states that the increased cost 
        of the defined benefit plan ``would significantly impair our 
        charitable mission to help those who are poor and vulnerable 
        and place [the organization] and its agency system in financial 
        peril.''
          A large national charity that has sponsored a defined 
        benefit plan for six decades is facing an increase in pension 
        contributions of more than 250 percent for 2010 due to the 
        investment losses. The organization has already reduced staff 
        by 15 percent and, because it has no endowment, will be forced 
        to borrow much of the $4.4 million needed to satisfy its 
        unexpected pension obligations.

    The budgets of nonprofits serving multiple needs in their 
communities are already stretched too thin, and, as the recent cuts 
described above demonstrate, additional expenses will mean eliminating 
or reducing existing programs. Most nonprofit organizations that 
sponsor defined benefit plans do not have endowments or other sources 
of funds to cover these unexpected pension obligations. A December 
report of the Urban Institute (Maintaining Nonprofit Operating 
Reserves: An Organizational Imperative for Nonprofit Financial 
Stability, December 2008) found that nearly fifty percent of nonprofits 
located in Washington, D.C. had operating reserve ratios of less than 3 
months of their annual expense budget. More worrisome, 32 percent had 
reserve ratios of zero to three months. Without immediate relief from 
the pension obligations arising from the market losses of 2008, the 
current rules will force nonprofits that sponsor defined benefit plans 
to divert substantial financial resources away from vital community 
services at a time when they are desperately needed.
    We urge Congress to enact temporary funding relief for nonprofit 
organizations and other sponsors of defined benefit pension plans that 
will allow them to recoup the shortfall for 2008 over a longer, more 
manageable period. By stretching out payments for these unexpected 
losses, such relief will permit organizations to maintain services and 
jobs, while continuing to fund their pension plans.
    We thank you for your consideration, and look forward to working 
with you and your staff to develop and pass legislation that will help 
our organizations continue to serve communities across the nation while 
providing secure retirements for our employees.
                               __________
    Independent Sector is a national, nonpartisan charitable 
organization with approximately 550 members, including public 
charities, private foundations, and corporate giving programs, 
collectively representing tens of thousands of charitable groups in 
every state across the nation. Our coalition leads, strengthens, and 
mobilizes the charitable community to fulfill our vision of a just and 
inclusive society and a healthy democracy of active citizens, effective 
institutions, and vibrant communities. IS members represent a broad 
cross-section of our nation's nonprofit community, which exists to meet 
society's needs, frequently in partnership with government, in diverse 
areas such as the arts, education, human services, community 
development, and health care.
Contact:

Patricia Read
Senior Vice President, Public Policy

                                 
             Statement of the Investment Company Institute
    The Investment Company Institute, the national association of U.S. 
investment companies,\1\ which companies manage more than 40 percent of 
all 401(k) and IRA assets, is pleased to submit this statement.
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    \1\ The Investment Company Institute is the national association of 
U.S. investment companies, including mutual funds, closed-end funds, 
exchange-traded funds (ETFs), and unit investment trusts (UITs). ICI 
seeks to encourage adherence to high ethical standards, promote public 
understanding, and otherwise advance the interests of funds, their 
shareholders, directors, and advisers. Members of ICI manage total 
assets of $11.02 trillion and serve over 93 million shareholders.
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Executive Summary
    In the nearly 30 years that it has existed, the 401(k) plan has 
become a powerful engine for providing retirement security to millions 
of American workers who participate in plans. The system would work 
even better, however, if more participants had increased access to 
investment advice and if ERISA rules both assured that participants 
receive disclosure concerning key information about all investment 
options in their plans, and set out clearly the information employers 
need to consider about plan service arrangements.
    The need to expand access to investment advice is clear. Access to 
a financial adviser is much more common for investors outside 
retirement plans than for those saving in 401(k) plans, despite the 
amount of assets in those plans, and the importance of those savings to 
plan participants. The current financial crisis, which has made many 
Americans want to take stock of their financial picture, underscores 
the need for robust investment advice services for those savers. The 
Pension Protection Act of 2006 (PPA), which we supported, created a new 
exemption to expand access to advice to allow plan and IRA savers to 
obtain advice from companies familiar to those savers--the companies 
providing services or investments to the plan or IRA. Congress included 
strict conditions and protections, including that the advice be 
unbiased and offered under fully transparent arrangements and from 
someone who accepts ERISA's full fiduciary responsibility.
    After a long regulatory process, the Department of Labor under the 
Bush Administration adopted a regulation to implement the exemption and 
resolve ambiguities about the meaning of the PPA statutory language. 
While the Institute believes these regulations reasonably implemented 
the PPA provision in a manner that provides clarity and makes it 
possible for plans and providers to offer new investment advice 
programs, we understand the Obama Administration's desire to take a 
fresh look and issue a new proposal for notice and comment. We urge DOL 
in its regulatory process and Congress in its consideration of 
investment advice to encourage the appropriate expansion of avenues for 
investment advice and preserve pre-PPA guidance that allows various 
forms of advice and education programs on which many plans now 
successfully rely. We do not support the advice provisions in H.R. 
2989, the ``401(k) Fair Disclosure and Pension Security Act of 2009,'' 
because the bill would not only repeal the PPA statutory exemption but 
would require significant revision of pre-PPA programs, which have been 
operated successfully.
    The Institute strongly supports efforts to enhance existing rules 
providing for disclosure to participants and employers. The Obama 
administration has said it will complete two regulatory projects that 
will close gaps in its disclosure regime, and we support those 
projects. Two bills referred to this Committee for consideration (H.R. 
2779 and H.R. 2989) would address the same disclosure gaps in defined 
contribution plans. As the Ways and Means Committee looks at the bills 
and considers whether legislation is necessary in light of DOL's 
proposals, we urge that the Committee be guided by the following 
principles:

          Participants in all self-directed plans need simple, 
        straightforward disclosure focusing on key information, 
        including information on fees and expenses, which allows 
        comparisons among a plan's investment options. Comparability of 
        fees is best achieved through use of percentages or basis 
        points or through a representative example (such as the dollar 
        amount of fees for each $1,000 invested).
          The disclosure should cover all investment products 
        available in plans, including providing comparable disclosure 
        for products that provide a fixed or promised return.
          Employers should get clear information that allows 
        them to fulfill their fiduciary duties.
          Plan fiduciaries are responsible for determining the 
        investments that are appropriate for participants and Congress 
        should not upend ERISA's framework. It is not appropriate for 
        the government to pick investment options for private 401(k) 
        plans.
          The disclosure rules should be precise and clear so 
        that service providers and plan fiduciaries know what 
        disclosure is required of them. These rules also should be 
        designed to prompt correction of minor or inadvertent errors.

I. Introduction
    The success of the defined contribution plan system is evidenced by 
wide employer and participant adoption and participant feedback. Latest 
available official Department of Labor data indicate that in 2006, 
there were 645,971 private-sector defined contribution plans with more 
than 65 million active participants.\2\ Institute research on 
Americans' attitudes towards 401(k) plans tells us that Americans 
strongly support the current 401(k) system and greatly value the tax 
incentives 401(k)s provide.\3\ Almost nine in 10 households surveyed 
rejected the idea that the government, and not individuals, should make 
investment decisions for retirement accounts. Even households without 
401(k) or IRA savings see value in the 401(k) system and do not want 
drastic changes. Reports indicate that, despite the bear market of late 
2008 and early 2009, 401(k) participants are staying the course and not 
abandoning their plans.\4\
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    \2\ See U.S. Department of Labor, Employee Benefits Security 
Administration, Private Pension Plan Bulletin: Abstract of 2006 Form 
5500 Annual Reports (Dec. 2008), available at http://www.dol.gov/ebsa/
PDF/2006pensionplanbulletin.pdf. The bulk of these plans were 401(k) 
plans, with 465,653 plans and more than 58 million active participants.
    \3\ The Institute surveyed 3,000 U.S. households. The survey was 
conducted in late October through December 2008--that is, during some 
of the most jarring days in the history of our financial markets. See 
Investment Company Institute, Retirement Saving in Wake of Financial 
Market Volatility (Dec. 2008), available at http://www.ici.org/pdf/
ppr_08_ret_saving.pdf.
    \4\ See, e.g., Vanguard, How America Saves 2009, A Report on 
Vanguard 2008 Defined Contribution Plan Data, available at https://
institutional.vanguard.com/iam/pdf/HAS09.pdf; Vanguard Research 
Commentary, ``Participants calmer than you'd think amid market 
turmoil,'' 
(Dec. 2, 2008), available at https://institutional.vanguard.com/VGApp/
iip/site/institutional/researchcommentary/article?File=NewsPartCalm; 
Fidelity, ``Participants Continue to Stay the Course Amidst Market 
Downturn,'' available at http://content.members.fidelity.com/
Inside_Fidelity/fullStory/1,,7669,00.html; The Principal, Retirement 
Trends Report, The Total View 2009, available at http://
www.principal.com/about/news/totalview.htm.
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    Defined contribution plans could be improved, and the Institute has 
offered a number of suggestions for changes that, in our view, would 
strengthen the system by which employers and workers have entrusted and 
will continue to entrust trillions of dollars of retirement savings to 
these plans.\5\ This statement addresses two ways to better serve those 
saving for retirement in 401(k) plans: expanding access to quality 
investment advice, and ensuring that plan fiduciaries and participants 
have the information they need to make the decisions charged to them 
under their plans.
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    \5\ In recent testimony to the Education and Labor Committee, ICI 
recommended seven policy improvements that could be made to strengthen 
the U.S. retirement system. See Testimony of Paul Schott Stevens, 
Hearing on ``Strengthening Worker Retirement Security,'' House 
Education and Labor Committee (Feb. 24, 2009), available at http://
www.ici.org/policy/ici_testimony/09_house_401k_tmny.
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II. Investment Advice
A. The Need for Advice
    While the need for increased opportunities for investment advice to 
participants is clear, relatively few participants have access to or 
use investment advice today. According to the Profit Sharing/401k 
Counsel's annual survey, about half of all plans offered investment 
advice to participants in 2008, and only 28% of participants utilized 
advice when it was offered.\6\ While pre-PPA programs have been 
effective in reaching some plans and some participants, more work is 
needed to create cost-effective advice solutions that would encourage 
adoption by employers and utilization by participants. Although the PPA 
exemption adopted in 2006 held great promise for encouraging more 
advice programs in plans, the absence of clear rules for using the 
exemption has deterred new offerings of advice.
---------------------------------------------------------------------------
    \6\ See Profit Sharing/401k Council of America, 52nd Annual Survey 
Reflecting 2008 Plan Experience (2009).
---------------------------------------------------------------------------
    Compare the relatively low offering and utilization of advice in 
401(k) plans with what mutual fund investors outside 401(k) plans and 
IRA savers experience. Among households holding fund shares outside 
plans, 77 percent owned shares through professional financial advisers 
in 2008.\7\ Among households owning traditional IRAs in 2008 who took a 
withdrawal in tax-year 2007, 59 percent consulted a professional 
financial adviser to determine the amount to withdraw in tax-year 
2007.\8\ A survey the Institute conducted in 2007 of recent retirees 
about how they used their defined contribution proceeds at retirement 
showed that respondents pursued a range of outcomes reflecting their 
own personal needs, in many cases rolling some or all of their account 
balances over to IRAs.\9\ In making their distribution decision, 
retirees with a choice of options often consulted multiple sources of 
information. Forty-two percent indicated they sought advice from a 
professional financial adviser that they found on their own.
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    \7\ Investment Company Institute, 2009 Investment Company Fact 
Book, 49th Edition, available at http://www.ici.org/pdf/
2009_factbook.pdf.
    \8\ Holden and Schrass, The Role of IRAs in U.S. Households' Saving 
for Retirement, 2008, ICI Fundamentals, vol 18, no. 1(Jan. 2009), 
available at www.ici.org/pdf/fm-v18n1.pdf.
    \9\ Sabelhaus, Bogdan, and Holden, Defined Contribution Plan 
Distribution Choices at Retirement: A Survey of Employees Retiring 
Between 2002 and 2007, Investment Company Institute Research Series 
(Fall 2008), available at www.ici.org/pdf/rpt_08_dcdd.pdf.
---------------------------------------------------------------------------
    The recent financial crisis, which has made many Americans want to 
take stock of their financial picture, underscores the need for clarity 
in making advice more broadly available to participants. Investment 
advice services can help participants in ERISA plans and IRAs 
understand the long-term nature of retirement savings and assemble and 
maintain a diversified portfolio. During the financial crisis, many 
participants sought help and reassurance from their 401(k) providers. 
One Institute member with a large recordkeeping business reported to us 
that participant calls increased 60 percent, and website visits 
increased by 65 percent, during the market volatility in late 2008. 
Another large retirement service provider reported that the volume of 
calls during the most volatile period (late September and early October 
2008) spiked to over 100,000 calls per day.\10\ Without clear rules 
from DOL, it is difficult for 401(k) providers to offer real assistance 
to nervous participants. Obtaining clarity on the rules that govern 
investment advice under the PPA exemption would allow providers to 
better serve participants when they reach out for reassurance.
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    \10\ See http://content.members.fidelity.com/Inside_Fidelity/
fullStory/1,,7669,00.html.
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B. Pension Protection Act of 2006 and Implementing Regulations
    In 2006, Congress enacted the Pension Protection Act to expand 
access to investment advice for plan and IRA savers by allowing the 
companies they are already familiar with--those providing services or 
investments to the plan or IRA--to provide advice programs under strict 
conditions and protections. These conditions require that the advice be 
unbiased, in that either the adviser's compensation does not vary 
depending on the participant's investment choices, or the advice is 
rendered through an unbiased computer model. Additional safeguards 
require that (1) the adviser must agree to be subject to ERISA's strict 
fiduciary duty and acknowledge fiduciary status in writing; (2) the 
advice program must be audited annually by an independent auditor for 
compliance with the conditions of the exemption; (3) computer model 
advice must be pursuant to a model certified by an independent expert; 
(4) the fiduciary adviser must provide robust disclosure of fees, 
material affiliations and conflicts of interest, past performance, use 
of participant information, and more; and (5) the fiduciary adviser 
must maintain records demonstrating compliance with the exemption for 
six years.
    The PPA required DOL to issue regulations implementing a number of 
the investment advice provisions. In addition, there were a number of 
textual ambiguities in the statutory language that needed 
clarification. After a regulatory process extending over thirteen 
months, which included two requests for information, a Field Assistance 
Bulletin, two public hearings, and notice and comment on proposed 
regulations, DOL issued final regulations at the end of Bush 
administration.
    While the final regulations did not include most of the changes 
that the Institute had requested in its comments to DOL, we believe 
that the final regulations reasonably implement the PPA exemption in a 
manner that will encourage plans and providers to offer investment 
advice programs to assist participants and beneficiaries of ERISA plans 
and IRA investors in managing their accounts.
    We appreciate, however, that the Obama administration wishes to 
take a fresh look at these rules to assure itself that the rules are 
appropriate and in the public interest. Assistant Secretary Phyllis 
Borzi has stated DOL will issue a new proposal so that interested 
parties can comment.\11\ In its efforts, DOL should adopt policies that 
promote the provision of investment advice and preserve pre-PPA 
guidance that allows various forms of advice and education programs on 
which many plans now successfully rely. This pre-PPA guidance either 
provides an exemption with conditions that protect participants and 
beneficiaries or finds that if an arrangement operates as described in 
the guidance, there would be no prohibited transaction requiring 
exemptive relief.
---------------------------------------------------------------------------
    \11\ See ``Labor Department moving ahead on advice proposal, Borzi 
says,'' Pensions and Investments (Sept. 23, 2009), available at http://
www.pionline.com/article/20090923/DAILYREG/909239990.
---------------------------------------------------------------------------
    Congress should follow the same principle: adopt policies that 
expand, not reduce, the number of participants with access to 
investment advice. For this reason, we do not support the advice 
provisions in H.R. 2989, the ``401(k) Fair Disclosure and Pension 
Security Act of 2009,'' because the bill would not only repeal the PPA 
statutory exemption but would require significant revision of pre-PPA 
programs. These programs have operated successfully and there is no 
need to subject arrangements that do not involve prohibited 
transactions or those under prohibited transaction exemptions to 
additional conditions that add unnecessary cost and might cause plans 
or providers to no longer offer the programs.
III. Improving Disclosure
A. Why Disclosure Reform is Needed
    The Institute has long supported meaningful and effective 
disclosure to 401(k) participants and employers, as Institute President 
Paul Stevens testified before this Committee two years ago.\12\ We 
stated then and continue to believe that initiatives to strengthen the 
401(k) disclosure regime should focus on the decisions that plan 
participants and employers must make and the information they need to 
make those decisions.
---------------------------------------------------------------------------
    \12\ See http://www.ici.org/policy/regulation/products/mutual/
07_house_401k_tmny.
---------------------------------------------------------------------------
    In addition to supporting disclosure reform, we have sought to shed 
light through our research on 401(k) fees and the factors that drive 
fees. A recently completed and detailed survey of 130 plans of various 
sizes by the ICI and Deloitte Consulting LLP found that the median fee 
(including investments and recordkeeping) across all 
  
