[Senate Hearing 111-762]
[From the U.S. Government Publishing Office]
S. Hrg. 111-762
THE RETIREMENT CHALLENGE: MAKING SAVINGS LAST A LIFETIME
=======================================================================
HEARING
before the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
----------
WASHINGTON, DC
----------
JUNE 16, 2010
----------
Serial No. 111-19
Printed for the use of the Special Committee on Aging
S. Hrg. 111-762
THE RETIREMENT CHALLENGE: MAKING SAVINGS LAST A LIFETIME
=======================================================================
HEARING
before the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
WASHINGTON, DC
__________
JUNE 16, 2010
__________
Serial No. 111-19
Printed for the use of the Special Committee on Aging
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
______
U.S. GOVERNMENT PRINTING OFFICE
61-707 PDF WASHINGTON : 2010
___________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer
Contact Center, U.S. Government Printing Office. Phone 202-512-1800, or
866-512-1800 (toll-free). E-mail, [email protected].
SPECIAL COMMITTEE ON AGING
HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon BOB CORKER, Tennessee
BLANCHE L. LINCOLN, Arkansas RICHARD SHELBY, Alabama
EVAN BAYH, Indiana SUSAN COLLINS, Maine
BILL NELSON, Florida GEORGE LeMIEUX, FLORIDA
ROBERT P. CASEY, Jr., Pennsylvania ORRIN HATCH, Utah
CLAIRE McCASKILL, Missouri SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island LINDSEY GRAHAM, South Carolina
MARK UDALL, Colorado SAXBY CHAMBLISS, Georgia
KIRSTEN GILLIBRAND, New York
MICHAEL BENNET, Colorado
ARLEN SPECTER, Pennsylvania
AL FRANKEN, Minnesota
Debra Whitman, Majority Staff Director
Michael Bassett, Ranking Member Staff Director
(ii)
C O N T E N T S
----------
Page
Opening Statement of Senator Herb Kohl........................... 1
Opening Statement of Senator Susan Collins....................... 2
Panel I
Statement of Honorable Phyllis C. Borzi, Assistant Secretary of
Labor, Employee Benefits Security Administration, U.S.
Department of Labor............................................ 4
Statement of J. Mark Iwry, Senior Advisor to the Secretary of the
Treasury and Deputy Assistant Secretary (Tax Policy) for
Retirement and Health Policy, U.S. Treasury Department......... 17
Panel II
Statement of Ted Beck, President and Chief Executive Officer,
National Endowment for Financial Education..................... 31
Statement of Kelli Hueler, Founder and Chief Executive Officer,
Hueler Companies............................................... 43
Statement of William J. Mullaney, President, U.S. Business,
Metlife, Representing the American Council of Life Insurers.... 60
Statement of Lisa Mensah, Executive Director, Aspen Institute
Initiative on Financial Security............................... 91
APPENDIX
Mr. Iwry's Responses to Senator Kohl's Questions................. 105
Statement from the American Academy of Actuaries................. 107
Statement from Certified Financial Planner Board of Standards,
Inc............................................................ 130
Testimony of Amy Matsui, National Women's Law Center............. 145
Testimony of Leonard M. Glynn, Managing Director, Policy Putnam
Investments.................................................... 155
Statement from World at Work..................................... 163
Testimony submitted by AARP...................................... 165
Statement by Thomas Bartell, Americans For Secure Retirement..... 181
Testimony submitted by Brian K. Atchinson, President and CEO
Insurance MarketPlace Standards Association.................... 185
Testimony of Catherine J. Weatherford, CEO and President, Insured
Retirement Institute........................................... 187
Statement of the Investment Company Institute.................... 194
Statement from Retirement Solutions, LLC......................... 223
Statement from the American Benefits Council..................... 229
Testimony of Jessica R. Flores, Managing Partner Fiduciary
Compliance Center, LLC......................................... 239
Written Testimony Provided by: American Agriculture Movement,
Federation of Southern Cooperatives, National Latino Farmers
and Ranchers Trade Association, National Association of Farmer
Elected Committees and Women Involved in Farm Economics........ 242
Statement from The American Council of Life Insurers,............ 245
Written Testimony from Retirement Income Industry Association.... 274
(iii)
THE RETIREMENT CHALLENGE: MAKING SAVINGS LAST A LIFETIME
---------- --
WEDNESDAY, JUNE 16, 2010
U.S. Senate,
Special Committee on Aging,
Washington, DC.
The Committee met, pursuant to notice, at 2:06 p.m., in
room SD-562, Dirksen Senate Office Building, Hon. Herb Kohl
(chairman of the committee) presiding.
Present: Senators Kohl [presiding], Franken, and Collins.
OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN
The Chairman. Good afternoon to one and all, and we thank
you very much for being here. Our hearing today is the start of
a legislative debate about how we can help Americans make their
retirement savings last a lifetime. So far the focus of most of
our education efforts have been on encouraging people to save,
but we've done very little to help the average retiree make the
difficult choices about how to make their savings last.
Our goal is to find ways to ensure retirees have access to
lifetime income options that provide adequate consumer
protections at a reasonable cost. It goes without saying that
the most important source of retirement income is Social
Security. This committee has long been an ardent supporter of
the program and we recently released a report on the various
ways it can be fortified for coming generations. With modest
tweaks, we will be able to improve solvency and strengthen
benefits for those who rely on Social Security the most.
The pension landscape has changed considerably over the
past several decades, with defined contribution savings plans
replacing defined benefit plans, which provided individuals
with a payment throughout their retirement. While individuals
have more control of their finances under this new system, they
do face complicated investment choices. Now when individuals
retire they have a plot of savings--I'm sorry--a pot of savings
and must choose how to use it over time.
With Americans living longer, the stakes are high for not
adequately managing one's savings. Unfortunately, the vast
majority of people have to make these difficult decisions on
their own, as fewer employers provide their retirees with
lifetime income options. According to Hewitt Associates, only
14 percent of defined contribution plans offer annuities and
only 1 percent of the covered participants invest in them.
We need to provide employers with more guidance, more
tools, and more protection to encourage them to offer a range
of options to their employees. We also need to better educate
workers to understand their choices. Senators Bingaman,
Isakson, and myself recently introduced the Lifetime Income
Disclosure Act, which would require 401(k) statements to show
account holders how much their balance would pay out if they
were annuitized.
However, while annuities may be the right fit for some,
they can also be highly complex and in the retail market they
have often been associated with aggressive sales tactics. I'm
pleased to have worked with the National Association of
Insurance Commissions on improving the suitability standards
and the use of professional titles in selling annuities. As
with other retirement instruments, we are dedicated to ensuring
that all fees associated with annuities are disclosed and that
they are competitively priced and also that consumers are fully
educated about the risks and the opportunities of these
products.
I'm also encouraged by the recent innovations in the
financial services industry to develop new products that will
help retirees manage their savings. This is a rapidly
developing area and we want to encourage employers to consider
offering such products to meet their workers' needs. However,
we must also ensure that these products have adequate
regulation that provides consumer protections and fosters a
competitive, low fee market.
With all the talk today about encouraging options, I want
to be clear that no one should be forced to purchase a lifetime
income product. I will not support any kind of mandate for
consumers because we recognize there is a wide range of
circumstances and need. When it comes to retirement, there is
no one size fits all. Instead, our aim with this hearing and
through legislation is to create an environment where
participants have the option of investing in a stable product
that best fits their needs at a fair price.
So we're pleased that you're all here today and I'd like
now to turn to Senator Susan Collins, who would like to make a
statement.
OPENING STATEMENT OF SENATOR SUSAN COLLINS
Senator Collins. Thank you, Mr. Chairman.
Let me begin by thanking you for scheduling this hearing
today on the all-important subject of retirement savings. When
we think about the coming demographic shock of millions of baby
boomers reaching retirement age, usually we who are involved in
public policy focus on the economic challenges facing Social
Security, which, as the chairman pointed out, remains the most
critical component of retirement income for many Americans.
We do not spend nearly the amount of time that we should in
considering how changes in the way that Americans build their
retirement nest eggs and how they spend those assets after they
stop working affect their ability to remain financially secure
throughout their retirement years. For that reason, I commend
the chairman for focusing on that issue today.
All of us are familiar with the dramatic shift that has
occurred in recent years away from defined benefit plans toward
defined contribution plans. Three decades ago, nearly two-
thirds of those Americans who participated in a pension plan
received defined benefit. Now, however, nearly two-thirds
participate only in a defined contribution plan. It's
completely reversed.