plans surveyed was 0.72 percent (or 72 basis points) as a percentage of 
total assets,\13\ significantly less than some critics of 401(k) plans 
have claimed.\14\ While fees vary across the market, 90 percent of all 
plans surveyed had an all-in fee of 1.72 percent or less.
---------------------------------------------------------------------------
    \13\ Deloitte Consulting and Investment Company Institute, Defined 
Contribution/401(k) Fee Study (Spring 2009), available at http://
www.ici.org/pdf/rpt_09_dc_401k_fee_study.pdf.
    \14\ This figure represents the median fee for the 130 plans in the 
survey. The survey used a sampling technique known as nonproportional 
quotas. Knowing that the universe of 401(k) plans includes more than 
450,000 plans, and that smaller plans are harder to find, the survey 
was specifically targeted across the spectrum of asset sizes and stayed 
in the field until specific quotas for plans of different sizes were 
filled. Although the plans are intended to be representative, the 
median fee should not be projected to the entire population of U.S. 
401(k) plans. Weighting the reported fees in the 130 plans by the 
actual distribution of participants in all 401(k) plans results in a 
total fee of 0.86 percent. See the Study for more information on the 
plans surveyed.
---------------------------------------------------------------------------
    The research showed that a plan's number of participants and 
average account size (which together constitute the total plan size) 
are the two most significant drivers of the plan's overall cost. Other 
factors that correlated with a lower total fee included higher 
participant and employer contribution rates, lower allocation of assets 
in equity-oriented asset classes; use of auto-enrollment; fewer plan 
sponsor business locations reducing the servicing complexity; and other 
plan sponsor business relationships with the service provider (e.g., 
defined benefit plan or health and welfare plan). The factors that were 
not significant drivers of fees include the type of provider the plan 
utilized (insurance company, mutual fund company, bank, third party 
administrator) and the extent to which investments of the 401(k) 
provider were utilized.
    Examining mutual fund assets, ICI research shows that 401(k) 
investors concentrate their assets in lower-cost mutual funds. The 
average asset-weighted total expense ratio incurred by 401(k) investors 
in stock mutual funds was 0.72 percent in 2008, about half the 1.44 
percent simple average for all stock funds and substantially less than 
the industry-wide asset-weighted average of 0.84 percent.\15\
---------------------------------------------------------------------------
    \15\ Holden and Hadley, The Economics of Providing 401(k) Plans: 
Services, Fees, and Expenses, 2008, ICI Fundamentals, vol. 18, no. 6 
(August 2009), available at http://www.ici.org/pdf/fm-v18n6.pdf. While 
the Deloitte/ICI study described above covers all plan costs, this 
research only covers mutual funds held in 401(k) plans because ICI does 
not have the information necessary to study other investments.
---------------------------------------------------------------------------
    Disclosure reform should address two gaps in the current 401(k) 
disclosure rules, the first relating to participant disclosure, and the 
second to that received by the employer (plan sponsor). First, unlike 
current DOL participant disclosure rules, which cover only certain 
plans and do not require disclosure about all investment products, 
participants in all self-directed plans should receive key information 
about all products. Second, disclosure reform should clarify the 
information that service providers must disclose to an employer on 
services and fees. The Institute supports disclosure of payments a 
service provider receives directly from plan assets and indirectly from 
third parties in connection with providing services to the plan. Where 
the service provider's services include access to a menu of investment 
options, employers should receive from that provider information about 
the plan's investments, including information about fees.
B. Department of Labor Proposals to Address Disclosure Gaps
    The Department of Labor has two proposed regulations that will 
address both of these gaps. The first proposal will require that all 
participants in 401(k) plans receive basic and comparable information, 
including fees, on all the investment options available to them.\16\ 
Participants would also receive at enrollment a description of any fees 
that they may pay in addition to the costs of the plan's investments. 
DOL's proposal uses a layered approach to ensure each participant 
receives key information, with more detail available online and upon 
request for those participants who want it.
---------------------------------------------------------------------------
    \16\ See 73 Fed. Reg. 43014 (July 23, 2008).
---------------------------------------------------------------------------
    Participants would receive, at enrollment and annually thereafter, 
a chart listing each investment on the plan's menu and comparing each 
investment's type (i.e. large cap, international equity, etc.), 1-, 5-, 
and 10-year historical performance compared against a benchmark, and 
fees. DOL's proposal includes a model comparative chart plans can use. 
Participants would be referred to a website for more information on 
each investment, including the investment's strategies and risks, the 
identity of the investment issuer or provider, portfolio turnover, and 
the assets held in the portfolio. More detailed documents, like a copy 
of a prospectus or similar document, would be available upon request. 
Participants' quarterly statements would display any administrative 
fees deducted from their accounts during the quarter.
    The second DOL proposal would require plan service providers to 
disclose to employers the services that they provide and the direct 
compensation they receive from the plan and employee accounts.\17\ 
Service providers also must disclose in detailed fashion all indirect 
compensation, broadly defined to include anything of value paid from 
any source other than the plan, employer, or the recordkeeper. This 
would include finder's fees, soft dollar payments, float, brokerage and 
other transaction-based fees, and payments that an affiliate of the 
recordkeeper receives in connection with the plan. In addition to fee 
disclosures, the regulation will require comprehensive ``conflict of 
interest'' disclosure to employers. Under these new disclosure 
regulations, a plan fiduciary will be able to assess all of the 
compensation paid to a 401(k) plan service provider before any contract 
is entered into. Violations of the new disclosure scheme are enforced 
by tough penalties on the service provider.
---------------------------------------------------------------------------
    \17\ See 72 Fed. Reg. 70988 (Dec. 13, 2007).
---------------------------------------------------------------------------
    These projects were not completed by the Bush Administration, and 
Assistant Secretary Borzi has announced she intends to finalize 
them.\18\ The Institute strongly supports these initiatives and has 
urged DOL to complete these projects as quickly as possible.
---------------------------------------------------------------------------
    \18\ ``Lifting the fog: Face to Face with Phyllis C. Borzi,'' 
Pensions and Investments (Sept. 7, 2009), available at http://
www.pionline.com/article/20090907/FACETOFACE/309079996.
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C. Congressional Proposals to Enhance Disclosure
    This Committee has been referred for consideration two bills 
intended to close the disclosure gaps described earlier: H.R. 2779, the 
``Defined Contribution Plan Fee Transparency Act of 2009'' and H.R. 
2989, the ``401(k) Fair Disclosure and Pension Security Act of 2009.'' 
As noted earlier, H.R. 2989 also contains extensive reworking of the 
rules for providing investment advice to participants. In analyzing 
these proposals, and considering whether legislation is necessary in 
light of the Department of Labor's proposals, we urge the Committee to 
apply the following principles.
    Participants in all self-directed plans need simple, 
straightforward disclosure focusing on key information, including 
information on fees and expenses, which allows comparisons among a 
plan's investment options. This key information includes an investment 
option's investment objective, risks, historical performance, and fees. 
Comparability is particularly important with respect to fees. Mutual 
fund investors have for years had access to a simple, standardized 
measure of fees--the expense ratio--as well as a representative example 
showing what the expense ratio means in dollar terms for a typical 
investment. H.R. 2989 requires plan fiduciaries to translate asset-
based investment fees into dollars on a quarterly basis. Because 
contributions and distributions are continually being made into and out 
of 401(k) accounts, creating systems that could provide this disclosure 
could be very expensive, and in addition, the requirement complicates 
comparing among the plan's investment options. For example, if a 
participant has 90% of his or her account invested in a fund with a 
0.40% (40 basis point) expense ratio and 10% invested in a fund with a 
1.00% (100 basis point) expense ratio, the participant presented with 
the dollar amounts of fees for each investment might think the first 
fund is relatively expensive and the second is cheaper. The best way to 
achieve comparability is through use of percentages or basis points or 
through a representative example (such as the dollar amount of fees for 
each $1,000 invested).
    The disclosure should cover all investment products available in 
plans, including providing comparable disclosure for products that 
provide a fixed or promised return. All of the current legislative and 
regulatory proposals would cover all products. Both legislative 
approaches include a provision requiring regulations to ensure 
comparable disclosure for insurance and other products that provide a 
fixed return (like annuities). However, H.R. 2779 appropriately makes 
the issuance of these regulations mandatory; H.R. 2989's provision is 
optional for DOL.
    Employers should get clear information that allows them to fulfill 
fiduciary duties. Employers should receive information from service 
providers on the services that will be delivered, the fees that will be 
charged, and whether and to what extent the service provider receives 
compensation from third parties in connection with providing services 
to the plan. These payments from third parties, sometimes inaccurately 
referred to as ``revenue sharing'' but which are really cost sharing, 
often are used to defray the expenses of plan administration. We 
support requiring their disclosure by service providers.
    We do not support provisions in H.R. 2779 and H.R. 2989 that force 
providers to disclose fees in various service categories even if there 
are no separate charges for the services and the services are not 
available on a standalone basis. This approach favors one business 
model--firms that just bundle together recordkeeping and other 
administrative services--over another business model--firms that offer 
recordkeeping and administration as well as investment management 
services, by imposing additional disclosure burdens on the full-service 
model. More importantly, employers need information that they can use, 
and this presents them with information--an unbundled number for a 
service that is not offered separately--the usefulness of which is 
unclear and which could create liability concerns for employers and 
service providers.
    If Congress should determine nevertheless to require providers to 
allocate fees among categories even when services are not separately 
available, it must recognize the difficulties (and liability risks) of 
disclosing a fee for a service that is not offered separately and allow 
service providers to allocate in a manner that is reasonable and in 
good faith. At a minimum, the legislation should provide for safe 
harbor methods a service provider could, but would not be required to, 
use for the allocation. This would offer certainty for providers that 
want to rely on a pre-approved allocation method but offer flexibility 
for providers to develop and use other reasonable methods. Finally, 
disclosure should provide flexibility in the form of disclosure 
(percentage of assets, total dollars, amount per transaction) so that 
providers can disclose fees accurately in the manner in which they are 
charged.
    Congress should leave to plan fiduciaries the responsibility of 
determining the investments that are appropriate for participants. H.R. 
2989 sets a dangerous precedent by effectively requiring plans to 
include an indexed investment option meeting specific requirements. 
This goes far beyond disclosure. It is not appropriate for the 
government to begin to pick investment options for private 401(k) 
plans. Decisions about the investment menu of a 401(k) plan are best 
made by plan fiduciaries who can consider all options available now or 
in the future in designing plan offerings that will enhance employees' 
retirement security.
    The disclosure rules should be precise so that service providers 
and plan fiduciaries know what disclosure is required of them and do 
not need to interpret the law broadly to avoid penalties. Unless the 
rules are clear, the resulting disclosure will be confusing to plan 
fiduciaries and participants and unnecessarily costly to prepare. H.R. 
2779 is more clearly written and therefore avoids a number of difficult 
interpretive issues presented by H.R. 2989. For example, H.R. 2989 
defines a 401(k) plan's services subject to the bill so broadly that it 
could cover service providers to the plan's investments. As a result, 
service providers to investment products like mutual funds and 
insurance contracts (such as accountants, printers, and custodians), 
who have no direct relationship with a plan, could suddenly be 
subjected to detailed fee disclosure for one class of investors, the 
cost of which will be passed on to retirement plan savers investing 
through a workplace savings plan. In addition, this suggests that plans 
must have a personalized contract with each investment product in which 
it invests, which violates the basic securities law principle that all 
mutual fund shareholders must be treated equally.
    In addition, because of the difficult compliance burdens that the 
disclosures in H.R. 2779 and H.R. 2989 would require, the bills should 
include provisions that allow one service provider to rely on 
information provided by another entity unless the provider knows or 
should know that the information is inaccurate or incomplete, and that 
allow inadvertent errors to be corrected within a reasonable time 
without penalty. Provisions along these lines, which are contained in 
H.R. 2779, will enhance compliance and correction of minor or 
inadvertent errors.
    As the Institute said when it last testified before this Committee, 
we applaud the Committee for examining how we can make the 401(k) 
system even more effective in providing retirement security. We look 
forward to continuing to work with this Committee and its staff on 
these issues.

                                 
              Maryland State Education Association, letter
    On behalf of the 70,000 member Maryland State Education Association 
(MSEA), I am please to submit these comments on funding defined benefit 
pension plans.
    While our members are all public sector employees, our Association 
and the defined benefit pension plan we provide to nearly 100 employee-
participants fall under private sector rules.
    We are committed to maintaining and adequately funding our defined 
benefit plan. In addition, we encourage our employees to supplement 
their retirement savings by participating in our 401(k) defined 
contribution retirement plan. We offer a generous employer match for 
those who do.
    The Pension Protection Act's intent was to stabilize defined 
pension plans and ensure their adequate funding. Unfortunately, its 
outcome was to make defined pension plan funding more volatile and the 
plans themselves unaffordable to many employers.
    MSEA felt the impact of the Pension Protection Act's funding 
changes. For example, over the past two years we made the full 
contributions recommended by our actuaries, transferring more than 
eight percent of our revenue into our defined benefit plan. 
Simultaneously, our accountants informed us that FAS 158 required us to 
adjust net assets downwards by nearly four million dollars. This turned 
what would have been a million dollar two-year increase in our 
beginning balance into a three million dollar reduction!
    That hit us pretty hard. But the worst aspect was that it occurred 
prior to the staggering market losses of late 2008 and early 2009. 
Absent significant and speedy relief from the onerous funding 
requirements in the PPA, we will soon need to curtail staff, reduce 
programs, or both.
    MSEA joins the National Education Association (NEA) and many of its 
state affiliates in supporting legislation being drafted by 
Representative Pomeroy of North Dakota. Representative Pomeroy 
understands that we need more time to offset the recent market losses. 
He also understands that providing this flexibility to private sector 
DB plan sponsors will allow them to maintain--not terminate--existing 
plans, thereby relieving funding pressure on the Pension Benefit 
Guarantee Corporation.
    Defined benefit pension plans are good for the economy. They 
provide valuable retirement security for workers. Their sponsors 
utilize smart, balanced investment policies (in terms of equities and 
fixed income) and long-term horizons, improving returns for their 
employees while adding stability to our nation's markets. 
Unfortunately, the PPA discourages such an approach, deeply penalizing 
employers for placing plan assets in equities. It is quickly driving 
the remaining defined benefit plans out of existence.
    Please support Representative Pomeroy's legislation and help us in 
our efforts to properly fund our obligations, thereby providing our 
employees the retirement security we've promised them.