Those defined contribution plans have many positive
features, but they can make retirement planning especially
challenging in times of stock market volatility. The decline in
the market in 2008, for example, reduced total assets held by
defined contribution plans by $1.1 trillion, nearly 28 percent,
and all of us know seniors who were planning to retire and
could not because of the drop in the value of their defined
contribution plan.
While much of that loss fortunately has since been
recovered, the recent economic crisis underscores how important
it is that Americans approaching retirement or in retirement
diversify their assets and engage in financial planning that is
appropriate to their long-term needs.
This issue is tremendously important. Without better
planning, millions of American workers will be facing
retirement years that are anything but golden. This is
particularly true given the demographics of the next few
decades, when the tidal wave of retiring baby boomers will be
imposing unprecedented burdens and challenges for both the
Social Security System and for private pensions.
So again, Mr. Chairman, thank you for calling this
important hearing.
The Chairman. Thank you very much, Senator Collins.
At this time we'll turn to the first panel. Our first
witness on the first panel today is Phyllis Borzi, the
Assistant Secretary of the Employee Benefits Security
Administration at the Department of Labor, where she oversees
the administration, regulation, and enforcement of Title 1 of
ERISA. Previously Ms. Borzi was a research professor at George
Washington University Medical Center and served as pension and
employee benefit counsel for the House Committee on Education
and Labor.
Then we'll be hearing from Mark Iwry, a Senior Advisor to
the Secretary of the Treasury and the Deputy Assistant
Secretary for Retirement and Health Policy. Previously Mr. Iwry
was a senior fellow at the Brookings, and he also served as the
benefit tax counsel at the U.S. Treasury Department, where he
was responsible for tax and regulations relating to tax-
qualified pensions and 401 plans.
We welcome you both and we will take your testimony now,
starting with you, Ms. Borzi.
STATEMENT OF HON. PHYLLIS C. BORZI, ASSISTANT SECRETARY OF
LABOR, EMPLOYEE BENEFITS SECURITY ADMINISTRATION, U.S.
DEPARTMENT OF LABOR
Ms. Borzi. Thank you, Chairman Kohl. Good afternoon,
Senator Collins, Senator Franken. Thank you so much for
inviting me to discuss the Department of Labor's activity
regarding lifetime income options for participants and
beneficiaries in retirement plans.
I'm Phyllis Borzi, the Assistant Secretary of Labor for the
Employee Benefits Security Administration. I'm proud to
represent the Department, EBSA, and its employees. We work
diligently to protect the security of retirement and other
employee benefits for America's workers, retirees, and their
families.
The administration shares the committee's interest in
examining policies to help America's workers manage their
retirement savings to last a lifetime. Workers both need and
deserve an opportunity for a dignified and secure retirement.
As you know, today the risks for retirement security have
largely shifted onto the shoulders of American workers. Workers
are living longer, baby boomers are beginning to retire in
larger numbers. We need to explore what we can do to ensure
that workers have the information and the tools they need to
both accumulate adequate retirement savings and make those
savings last a lifetime.
To that end, the Departments of Labor and the Treasury
published a request for information in order to start a dialog
around the challenges and issues facing today's workers at
retirement. The RFI asks a number of questions that are
generally organized into categories under which we may decide
to provide additional guidance in the future. The responses to
the RFI will inform our analyses of a wide variety of issues
relating to the offering and selection of lifetime income
products.
We're committed to exploring what can be done through
interpretation, regulation, and legislation to address these
issues.
For the remainder of my testimony, I just would like to
discuss a number of important considerations that have been
raised in the comments and the next steps we're considering.
I'm extremely pleased that the RFI has generated so many
thoughtful responses with so many different perspectives. We've
received nearly 800 public comment letters. As a general
overview of the types of commenters, we received more than 600
letters from ordinary citizens and approximately 10 more
comment letters from organizations such as labor organizations,
consumer groups, representing workers, retirees, and plan
participants. Approximately 40 of our comment letters are from
representatives of the financial services industry, including
insurance companies, investment companies, and banks. About 30
letters are from plan service providers, including third party
administrators, recordkeepers, actuaries, consultants, lawyers.
About ten more are from representatives of employers, plan
sponsors, plan administrators. Of course, approximately ten
comment letters are from government officials and members of
academia.
We're still in the process of reviewing these letters and,
even though we haven't finished analyzing all of them, I can
certainly make a few observations about their contents today.
We have received a number of comment letters from individuals
who are very concerned that this RFI is the first step in a
government plan to take over workers' 401(k) plans or to
mandate that they invest their retirement savings in
government-sponsored retirement products or treasury bonds.
Of course nothing could be farther from the truth. We do
not support a government takeover of private retirement plans.
I've repeatedly and publicly said that the RFI is merely
intended to start a national dialog about the question of
whether a lifetime income stream is a good thing and, if it is,
whether and how the Department can facilitate access to and use
of lifetime income streams.
Now that we've begun analyzing the comment letters, I'm
even more convinced that this is an important discussion worth
having. Even though it's still early in our review process,
many of the commenters believe that the government can and
should do more in this area. On the other hand, others disagree
that there is a problem at all.
Perhaps the biggest area of disagreement among the
commenters centers on whether employers should be required to
provide workers with an option of a lifetime income
distribution. Far less disagreement occurs, of course, on
whether or not there ought to be additional educational
incentives. Many commenters believe that the interest of
participants as a whole will be best served by educating
employers and workers on the benefits and features of lifetime
income, so they'll better be able to make choices on their own.
Many commenters discuss the type of information that would
be useful to workers, and in particular of course I want to
thank you, Chairman Kohl, for your response to the RFI. You put
a spotlight on these disclosure issues by joining, as you
mentioned, Senator Bingaman and Senator Isakson in introducing
the Lifetime Income Disclosure Act. We believe that providing
account-specific information on lifetime income may be very
useful to workers as they make critical decisions concerning
their retirement accounts.
We're reviewing the RFI comments to better inform us
regarding the feasibility of providing participants with this
type of information.
So the number and scope of the comments reinforces our
prior sense that providing lifetime income raises a lot of
different issues and tradeoffs. I'm pleased to announce that
we've decided to build on this dialog started with the RFI by
holding a public hearing in the near future to focus on some of
these critical financial technical issues that have been raised
in the comments.
We're finalizing the details of the hearing and a formal
announcement will appear soon in the Federal Register.
So thank you again for the opportunity to testify before
you today. The Department is committed to ensuring that workers
have the information and tools they need to enjoy a dignified
and secure retirement, and we're happy to work with all of you
on the committee and Chairman Kohl, and I look forward to
taking your questions.
Thank you.
[The prepared statement of Ms. Borzi follows:]
The Chairman. Thank you very much, Ms. Borzi.
Now we'll hear from Mr. Iwry.
STATEMENT OF J. MARK IWRY, SENIOR ADVISOR TO THE SECRETARY OF
THE TREASURY AND DEPUTY ASSISTANT SECRETARY [TAX POLICY] FOR
RETIREMENT AND HEALTH POLICY, U.S. TREASURY DEPARTMENT
Mr. Iwry. Mr. Chairman, Senator Collins, Senator Franken.
Thank you very much for holding this hearing and for the
opportunity to appear before you today.
We know that most Americans enjoy a fundamental level of
protection against the risk of outliving their assets,
longevity risk, in the form of Social Security. That continues
to provide, thankfully, a basic foundation of guaranteed,
predictable lifetime income.
In addition, the private pension system plays a critical
role in enhancing retirement security. But with the continuing
shift from pensions, classically thought of as employer-funded
programs, such as defined benefit plans, that provide
predictable income for life at retirement, to account-based
retirement savings arrangements that depend mostly on employee
salary reduction contributions made at the initiative of the
employee, and that typically make single-sum cash payments at
each change in employment, we've seen a shift as financial
prospects for retirement security in this country increasingly
turn on how much people save and how they manage their savings.
We know it's not easy for people to manage their savings.
For one thing, predicting how long we're going to live is
different, if not impossible. The result is that for many
people there's anxiety about how to manage the assets they've
got so that they don't run out of assets during their lifetime.
Some people are anxious to the point where they fall into the
opposite error of hoarding the assets to a much greater extent
than they needed to and not enjoying the kind of lifestyle that
they could have afforded if they had had some methodical way of
ensuring themselves that their assets would last for life.