            Thank you,

                                                   David E. Helfman
                                                 Executive Director

                                 
                   Statement of Matthew D. Hutcheson
INTRODUCTION
    Chairman Rangel, Ranking Member Camp, and Members of the Committee 
on Ways and Means. Thank you for the opportunity to deliver this 
testimony today.
    My name is Matthew Hutcheson. I am a professional independent 
fiduciary. In some instances, employers that sponsor 401(k) and other 
pension benefit plans may determine that, due to day-to-day workload, 
or unavoidable conflicts of interest, it is better simply to sponsor 
the plan instead of both sponsor and manage it. In those cases, an 
employer may choose to appoint an independent fiduciary to ensure a 
professional level of fiduciary decision, oversight, and 
accountability. That is the role I play; employers appoint me to become 
the primary decision maker, accountable to plan participants.
EXPERIENCE
    It has been my experience that 401(k) plan participants feel 
financially vulnerable. It is difficult for them to make sound 
investment decisions. This year, I have asked thousands of rank and 
file employees and professionals alike, all who have been participating 
in their 401(k) plan for many years, whether they could take the funds 
in their retirement accounts and construct a meaningful portfolio with 
expected long-term rates of return and expected levels of risk. Not one 
of the thousands of participants or professionals (``professionals''--
read Attorneys, CPA's, Engineers, Physicians, etc.) could answer the 
question in the affirmative. Not one of them could even partially 
answer, or explain the principles of Modern Portfolio Theory that is 
the foundation of making such decisions. The ensuing discussions 
revealed a significant lack of investment understanding.
    Those experiences confirm to me that most participants either do 
not have the aptitude for understanding complex investment concepts, or 
they do not have the time or inclination to learn. Nevertheless, the 
Employee Retirement Income Security Act of 1974 (ERISA) affords iron 
clad protections to participants and their beneficiaries that must not 
be discounted. In other words, under ERISA provides an expectation that 
the participant's portfolio is free from conflicts of interest, and is 
economically sound at its core.
    A prominent attorney and investment fiduciary pursuant to ERISA 
section 3(38) explains it this way:

           ERISA was the first body of law to apply key tenets of 
        modern portfolio theory to the management of assets by 
        investment fiduciaries. In a Department of Labor regulation 
        issued in 1977 [Labor Reg. Sec. 2550.404a-1 (42 FR 54122, 
        1977)], the DOL decided that ERISA fiduciaries responsible for 
        investing and managing the assets of qualified retirement plans 
        such as 401(k) plans must do so according to the principles of 
        Modern Portfolio Theory. Not only the DOL but also the courts 
        have decided that ERISA's investment provisions are grounded in 
        Modern Portfolio Theory.
           The language of Modern Portfolio Theory found in another 
        ERISA regulation [ERISA Reg. Sec. 2550.404a-1] instructs 
        investment fiduciaries of 401(k) plans to avoid thinking in 
        terms of ``bits and pieces''--that is, a non-portfolio mindset. 
        Notwithstanding ERISA's regulations, an overwhelming number of 
        fiduciaries responsible for 401(k) plans demonstrate this kind 
        of mindset--whether or not they're even aware of it--by 
        offering plan investment options with risk and return 
        characteristics that do not take into account the fact that 
        they function within the context of a portfolio.
           Keeping in mind the primacy of the portfolio, independent 
        fiduciaries must focus consciously on the risk and return 
        tradeoffs of plan portfolios. As ERISA Interpretive Bulletin 
        94-1 puts it, in part: ``any models or materials presented to 
        participants or beneficiaries will be consistent with widely 
        accepted principles of modern portfolio theory, [which] 
        recogniz[e] the relationship between risk and return.''
           This is important because, in fulfilling their duty to 
        provide a prudent menu of investment options, investment 
        fiduciaries of 401(k) plans must find a tradeoff for each 
        portfolio that will achieve the highest return for a given 
        level of risk or the lowest risk for a given level of return. 
        Achievement of this goal helps independent fiduciaries 
        introduce truly prudent investment options to 401(k) plans.\1\
---------------------------------------------------------------------------
    \1\ Statement of Scott Simon, JD, AIFA' during 
Independent Fiduciary Symposium, Boise State University, September 24, 
2009.

    Given the preexisting right a 401(k) participant has to an 
economically sound, unbiased, prudent portfolio, Congress must augment 
that existing right through policy that clearly prohibits biased or 
conflicted investment advice.
ADVICE TO 401(k) PARTICIPANTS
    401(k) plan participants have a well founded reason to believe that 
any advice they receive will lead them to a prudent portfolio that 
would be equal in every way to a portfolio created by an investment 
expert familiar with such matters.\2\ It would be best if all 
participants were simply ``given'' such a portfolio, as the duty owed 
to participants is the highest duty known to the law.\3\ 
Notwithstanding, the current 401(k) environment permits most 
participants the opportunity to construct their own portfolio from an 
available list of funds. That requires advice, guidance, etc. Although 
participants need the advice, most choose not to use it.
---------------------------------------------------------------------------
    \2\ ERISA section 404(a)(1)(B), 29 U.S.C. 1104(a)(1)(B).
    \3\ Donovan v. Bierwirth, 680 F.2d 263, 272 (2d Cir. 1982.
---------------------------------------------------------------------------
    [T]he Department pointed out repeatedly in support of investment 
advice legislation, this model simply did not work because very few 
investment providers adopted the models and even fewer participants 
actually used them.\4\ (emphasis added)
---------------------------------------------------------------------------
    \4\ SIMFA testimony Marc E. Lackritz President and Chief Executive 
Officer Securities Industry and Financial Markets Association Before 
The Employee Benefits Security Administration United States Department 
of Labor.
    July 31, 2007 http://www.sifma.org/legislative/testimony/pdf/
ComputerModelHearing.pdf.
---------------------------------------------------------------------------
    To further clarify, advice is available to participants, but the 
participants choose not to utilize the advice, despite their 
recognition that they are vulnerable and given the conventional 
participant directed environment, participants need to rely on advice 
from ``someone.''
    Dr. Gregory Kasten explains:

           Over the Past 20 Years 401(k) Plan Features Have Steadily 
        Increased. Daily valuation multiple fund families, web based 
        calculators, target date funds, electronic trading, rapid loan 
        processing, simple ``gap'' reports, better communication 
        materials, Financial Engines, Morningstar reports, asset 
        allocation software, quarterly reports, auto enroll, PPA 2006, 
        increasing fund choices, sector funds, brokerage accounts. Yet 
        with more ``features''--retirement confidence has steadily 
        fallen (citing Source EBRI: The 2009 Retirement Confidence 
        Survey: Economy Drives Confidence to Record Lows; Many Looking 
        to Work Longer).\5\ (emphasis added)
---------------------------------------------------------------------------
    \5\ Statement of Dr. Gregory Kasten, MD, MBA, CPC, AIFA' 
during Independent Fiduciary Symposium, Boise State University, 
September 24, 2009.

    The reality that participants do not use the advice or ``features'' 
available to them is confirmed by a study performed by Ruth Helman; 
Mathew Greenwald & Associates; Jack VanDerhei of Temple University and 
EBRI Fellow; and Craig Copeland, EBRI. [``The Retirement System in 
Transition: The 2007 Retirement Confidence Survey'' EBRI Issue Brief 
No. 304 April 2007.]
    They found that:

          46% don't want advice;
          5% ignore all of the advice;
          36% implement some of the advice; and, just
          13% implement all of the advice

    Indeed, fewer than half of participants choose to use any advice, 
and therefore are left to their own devices to try to figure out one of 
the most complex financial matters in modern life. The question that 
should be asked is not whether advice should be available in a 
participant directed plan. Rather, the question is why aren't 
participant's utilizing that advice? What is it that concerns them?
    Independent Fiduciary Adviser, Chad Griffeth, AIF', 
makes the following observation:

           If the provider of the advice is being paid by the mutual 
        funds in any way, trust is damaged dramatically. The reality of 
        the situation is that the advice provider must earn 
        participants' and management's respect, and the story of true 
        independence, fiduciary prudence, and thus acting in the sole 
        interest of the participant's best interest is critical to the 
        success of the advice provider, and thus the participants. If 
        participants do not trust the source of the advice and account 
        management, they will not use it, even though they need it. 
        Thus, participants will likely not experience the success they 
        need for a dignified retirement.\6\
---------------------------------------------------------------------------
    \6\ Email from Chad Griffeth, AIF', July 28, 2009.

    There exists under the SunAmerica and PPA participant advice 
models, a level fee requirement. That means compensation received by 
the individual or entity providing the advice not be tied directly to 
subsidies offered by mutual funds or other financial instruments, nor 
may compensation be higher for selecting one individual fund over 
another.
    Although that ``prior advice'' policy or regulation seems 
reasonable on its face, participants can sense that something is 
``off.'' That explains why the advice is not being used by 
participants.
    To gain insight into the visceral concern of 401(k) plan 
participants, we can look to 2003 Congressional testimony given by 
Department of Labor officials:

           Current ERISA law raises barriers against employers and 
        investment firms providing individual investment advice to 
        workers. As a result, millions of rank and file workers do not 
        have the information and advice necessary to make sound 
        investment decisions to enhance their long-term security and 
        independence.

    The President's Retirement Security Plan would increase workers' 
access to professional investment advice. By relying on expert advisers 
who assume full fiduciary responsibility for their counsel and disclose 
relationships and fees associated with investment alternatives, 
American workers will have the information to make better retirement 
decisions.
    Here we find the answer to the riddle. Participants intuitively 
know, suspect, or worry that the person or entity giving the advice is 
not an adviser that will or can assume full fiduciary responsibility 
for the advice given. Rather, in all too many cases participants can 
discern that the person or entity rendering the advice is doing so 
under exemptions, exceptions, or under the appearance of full fiduciary 
loyalty, but avoiding the full meaning of that term.
    To summarize, it is somewhat irrelevant what advice model is 
advanced as ``best policy'' if the advice model is not widely trusted 
by participants. That requires a true duty of loyalty without conflicts 
of interest--i.e. advice must be given by investment fiduciaries who 
are independent of those managing the portfolios and selecting the 
underlying funds.
RESTORING TRUST IN THE 401(k) SYSTEM AND THE ROLE OF H.R. 2989
    The fiduciary duty is highest duty known to the law. The assistance 
we give participants, whether in the form of advice or discretionary 
action taken by a fiduciary, must conform to that ``highest'' duty.
    In other words, the advice must be the ``highest'' possible advice; 
namely, advice that carries with it the highest ideals of society and 
does not carry with it exemptions, exceptions, conflicts, or biases 
that favor the advice giver. That is very clear. Given that there are 
many professional investment fiduciaries giving unconflicted, unbiased 
advice, independent of the investment fiduciaries managing the 
portfolios, we know it can be done, and must be required for all other 
advice givers.
    Participants are vulnerable due to the complexities of the world of 
finance. Those vulnerabilities require a participant who wants advice 
to rely on others, with an expectation of loyalty. Participants expect 
those that are brought in to provide advice will have been vetted and 
screened for conflicts of interest by their plan sponsor; they are 
expecting and relying on that sponsor to protect them. However, they 
currently are uncertain and unsettled; there's a lack of confidence 
that the advice giver is truly willing to assume full responsibility 
for the advice given.
    Participants will use advice if they are certain that the advice 
giver is an investment fiduciary with a duty of loyalty that is ``eye-
single'' to the interests of the participant and the participant's 
beneficiary.
    H.R. 2989 creates that environment of loyalty. If we as a society 
of future retirees will ever benefit from unbiased advice, such advice 
must first be used. To foster the trust in an advice based system, we 
will need to adopt and implement a system that satisfies the broad 
discernment of over fifty million American workers. That means getting 
rid of exemptions and bringing a true fiduciary duty to advice given; 
as the Department of Labor conveyed to Congress in 2003.
    It will be necessary to adopt and implement policy that requires 
advice givers be Registered Investment Advisers defined under the 
Investment Advisers Act of 1940 (such advisers are investment 
fiduciaries), or individuals directly under the oversight and 
management control of a Registered Investment Adviser.
    Principal decision making fiduciaries like me have the opportunity 
to hire an investment manager as defined under ERISA section 3(38). To 
the extent that participants desire to construct their own portfolios, 
a separate advice giver other than the investment manager hired at the 
plan level, will be permitted to give participants advice so long as 
they are independent of the ERISA 3(38) investment manager, and are 
willing to accept full fiduciary responsibility for the advice given.
    Professional fiduciaries will not accept or hire an investment 
professional under any other conditions. The investment advice 
component of H.R. 2989 is trust building policy, and should be advanced 
to law. When this legislation becomes law, it will pass the ``smell 
test'' of those who need advice, and who, in turn, will have increased 
confidence in the 401(k) system as a means to provide them with 
retirement income security.
    The following paper from the Journal of Pension Benefits further 
elaborates on the vulnerabilities and expectations of 401(k) 
participants, and facilitates an understanding of the favorable impact 
H.R. 2989 will have on American workers.