This initiative that Assistant Secretary Borzi and I have
been launching, and we very much applaud your leadership on
these issues, not only submitting the comment, holding this
hearing, and on an ongoing basis over the past several years on
these retirement security issues--this project is not intended
to require or mandate any particular type of payment, annuity
or otherwise. It's not intended to promote or favor any
particular industry or any particular type of product. But it
is intended to help Americans with the difficult challenge of
managing their savings during retirement, and to do so in a
context where people have increasingly expressed the concern
that they do not have enough advice, do not have enough
realistic options to provide the appropriate mix of income
security and flexible assets.
We don't purport to know what's best for people and we're
not suggesting that more lifetime income or annuitization on
top of what Social Security provides is necessarily the answer
for everyone. As you said, Mr. Chairman, it's not a one size
fits all situation. But we do think that we need to do more to
help the system provide options to people, provide choices that
are more realistic, more attractive, and that people better
understand, choices that are reasonably priced, that are
transparent in their features, that are not confusingly
complex, that are, in other words, user-friendly and responsive
to the needs of retirees.
We applaud the creativity of the private sector in coming
up with new products and innovations that look like they would
be responsive to a lot of these needs and that take advantage
of the plan sponsor's ability to help individuals through their
fiduciary exercise of expertise, by negotiating with providers
of lifetime income or other financial products on a group basis
that can reduce costs and that can give more bargaining power
to the individual.
It's premature for us to say exactly what we're going to
do. We are reading the comments with great care and interest.
They're very thoughtful. We appreciate all the work that people
have put into them and we're very much looking forward to the
dialog with you today and an ongoing dialog with the
stakeholders.
[The prepared statement of Mr. Iwry follows:]
The Chairman. Thank you very much, Mr. Iwry.
First question for you both. We found with our
investigation of target date funds the importance of making
sure that retirement products are clearly defined. How can we
make sure that consumers understand how lifetime income options
work and what their costs and benefits are? Ms. Borzi, you want
to comment?
Ms. Borzi. Well, I couldn't agree with you more that that's
really the crux of the issue. The comments we've gotten from
the industry say to us basically if people understood the
benefits of these kinds of approaches, more people would choose
them, because the difficulty is even when they're offered
participants don't choose them.
These are extremely complicated products. We absolutely
need more transparency. We need more explanation. We need more
understanding. We need to understand what the risks are, what
the rewards are. I think this whole question of disclosure is
critically important.
We've gotten lots of interesting suggestions on how to deal
with it, and this is certainly one of the themes that we're
going to be focusing on going forward. Your bill, of course, is
certainly something that we've been looking forward--we've been
looking forward to working with you on that because it's one of
the issues that we've been thinking about in the context of our
own benefit statement regulations.
The Chairman. Thank you.
Mr. Iwry?
Mr. Iwry. Mr. Chairman, I agree with what Ms. Borzi said,
Mr. Chairman. I think that there are real education needs and
challenges here. I think Ted Beck from NEFE's going to be
testifying on the next panel. They've done a great job of
trying to promote better understanding and education in this
area.
I think we all need to do more in that regard. There are
basic facts that folks don't really understand, to the point
where, picking up on what Ms. Borzi just said, the economic
literature is full of expressions of bafflement at what they
call the annuity puzzle. Why is it that folks don't pool some
of their assets in order to protect themselves against
longevity risk by purchasing annuity type products that will
let people put in enough money to last for the average life
expectancy, so that people who live longer than the average
will not have to be uncertain about whether there will be
enough left, folks who die earlier, their funds will in effect
subsidize people who die later than the average.
People don't understand, for example, the fundamental
asymmetry in up and down investment returns between the
accumulation phase and the spenddown phase. In other words,
we're used to thinking that if you stay invested for the long
term, you buy and hold, many people say, up markets and down
markets will eventually work out, the down markets will be
succeeded by better times, and it will all be fine.
Well, in retirement that can also be true, but what people
don't take into account is that when you're spending down on a
regular basis, when you're withdrawing, a few bear market years
early on cannot be recovered from as readily by some bull
market years later as they can when you're in the accumulation
phase.
It's not quite a symmetrical process. That's why the
financial planners and the literature tell people, don't
withdraw more than X percent from your retirement savings on a
regular basis. In other words, if you were not to adjust and
you were just to ask how much can I safely withdraw without
much of a risk of running out, the literature suggests some
people say 4 percent, 4.5, 5 percent, depending on how high a
probability you want of not running out of assets.
Many people aren't even aware of that. They may think,
well, gee, I've got a couple hundred thousand dollars in my
401(k), I'm retiring, I'm set for life. That should last me 35
years. They don't think about how to convert that large-
sounding account balance into a pension paycheck, a stream of
regular income that will last them for life.
If they're confronted with the proposition, do you want to
use some of that account balance to buy an annuity or to buy a
lifetime income of some kind, they'll often say: You mean
you're only going to offer me this piddling number of dollars
per month for this huge treasure I've got in my account
balance? It's a wealth illusion. We're not used to thinking in
income terms when we're starting with a large lump sum.
So we've got a lot of education to do, and the disclosure
the framing of the benefits, as your bill would promote, in an
income format, in the form of a pension paycheck or a
retirement paycheck on a monthly basis is one step in getting
people to start thinking in those terms.
The Chairman. Thank you.
Senator Al Franken.
Senator Franken. Thank you, Mr. Chairman, for this very,
very important hearing. We've all had parents who faced this
very challenge. My mom got an annuity and I think it was a good
thing. But very few people do get annuities, isn't that right?
Mr. Iwry. Comparatively few.
Senator Franken. What are the percentages of people who get
annuities in their retirement?
Mr. Iwry. Well, to give you an example from the 401(k)
world, which of course is still the part of the retirement
universe that's growing fastest, the percentage of people who
take annuities I believe is down around 1 to 2 percent of all
the payouts.
Now, defined benefit plans, a much higher percentage. But
unfortunately those are dwindling.
Senator Franken. So what are the barriers? I imagine it's
complexity, that people are looking at these things and they're
complex.
Ms. Borzi. Cost.
Senator Franken. I think that people--do people by and
large underestimate how long they're going to live?
Ms. Borzi. They do. As Mark said, the fact is that they
have no concept of how much they will need, even in a normal
retirement, even if they don't outlive the actuarial
predictions. They don't really understand how much they'll need
to live.
Senator Franken. That's an answer to a slightly different
question. I just want to know whether people actually on
average underestimate how long they're going to live.
Mr. Iwry. Senator, I think that there is--yes. I think
there's evidence in the behavioral economics literature and in
the related literature about aging, that people do tend to
underestimate how long they're going to live. Plus people tend
to look at life expectancy statistics, if they're informed
enough to know what the life expectancy is at any given age,
and not think so much about the 50 percent chance that they'll
exceed that life expectancy.
Senator Franken. Also sometimes they're looking at life
expectancy of the general population and not someone who's
already reached their age, and not----
Ms. Borzi. Exactly.
Mr. Iwry. Exactly. But if they're looking at a table where
they're 65 and they're saying, what's the life expectancy of a
65 year old, a lot of people seem to be eager to not look at
how much they need to have to deal with the contingency that
they'll live way past their life expectancy.
Senator Franken. I'm sorry, Ms. Borzi. What you were saying
is that exacerbating that is the fact that people have kind of
no idea how much money they're going to need per year?
Ms. Borzi. That's absolutely right, Senator. What they
particularly don't usually take into consideration is how much
in medical costs they will have to spend, because we know for
most people from 55 and older it's the medical costs that are
the most unexpected. Hopefully, with health care reform some of
that will be alleviated.
Senator Franken. Well, the doughnut hole will be. But we're
talking about Social Security and Medicare as really the safety
nets that have--when you're talking about income security and
when you're talking about paying for health care you're talking
about the two basic foundations, which thank goodness we have
those, right?
Ms. Borzi. Thank goodness we do. But of course, as you
know, the largest bit of medical expense occurs in those pre-
Medicare eligibility years.
Senator Franken. Sure, the 55 to 65.
Ms. Borzi. The 55 to 65.
Senator Franken. Well, speaking of which, when you talk
about people learning about how they're going to get through
their retirement years, have income security during their
retirement years, are you mainly talking about getting this
message out to 25 year olds, to 35 year olds, to 45 year olds,
to 55 year olds, or to 15 year olds?
Mr. Iwry. Senator, yes.
Ms. Borzi. All of the above.
Senator Franken. Well, it wasn't meant to be answered that
way.
Mr. Iwry. Seriously, I think that there's a different type
of strategy for each of those age groups, but that we actually
need the education to start in the schools and then to be
directed in an age-appropriate form to each of those age
groups.
The time when people really start to care about it the
most, of course, is when they reach their typically 50's or so.
Senator Franken. I think that----
Ms. Borzi. The point that--I'm sorry. What I was going to
say is at the point at which they're ready to make these
decisions, in many respects that's the most critical, because
they have no way to make up the time that they've lost. So to
me the most important priority--I agree that all of these age
groups need to be educated, but right now our immediate problem
is to focus on the people close to retirement age, so that they
begin to understand what their choices and options are, because
they're much more limited than in the 30's and 40's.
Senator Franken. If they started--if we started earlier
with financial literacy--and I'm talking about in high school,
before kids get credit cards and get student loans and all
those things----
Ms. Borzi. We're working on elementary school, actually,
financial literacy in elementary school.
Senator Franken. You're better than me, in high school.
[Laughter.]
But OK. I mean, it seems to me that one of the biggest
problems here is financial illiteracy, and if we started early
with kids in elementary school, say--here's an idea I have----
[Laughter.]
Ms. Borzi. It's brilliant, a brilliant idea.
Senator Franken. Thank you, thank you. That's why I'm a
Senator.
Then it seems to me that they'd be able to adjust during
their lives and start thinking about it sooner. Anyway,
probably my time has lapsed.
The Chairman. Go ahead.
Senator Franken. Well, I probably don't think this is
necessarily the place, but we need to make sure that Social
Security is sound, and I have some theories on how we could do
that. But maybe that's not what this hearing is so much about.
Yes?
Mr. Iwry. Senator, if I may just add to our response, one
of the things that people in their 50's or 60's could use some
more information about is the value of, in addition to the
saving--as Phyllis was pointing out, it may be too late to do
as much as we'd like about saving more at that point--the value
of deferring retirement incrementally.
If you postpone retirement for one more year, if you can do
it, if you've got the health, if you've got the job, etcetera,
how much will you gain in terms of financial security?
You get an additional year of earnings. You get an
additional year subtracted from the number of years you won't
be earning that you have to support with the savings from your
earnings. If you postpone Social Security, the time when you
start Social Security, of course, that can be helpful. People
haven't gotten enough information about that.
In our discussions earlier about what people don't know and
the misperceptions that folks have, I'm sure I speak for
Phyllis, too--we don't need to convey an attitude that people
are not intelligent, that Americans aren't smart, not at all.
First of all, I include myself in all of those statements, that
we don't understand as much as we should, that we're not as
disciplined perhaps as we should be, that we don't have as much
information, we need more education.
It's true of most of us. Partly it's denial. Sure, people
understand about life expectancies. They know that there's a 50
percent chance they'll live more than the average. These are
sometimes painful and anxiety-inducing realities that we're
grappling with. So I think we need to help people, and that's
why we're embarked on this.
We've heard and we've gotten a sense from you and others
here that there might be a constructive role for public policy
to play in this.
Senator Franken. For example, what you're talking about in
terms of deferring retirement, that would be an entirely
voluntary thing.
Mr. Iwry. Absolutely.
Senator Franken. That's what we're talking about. It's
interesting on age and life expectancy, and you were talking
about denial. I would think that denial would be on the other
side, that I would think it would be human nature to think: I'm
going to outlive the actuarial table. But it isn't, is it?
Ms. Borzi. Actually one of the other interesting things
that you discover in the literature is most people think
they're going to--along the lines you're suggesting, most
people assume that they're going to work a lot longer than they
do. If you ask people when they think they'll retire, the
overwhelming majority of people think that they're going to
work until at least age 65.
But when you look at the statistics, people actually retire
much earlier than that, because of health problems, because of
financial problems, because of caregiving responsibilities,
where they'll have--particularly women who will have to leave
the work force early to care for ill spouses or children or
siblings or parents.
Mr. Iwry. Because it can be harder for an older person to
get a job if they lose their current job.
Ms. Borzi. So there are a lot of issues around this
question about when you're going to retire, how much money
you'll need, how long you're going to live, that people haven't
really focused on. You're right, the misperceptions, the
misunderstandings, go in both directions really.
Senator Franken. Thank you. Thank you both very much. Very
helpful.
Mr. Chairman thank you.
The Chairman. Thanks a lot, Senator Franken.
Thank you both for being here. You've made great
contributions.
Ms. Borzi. Thank you so much.
The Chairman. We appreciate your taking the time.
Mr. Iwry. Thank you, Mr. Chairman.
The Chairman. We'll turn now to the members of our second
panel. Our first witness on this panel will be Ted Beck. Mr.
Beck has been the President and CEO of the National Endowment
for Financial Education since 2005. Previously he was an
Associate Dean at the University of Wisconsin School of
Business and spent more than 20 years in senior management
positions for Citibank, Citigroup.
Welcome.
Next we'll be hearing from Kelli Hueler, CEO and Founder of
Hueler Companies, which is an independent data and research
firm on the annuity and stable value marketplace. Ms. Hueler
headed the development of income solutions and is nationally
recognized as an industry expert. Welcome.
Then we'll be hearing from Bill Mullaney, President of U.S.
Business for MetLife. MetLife is a leading provider of life
insurance, annuities, and other retirement and savings
products. Mr. Mullaney is responsible for the oversight of all
of MetLife's insurance, retirement, and corporate benefit
funding businesses in the United States. He will offer
testimony on behalf of the American Council of Life Insurers.
Then we'll be hearing from Lisa Mensah. Ms. Mensah is the
Executive Director for the Aspen Institute's Initiative on
Financial Security, where she has an advisory board which
investigates financial products that build wealth for working
families. Previously Ms. Mensah served as the Deputy Director
of economic development for the Ford Foundation. Welcome.
Mr. Beck, we'll start with you.
STATEMENT OF TED BECK, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
NATIONAL ENDOWMENT FOR FINANCIAL EDUCATION
Mr. Beck. Thank you, Mr. Chairman. My name's Ted Beck. I am
President and Chief Executive Officer of the National Endowment
for Financial Education, located in Denver, CO. We at NEFE
would like to thank Chairman Kohl, Ranking Member Corker,
Senator Franken, and the members of the Special Committee on
Aging for this opportunity to share our views on retirement
income.
For those of you that don't know the National Endowment,
we're a private nonprofit foundation solely focused on
improving the financial knowledge, capability, and wellbeing of
all Americans. We have been deeply involved in the financial
education arena for several years, ranging from high school on
through to retirement.
I'd like to tell you about a recent development that we've
been involved with. In 2006 we took a step back and looked very
hard at the questions around retirement. We were very concerned
about how few people were actually calculating what their
financial needs were. The current estimate on that is 46
percent, actually do the calculation.
Also, only about 40 percent--excuse me. Only 60 percent of
the population is currently saving for retirement. Those are
2010 numbers.
Also, research tells us that workers age 55 and older have
very weak financial knowledge and skills.
So these caused great concern. As we looked at this, we
also discovered that there is a limited knowledge base on
decisions made in retirement on assets you've accumulated.
We're especially concerned in this area in families who are
making between $30,000 and $100,000 pre-retirement.
So as we looked at this situation, we thought the best
thing we could do would be to assemble a task force of people.
We pulled together 40 experts from consumer education,
financial service industry, academic, regulation, including two
of our witnesses today, Kelli Hueler and Mark Iwry from the
earlier panel. We wrestled with the question of what should be
done about this.
The project that came out of that is an effort that we're
deeply involved with called ``My Retirement Paycheck.'' The
goal of this project is to help people generate the equivalent
of a paycheck in retirement using the assets they've
accumulated effectively. The program looks at eight different
categories: work, home and mortgage, pensions, debts, Social
Security, insurance, retirement plans, and fraud. We try to
look at these categories in a holistic way and look at the
interaction of what happens if you make a decision in one area
and how it affects other areas.
For example, we talked a second ago about working 2 to 4
years longer. What does that do for you if you have that
option? A typical retirement age right now is 62 to 63. If you
are able to continue to work, how much extra security does that
give you?
Likewise on Social Security, if you start taking benefits
at 62 versus age 70 by delaying, it you're actually giving up
75 percent difference. So if you get $1,000 in your retirement
paycheck at age 62, the equivalent of that if you wait until
age 70 is $1750, a significant difference that everybody should
be informed of and able to make as part of their retirement
decision.