                                 
 Statement of National Association of Insurance and Financial Advisors
    The National Association of Insurance and Financial Advisors 
(NAIFA) appreciates the opportunity to share with you, the members of 
the House Ways and Means Committee, our views in connection with your 
hearing on defined benefit pension plan funding levels and investment 
advice rules. Our comments are focused on investment advice rules, 
which are important to many NAIFA members who operate as investment 
advisor representatives, and to the consumers whom we serve. For the 
reasons discussed more fully below, we urge you to maintain current 
law, allowing advisors to provide much-needed information to 
participants in 401(k) plans.
    Founded in 1890 as the National Association of Life Underwriters, 
NAIFA comprises more than 700 state and local associations representing 
the interests of approximately 200,000 agents and their associates 
nationwide. NAIFA members focus their practices on one or more of the 
following: life insurance and annuities, health insurance and employee 
benefits, multiline, and financial advising and investments. The 
Association's mission is to advocate for a positive legislative and 
regulatory environment, enhance business and professional skills, and 
promote the ethical conduct of its members. NAIFA's website can be 
accessed at www.naifa.org.
    As part of their business plans, many NAIFA members work with their 
small business clients to establish 401(k) plans to provide a means for 
employers and employees to build retirement income security. Since 
passage of the Pension Protection Act (PPA) in 2006, NAIFA members who 
are investment advisor representatives have been able to provide much-
needed assistance and advice to participants in 401(k) plans. The 2006 
Act modified ERISA prohibited transaction rules that barred financial 
institutions that sponsor their own investment products from 
recommending those products to plan participants when asked to give 
recommendations, and provided legal protections to employers who 
offered investment advice to employees participating in their 401(k) 
plans. The changes resulting from the 2006 Act allow professionals to 
offer investment advice to 401(k) plan participants, whether or not 
they are independent of a plan investment provider, subject to certain 
protective conditions. Thus, advisors are now permitted, again, under 
certain protective conditions, to answer questions, recommend changes 
to investment selections, and generally assist participants in 
understanding their 401(k) investments.
    NAIFA supported the changes ushered in by the PPA, and opposes the 
provisions in proposed legislation, H.R. 2989, that would change 
current law by prohibiting investment advisers who represent companies 
providing investments to 401(k) plans from providing advice to plan 
participants. The pending legislation would recreate the ``advice gap'' 
that existed prior to the 2006 reforms--resulting in investors being 
less informed as they make critical decisions about their financial 
futures.
    Professional assistance is crucial to help people figure out how 
best to allocate the hundreds and even thousands of dollars that they 
and their employers deposit in their 401(k) plans annually. The need 
for advice from trained and licensed professionals to 401(k) plan 
participants has increased with the ever growing shift from defined 
benefit plans to defined contribution plans, and is arguably even 
greater in light of the precipitous drop in the market over the last 
year and continuing market volatility. Yet, as we have seen from 
experience, a significant number of 401(k) plan participants do not 
have an investment advisory service available to them through their 
retirement plans. In many cases, this occurred because employers were 
unwilling to risk legal liability prior to the enactment of PPA in 
2006. This is problematic for all participants, but particularly 
troublesome in light of the fact that many novice retirement plan 
participants direct their own account investments.
    There is no dispute that there exists a huge need for sound 
investment advice for most workers. Planning for retirement is a 
complex task, taking into account numerous variables years, even 
decades into the future. This makes it difficult for most people--not 
just rank and file workers, but other groups one would expect to be 
more investment savvy. According to news reports, more than half of 
401(k) participants allocate their money either into overly 
conservative or overly aggressive investments. Many--including an 
estimated 50% of Harvard's faculty and staff, as well as the 3 million 
plus members of TIAA-CREF--simply allocate their money to money market 
accounts, or, once allocated to specific funds, never adjust them.
    This is changing. A recent report by the Profit Sharing/401k 
Council of America (PSCA) notes that the availability of investment 
advice for 401(k) plan participants continues to increase. For the 
first time, more than half of all plans (51.8 percent) offer investment 
advice options to participants. More small companies offer investment 
advice options than large companies. (PSCA 52nd Annual Survey of Profit 
Sharing and 401(k) Plans, September 28, 2009.) This is good progress 
that should be encouraged to continue. Unfortunately, current 
legislative proposals--specifically, H.R. 2989--would likely reverse 
any gains made since enactment of the PPA in 2006.
    That is why NAIFA opposes the proposed rolling back of the changes 
made by the PPA. We believe such a move would significantly hurt plan 
participants--the average American worker and investor--because it 
would reduce their access to an informed adviser whose purpose is to 
help them understand their retirement plan and make informed choices 
about their 401(k) investments. Moreover, we believe the current rules 
provide adequate consumer protections that would not be enhanced by the 
new proposals.
    Here is a brief explanation of how the current marketplace works: 
The typical NAIFA member represents a plan investment provider in 
connection with 401(k) plans. The NAIFA member, an investment advisor 
representative (IAR), interacts with the plan sponsor on behalf of the 
provider. In that role, the NAIFA member/IAR provides a number of 
services to the plan sponsor, including (under current law) providing 
investment advice regarding investment options to the sponsor's 
employees.
    The IAR generally is compensated for all services provided in 
connection with a plan based upon a certain percentage of assets under 
management. In our experience, these are generally very small amounts--
up to 25 basis points is common--and are included in the general fee 
charged by the plan investment provider. Moreover, our experience 
indicates that the compensation generally does not vary if the plan 
participant chooses one fund over another. There is, therefore, no 
incentive for the IAR to recommend a particular fund, whether it is a 
proprietary fund of the plan investment provider or any other 
investment. The incentive, to the extent there is one, is to provide 
the best advice possible to the participant in order to increase the 
size of assets under management. And given the very small percentages, 
that goal benefits the plan participant far more than the IAR.
    Under the proposed legislation, this would change. To the extent a 
plan sponsor engages an investment adviser for its plan participants, 
the adviser would be required to be independent of the plan investment 
provider. This independence comes at a cost. The independent adviser 
would charge a fee--likely to be 1-1.5% of assets. This fee would be in 
addition to the fee charged inside the product, be it insurance, mutual 
fund or collective trust. Experience has shown that many plan sponsors 
are unwilling to incur the additional cost, leaving participants to 
seek out and pay for their own investment advice or go without.
    Moreover, even to the extent a plan sponsor incurs the cost of 
engaging an independent adviser, the adviser is at no advantage to an 
IAR because the adviser is limited to the same group of funds within 
the plan--that is, an independent adviser is making recommendations 
from the same menu of funds that an IAR would select. Given that there 
is no financial incentive to an IAR to select one fund over another, 
there is no reason to believe an independent adviser would be less 
conflicted or do a better job.
    Thus, rolling back current PPA provisions would very likely result 
in less information--and potentially, less helpful information--in the 
hands of investors:

          Plan participants are not likely to seek out advice 
        on their own because they cannot (or will not) pay for it. We 
        note that there is nothing in current law that prohibits plan 
        participants from engaging an independent adviser if they would 
        prefer to work with someone who is not affiliated with the plan 
        investment provider. Indeed, the Department of Labor's proposed 
        regulations, which have now been withdrawn, would have required 
        that participants be notified in writing of their ability to do 
        so. Having said that, it is our experience that most plan 
        participants do not have the means or inclination to engage an 
        adviser on their own, and there is nothing to suggest that this 
        would change.
          Plan sponsors, who currently pay for the advice 
        provided by IARs through the fees they pay plan investment 
        providers, would violate ERISA by arranging for an adviser to 
        provide investment advice to their employees unless they engage 
        independent advisers. Even hiring an independent adviser places 
        all the liability for the adviser's compliance with the 
        requirements of the statute on the sponsor. Having said that, 
        however, there is no requirement that a plan sponsor provide 
        any investment advice to participants--whether through an 
        affiliated or non-affiliated adviser. Thus, faced with 
        additional costs charged by independent advisers and facing 
        potential legal liability, we believe employers are likely to 
        forego providing advice altogether, leaving participants to 
        fend for themselves once again.
          Plan investment providers and their IARs, who have 
        the closest relationships with plan sponsors and participants, 
        would be prohibited from sharing their knowledge and expertise 
        for the benefit of participants.

    The practical effect of rolling back the PPA's investment advice 
provisions and replacing it with a requirement that participants be 
provided with independent advisers--or no advice at all--is that many, 
if not most, rank and file employees will not have access to 
affordable, professional advice with respect to how to invest their 
401(k) plan contributions. We do not believe this is in anyone's best 
interest, particularly those of plan participants. The financial 
markets are incredibly complicated. Investors are confused and it is 
difficult to determine the best course of action. That results in 
inaction and/or uninformed action on the part of plan participants. 
Current law has helped to provide better, more complete information to 
plan participants, to assist them in making informed choices based on 
their needs and risk tolerance. The proposed legislation, instead of 
fostering an increase in accessible, professional advice, is very 
likely to do just the opposite with serious adverse consequences.
    Thank you for your consideration of our views.

                                 
        Statement of the National Council of Farmer Cooperatives
    The National Council of Farmer Cooperatives (NCFC) appreciates the 
opportunity to submit this statement in response to the Committee's 
hearing: ``Defined Benefit Pension Plan Funding Levels and Investment 
Advice Rules.''
    Since 1929 NCFC has represented the interests of America's farmer 
cooperatives. There are nearly 3,000 farmer cooperatives across the 
U.S. whose members include a majority of our nation's more than two 
million farmers. We believe farmer cooperatives offer the best 
opportunity to achieve farmer-focused agricultural policy because 
farmer cooperatives allow individual farmers the ability to own and 
lead organizations essential for continued competitiveness in both the 
domestic and international markets.
    America's farmer cooperatives provide a comprehensive array of 
services for their members. These diverse organizations handle, process 
and market virtually every type of agricultural commodity produced. 
They also provide farmers with access to infrastructure necessary to 
manufacture, distribute and sell a variety of farm inputs. 
Additionally, they provide credit and related financial services 
including export financing. Earnings derived from these activities are 
returned by cooperatives to their farmer-members on a patronage basis, 
thereby enhancing their overall farm income.
    Farmer cooperatives generate benefits that strengthen our national 
economy, providing jobs for nearly 250,000 Americans with a combined 
payroll of over $8 billion. Many of these jobs are in rural areas where 
employment opportunities often are limited. The pension funding crisis 
has placed many of these rural jobs in jeopardy, however. The economic 
crisis and the collapse of the stock market have caused unprecedented 
losses in defined benefit pension plans all across the country, and 
requirements for defined benefit pension plans of farmer cooperatives 
are reaching unsustainable levels.
    Due to increased funding requirements, farmer cooperatives may be 
forced to lay off workers, postpone investments in new products and 
services, and take other drastic measures in order to meet current 
funding requirements.
    NCFC surveyed members from all parts of the country and asked them 
whether the market downturn has had an impact on their defined benefit 
plan funding requirements. Nearly all of those surveyed reported 
dramatic increases in funding requirements. In fact, for single 
employer plans, the anticipated increase in average annual contribution 
(2006-2008 vs 2009-2014) is more than 75 percent. Prior to the market 
downturn, many of those plans had sizeable cushions from discretionary 
contributions or were approaching full funding.
    In order to address this severe funding problem, farmer 
cooperatives are taking or considering the following actions:

          Eliminating jobs and reducing salaries.
          Reducing patronage payments to members, impacting 
        both members and rural communities.
          Reducing capital investments.
          Reducing spending on marketing, travel, training, 
        etc.
          Suspending 401(k) employer-match contributions.
          Canceling annual salary increases.
          Canceling annual incentive programs.

    Farmer cooperatives are not asking for relief from, or a reduction 
in, pension funding obligations; instead, they are asking for 
additional time to allow for a positive stock market correction. Time 
is of the essence, however, and we urge you to act quickly to address 
this problem. The vast majority of single employer plan sponsors' 
funding obligations will be determined on January 1, 2010, regardless 
of stock market performance in the remainder of the year. Farmer 
cooperatives and other businesses must plan now for the substantial 
funding liabilities in the new year.
    NCFC is very pleased that Representative Earl Pomeroy has issued a 
discussion draft of legislation providing relief to plan sponsors and 
workers. The discussion draft provisions would allow more time for 
employers to manage losses from the recent stock market downturn. That 
additional breathing space for employers would help to ensure economic 
recovery in rural America and the continued viability of our nation's 
farmer cooperatives.
Conclusion
    Thank you for the opportunity to share our views. NCFC looks 
forward to working with the Committee to address the ongoing challenges 
in defined benefit pension plan funding. We appreciate this statement 
being included in the official hearing record.
                                 
                New Jersey Education Association, letter
Dear Mr. Chairman:

    On behalf the 203,000 members of the New Jersey Education 
Association, we appreciate the committee's interest in the future of 
defined benefit pensions and wish to submit the following comments, for 
the record, on Defined Benefit Pension Plan Funding Levels and 
Investment Advice Rules.
    NJEA strongly believes in the value of a defined benefit pension as 
the most secure retirement benefit for American workers. In addition, 
we believe that properly regulated defined benefit plans are the most 
responsible and stable retirement benefits employers can offer to their 
employees.
    These policy positions are modeled by NJEA through its sponsorship 
of a single-employer, private defined benefit pension plan for our own 
employees and retired employees. As a responsible plan sponsor, NJEA 
has consistently met all federal funding requirements for its Plan, 
ensuring the retirement security of more than 470 Plan Members and 
beneficiaries.
    However, like many other defined benefit plan sponsors, NJEA is 
facing the challenge of continuing to fully fund our Plan in the wake 
of deep investment losses in 2008-09 while meeting more stringent 
funding requirements under the Pension Protection Act of 2006. This has 
caused us to defer planned staff expansion and capital projects, and to 
reduce other expenditures, impacting the local economy, as we have 
shifted resources within our budget in anticipation of a required 
employer contribution that could be three to five times our previous 
annual funding requirement.
    We recognize that some measure of pension funding relief was 
enacted under the Worker, Retiree, and Employer Recovery Act of 2008 
(WRERA), and we greatly appreciate changes to the original asset 
smoothing method in the PPA.
    In addition, WRERA and subsequent regulatory measures by the IRS 
provide flexibility to plan sponsors in setting the interest rates on 
which their plan liabilities are valued. While this can have a dramatic 
effect on current liability for this plan year--and help prevent a 
spike in required employer contribution--it is a short-term and 
somewhat artificial fix. The fact remains that our Plan's assets 
declined almost 16% from September 1, 2008 to August 31, 2009, and plan 
sponsors with calendar fiscal years saw far steeper declines.
    While rate relief will allow us to measure our Plan liabilities 
much lower, it may only defer the spike in employer contribution for a 
year. Corporate bond yields--on which the target liability yield curve 
is based--are already falling, which will likely cause our Plan's 
liability to be measured at a dramatically higher level next year. At 
the same time, the Plan's assets will have to be at 96 percent of 
liability (versus 94 percent this year) under the PPA funding target 
phase-in.
    We strongly encourage Congress to enact additional relief measures, 
including a provision for plan sponsors to separately value and 
amortize their 2008 and 2009 investment losses over 30 years. This 
would alleviate volatility and spikes in employer contributions without 
forgiving any plan liability.
    This proposal and others have been advanced by the National 
Education Association, in concert with many other organizations. We 
urge the Committee to consider and act favorably on NEA's proposals.

            Sincerely,

                                                 Barbara Keshishian
                                                          President
                                 
                 Oklahoma Education Association, Letter
Dear Chairman Rangel and Members of the Committee on Ways and Means:

    Please allow me to introduce myself as the Executive Director of 
the Oklahoma Education Association (OEA), a state affiliate of the 
National Education Association (NEA). I am writing to respectfully 
submit the comments of the OEA to the Ways and Means Committee in 
conjunction with a draft proposal by Representative Pomeroy that will 
provide relief for defined benefit pension plan funding levels and 
investment advice rules.
    The OEA was established in 1889 prior to Oklahoma statehood and 
currently represents approximately 40,000 active and retired public 
sector education employees. Over 50 hard working Oklahoma citizens are 
directly employed by the OEA to carry out our mission. Those employees 
are private sector employees and consist of support, professional, and 
management staff.
    The OEA maintains a single employer defined benefit retirement plan 
for its employees. Our plan currently has 53 plan participants and I 
think it is fair to describe our plan benefits as ``modest'' at best. 
Our defined benefit plan is based on a 2% factor and we do not have any 
cost of living provisions, nor do we provide any post-retirement health 
care or other post-retirement benefits. We do however believe that our 
plan provides basic economic security for our employees who vest in the 
plan and retire from service at the OEA.
    The OEA has always been a fiscally responsible sponsor of its 
defined benefit pension plan, despite requirements to make substantial 
additional monetary contributions to the plan in order to provide the 
maximum funding levels implemented by the recently enacted Pension 
Protection Act (PPA). We are proud to sponsor a defined benefit plan 
that is annually funded at the maximum allowable level and sincerely 
believe in our obligation to provide reasonable and affordable 
retirement benefits to our hard working employees.
    However, the inflexible and stringent rules mandated by the PPA and 
the recent downturn in the financial markets have created an 
environment where we are facing a catastrophic financial crisis. Unless 
we have relief in the form of more flexible funding requirements for 
the defined benefit plan--particularly in the area of funding 
investment losses over a longer period of time than is currently 
available under the PPA--or drastically cut back regular services to 
our members, staffing, and normal capital improvement expenditures, the 
OEA will not be able to sustain its annual budget. Under the current 
PPA rules, the total impact of our defined benefit plan on our most 
recent fiscal year budget is 43% of our total revenues.
    The OEA will not be able to continue to maintain its defined 
benefit plan under the current funding requirements without suffering 
substantial financial damage. We are currently faced with the 
unpleasant dilemma of either breaking our promise to continue 
sponsoring a defined benefit plan for our employees, or breaking our 
promise to continue to provide the very best services available for our 
members. Changes in the current funding requirements are necessary to 
make plan funding more predictable and affordable, which in turn will 
allow organizations/employers such as the OEA to maintain defined 
benefit pension plans in the future.
    The draft proposal by Representative Pomeroy provides sensible 
short term funding relief for defined benefit pension plans without 
jeopardizing the long term funding protections for these plans. I urge 
the Ways and Means Committee to support the Pomeroy proposal and to 
expeditiously enact legislation that will provide much needed relief to 
sponsors of defined benefit plans in the private sector.

            Thank You,

                                      Lela Odom, Executive Director
                                 
               Statement of The ERISA Industry Committee
    As the representative of America's major employers on retirement 
issues, The ERISA Industry Committee (``ERIC'') appreciates the 
Committee's focus on the issues of funding relief for pension plans and 
investment advice in defined contribution plans.
    ERIC is a nonprofit association committed to the advancement of the 
employee retirement, health, incentive, and welfare benefit plans of 
America's largest employers. ERIC's members provide comprehensive 
retirement, health care coverage, incentive, and other economic 
security benefits directly to some 25 million active and retired 
workers and their families. ERIC has a strong interest in proposals 
affecting its members' ability to deliver those benefits, their costs 
and effectiveness, and the role of those benefits in the American 
economy.
SUMMARY: DEFINED BENEFIT PLAN FUNDING RELIEF
    ERIC strongly supports and has urged both the Congress and the 
Administration to provide immediate, temporary and meaningful funding 
relief for defined benefit plans. Employers have not asked and are not 
now asking for relief in the form of direct financial support from the 
government. Rather we are merely asking for more time to make 
unexpected and larger contributions to defined benefit plans as a 
result of the unprecedented financial and economic problems that stem 
from the ongoing global financial meltdown.
    Companies that sponsor defined benefit plans, including those that 
had made significant contributions to comply with the new more 
stringent funding rules of the Pension Protection Act of 2006 (PPA), 
suffered significant and unexpected losses in their pension plan 
investment portfolios as a result of the ``once in a generation'' 
investment crisis. Because of the worst recession since the Great 
Depression, many have been forced to freeze their pension plans, reduce 
financial support for 401(k) plans, curtail employment, and 
significantly reduce investment.
    Unlike other sectors of the economy, however, companies sponsoring 
defined benefit plans are not asking for a taxpayer bailout; instead we 
are merely asking for more time to make contributions to match long-
term liabilities inherent in the pension plan system. There is ample 
precedent for such a solution: in 1974 when the Employee Retirement 
Income Security Act (ERISA) was enacted, companies were given 30 years 
to amortize existing liabilities.
SUMMARY: PARTICIPANT ADVICE
    Millions of Americans rely on their 401(k) plan and other defined 
contribution plans for retirement security. ERIC member companies who 
sponsor 401(k) plans offer investment advice products and services to 
plan participants as permitted under current law. Many utilize the 
regulatory framework approved by the Department of Labor known as 
``SunAmerica,'' whereby participants receive investment advice based on 
a computer model designed by a third party with no financial stake in 
the underlying investments in the plan and is independent of the 
service provider or financial institution providing the investment 
advice.
    ERIC supports investment advice rules that carefully balance the 
need of the participant to receive effective and useful investment 
advice from the company plan sponsor and/or its service provider as 
well as the need for the employer to have clear and consistent rules 
under which to legally offer the advice. ERIC's members have a vital 
interest in assuring that the rules and regulations issued in 
connection with investment advice achieves its objective in a way that 
encourages voluntary investment advice programs without exposing 
employers to an undue risk of fiduciary liability.
Defined Benefit Plan Funding
    As Congress and the Administration focus on efforts to stimulate 
the economy, real relief for America's pension plans is an absolute 
necessity. There is general agreement among those directly concerned 
with business, employment, and retirement administration that failure 
to provide meaningful relief will increase unemployment, slow economic 
recovery, and put retirement security at risk. The drop in the value of 
pension plan assets and the credit crunch, together with the new 
accelerated funding requirements of the Pension Protection Act of 2006 
(PPA), has placed employers in a difficult position.
    At a time when companies need cash to keep their business afloat, 
retain and recruit employees, build product in American factories, the 
new funding rules under the PPA coupled with the economic meltdown 
require extraordinary and unexpected cash contributions to their 
defined benefit plans, to fund liabilities that are many years in the 
future.
    As a result, companies, including those that need to continue to 
manufacture goods and build inventory, will divert much needed cash to 
make pension plan contributions, cash that would otherwise be spent on 
current job retention, job creation, and capital investments. Many of 
these companies fear that they will be forced to increase off-shore 
resources--with its permanent impact on jobs--in order to reduce costs 
to make up for these contributions. These funding challenges apply to 
both frozen and non-frozen plans (those that continue to accrue new 
benefits for employees). Unless Congress intercedes with reasonable 
rules that will promote retention of pension plans, the result will be 
an increase in unemployment--some of it permanent--and a slower 
economic recovery.
    The Worker, Retiree, and Employer Relief Act of 2008 corrected a 
number of technical errors in the PPA and clarified some points of 
contention between plan sponsors and the regulatory agencies. It did 
not, however, adequately provide the substantive relief needed to force 
plan sponsors from making an unfortunate choice between funding their 
pension plans and retaining current employees, hiring new employees, 
and the capital investments necessary to stimulate the economy and 
improve the lives of millions of Americans.
    The Treasury Department has recently provided some needed 
regulatory relief in this area. However, due to statutory constraints, 
the Treasury relief was not provided to all pension plans, leaving some 
plans, particularly fiscal-year plans (as opposed to calendar-year 
plans) suffering grave economic hardship. Simply stated, Congress needs 
to act, quickly and decisively in order to support the remaining 
defined benefit plans still offering retirement security to 
participants. Any relief that Congress provides must be made available 
to both frozen and non-frozen plans in order help companies transition 
out of this deep recession.
    As you are aware, the last four months of 2008 posed a significant 
challenge for defined benefit pension plans that, in compliance with 
the PPA 2006, had reached or were close to full funding. A dramatic and 
unexpected decline in the value of the equity markets significantly 
reduced the assets held by these plans through no fault of the PPA. As 
a result, pension plans that were fully funded only one year ago are 
now substantially underfunded under the standards set by the PPA 2006.
    The PPA significantly tightened the nation's pension funding rules. 
Congress, not anticipating the financial crisis, made no provision in 
the Act that that would have provided relief from the crisis. Plan 
sponsors have spent the two-plus years since the legislation was 
enacted preparing to meet the new law's funding requirements, but they, 
like Congress when the law was enacted, did not and could not 
anticipate the financial crisis through which the nation is now 
progressing. The confluence of tighter funding laws and the current 
economic environment created a ``perfect storm'' that requires relief.
    Many major employers that have responsibly funded their pension 
plans are now facing statutorily required contributions in the coming 
year that exceed the previous year's contributions by magnitudes of 
hundreds of percent. The sheer size of the contributions leaves 
employers in an untenable position: they must either cut jobs and delay 
hiring and investment, or allow their plans to go underfunded, in many 
cases, resulting in restrictions on the benefits that workers can claim 
as they retire. In some cases, the pension liabilities that must be met 
under the requirements of the PPA may exceed the net worth of the 
company. We do not believe that Congress intended to allow companies to 
close their doors as a result of inability to meet the funding 
requirements of the PPA coupled with the Great Recession.
    Looking ahead to 2010, companies expect increased required 
contributions to their pension plans, barring an enormous market 
recovery or another unusual spike in interest rates that would reduce 
minimum contributions. These increased minimum contributions apply to 
both frozen and non-frozen plans because of investment losses and 
interest rate assumptions.
    Because companies suffered enormous investment losses in 2008, 
current investment returns are not sufficient to reverse the dramatic 
negative investment returns of the last quarter of 2008. Those losses, 
the low return on investments, coupled with the fact that interest 
rates are substantially lower than in October 2008, results in an 
increase in the computation of pension plan liabilities (based on 
current interest rates). Higher liabilities result in higher minimum 
contributions to the plans, thus continuing the cash-crunch cycle into 
2010 and forcing companies to choose between funding pension plan trust 
funds, that represent long-term liabilities, and ending workforce 
reductions, rehiring workers and/or making infusions of capital into 
their core business interests.
    A failure to provide funding relief will undoubtedly have real 
pension implications including an increased risk to the PBGC and the 
loss of pension benefits and plan freezes (as well as curtailment of 
401(k) plans in order to raise cash) for many workers, the 
repercussions will stretch far beyond pensions to the whole of economic 
growth. With required contributions for many employers reaching tens 
and hundreds of millions of dollars, the job and investment 
consequences of failing to act are real. We urge you to provide real, 
temporary relief that allows plan sponsors additional time to fully 
fund their pension plans.
    Pension plan sponsors are not asking for a bailout--we are not 
asking that the government provide plan sponsors with cash or take on 
plan sponsors' liabilities. Plan sponsors simply need additional time 
over which to make their pension contributions. Plan sponsors need more 
time to amortize the 2008 losses as well as rules that reflect the true 
long-term nature of the pension plan liability.
    In these uncertain economic times, employers are forced into making 
hard and difficult choices--in some cases cutting retirement benefits 
in order to retain jobs. Many employers eliminated 401(k) matches in 
order to divert the cash to cover other expenses, including payroll, 
and defined benefit plan funding. These employers hope to and in some 
cases are slowly returning to providing the employer match. However, as 
we have learned from this economic crisis, employers need the 
flexibility to make business decisions regarding cash allocation 
quickly and without depending on Congress.
    One short-term result of the economic crisis, and government 
failure to date to provide needed flexible relief, is that employers 
are hesitant to take on long-term financial commitments. For instance, 
employers are wary of making long-term commitments that require 
maintenance of short term funding to cover what are in fact, long term 
liabilities. The current financial crisis not only impacts workers 
today, but also will have severe, short-term negative effects on the 
pension plans in which they participate, reducing benefits, undermining 
retirement security and will continue to impact the ability for large 
employers to maintain current workforce levels.
    We understand that there are some, in and out of government, who 
contend that there are no econometric studies to illustrate that if 
companies are required to make statutorily required pension 
contributions they will be forced to curtail spending for jobs and 
investment. We find this contention so out of balance with common sense 
that it is without merit of consideration.
Investment Advice
    The Education and Labor Committee approved a bill this summer that 
would drastically change the way employers offer investment advice to 
workers participating in their 401(k) plans. The PPA included 
investment advice provisions that expanded the ways in which employers 
could provide investment advice to their workers through their 401(k) 
plans. The effective date of the final regulations on investment advice 
issued by the Bush Administration has been delayed upon further review 
by the Obama Administration.
    Employers need clear rules that apply when an employer chooses to 
make investment education or investment advice available under a 
participant-directed defined contribution plan. Congress should 
recognize, however, that plan sponsors and fiduciaries are increasingly 
targeted in class action lawsuits that propose expansive theories of 
fiduciary liability and seek substantive damages. Even when these 
lawsuits are without merit, as is often the case, they are expensive to 
defend and they divert time and attention from the employer's business. 
As a result, any employer that considers whether to adopt an investment 
advice program must weigh the potential benefit to plan participants 
against the very real risk of costly and time-consuming litigation.
    Employers will voluntarily offer investment advice programs only if 
the rules governing these programs are clear and objective, do not open 
the door to increased fiduciary liability, and provide safe harbors 
whenever possible.
    The Education and Labor's bill approved out of the Committee this 
summer, would significantly disrupt the manner in which employers 
provide investment advice to plan participants. Specifically, this 
legislation would prohibit employers from providing investment advice 
under most ``SunAmerica'' models, which has provided a framework for 
employers to provide investment advice for eight years.
    Many ERIC members provide investment advice under the SunAmerica 
model. Our members have indicated that if the rules under which 
employers may offer participants investment advice in 401(k) plans are 
completely revamped so as to preclude most SunAmerica arrangements, 
many would not undertake the expensive and time-consuming exercise of 
overhauling their investment advice programs. In addition, these 
changes would also result in uncertainty and increased exposure to 
liability for employers.
    ERIC strongly supports the SunAmerica investment advice framework. 
It appears that the Education and Labor Committee has concerns 
regarding the PPA investment advice provision as well as the Bush 
Administration final regulations on investment advice. ERIC urges a 
full and fair debate on this issue within the Committee. However, by 
casting doubt on SunAmerica arrangements, Congress would force 
employers to review and reconsider whether providing investment advice 
results in litigation jeopardy. Employers would limit and or eliminate 
investment advice programs resulting in fewer Americans receiving 
investment advice through their employer-sponsored 401(k) plans.
    ERIC appreciates the opportunity to present this statement. If the 
Committee has any questions about our statement for the record, or if 
we can be of further assistance, please let us know.

    The ERISA Industry Committee

                                 
            Statement of the Michigan Education Association
    The Michigan Education Association (MEA) respectfully submits these 
comments to the Committee on Ways and Means in conjunction with the 
October 1, 2009 hearing on defined benefit pension funding levels and 
investment advice rules.
    MEA is a labor organization with more than 160,000 members 
consisting of active and retired employees of public elementary and 
secondary schools and institutions of higher education in the state of 
Michigan. Although MEA members are not subject to the funding rules 
governing private sector defined benefit pension plans, the MEA has a 
defined benefit pension plan that covers over 700 employees of MEA and 
its associated organizations.
    MEA strongly supports legislation being drafted by Representative 
Pomeroy that will provide appropriate funding relief for sponsors of 
private sector defined benefit pension plans. The extraordinary 
economic downturn that has been experienced during the past 12 to 18 
months in Michigan and throughout the United States creates substantial 
funding challenges for employers, like the MEA, that have defined 
benefit pension plans for its employees. Congressman Pomeroy's proposed 
legislation would significantly assist MEA and other defined benefit 
plan sponsors by providing extended amortization of certain funding 
shortfalls, expanding the smoothing corridor for assets that have 
experienced serious declines in value, and protecting an employee's 
right to choose a social security leveling benefit payment option.
    MEA is facing significant increased minimum contributions to its 
pension plan in the next few years due to the unusually severe downturn 
in the economy. The ability to elect to amortize funding shortfalls 
over a 15 year period and an expansion of the smoothing corridor for 
assets greatly enhances MEA's ability to fund the pension plan and 
protect the benefits of its employees. The plan has had a Social 
Security leveling benefit option for its employees for many years. The 
ability to retain that option for its employees is a significant 
benefit of the proposed legislation.
    The Pomeroy draft legislation assists in addressing the funding 
crisis arising out of the economic recession, while ensuring the 
protection of employees' benefits. MEA fully supports this legislation 
and urges the members of the Ways and Means Committee to approve it 
expeditiously.
                                 