We've developed a very rich resource that is now available
to the public, that was made available in 2009, and we feel
that this sort of education tool will be of great importance
going forward.
However, there are several next steps we need to talk
about. Merely developing a new web site with the best
intentions is irrelevant if people don't use it. Therefore
we're spending a lot of our time on trying to figure out how to
get this information to people in a manner that is acceptable
to them and that they will actually respond to. That is a big
function of what we do every day.
So we're very focused on retirement education. As an
example, we've just finished a study at Darthmouth College that
used different social marketing tools as a way to get more
people involved in their 401(k) plans early in their career,
and by approaching this sort of question differently we found a
very significant increase in involvement.
Likewise, we think workplace is a great opportunity to do
more work here, especially early in the career, not one year
before retirement, as many of the programs are now. We're also
very convinced that we have to spend more time on segmentation.
Senator Kohl, you are absolutely right, one size does not fit
all here. There are differences between social and economic
groups, different levels of education, and especially with
women, that we want to do more work with.
Another area that we're very concerned about is seniors who
are suffering from diminished capabilities. How do we make sure
that we get information to not only those individuals, but
their caregivers, to make sure that they're making intelligent
decisions that are informed?
Our real goal here is to help people build savings and
financial planning that will allow them to make informed
decisions, and we are convinced that the American people are
perfectly capable of doing this.
Thank you.
[The prepared statement of Mr. Beck follows:]
The Chairman. Thank you so much.
Ms. Hueler.
STATEMENT OF KELLI HUELER, FOUNDER AND CHIEF EXECUTIVE OFFICER,
HUELER COMPANIES
Ms. Hueler. Good afternoon, Chairman Kohl, Senator Franken,
a fellow Minnesotan.
Senator Franken. Yes, I was going to say.
Evidently, Mr. Chairman, we have two votes or something?
The Chairman. Yes. We probably will get through her
testimony and then we'll have to call a break.
Senator Franken. OK, is that what we're going to do? Good.
Ms. Hueler. Should I continue?
Senator Franken. Welcome from----
Ms. Hueler [continuing]. Members of the committee as well.
My name is Kelli Hueler. I'm founder and CEO of Heuler
Companies. I want to express my sincere thanks to both of you
for holding this hearing today, and Chairman Kohl particularly
in your efforts to champion this issue and concern.
We're very grateful for the opportunity to be here at the
hearing today on what we believe to be one of the most
important economic issues facing our Nation, ensuring greater
retirement income security for millions of Americans.
Our company's been providing independent data and research
to large institutions and employers since 1987. Hueler's
written submission provides background and extra information
regarding our experience.
I'm honored to come before you today to discuss how overall
retirement income levels can be substantially improved and
ultimately the use of annuity and lifetime income programs can
be more broadly accepted. If plan participants are provided
access to lifetime income and annuity alternatives by their
employers and IRA providers through independent,
institutionally priced, competitive offerings, they are in fact
able to pensionize their hard-earned savings into a paycheck
for life and increase their monthly income by an average of 6
percent or more over what they could likely achieve in the
retail market.
Not only can the income amount be dramatically improved,
but this type of approach allows retirees to transfer some of
the key risks associated with longevity, inflation, and
unforeseen market losses to a preestablished group of qualified
providers.
As shown by the data in our written submission, the
economic benefit of combining institutional or group pricing
with competition among providers is substantial, and we can
simply not afford to ignore this fact.
Statistics show that participants have basically rejected
traditional annuity distribution offerings. For that to change,
we believe lifetime income and annuity products need to be
presented in a simple, easy to understand format, requiring
quote responses to be standardized, to promote straightforward
apples to apples comparison and objective review.
Participants need flexibility. As we've been talking about,
there is no one size that fits all. They need educational tools
to help them determine not only how much of their nest egg--
what percentage of their nest egg to convert into income, but
what features best meet their personal financial goals.
It's worth noting that the calculators on our web site are
the most frequently visited pages and that we typically see
participants request on average of four quotes before they make
a decision.
Participants also need to be encouraged to diversify across
multiple providers and to pensionize in increments over time to
additionally limit provider and investment risk. Institutional
offerings must eliminate the bells, whistles, and marketing
hype that hide relative costs, create substantial confusion and
suspicion, and ultimately lead to inaction or poor decision
making.
Some key observations we can make are that when
professional, objective assistance is provided to participants
during the decisionmaking process, there is far greater
purchase activity than those programs that are delivered purely
on line in a self-serve format; and there is a direct
correlation between employer communication and participant
activity. Both quote and purchase activity increase
dramatically following directed, targeted communication by a
plan sponsor to the key demographic participant group.
This leads me to a critical point. Participants have a high
degree of trust with their employers when it comes to financial
decisions. If employers do not endorse lifetime income or
annuity programs, participants will shy away from them, even if
they're being offered.
Hueler's research shows fiduciary liability relative to
issuer selection and appearance of endorsement as two of the
top roadblocks for employers to offer any form of lifetime
income distribution. While our program can be offered either as
a plan distribution or a voluntary IRA rollover, better than 98
percent of the sponsors choose the IRA rollover.
Additionally, sponsors cite two main reasons for adopting
that type of program: the competitive multi-issuer format and
the independent issuer selection and ongoing due diligence.
Providing a fiduciary safe harbor that reflects legitimate
plan sponsor concerns is critical if we expect them to
encourage and endorse lifetime income alternatives. Given the
recent financial crisis and persistent market volatility, the
need for mitigating risk is urgent and the time is now for
promoting education around and access to alternatives for
converting retirement savings into lifetime income. Without
low-cost income alternatives being widely accessible to plan
participants, the defined contribution system will have severe
limits going forward in terms of serving the public interest
and meeting the needs of an aging population.
Increased life expectancy is a wonderful, albeit expensive,
gift and I believe it's incumbent upon all of us to work
together to improve the likelihood that individuals will be
able to financially sustain themselves with dignity during
their retirement years.
Thank you very much.
[The prepared statement of Ms. Hueler follows:]
The Chairman. Thank you so much.
We'll now have a break for two votes of 15 minutes, maybe
20. Thank you.
[Recess from 2:57 p.m. to 3:29 p.m.]
The Chairman. Mr. Mullaney.
STATEMENT OF WILLIAM J. MULLANEY, PRESIDENT, U.S. BUSINESS,
METLIFE, REPRESENTING THE AMERICAN COUNCIL OF LIFE INSURERS
Mr. Mullaney. Good afternoon, Mr. Chairman and members of
the committee. My name is Bill Mullaney. I'm the President of
MetLife's U.S. Business Division, testifying on behalf of the
American Council of Life Insurers.
ACLI member companies represent more than 90 percent of the
assets and premiums of the U.S. life insurance and annuity
industry and offer insurance contracts and investment products
and services to qualified retirement plans and individuals. As
both providers and employers, we believe that saving for
retirement and managing assets throughout retirement are
critical economic issues facing individuals and our Nation.
Today's hearing focuses on the crisis that retirees face in
managing their assets in retirement and the need for public
policy to help them avoid outliving their savings. I applaud
the committee's foresight and appreciate the opportunity given
the industry to offer insights and potential solutions.
My written testimony highlights issues and recommendations
that the industry submitted in response to the Department of
Labor and Treasury's request for information regarding lifetime
income annuities and similar lifetime income options available
to defined contribution plans.
Today I will discuss the role of annuities in providing
retirement income security, product features and innovations,
how public policy can enhance the use of guaranteed lifetime
income, and consumer protections.
Retirement begins with a fundamental transition, from
living off one's wages to living off one's savings. With this
transition comes multiple risks for individuals to manage, the
most difficult of which is longevity risk, the risk of
outliving one's savings.
Today most Americans won't receive a guaranteed monthly
paycheck for life from their employers when they retire. For
many people, defined contribution plans such as 401(k)s have
become their primary retirement savings vehicle. Guaranteed
lifetime income products shift the risk of outliving one's
savings to a life insurer.
In addition to guaranteed income for life, today's annuity
products address survivor benefits, liquidity for emergencies,
and inflation. Annuities with optional guaranteed living
benefits can provide protection against both longevity and
investment risk.
Employers play a key role in helping employees understand
the benefits of and to gain access to the protection provided
by guaranteed lifetime income products.