            Statement of the National Education Association
    The National Education Association (NEA) respectfully submits these 
comments to the Committee on Ways and Means for the record in 
conjunction with the October 1, 2009 hearing on defined benefit pension 
plan funding levels and investment advice rules.
    NEA strongly supports legislation being drafted by Representative 
Pomeroy that will provide the funding relief desperately needed by 
sponsors of defined benefit pension plans in the private sector. The 
bill is appropriately calibrated to help plan sponsors recover from the 
cataclysmic market losses that occurred during the five-month period 
stretching from the summer of 2008 through the winter of 2009, when the 
assets of defined benefit pension plans suffered an average market 
value loss of 40 percent. Without the short-term, targeted funding 
relief provided by the Pomeroy draft, many employers will not be able 
to continue in business, let alone maintain their pension plans. 
Accordingly, NEA commends Representative Pomeroy for sponsoring this 
bill and urges the House Ways and Means Committee to move the bill to 
the House floor intact and to send with it an urgent message about the 
need for speedy passage of the bill in both the House and Senate.
    NEA is a leading advocate for financially stable, employment-based, 
defined benefit pension plans in both the public and private sectors of 
the economy. Although nearly all of NEA's members are employed by 
public school employers not subject to the funding rules governing 
private sector defined benefit pension plans (and therefore would not 
be affected by the funding relief provided by the Pomeroy bill), NEA 
understands that passage of the legislation is vitally important to the 
survival of employment-based defined benefit pension plans in all 
sectors of the economy. Without funding relief, the relatively 
inflexible funding rules imposed on sponsors of private sector defined 
benefit plans would make sustaining those plans, given the stresses of 
the once-in-every-other-generation market upheaval of the end of last 
year and the beginning of this one, nearly impossible for many 
employers. For those employers, the cost of sustaining their defined 
benefit pension plans under the funding rules without relief will force 
them to retrench their operations severely, causing losses in economic 
activity and jobs in their core businesses. And, as private sector 
defined benefit pension plans become rarer, the defined benefit pension 
plans maintained for our members will inevitably become harder for 
public sector employers to sustain.
    NEA's knowledge about the severe challenges that private sector 
employers are facing in maintaining their defined benefit pension plans 
has been gained first hand through the experience of its own affiliated 
associations throughout the country, nearly all of whom maintain 
defined benefit pension plans--on both a single employer and 
multiemployer basis--for their own employees. For the most part, NEA's 
affiliates are financially stable, mature organizations with 
predictable cash flow. These organizations take pride in providing 
retirement security for their staff employees by maintaining well-
funded defined benefit pension plans. Yet, the application of the new 
stringent funding rules of the Pension Protection Act (``PPA'')--which 
generally increase the unpredictability of funding requirements year-
to-year--to plans that have suffered, over a five-month period, a 
drastic and unpredictable market drop in the value of their funding, 
has suddenly made sustaining those plans a nearly unbearable burden.
    And it is not just the plans that are jeopardized by this funding 
crisis: many of NEA's affiliated associations are being forced to 
postpone, curtail, or eliminate regular services, staffing, and capital 
improvements, often on top of increases in member dues. This is 
because, absent relief, in 2009 the average NEA affiliate will be faced 
with the immediate obligation to make funding contributions equal to 37 
percent of its payroll, just to maintain its defined benefit pension 
plan. This huge funding obligation is not the result of past 
irresponsible funding behavior; on the contrary, these organizations 
have been uniformly fiscally responsible sponsors of their defined 
benefit plans, and many have been making markedly increased 
contributions to their plans over the last few years. Not one of these 
associations has taken contribution holidays or paid only the minimum 
contribution required by existing funding rules. Financially sound, 
long-term membership organizations such as these--like many other 
businesses in the private sector--should be financially able to 
maintain defined benefit pension plans. But, unless these employers are 
given some temporary flexibility in how to recoup the severe investment 
losses of the last two years suffered by their plans, many of these 
plans will not be sustained, and the organizations will be 
substantially damaged financially as well.
    Representative Pomeroy's proposal will have a major beneficial 
impact by providing sponsors the opportunity to fund the investment 
losses that their defined benefit plans incurred at the end of 2008 and 
the beginning of 2009 over a longer period of time. This one temporary 
change in the funding rules will permit many defined benefit pension 
plans to remain viable; and it will free up needed investment capital 
for the sponsors' core businesses and allow these employers to begin 
hiring again. The Pomeroy proposal provides this temporary relief in 
the form of two alternative funding rules, either of which sponsors may 
elect voluntarily to comply: (1) an option to defer for two years the 
amortization of the shortfalls occurring in 2009 and 2010; or (2) an 
option to amortize the shortfalls occurring for the first time in 2009 
and 2010 separately over a 15-year period. NEA is most pleased by the 
inclusion of the latter alternative in the bill, because it will 
provide greater relief for sponsors' contribution obligations in the 
earlier years. NEA is similarly pleased with the bill's temporary 
funding relief for multiemployer plans, which employers would be 
permitted to elect voluntarily during 2009 or 2010 either: (1) to 
restart the amortization of unfunded liabilities over a 30-year period; 
or (2) to establish a separate amortization base for investment losses 
recognized from the fall of 2008 through the fall of 2010 and to fund 
this liability over a 30-year period.
    The bill's ``maintenance of effort'' requirements, which are linked 
to its temporary funding relief provisions for single employer plans, 
are appropriately calibrated to incentivize sponsors to continue to 
provide benefits to plan participants during the same period in which 
they are receiving relief. As no plan sponsor is required to accept the 
temporary funding relief, and the bill provides different methods of 
complying with the maintenance of effort requirements, the temporary 
limitation on the sponsors' flexibility to curtail plan benefits or to 
enhance executive nonqualified plan benefits is both justified and 
fair.
    The genius of the bill is that it provides temporary funding relief 
without undoing the principles of the Pension Protection Act, which 
were designed to ensure that defined benefit pension plans were better 
funded. Under the bill, no employer would be allowed to make 
contributions for 2009 and 2010 that are less than those made for prior 
years. And no liabilities will be hidden; that is, the accounting 
statements made on behalf of the plan will fully reflect the value of 
the liabilities and the longer time period during which sponsors will 
fund them.
    Further, the changes that the bill does make to the PPA will help 
sponsors maintain better funded defined benefit pension plans. All of 
the temporary and permanent changes to the PPA are well-designed to 
make plan funding more predictable and affordable, making it much more 
likely that sponsors will be able to maintain their defined benefit 
pension plans in the long run. By doing so, the bill improves the 
financial outlook of the plan sponsors and the Pension Benefit Guaranty 
Corporation.
    For all of these reasons, NEA fully supports the Pomeroy proposal 
and intends to advocate vigorously for the bill's enactment. We urge 
the members of the Ways and Means Committee to pass it expeditiously.
    Thank you for the opportunity to submit these comments.

                                 
          Statement of the North Dakota Education Association
    The North Dakota Education Association (NDEA) respectfully submits 
these comments to the Committee on Ways and Means for the record in 
conjunction with the October 1, 2009 hearing on defined benefit pension 
plan funding levels and investment advice rules.
    The NDEA is firmly in support of legislation being drafted by 
Representative Pomeroy that will provide desperately-needed funding 
relief to defined benefit pension plans in the private sector. 
Representative Pomeroy's proposed legislation will provide necessary 
and appropriate relief to both single and multi-employer pension plans. 
The recently-enacted Pension Protection Act (PPA) did not envision the 
cataclysmic melt down of financial institutions and investments. 
Through no fault of their own, trustees of private pension plans saw 
their funds depleted by as much as 40 percent. The strict requirements 
of the PPA could cause the closure not only of many pension funds, but 
the closure of many private businesses and non-profit organizations 
that are responsible for these pensions. Such events could not only 
exacerbate the wounds inflicted upon the nation's economy, but they 
could also slow down efforts in speeding up the economic recovery.
    The NDEA participates in the NEA Pension Fund, a private, multi-
employer defined benefit plan. The required contributions to keep this 
plan solvent have forced us to radically reduce our budget for the 
2009-2010 fiscal year. Projected increases for the 2010-2011 year, up 
to 37percent of payroll, could force us to reduce staff. We know that 
our experience is similar to all other companies that are trying to 
maintain this valuable benefit for their employees.
    Representative Pomeroy's proposal will grant the trustees of 
pension plans the ability to segregate these once-in-a-century losses 
in a way that will grant employers time to recoup the losses without 
damaging the pension plans. Time is the friend of all pension plans, 
and Representative Pomeroy's plan gives employers the time necessary to 
recover from the unforeseen and unprecedented losses of 2008-2009. This 
temporary relief comes in the form of two alternatives, either of which 
employers are free to choose: (1) an option to defer for two years the 
amortization of the shortfalls occurring in 2009 and 2010; or (2) an 
option to amortize the shortfalls occurring for the first time in 2009 
and 2010 separately over a fifteen-year period. The NDEA is especially 
supportive of the second alternative because it will provide greater 
relief for sponsors' contribution obligations in the earlier years.
    The NDEA is in strong support of the bill's temporary funding 
relief for multi-employer plans. Under this plan employers would be 
permitted to elect voluntarily during 2009 or 2010 either: (1) to 
restart the amortization of unfunded liabilities over a thirty-year 
period; or (2) to establish a separate amortization base for investment 
losses recognized from the fall of 2008 through the fall of 2010 and to 
fund this liability over a thirty-year period.
    The ``maintenance of effort'' provisions of the proposed 
legislation are especially important for pension relief and viability. 
These provisions encourage and allow plan sponsors to keep their 
benefit promises to employees, while fixing the long-term problem. The 
temporary limitation on plan sponsors' flexibility to diminish plan 
benefits or to enhance executive nonqualified benefits is equitable and 
fair.
    What makes Representative Pomeroy's bill so powerful and just is 
that it provides necessary pension funding relief without undoing the 
principles of the PPA. The PPA is still intact and pension plans are 
allowed to recover from the harsh economic events of 2008-2009. 
Employer contribution levels cannot be reduced from prior years. And 
the transparency for pension plans required by the PPA will still be 
intact.
    Congressman Pomeroy's proposed legislation will prevent further 
economic damage from the investment and banking problems of 2008-2009. 
It will allow plans to recover without violating or vitiating the 
effects of the PPA.
    The NDEA wishes to go on record in support of the Pomeroy proposal. 
We urge the members of the Ways and Means Committee to pass this bill 
as quickly as possible.
    We appreciate the Committee's prompt attention to this critical 
issue.

                                 
       Statement of the Pennsylvania State Education Association
    The Pennsylvania State Education Association (PSEA) respectfully 
submits these comments to the Committee on Ways and Means for the 
record in conjunction with the October 1, 2009 hearing on defined 
benefit pension plan funding levels and investment advice rules.
PSEA and Pension Plan Funding
Background
    PSEA's mission is to advocate for strong effective schools on 
behalf of our membership of 191,000 public school teachers, educational 
support professionals, healthcare workers, retired educators, and 
students preparing to become educators. Both our members and staff 
appreciate the value and security of a traditional final average pay 
defined benefit (DB) pension plan. PSEA is a committed DB pension plan 
sponsor, with a pension plan designed to appeal to all employees.
    Prior to the Pension Protection Act (PPA), our normal cost for 
pension benefits (not including plan expenses) was $2.6 million, or 11% 
of payroll. With the advent of PPA, our normal cost increased by $1.5 
million to $4.1 million, or 17% of payroll. Given our annual budget of 
approximately $60.0 million, this increase is significant, however, it 
has not served to make our plan unsustainable.
Concern
    PSEA's most significant pension issue is the potential for annual 
volatility in our funding requirements due to the methods and 
procedures required by PPA for recognition of pension funding 
shortfalls. Based on the recent downturn in the investment markets, we 
have seen just how quickly the tide can turn. As of July 1, 2007, our 
pension plan's Funding Target Attainment Percentage (FTAP) was 100.6%. 
One year later at July 1, 2008, our FTAP had dropped to 94.4%, and our 
most recent valuation indicates a July 1, 2009 FTAP of 94%. While these 
funded levels may sound higher than those generally being reported in 
the press, it is only because we have made extraordinary contributions 
on the order of 50% of payroll for the past two years in order to 
maintain these funding levels ($12.75 million contributed in the period 
from July 1, 2007 to June 30, 2008, and $11.9 million contributed in 
the period from July 1, 2008 to June 30, 2009). Since July 1, 2009 we 
have been contributing over $1 million per month in order to continue 
to address the funding shortfall in our pension plan. A recent funding 
projection indicates that our minimum requirement will be nearly $8 
million per year as we continue to pay down the shortfall. These 
extraordinary contributions are not sustainable and have significantly 
reduced our reserves to precarious levels.
Organizational Impact
    We hope that two things are evident from the above. First, PSEA has 
and continues to responsibly fund its pension plan in an attempt to 
close the funding shortfall, and second, the recent levels of 
extraordinary contributions are not sustainable within our annual 
budget. PSEA maintains a DB pension plan in order to attract high-
quality staff who will carry out the mission of our organization. 
However, based on recent circumstances, maintaining and managing our 
pension plan has become a mission in and of itself and has severely 
limited our ability to carry out the organization's mission. The 
following are examples of organizational cutbacks and postponements 
that have been made in direct response to increased pension funding 
requirements:

          PSEA has placed all capital improvement projects on 
        hold including $3 million in projects that were budgeted for 
        the 2008-2009 fiscal year. The capital improvements placed on 
        hold include shovel ready construction projects for which 
        numerous contractors had submitted bids.
          PSEA has eliminated a number of staff positions and 
        carefully considers each vacant position to determine whether 
        or not it will be filled.
          PSEA cut the 2008-2009 budget by $1.8 million in the 
        middle of the fiscal year to provide additional resources to 
        fund the pension plan. The cuts were across the board.

    These are just a few examples to highlight the fact that the funds 
previously allocated to staff positions, capital projects, and other 
expenditures are now being directed to the pension plan and are not 
being used to stimulate the economy, and to create jobs within PSEA and 
within the state.
Pomeroy Proposal
Background
    In late 2008, the Worker, Retiree and Employer Recovery Act (WRERA) 
was enacted, providing DB pension plan sponsors with some temporary 
relief from the extraordinary market losses that occurred in 
conjunction with the new and untested PPA funding rules. WRERA 
undoubtedly preserved jobs and was a lifeline to some companies that 
maintain DB pension plans. However, the hoped-for recovery in the wider 
economy has not happened yet, leaving DB plan sponsors still facing the 
difficult position of downward pressure on revenue and significant 
increases in pension funding requirements.
    Thus, we were pleased to review the discussion draft of 
Representative Pomeroy's proposal for pension funding relief. In our 
view, the proposal will allow DB pension plan sponsors the ability to 
maintain their plans, which is a win/win/win situation for plan 
sponsors, plan participants, and also very importantly for the Pension 
Benefit Guaranty Corporation (PBGC), since healthy plan sponsors are a 
source of premium income for the PBGC and do not add to the PBGC's 
liability. We will focus on the two provisions of the Pomeroy proposal 
that would provide PSEA with the greatest short-term flexibility in 
dealing with the pension funding shortfall, while allowing us to 
establish a sustainable long-term pension funding strategy in 
conjunction with carrying out our organization's mission. Neither of 
the provisions change the underlying concepts of PPA; both are 
pragmatic responses to unprecedented events in modern times for DB 
pension plan sponsors.
Amortization Period
    Under PPA, losses occurring in a given year are amortized and 
funded over a 7 year period. In the event of swift and significant 
asset losses such as has occurred recently, the annual amortization 
payments needed to pay off the losses can reach levels that cause 
extreme stress on the sponsoring organization. Pension plan funding is 
a long-term proposition, and the 7 year period specified in PPA is 
simply an arbitrary number--other numbers that are not inherently 
better or worse could have been selected. Section 101 of the Pomeroy 
proposal offers plan sponsors alternate amortization options and 
requires ``maintenance of effort'' on the part of the plan sponsor. We 
strongly support both components and will address them in turn below.
    A longer amortization period results in a lower annual payment, at 
the cost of higher total contributions overall. It is important to note 
that extending the amortization period does not change the amount of 
the initial shortfall--no liability is being removed or avoided. This 
situation is similar to the mortgage on a house, where increasing the 
term of the loan results in lower payments each month, with a higher 
total amount paid over time due to additional interest charges. 
However, the length of the loan and the total amounts paid over time do 
not change the original purchase price of the house.
    The ``maintenance of effort'' requirement on the part of the plan 
sponsor is an important component of this section that protects the 
retirement security of plan participants. This provision also protects 
the PBGC in that it does not allow troubled plan sponsors to curtail 
benefit accruals and extend amortization periods to simply defer 
contributions and get deeper in the hole prior to turning the plan over 
to the PBGC.
    In the case of the PSEA Pension Plan, where benefit accruals are 
ongoing, the optional extension of amortization period would move us 
from a situation where we pay our normal cost each year plus an 
amortization payment that severely stresses the organization, to a 
situation where we pay our normal cost each year plus a lower and more 
manageable amortization payment that extends over a greater number of 
years.
Asset Smoothing
    Prior to PPA, pension plan sponsors commonly ``smoothed'' annual 
investment gains and losses by recognizing them on a pro rata basis 
over a 5 year period. In doing so, the smoothed asset value used to 
determine the contribution requirement progressed each year with much 
less volatility than in the underlying market value of assets. The 
prior rules limited the smoothed asset value to a range of 80% to 120% 
of the market value of assets.
    Under PPA, the maximum period for smoothing annual investment gains 
and losses was reduced from 5 years to 3 years, and the allowable 
corridor around market value was reduced from 80%/120% to 90%/110%. 
Both of these changes significantly increase the volatility in the 
smoothed asset values that will emerge in future years.
    Section 102 of the Pomeroy proposal expands the corridor to 80%/
120% for the 2009 and the 2010 plan years. The 80%/120% corridor was in 
existence for decades and worked well during that time. The proposal 
does not change the 3 year smoothing period, and does not change the 
ultimate goal of PPA, rather it allows plan sponsors short-term relief 
to cope with the existing shortfalls and to phase in the provisions of 
PPA. We strongly support this phase-in to PPA asset smoothing.
Conclusion
    Under either the current PPA rules or the Pomeroy proposal, PSEA 
will pay our normal cost each year and will make positive progress each 
year toward paying down our unfunded liability. The fundamental 
question is one of speed--is one time frame superior to the other?
    In the current economic climate we do believe so. Under the PPA 
rules we will pay down our unfunded liability more quickly, at the cost 
of staff reductions and delayed capital investments. Under the Pomeroy 
proposal, we will pay down our unfunded liability over a longer period, 
freeing up current funds to carry out our core mission.
    Given that we will be continually reducing our unfunded liability 
in either scenario, we do not believe that our plan poses a greater 
risk to the PBGC under the Pomeroy proposal than under the current 
rules. On the contrary, we believe that over the long term, the 
macroeconomic benefits of having PSEA and other DB plan sponsors invest 
in our people and our businesses will be more beneficial to society and 
to the PBGC than if we curtailed our programs in order to meet 
specified short-term pension funding thresholds.
    For all of the reasons discussed in our comments above, PSEA fully 
supports the Pomeroy proposal. We urge the members of the Ways and 
Means Committee to pass the bill expeditiously in order to provide 
greatly needed short-term flexibility and relief to DB pension plan 
sponsors, thereby allowing for a renewed focus on our mission in 
conjunction with setting a sustainable long-term strategy for pension 
plan funding under PPA.
    Thank you for the opportunity to submit these comments.

                                 
    Statement on Investment Advice and Defined Benefit Plan Funding
    The U.S. Chamber of Commerce and the National Association of 
Manufacturers would like to thank Chairman Rangel, Ranking Member Camp, 
and Members of the Committee for the opportunity to provide a statement 
for the record. The issues raised at today's hearing--defined benefit 
funding and investment advice--are crucial to the continued success of 
the private retirement system.
    The U.S. Chamber of Commerce is the world's largest business 
federation, representing more than 3 million businesses and 
organizations of every size, sector, and region. More than 96 percent 
of the Chamber's members are small businesses with 100 or fewer 
employees, 71 percent of which have 10 or fewer employees. Yet, 
virtually all of the nation's largest companies are also active 
members. We are particularly cognizant of the problems of smaller 
businesses, as well as issues facing the business community at large. 
The Chamber has substantial membership in all 50 states.
    The National Association of Manufacturers is the nation's largest 
industrial trade association representing small and large manufacturers 
in every industrial sector and in all 50 states. The NAM's mission is 
to advocate on behalf of its members to enhance the competitiveness of 
manufacturers by shaping a legislative and regulatory environment 
conducive to U.S. economic growth and to increase understanding among 
policymakers, the media and the general public about the vital role of 
manufacturing in America's economic and national security for today and 
in the future.
    The success of the current employer-provided retirement system is 
evident in the numbers. In 2007, private employers spent $199.9 billion 
on retirement income benefits.\1\ 81.9% of eligible employees 
participate in their 401(k) plan.\2\ By 2008, 55.1% of all plans and 
70.5% of plans with 1,000 or more employees permitted immediate 
participation in their 401(k) programs, up from 24% of plans in 
1998.\3\ Defined benefit retirement plans cover 43.8 million 
participants. Moreover, defined contribution plans have been on the 
rise, and now cover 79.8 million participants, up from 47 million in 
1995.\4\
---------------------------------------------------------------------------
    \1\ EBRI Databook on Employee Benefit, includes both defined 
benefit and defined contribution plans.
    \2\ Profit Sharing/401(k) Council of America survey of 1,011 plans 
with more than 7.4 million participants and $730 billion in plan 
assets.
    \3\ Profit Sharing/401(k) Council of America survey of 531 
companies of all sizes and region.
    \4\ PBGC Pension Insurance Data Book 2007, and BLS Abstract of 2006 
form 5500 published in December 2008.
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    Nonetheless, the current economic environment has created specific 
challenges for employers that want to maintain retirement plans. In 
addition to complying with the normal set of rules and regulations, 
plan sponsors must make tough decisions about their retirement plans 
and their businesses based primarily on economic survival. Therefore, 
the more certainty that plans sponsors have about the rules surrounding 
retirement plans, the better they will be able to make these important 
decisions.
    The hearing today focuses on two areas where plan sponsors need 
greater certainty. Defined benefit funding relief is a direct result of 
the financial crisis and the issue that requires the most immediate 
attention. Without definitive action from Congress, plan sponsors must 
take action based on the current law. Issuance of regulations 
pertaining to investment advice is necessary to provide certainty about 
the rules to plan sponsors and to provide participants with information 
useful in making decisions about their plan investments. Thus, we urge 
Congress to maintain the investment advice provisions under the Pension 
Protection Act of 2006 (``PPA'') and encourage the Department of Labor 
to issue final regulations.
Defined Benefit Plan Sponsors Need Funding Relief
    On August 17, 2006, the Pension Protection Act of 2006 (``PPA'') 
was signed into law. The act fundamentally changes the funding rules 
for both single-employer and multiemployer defined benefit plans. A 
major impetus behind the PPA funding rules was to increase the funding 
level of pension plans. Consequently, most plan sponsors entered 2008 
fully ready to comply with the new funding rules and based contribution 
estimates on these rules. However, the severe market downturn at the 
end of 2008 drastically changed the situation.
    At the beginning of 2008, the average funded level of plans was 
100%. Data from a study published by the Center for Retirement Research 
at Boston College \5\ indicates the following as of October 9, 2008:
---------------------------------------------------------------------------
    \5\ ``The Financial Crisis and Private Defined Benefit Plans'' 
(November 2008, Number 8-18), Alicia H. Munnell, Jean-Pierre Aubry, and 
Dan Muldoon.

          In the 12-month period ending October 9, 2008, 
        equities held by private defined benefit plans lost almost a 
        trillion dollars ($.9 trillion).
          For funding purposes, the aggregate funded status of 
        defined benefit plans unpredictably fell from 100% at the end 
        of 2007 to 75% at the end of 2008. (See footnote 5 of the 
        study).
          Aggregate contributions that employers will be 
        required to make to such plans for 2009 could almost triple, 
        from just over $50 billion to almost $150 billion.

    Various reports showed that as a result of the unprecedented 
downturn in virtually all the investment markets, across the board, 
pension funding ratios fell significantly. In addition, corporate bond 
interest rates fell dramatically during December of 2008, triggering a 
significant increase in pension liabilities.
    In December of 2008, Congress took an important first step by 
passing The Worker, Retiree, and Employer Recovery Act of 2008 
(``WRERA'') which provided needed technical corrections. However, the 
business community was very clear that additional legislative relief 
would still be necessary to fully address the economic downturn and its 
impact on employee retirement plans.
    Third quarterly payments for the unexpectedly high 2008 
contribution requirements are due on October 15 and fourth quarterly 
payments are due January 15, 2010. Moreover, even with the relief 
provided by WRERA and the regulatory flexibility provided by the 
Treasury Department, minimum contributions requirements for 2009 and 
2010 will still significantly exceed the minimum contribution 
requirements for 2008.\6\
---------------------------------------------------------------------------
    \6\ According to a Watson Wyatt study, plans that used the relief 
under both WRERA and the Treasury Department guidance will have minimum 
contribution requirements in 2010 that will be triple the contribution 
required in 2008. For plans that cannot use the Treasury relief, the 
minimum required contributions are almost triple for both 2009 and 
2010. (Watson Wyatt 
Insider, April 2009--http://www.watsonwyatt.com/us/pubs/insider/
showarticle.asp?ArticleID=20
942).
---------------------------------------------------------------------------
    Because of the importance of this issue to workers' retirement 
security and the overall U.S. economy, we continue to urge Congress to 
adopt follow-up, temporary provisions that will ease cash flow 
constraints and make contributions more predictable and manageable in 
2009 and 2010. We believe that relatively modest temporary changes can 
provide greater stability and improved chances of economic recovery for 
many companies, non-profits, and charitable organizations.
    We encourage Congress to implement funding relief without attaching 
conditions that could ultimately hurt the defined benefit system. 
Requiring a maintenance of effort as a condition of receiving relief 
will limit the legislation in two ways. First, many companies will 
choose to forego the relief due to concern that if economic challenges 
continue they will be unable to meet the obligations set forth by 
Congress. Secondly, and more importantly, a maintenance of effort 
provision jeopardizes the voluntary nature of the defined benefit 
system that has served employers and workers so well. If companies 
believe that the government might eliminate a company's ability to 
change or suspend its pension plan down the road, they will be more 
reluctant to continue their current defined benefit plans and certainly 
unlikely to begin a new defined benefit plan. Other efforts to penalize 
companies through executive compensation restrictions or targeting some 
companies over others will not achieve the intended effect, which is in 
fact to protect and encourage continuation of employer-provided 
retirement plans.
    Without further legislative action, these unexpected funding 
requirements will continue to require that companies choose between 
funding their pension plans (which are long-term obligations) and 
laying off workers, closing plants, and postponing capital investments. 
This could result in increased unemployment and more harm to the 
economy.
Current Investment Advice Provisions Should be Maintained
    The PPA modernized ERISA by better enabling employers to provide 
workers with access to investment advice pertaining to their retirement 
plan. Defined contribution plans, which largely did not exist when 
ERISA was enacted in 1974, require greater employee participation than 
traditional defined benefit plans, in which the employer pays for the 
entire benefit and takes on investment risk. With defined contribution 
plans, employees make investment decisions and take on that risk. 
Clearly, the need for education and advice on how to invest that money 
is an important complement to the defined contribution retirement 
model.
    In light of the financial crisis of the past year, it is more 
important than ever for participants to have access to professional 
investment advice. The provisions in the PPA will allow plan sponsors 
to more easily provide employees access to investment advice from 
regulated professionals. To reduce the potential for a conflict of 
interest should the retirement plan service provider also be the 
provider of investment advice, the legislation requires disclosure of 
fees as well as any potential conflicts.
    The PPA was a negotiated compromise between all interested parties. 
While we were not in agreement with all of the provisions implemented, 
we have agreed to maintain the compromises as negotiated. We urge 
Congress to do the same. As such, no legislative changes should be made 
to the investment advice provisions under the PPA and the Department of 
Labor should be encouraged to issue and implement final investment 
advice regulations.
Conclusion
    The current economic situation has put a significant strain on the 
employer-provided retirement system. Therefore, plans sponsors and 
participants need certainty about the rules surrounding retirement 
plans to make appropriate decisions. We appreciate the opportunity to 
share our thoughts and concerns with you and look forward to future 
discussion on this issue.

                                 
          United Jewish Appeal-Federation of New York, letter
Dear Chairman Rangel:

    UJA-Federation of New York is the largest Jewish communal 
philanthropy in New York State and in the nation. Last year, despite a 
severe national recession that reduced contributions to our annual 
campaign by over 11 percent we were still able to raise $215 million in 
support of our mission to care for those in need and strengthen the 
Jewish community. A significant portion of the money we raise supports 
the work of 100 health and human service and community agencies within 
our catchment area of New York City, Long Island and Westchester 
County. These agencies include Jewish Home Lifecare, Metropolitan 
Council on Jewish Poverty, Jewish Board of Children and Family 
Services, as well as many Jewish community centers and councils. As you 
know, our agency network provides services to all individuals and 
families that request their assistance.
    For the last 58 years, UJA-Federation has maintained a multiple-
employer, defined benefit plan that includes 39 of our affiliated 
agencies as participants. Through this defined benefit plan we provide 
approximately 10,000 current and former employees with the assurance of 
retirement income, providing them sufficient income in their retirement 
years to maintain a suitable standard of living.
    Unfortunately, the severe economic recession of the past two years 
threatens the future of UJA-Federation's defined benefit pension plan. 
From a base of $16 million our contribution this year will rise to 
$21.3 million, an increase of $5.3 million. Without plan changes or 
federal pension relief legislation our annual pension payment is 
expected to rise to $27 million per annum for the following several 
years, $11 million--nearly 70%--more than our base contribution of 
previous years. These increased payments are simply unaffordable. Given 
this reality, UJA-Federation must consider all options including 
seeking federal legislative relief (e.g. spreading payments over a 
longer period of years) and reducing the future benefits of both 
current employees and employees newly enrolled in our pension plan. 
Doing nothing is not an option as the increased cost of our defined 
benefit plan left unaddressed would significantly impair our charitable 
mission to help those who are poor and vulnerable and place UJA-
Federation and its agency system in financial peril.
    We look forward to working with you and the other members of the 
House Ways and Means Committee to address the difficulties now faced by 
defined benefit pension plans in both the private and non-profit 
sectors.