ACLI has included a number of legislative and regulatory
recommendations in its written statement which can help
employers assist their employees in obtaining guaranteed
lifetime income. Among those recommendations are simplifying
the fiduciary standard by which the employer chooses an annuity
provider and allowing insurers to administer the joint and
survivor rules for married individuals.
In addition to employer efforts, participants need
education about the value of guaranteed lifetime income. To
that end, ACLI thanks Chairman Kohl and Senators Bingaman and
Isakson for their bipartisan sponsorship of S. 2832, the
Lifetime Income Disclosure Act, a bill that would provide a
lifetime income illustration on workers' 401(k) statements.
With this information, workers can decide whether they need to
increase their savings, adjust their 401(k) investments, or
reconsider their retirement date if necessary to assure the
quality of life they expect in retirement.
ACLI also asks the Treasury Department to modify some of
their notices to workers to include information on guaranteed
lifetime income and the availability of lifetime income
distribution options. Furthermore, ACLI supports legislation to
facilitate a worker's election to use a portion of her account
to obtain guaranteed income for life. Most notably, ACLI
supports H.R. 2748, the Retirement Securities Needs Lifetime
Pay Act, which contains three proposals which we hope this
committee will endorse:
First, to facilitate the use of longevity insurance in
employer plans and IRAs, it excludes the longevity insurance
premium amount when calculating an individual's required
minimum distribution.
Second, to encourage employees to take a portion of their
retirement savings as guaranteed lifetime income, it includes a
limited tax incentive.
Last, for those individuals with an individual deferred
annuity, it would permit partial annuitization of that annuity.
This last proposal was included as part of the administration's
2011 budget proposal.
As the committee considers these recommendations, it is
important to note that all insurance products are regulated by
the States. State insurance departments have a number of
safeguards in place which not only protect the consumer, but
ensure life insurers' unsolvency and provide protection to the
consumers in the rare instance of an insolvency. Each State has
laws and regulations governing the activities such as licensing
requirements, sales practices, market conduct regulations, and
product approvals.
I want to thank the committee again for holding this
hearing and for inviting the ACLI to testify. The goal of
helping Americans achieve personal retirement income security
is one of the industry's top public policy issues, and I'm
happy to answer any questions that you have.
[The prepared statement of Mr. Mullaney follows:]
The Chairman. Thank you, Mr. Mullaney.
Ms. Mensah.
STATEMENT OF LISA MENSAH, EXECUTIVE DIRECTOR, ASPEN INSTITUTE
INITIATIVE ON FINANCIAL SECURITY
Ms. Mensah. Thank you, Chairman Kohl, and my thanks as well
to Ranking Member Corker.
My name is Lisa Mensah and I'm the Executive Director of
the Aspen Institute Initiative on Financial Security. It's an
honor to be here today. I'm the granddaughter of an Iowa
insurance agent and the daughter of an African engineer who
comes before you today as a personal witness to America's
greatest promise, that we can all share in the prosperity of
this land if we can grab hold of the basic tools we need to
succeed. I believe savings is one of those basic tools.
I spent 13 years at the Ford Foundation working in some of
our poorest areas, including the Delta counties of Tennessee
and the Iron Range of Wisconsin. Workers there and elsewhere in
America are struggling to get off the hamster wheel of just
making ends meet, and we've failed to give them an accessible
and robust system of savings.
I founded Aspen IFS with a simple dream: to help bring
about the policies and the financial products that enable all
Americans to join the savings and wealth-building system in
America.
We commend the administration for its fresh look at
retirement savings and we were pleased to be hosted recently by
you, Senator Kohl, to describe our hopes for an automatic IRA
system that builds large nest eggs. At Aspen IFS we believe the
journey to financial security is not just a people problem, but
also it's a product problem, and that we really need simple and
secure financial products to help all Americans save, invest,
and own.
So today I come before you with a message of hope, but also
a message of caution. I'm filled with hope because this hearing
is really the first serious consideration of helping Americans
manage their nest eggs in retirement.
This summer we celebrate the 75th birthday of the Social
Security System, perhaps our most popular government policy.
Social Security provides the securest of lifelong income, but
it was never intended to be the only income in retirement.
So I believe our question is: How can we build a better
private savings system for the next 75 years?
Now my cautions. We can say confidently that everyone needs
to save, but we can't say that everyone needs to annuitize.
There is an all too common refrain that if we don't force
people to do what's best for them, those people can just head
to Vegas or buy an RV with their nest eggs.
I think this is a painful stereotype. I propose instead
that we keep annuities voluntary, but make them easier, safer,
and a better deal.
We've heard from everyone that we'll need more than one
choice or one default, and we've heard that one size does not
fit all. Some people are very healthy and look forward to a
long retirement. Many others are not. Some have grown children
and a spouse with a pension. Others are in a second marriage
and have a young family. Many are sandwiched, supporting
parents and children or grandchildren. Some have children with
special needs who must be cared for when they've gone. Some
have large 401(k) balances and other savings and others have
very modest assets, but have paid up their house.
So there really is more to consider here than just an
account balance. That's where we bring us to the challenges.
First, the workplace challenge. While we think the employer
plan system can play an important role, let's not experiment
with the whole system until we have broad agreement on the
suitable products for our extremely diverse workforce. We risk
jeopardizing the entire noble effort of making savings last a
lifetime if we start too big and create a backlash of
opposition.
In addition, annuity options will add another layer of
complex laws and regulations to plans and entail greater
fiduciary liabilities for employers. Will the small and medium
employers accept this or will they head for the exits? Will
workers accept being defaulted into products they don't value
or understand?
So the second risk I'd like to talk about is the default
risk. An annuity is a promise that can last for decades and
it's only as good as the insurance company standing behind it.
We've been in such a tumultuous time with the solvency of our
financial system. Who will secure the promise of the annuities
in 401(k) plans? Will it be the insurance companies, State
guarantee funds, the employers, or will it fall to the Federal
Government?
Last, I'd like to speak about the value challenge. What
consumer love about Social Security is both longevity and
inflation protection. It does little good to promise paychecks
for life if they don't keep up with inflation. Value must also
be judged by cost. Until we can offer our consumers a product
with inflation protection and at a reasonable cost, we must
proceed with caution.
These are all big issues, but it doesn't mean we can't get
started. So I believe we could start by helping the over 3
million baby boomers who reach retirement each year convert
their savings into modest monthly checks by piggybacking onto
our Social Security System. Aspen IFS has proposed a new
public-private partnership to market security-plus annuities
through the Social Security Administration. Seniors who are
deciding to claim Social Security could opt to buy an
additional layer of Social Security-like income with their own
money and have it added to their monthly checks. Private
companies would underwrite these basic immediate annuities,
which could be priced reasonably on a group basis.
The key point here is that it's better to start small with
a voluntary system that's simple and secure.
In closing, I want to return to my hope. I have a hope that
we can demand more innovation from our private insurance
providers. It's time for better products that match today's
consumers and we believe the industry is ready to deliver. I
also have a hope that we can regulate annuity products so
they'll be suitable, safe, and good value. Finally, I hope that
we'll learn much more about what Americans actually want with a
lifelong income product. Once we do, we'll be able to deliver
and improve on our system of savings so that it really can
deliver lifelong income for a very diverse America.
Thank you very much.
[The prepared statement of Ms. Mensah follows:]
The Chairman. Thank you very much.
Mr. Beck, in your testimony you talk about how workers can
improve their lifetime income by delaying taking Social
Security benefits. In the last Congress I introduced an older
workers bill to allow seniors to earn Social Security tax
credits up to the age of 72. How do you feel about that
proposal?
Mr. Beck. I think anything that improves the flexibility
available to the worker is a positive thing. The key thing,
though, from our point of view is does the person understand
what that flexibility means to them? If somebody has the
ability to defer beyond age 70 as it currently sits and that
doesn't create a burden on them, that puts them in a much
better position. So I think it's a very positive factor
available to workers, so long again as they understand what
they're doing and how they would go about making that fit into
their monthly budgets.
The Chairman. All right. Ms. Hueler, you said that many
employers are reluctant to take on the responsibility for
offering lifetime income products. How can we remove some of
the barriers so as they would be more willing to offer these
options, as well as educating their workers?
Ms. Hueler. That's one of the really--we call it kind of
the conundrum, where the employee and the employer's behavior
is inextricably linked. If the employer doesn't offer or
encourage, the employees are not going to move.
But the employers have this burden or concern that's very
legitimate over issuer selection and the language that's
utilized in the Department of Labor regulations relative to
that issue. So I think what we see is that employers have a
willingness of heart, but they face the concern over the
specific liability. So if we offered safe harbor language that
would give them a simple road map to something that they know
they could comply with--and it's important, too, to think about
it this way. You have the HR-benefits side of the house and you
have the finance side of the house. So there's a lot of
consideration that goes into the financial risks relative to
offering annuitization. So if you gave them a simple road map
where they could diversify and ensure low costs and know that
they were providing a real value to those participants that
mitigated certain risks like inflation and other things, then
they are going to be far more receptive to adopt programs that
fit within a safe harbor.
In essence, the safe harbor can't just be for the heck of
providing a safe harbor. It has to really reflect the plan
sponsors concerns about their participants.
The Chairman. On the way over to the vote, Senator Franken
said to me: Well, what happens if somebody buys an annuity from
a company and the company goes out of business?
Ms. Hueler. We've got an issuer at the table.
The Chairman. Do you want to answer that question, Mr.
Mullaney?
Mr. Mullaney. Sure. I think first of all, if you think
about the insurance industry, the insurance industry has been
paying annuity benefits to millions of people for a number of
years. Over the last 10 years or so, insurance companies have
continued to see the capital requirements that States require
for them to operate continue to increase. I think as we've gone
through this recent financial crisis, insurance companies have
held up very well in terms of their financial strength and
their ability to continue to provide benefits to their
policyholders.
You know, the State regulation of insurance really allows
for State insurance regulators to look very closely at the
financial performance of an insurance company, the capital
requirements, the reserves associated with the liabilities that
that insurance company has written. If there's any sign that an
insurance company might be in trouble, State regulators step in
early and begin to take the necessary steps to resolve an
insurance company's issues.
In the rare event that there is an insolvency, there are
State guarantee funds that can step in and continue benefit
payments.
The Chairman. So you don't consider that to be a major
problem?
Mr. Mullaney. I do not consider it to be a major problem.
Ms. Hueler. Chairman Kohl, if I could respond as well.
The Chairman. Ms. Hueler.
Ms. Hueler. I think one of the other issues is
concentration of risk. By having multiple providers, you also
do reduce the risk of exposure to any single incident or any
single event that might occur at a given insurance entity, not
only all the protections that Bill describes. But that's a
really important aspect of not concentrating risk into one
single provider and assuming that a provider will stay the same
for eternity.
The Chairman. That's a good point.
Mr. Mullaney. Just maybe to follow up on that if I could,
Mr. Chairman. The competitive landscape in the annuity industry
is very robust. There are dozens of companies that provide
annuities to millions of Americans. So there's plenty of
competition in the annuity industry for consumers and employers
if they choose to do so, to offer a wide range of product
providers and solutions to their employees.
The Chairman. Thank you.
Ms. Mensah, we've heard the value of educating
participants, of course, is extremely pertinent here. While
your security-plus annuity proposal would be relatively simple
for participants, what education efforts do you think would be
needed to ensure that Americans were aware of and fully
understood this option?
Ms. Mensah. Thank you, Chairman Kohl. What we love about
this idea is that it's catching people right at the moment when
they're retiring. It's saying at the time that you sign up for
Social Security, you could receive information at this point
from the Social Security Administration. You could be directed
to a call center, to say: Would you like to purchase some
additional income? So that you would be making--this is the
perfect time to have a comparative yardstick, something that
you're going to get from Social Security and what else you'd
like to do with your nest egg.
So we think it's not only educating, because that's the
focus on just people only. It's matching people and a product
at the right time in their life. We've heard a lot about how
education is more effective at the right moment. So we think
that that's the power of this, that you could do this talking
about it, and it would be from a trusted source. Here it could
be your Social Security Administration giving you the
information or with a private call center that would help
direct those questions.
So it seems to us a timing question, to time the education
with the purchase decision.
The Chairman. To the rest of you: The security-plus annuity
proposal, would you critique it a little bit for the rest of
us? Mr. Beck?
Mr. Beck. Just from an education point of view, it's an
interesting idea. The challenge I would have from an
educational point of view is is the consumer at that point
aware of alternatives available to them? There's a big
difference between financial knowledge and financial
sophistication. If you're being offered a product at a specific
time and you have no comparative program to look at and do not
necessarily understand the pluses and minuses--I would be more
comfortable with the concept if the education process had that
comparative component into it, rather than saying, here's an
add-on to an existing trusted source product delivery.
The Chairman. Ms. Hueler, would you agree with that?
Ms. Hueler. I do. I agree with Ted's comments. From our
perspective in dealing directly with employers, I guess there's
a couple of issues. If you really look at the participant, they
place a high degree of trust in their employer. We need--we
believe we need employers to be involved, both public and
private, to be involved in this process.
I think it would be difficult to have them excited about a
proposition like this. I do think that would be one of the big
hurdles. It may look very easy on the surface, but the appetite
for more emphasis on a government-sponsored program, even if
it's just the perception, I think that that's a big challenge.
I think government support is very different, government
encouragement, providing the framework and allowing the private
sector to really come through with programs that meet the needs
of the participants. So I think you have to really consider
what the participants face in this decisionmaking process and
who their sources, who their trusted sources really are.
The Chairman. Yes, Ms. Mensah?
Ms. Mensah. Yes, just to say, we also design this for so
many people who are not in plans. That's really 50 percent of
our workforce. So while I would not disagree, when you have an
employer who can play that role for you you're in a privileged
position, and I wish more Americans were there. But there are
many employers who won't.
Just to make very clear, we've always seen this. We
designed this in partnership with CEOs from the financial
sector. So this is a private product. It's a public-private
partnership. It's private companies who would underwrite.
Also, we've always said that it should be a starter
annuity. It isn't everybody's choice, Ted, you're correct on
that. This would be a way to get started for some people who
want to annuitize some of their nest egg. You could do it in a
trusted way, and maybe this is your starter and you would make
your way to other products that might give you more flexibility
and control.
But for some people, just the chance to add an additional
$100 to that Social Security check, it would make sense at that
moment. That's our contention.
The Chairman. Mr. Mullaney, you're sitting between these
two adversaries. Would you like to offer a little illumination
to us?
Mr. Mullaney. I would, yes. Thank you, Mr. Chairman. I
think the proposal that Lisa has put out there is elegant in
its simplicity, but one of the things that I would be concerned
about is the fact that retirement planning for individuals is
somewhat complicated, because it's a function of each
individual's unique circumstances. In the earlier panel that we
had before, we heard about how long people expect to live. In
studies that we've done, over 60 percent of the people don't
expect to live as long as the mortality table suggests that
they will.
There are issues around how much money people need to save
to cover things like medical expenses in retirement. So the
industry's view is that it's important for people to be able to
get the appropriate level of advice, to be able to customize a
retirement program that includes some amount of guaranteed
income where appropriate, so that a person will never run out
of income in retirement. While your point is well taken that
many people are not in plans today, there's a very robust
market where, in the retail space, people can go out and get
some advice and counsel, and some of the products and solutions
they might need to be able to provide guaranteed income in
retirement. So that's just not something that's available to
people who are at work.
The Chairman. Ms. Hueler?
Ms. Hueler. Sure, if I could clarify a couple things. We
don't view plans as the only source of retirement savings, for
sure. There's a lot of individuals that are not covered by
plans, and that's a very legitimate position.
But even in the IRA sector, we believe this group
institutional approach for all participants in qualified plans,
whether that be individual IRA plans or retirement plans that
are sponsored by employers, can be done efficiently and cost
effectively. If there's a starter program, I can understand the
value, the true value of that. But I think we also have to look
at the broadest base of where people have their savings, who
they're utilizing as their resources for this type of
educational and financial planning information, and we have to
provide them access through those channels if we really expect
it to work in a meaningful way.
The Chairman. All right.
Mr. Mullaney, I think we're all pleased to see the
development of new and innovative products to provide consumers
with lifetime income. Obviously that's key. But I'm concerned
that they have adequate consumer protections, such as spousal
protections and reasonable fees. How is your industry
guaranteeing that these products are designed in the interest
of your consumers?
Mr. Mullaney. First of all, as we think about product
designs and new innovations that we might want to bring to our
products, the first place we start is with the consumer, to
understand what the consumer needs are. If you look at
guaranteed lifetime income products from where they started
many years ago to where they are today, many features have been
added to these products. Those features really reflect the
needs that consumers have expressed to us in terms of the type
of features that they would like to see in guaranteed lifetime
income programs.