            Sincerely,

                                                 Irvin A. Rosenthal
                                            Chief Financial Officer

                                                        Ron Soloway
                                                  Managing Director
                                  Government and External Relations

                                 
       United Jewish Communities of Metro West New Jersey, letter
Dear Honorable Chairman Rangel:

    Imagine not helping a person who lost his job and was so 
embarrassed he didn't tell his wife as he went to work each day, 
briefcase in hand. The ensuing marital discord, compounded by lack of 
income, needs the professional services provided by our agencies. Yet, 
because of the drain on our resources stemming from the current pension 
funding requirements, we will be forced to cut counseling and 
employment services.
    I am Max Kleinman, chief executive officer of the United Jewish 
Communities of MetroWest, New Jersey (``UJC''), and I write to urge 
Congress to pass meaningful defined benefit pension plan funding relief 
legislation so that UJC can continue to serve community needs and 
retain its valuable employees.
Who We Are and What We Do in the Communities
    United Jewish Communities of MetroWest New Jersey is the Jewish 
federation serving New Jersey's Essex, Morris, Sussex, and parts of 
Union counties. Our federation is ranked as the ninth largest in North 
America, representing a community of over 90,000 Jews who are part of 
the more than 1.4 million people who live in our service area.
    UJC is the largest Jewish philanthropy in New Jersey. Our United 
Jewish Appeal campaign raised over $20 million in 2009 (significantly 
reduced from almost $24 million in 2008, prior to the economic 
downturn). As a Jewish federation, we are the central fundraising 
organization on behalf of Jewish community needs locally and abroad. 
Locally, we fund our network of agencies directly, and we are their 
largest source of philanthropic support. Our major local beneficiary 
agencies include a nursing home, Jewish community center, vocational 
and family service agencies, and Jewish educational institutions. 
Through our agencies and program services delivered directly by our 
organization, the UJC serves as a focal point for Jewish community life 
in our area. Many of our agencies serve the general community, in 
addition to the Jewish community. Indeed, we seek and find common cause 
with peoples of all faiths.
    The UJC and its partner agencies employs more than 2,000 full- and 
part-time employees to help the young, the old, the poor, the needy, 
the hungry, the homeless, and those seeking a sense of community and 
purpose in their lives. Our committed employees accept modest pay and 
benefits for helping others.
    In addition to supporting our local beneficiaries financially, the 
UJC provides a variety of shared services to the agencies, including 
benefits plans (e.g. including our pension plan and also health 
insurance), human resource management functions, payroll services, 
accounting services, information technology services, and facilities 
management.
Specific Impacts of Excessive Pension Plan Costs
    During this period of economic decline and uncertainty, our 
services are in greater demand than ever, and our resources (both 
people and assets) are in dangerously short supply. Without meaningful 
funding relief, the UJC and its partner agencies will be forced to 
permanently freeze our pension plan, and further reductions in services 
to the community may become necessary.
    Examples of some of the reductions in services that have already 
been, and may become, necessary, due in part to the increases in plan 
funding requirements, include:

          A decrease in counseling and employment services due 
        to staff cuts and reduced financial aid
          Budget reductions that eliminate or postpone 
        administrative support services and needed facility maintenance 
        projects
          Reduction in Holocaust survivor education programs
          Reduction in, or possible elimination of, support 
        services for Holocaust survivors
          Reductions in home-based social work and advanced 
        nursing services for at-risk seniors
          Reduction in the delivery mode for dental services 
        for nursing home residents
          Reduction in fitness program subsidies for seniors
          Elimination of community-based adult day-care center
          Significant reductions in rent subsidies available 
        for the poor
          Reduction in programs for the developmentally 
        handicapped
          Reductions in scholarships and electives available 
        for students at our Jewish Day School
          Curtailed community inter-group relations outreach 
        programs

    The UJC and its partner agencies have worked extremely hard to 
minimize the adverse impact on services resulting from these pension-
funding increases, by reducing administrative functions, deferring 
maintenance and spending down reserves. But these strategies will only 
increase our costs in the long term.
What Has Happened to Our Plan
    As part of our remuneration, UJC and its partner agencies provide a 
modest defined benefit pension plan, which until recently provided 
pensions of approximately one percent of final average pay times years 
of service. Before the Pension Protection Act of 2006 (the ``PPA'') 
become effective in 2008, our pension plan had been fully funded for 
many years, thanks in large part to careful stewardship and 
consistently above-average returns on investments. Although we 
continued to reserve cash for contingencies, we were not required to 
contribute to the plan because the plan was fully funded as defined by 
law.
    Suddenly in 2008, due largely to the changes required by the PPA, 
our plan went from being 108% funded, with no required annual 
contribution, to being 97% funded and requiring a $1.3 million employer 
contribution, which represents an increase of four percent (4%) in 
payroll costs. This additional cost directly hurt our ability to 
deliver services, which was equivalent to losing approximately 20-25 
employees. Vacant employee positions were left unfilled and our 
employees--already stretched too far--were stretched to the limit. 
Budget cuts were inevitable, and more will be needed without pension 
relief legislation.
    For the fiscal year beginning July 1, 2009, the UJC was forced to 
reduce its support of local and overseas charitable organizations by 
19%, because of the decline of our fundraising campaign in the face of 
the financial market meltdown. In addition to reductions in our 
external philanthropic support, our organization trimmed its own 
internal operating budget by approximately 11%, including reductions in 
force, involuntary furloughs for employees, and salary reductions for 
management staff.
    In 2009, due to the market crash and the oppressive burdens of the 
PPA, the costs of our plan put our organizations in greater financial 
peril. For the 2008-2009 plan year, our plan assets declined 30% or $10 
million, from $37.6 million to $25.7, and our plan's funding percentage 
further declined to 80%, which would have resulted in annual 
contributions increasing 266% to $3.2 million, a $2 million increase.
    In the face of the dramatic cuts in budget and staff, the 
organization could not tolerate the higher pension funding 
requirements. The PPA left us and our agency partners no choice but to 
freeze the plan for the vast majority of the covered employees, as of 
July 1, 2009.
    Even with the plan freeze, we have been forced to require 
substantial furloughs of employees, which, in turn, has reduced 
services (some of which are described above), made life that much 
harder for those we serve and our employees, and, last but not least, 
made it substantially harder for employees who have dedicated their 
lives to serving the community to have secure retirements.
Where Do We Go From Here
    Unlike many companies that have frozen their pension plans with no 
prospect or intent to ``unfreeze'' them, we continue to hope that 
Congress will provide us with legislative relief that will allow us to 
unfreeze our pension plan. We recognize our responsibility to fully 
fund our plan--indeed, we have done so for many years. However, it will 
take time to recover the $13 million of plan assets lost over the past 
two years, which will restore our plan to full funding.
    If Congress were to pass legislation giving us more time to 
amortize our 2008 investment losses and our unfunded liabilities, and 
give us more leeway to smooth assets to absorb the short-term upheavals 
in the markets, we would like to unfreeze our plan, and possibly 
consider restoring some, if not all, of the benefits that have been 
lost during the freeze.
    Our actuaries have considered the potential impact of Congressman 
Pomeroy's proposal on our plan. If both asset smoothing (i.e., widening 
the permitted deviation between the actuarial value and market value of 
assets from 10% to 20% of market value) and permitting 9-year 
amortization of 2008 losses, with interest-only payments in the first 
two years were enacted, it would provide much needed relief to our 
organizations and would help us overcome the difficult combination of 
drastic changes in the law and crippling losses in the markets. Any 
diminution of Congressman Pomeroy's proposal for pension funding relief 
will seriously impair our ability to deliver critical services.
    Please contact Howard Rabner, our Chief Operating Officer/Chief 
Financial Officer, if you have further questions regarding our 
situation.
    Thank you your help on behalf of the UJC, its partner agencies, and 
the more than 1.4 million people in our central New Jersey service 
area.

            Sincerely,

                                                    Max L. Kleinman
                                            Chief Executive Officer
                                 
                    Statement of YRC WORLDWIDE, INC.
    YRC Worldwide, Inc. is one of the nation's largest trucking 
companies. We employ approximately 45,000 men and women in the United 
States, the majority of whom are members of the International 
Brotherhood of Teamsters. We provide good middle class jobs with strong 
wages, health care, and a pension. YRCW has approximately 700,000 
customers, including the Department of Defense and FEMA. In 2008, YRCW 
generated $22.1 billion in total output, employment for 141,158 
workers, and $2.8 billion in total tax revenues for federal, state, and 
local governments. The Company transported goods valued at 
approximately $202 billion or 1.4 percent of GDP. In addition, YRCW 
contributed approximately $540 million to 36 multiemployer pension 
plans to provide pension benefits to more than 1.2 million active and 
retired Teamster members.
    In the hearing notice, the Chairman pointed out that many companies 
that sponsor defined benefit plans ``may find themselves simultaneously 
struggling to navigate an economy during a severe downturn with 
decreased cash flow and less access to credit while having to make up 
for significant losses incurred in the pension trusts that fund their 
workers' pension benefits.'' For companies that are part of the 
trucking and grocery industries, the problems are even more acute.
    Prior to the start of the recession, the Company had delivered 
record earnings and operating margins. Since the freight recession 
began in the second half of 2006, however, the Company has gone from 
producing strong earnings to significant losses. In this exceptionally 
difficult business environment, YRCW now faces three inter-related 
problems in meeting its pension obligations: The Company funds the 
benefits of, and effectively acts an insurer or guarantor for, hundreds 
of thousands of workers who never have worked for YRCW (``non-sponsored 
retirees''); the multiemployer plans to which we have been contributing 
have suffered significant investment losses; and we face a worsening 
demographic challenge as fewer workers support the pension obligations 
of more and more retirees. Given our significant pension obligations, 
the downturn in business volume in the current economic environment has 
had especially adverse consequences for the Company. In short, our 
contribution burden has now grown to an unsustainable level as our 
business continues to suffer from the global economic meltdown.
    Working with the Teamsters, we are doing what we can through self-
help measures to address the challenges we face. Since the beginning of 
the year, for example, our union and non-union employees have agreed to 
a 15% reduction in wages. Management has done so as well. In addition, 
YRCW has taken other steps to improve the company's cash flow and 
liquidity, including selling off excess property, consolidating back-
office functions, and reducing overhead. In addition, we have 
temporarily terminated our participation in our largest plans for 18 
months in order to preserve our cash flow. At the same time, the 
multiemployer plans to which the Company has contributed also have 
taken self-help measures to address the solvency challenges they face.
    But unless Congress provides legislative relief this year, many of 
the pension plans to which YRCW has been contributing will eventually 
become insolvent. When that occurs, the Pension Benefit Guaranty 
Corporation (PBGC) will be responsible for the pension obligations of 
the hundreds of thousands of participants in the plans.
    How did we get here? In 1980, Congress enacted two bills that, 
albeit seemingly unrelated, have together over time created 
unsustainable pension plan obligations for YRCW and other successful 
freight carriers. The Motor Carrier Act deregulated the trucking 
industry, while the Multiemployer Pension Plan Amendments Act (MPPAA) 
imposed an exit penalty on companies upon their withdrawal from 
multiemployer pension plans, including companies in the trucking 
industry. As a result of MPPAA, a company that withdraws from a 
multiemployer plan must pay its fair share of liability to fund the 
plan's unfunded vested benefits.
    Although seemingly similar, ``termination'' liability and 
``withdrawal'' liability are fundamentally different legal concepts, 
and have had fundamentally different impacts in the real world. Prior 
to the enactment of MPPAA, if a multiemployer plan had a declining base 
of contributing employers, the remaining employers were required to 
absorb a greater share of the funding costs of benefits for non-
sponsored participants, i.e., plan participants previously employed by 
former contributing employers. Similarly, if a multiemployer plan 
terminated because of a substantial decline in its contribution base, 
only the companies remaining in the plan at the time of termination 
were required to pay termination liability to the PBGC. This often 
resulted in a race to the exits by companies wishing to avoid 
termination liability upon the plan's termination.
    By substituting ``withdrawal liability'' for ``termination 
liability'' in MPPAA, Congress sought to provide some measure of 
protection for companies remaining in multiemployer plans. The 
rationale for the change was that, if a company had to pay a fee upon 
withdrawal, remaining employers would be less exposed and less inclined 
to race to exit the plan. But the legislation had a perverse effect 
instead: by imposing an exit penalty upon withdrawing companies, MPPAA 
acted as a deterrent to new companies entering into multiemployer 
agreements. The impact was particularly dramatic in a contracting 
industry such as the freight carrier industry.
    As a result of the interplay of the two statutes, of the thousands 
of carriers in business in 1979, only a few are left to principally 
fund multiemployer pension plans today. This has created a crippling 
financial obligation that could lead to massive job losses and health 
care and pension benefits losses for hundreds of thousands of active 
and retired workers. To put the impact of the legislation in 
perspective, we have appended to our statement a list of the top 50 LTL 
carriers that were in business in 1979 and the handful left in business 
today, two of which are now part of YRCW and two of which have dropped 
out of the top 50.
    In short, as an unintended consequence of the 1980 legislation, 
YRCW now supports hundreds of thousands of workers who never worked for 
YRCW. In fact, we have contributed more than $3 billion towards their 
benefits. Employer bankruptcies and recent investment losses are 
crippling the multiemployer plans to which YRCW has been contributing. 
As a result, YRCW's contribution burden has become unsustainable and 
many pension funds are headed for insolvency.
    Many plans have been forced to implement both benefit reductions 
and contribution increases as a result of the collapse in equities and 
the requirements of the Pension Protection Act. Many plans are 
``mature'' plans in which retirees receiving benefits heavily outnumber 
participating active employees and where contributions already fall 
well short of paying benefits, requiring significant investment 
earnings each year to maintain their funding level. By themselves, 
these circumstances likely will require every multiemployer plan to 
make some kind of draconian adjustment for 2009 and beyond. Plans that 
are fully funded or nearly fully funded will likely be required to 
reduce the level of benefits they provide. Plans that are operating 
under an amortization extension, funding improvement plan or 
rehabilitation plan likely will be required to further reduce benefits 
or increase contributions or both for 2009 and beyond.
    The failure of a major employer, such as YRCW, will exacerbate 
these problems. When a contributing employer fails, the plan loses the 
contributions attributable to the employer both for the current year 
and for the purposes of its actuarial calculations. Only a small 
percentage of withdrawal liability--the amount the defunct contributors 
owe for prior year benefits--is ever recovered in bankruptcy. The plan 
suffers an immediate reduction in actives and often a substantial and 
immediate increase in retirees, increasing its annual benefit payments 
and making it more dependent on investment income. Required adjustments 
become correspondingly greater. Contributions will need to be higher. 
Cuts will need to be deeper.
    In a multiemployer plan, when one employer fails, the benefit 
obligations are shifted to the surviving employers, who must bear the 
burden not only for current participants but also for the new non-
sponsored retirees. For members of the Teamsters, the remaining 
employers include not just industrial employers but also participating 
local unions and affiliated health and welfare and pension plans. At a 
minimum, these remaining employers will bear the added burden of the 
vested benefits of the failed employer's employees. Depending on 
required adjustments, their employees may suffer reduced future 
accruals, and the employers will likely be required to pay even higher 
contributions. If the failure creates an immediate funding deficiency, 
the remaining employers, even if they have an existing collective 
bargaining agreement, will likely be required to pay an excise tax on 
top of the increased contributions.
    Higher contributions and reduced benefits may prompt other 
employers to leave the plan, further reducing the number of active 
members and the contribution base, increasing the number of retirees 
and terminated vested members, and making the plan even more dependent 
on future investment returns and more unstable. In some situations, 
higher contributions will likely force remaining employers into 
bankruptcy, resulting in even more lost jobs. In the worst case, the 
failure of the primary plan will have a domino effect, leading to the 
failure of other plans in which these employers contribute and even 
more job losses.
    Having made roughly $3 billion in contributions to fund the pension 
benefits of retirees not affiliated with YRCW, the Company can no 
longer afford to continue to serve in its role as an involuntary 
surrogate for the PBGC. Self-help measures will not be enough. For the 
sake of our Teamster employees and retirees, we need help from the 
Congress this year to address the challenges facing the company and the 
multiemployer plans to which we have long provided support.
Proposed Legislative Solution
    We very much appreciate the efforts by Representative Pomeroy and 
other Members to address the challenges faced by multiemployer plans 
and companies such as YRCW. In drafting legislation this year, we urge 
the Ways and Means Committee to--

          Update the ``partitioning rules'' of current law so 
        that the PBGC would assume the pension obligations for non-
        sponsored retirees while the plans continue to support the 
        participants of current employers;
          Provide a ``fresh start'' for multiemployer pension 
        plans suffering from recent investment losses; and
          Provide tax relief to offset the financial burden 
        that employers like YRCW have borne by acting as a surrogate 
        PBGC in funding the pension obligations of non-sponsored 
        retirees.

    Thank you for your consideration.

                                 
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