Whenever you design these programs, you also have to
consider the cost, and we believe very much in making sure that
the products that are offered in the marketplace are suitable
to the people who buy them and that there's full disclosure
around how those products work and the fees and the costs
associated with those products.
As I said before, there's a very competitive market for the
sale of lifetime income products. So the value that consumers
look for and the competitive nature of the market certainly
keeps the prices associated with these programs well in line
with what consumers can afford.
The Chairman. Mr. Beck, have you found any particular
retirement challenges among specific demographic groups, and
what suggestions do you have to help?
Mr. Beck. We have been doing some studies on specific
issues related to different groups. We have been doing research
specifically on Hispanic households with the University of
Notre Dame for several years. There are different challenges
and there have to be sensitivities.
But I think understanding those is the first key. We do not
yet have something that we could say specifically do this for
this group, be it different racial groups, be it different age
groups, be it different income groups. So the message from us
is this is something we need to study and do more research on.
The greatest risk here is doing ready, fire, aim. So we're
still in the research and data gathering mode to see what sort
of suggestions might be available to people to be more
sensitive and more applicable to different groups.
The Chairman. Ms. Hueler, can you explain the large
variations in the price of annuities and share your
recommendations with us on how to bring down the price of
annuities for all Americans?
Ms. Hueler. The comments we provided to you stem from
better than two decades of observing insurance company price
variability. It's inherent in the nature of the way that
products are designed and priced. Even in the case where
issuers are providing you their very best price of the day, at
very low cost or no cost, they may not in fact be competitive
with their peer at a given point in time for a given type of
annuity product.
It doesn't mean they're not doing a great job and it
doesn't mean they're not delivering at low cost. But their
price models are fluid and there is no one insurance company's
model that can deliver the best the market has to offer on any
given day.
So when you include peers who are doing best case pricing,
low cost delivery, low fees, you have the opportunity to
provide to the individual at the point in time that they're
converting the best the market has to offer. It's not to say
that insurance company A, B, and C are not all doing their best
job. But they will have a different price at any given point in
time on a particular annuity benefit, and that's just the
nature of the business.
We've done study after study, so we're confident in that
data, and we know the way to resolve that is to have apples to
apples comparative quote capabilities, so that when a person
asks for a particular type of benefit there's no confusion,
there's no additional bells, whistles, etcetera, and it's very
easily compared one to another, and the issuers have had the
opportunity to compete on that given day at that point in time
for that piece of business.
The Chairman. Good.
Well, I think you've all done very well and offered a lot
of illumination into something that's emerging and very
important in our society as we continue to go forward. So we
thank you for being here, thank you for your contributions. At
this time I think we'll terminate the hearing.
[Whereupon, at 3:58 p.m., the hearing was adjourned.]
A P P E N D I X
----------
Mr Iwry's Responses to Senator Kohl's Questions
Question. A March 29, 2010, Treasury Inspector General for
Tax Administration (TIGTA) report identified a significant loss
in Federal funds due to individual noncompliance with
Individual Retirement Account (IRA) excess contribution and
minimum distribution requirements. The report estimates that
these two forms of IRA noncompliance amounted to nearly $300
million in tax revenue losses for tax year 2006 and 2007. The
report also states that IRA noncompliance has continued to grow
since tax year 2005. The IRS agreed to address the problem when
it was first identified over two years ago in an earlier 2008
TIGTA report, but the noncompliance has continued to grow
unchecked. With the possibility of losing significantly more
than $300 million in tax revenue over the next two years due to
IRA noncompliance, what can be done now to protect these
Federal funds?
Answer. To respond to your questions about what more can be
done to protect Federal revenues from noncompliance with the
IRA excess contribution and minimum distribution requirements,
we have consulted with the IRS. The information they have
provided is reflected in our responses to your questions,
below.
The IRS completed an IRA study late last year that
responded to GAO and TIGTA audit findings involving both the
IRA Required Minimum Distributions (RMD) and IRA Excess
Contributions. TIGTA originally proposed use of the IRS
Automated Under Reporter (AUR) matching program for working
these IRA issues. However, the IRS study concluded that neither
issue is a good fit for AUR: RMD cases are not well suited for
AUR inventory because of difficulties with accurate matching
and the complications created by the need for two years of data
to determine non-compliance. Additionally, IRA cases involving
excess contributions are not well suited for AUR inventory
because of difficulties with accurate matching, multiple year
issues, and the low average penalty for an IRA excess
contribution, resulting in average potential assessments in the
$300 range.
It became evident to IRS management that a broader strategy
was needed for addressing IRA non-compliance, and that
examinations would be only one component of a more
comprehensive approach that would also consider amending
regulations, modifying existing forms and publications,
conducting additional research studies, and developing outreach
and education. Subsequent to the Committee's hearing, the IRS
convened a cross-functional group using executives in its
Candidate Development Program to review the TIGTA data and
identify activities that might be effective in preventing the
loss of revenue. The group consisted of key personnel in Wage
and Investment (W&I), Small Business/Self Employed (SB/SE), Tax
Exempt and Government Entities (TE/GE), Large Business and
International (LB&I) and Modernization and Information
Technology Services (MITS). This cross-functional team
developed several high-level suggestions, including initiatives
for working toward a broad-based strategy to effectively
address the issues while focusing on aspects such as forms and
regulations.
Question. In response to the report, the IRS has proposed a
Service-wide strategy to address IRA noncompliance in regards
to excess contributions and non-disbursements of required
minimum distributions, with a proposed implementation date of
October 15, 2012. How do you feel about the IRS's timeline, and
do you believe this much time is necessary to successfully
implement the strategy?
Answer. We believe that the IRS has appropriately
accelerated its original timeline for implementing its proposed
Service-wide strategy to address IRA noncompliance relating to
excess contributions and required minimum distributions. While
some elements of the strategy can be implemented in 2011,
successful implementation of other elements can be expected to
take until the Fall of 2012.
More specifically, it will take a significant level of
effort to address the myriad and complex issues surrounding IRA
noncompliance and develop a comprehensive strategy encompassing
all of the interrelated issues. There would be a considerable
opportunity cost if the IRS redeployed extensive exam resources
to work cases with relatively small average potential
assessments compared to other workload categories. But if we do
not pay sufficient attention to individual IRA cases because
the average assessments are small, then we risk forgoing the
substantial total assessments that are involved when the small
dollar per case average is multiplied by the large universe of
potential cases. We believe the answer is to find ways to
prevent the IRA compliance issues from occurring in the first
place, and relying less on remedying those issues with exams
after they have already occurred.
The suggestions developed by the cross-functional IRS team
referred to earlier should have a positive impact on the level
of non-compliance while limiting unnecessary contacts with the
taxpayer. To follow up, the IRS will be are convening a
strategy team in the first quarter of FY11 to develop an
overarching compliance strategy for addressing IRA
noncompliance. The team has been charged with identifying both
``quick hits'' and longer term proposals. The quick hit
recommendations will be options that can be implemented in
calendar year 2011. The proposed timeline of 2012 is needed to
coordinate the substantial activity connected with properly
working the longer term options, including systems changes and
significant outreach and education. Researching and
implementing actions such as these require a balancing of other
IRS priorities related to IT and Counsel resources and cannot
be accomplished in a relatively short timeframe.
Question. The Inspector General recommended the development
of processes to identify individuals who do not comply with
retirement provisions as well as the development of compliance
efforts to address the noncompliance. The IRS has stated that
their Service-wide strategy will contain compliance, education/
guidance, and outreach components. What are the most critical
elements of a strategy of this nature and how would you
envision this strategy being the most quickly and effectively
implemented?
Answer. A strategy of this nature relies on continued
vigilance on the compliance side, but also, in particular,
initiatives grounded in education/guidance and outreach. These
types of initiatives may hold the promise of being particularly
efficient by preventing noncompliance in the first place.
The IRS has indicated that, in connection with education/
guidance and outreach, the IRS strategy team will examine
options such as enhancing IRS Web-based service and information
offerings; presenting lists of common mistakes and how to avoid
them; increasing the clarity of published guidance; modifying
existing forms and publications, and examining the potential
for a ``soft notice'' campaign. The IRS team plans to identify
any quick-hit action items that can be put into place promptly,
while the more time- and resource-intensive solutions are
developed by the Service.
If the Senate Aging Committee staff would find it helpful
to have more detail or to discuss this strategy with the IRS
and Treasury, we would be glad to meet with Committee staff for
a discussion of these efforts.