[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
RETIREMENT SECURITY: CHALLENGES
CONFRONTING PENSION PLAN
SPONSORS, WORKERS, AND RETIREES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HEALTH,
EMPLOYMENT, LABOR AND PENSIONS
COMMITTEE ON EDUCATION
AND THE WORKFORCE
U.S. House of Representatives
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, JUNE 14, 2011
__________
Serial No. 112-28
__________
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COMMITTEE ON EDUCATION AND THE WORKFORCE
JOHN KLINE, Minnesota, Chairman
Thomas E. Petri, Wisconsin George Miller, California,
Howard P. ``Buck'' McKeon, Senior Democratic Member
California Dale E. Kildee, Michigan
Judy Biggert, Illinois Donald M. Payne, New Jersey
Todd Russell Platts, Pennsylvania Robert E. Andrews, New Jersey
Joe Wilson, South Carolina Robert C. ``Bobby'' Scott,
Virginia Foxx, North Carolina Virginia
Bob Goodlatte, Virginia Lynn C. Woolsey, California
Duncan Hunter, California Ruben Hinojosa, Texas
David P. Roe, Tennessee Carolyn McCarthy, New York
Glenn Thompson, Pennsylvania John F. Tierney, Massachusetts
Tim Walberg, Michigan Dennis J. Kucinich, Ohio
Scott DesJarlais, Tennessee David Wu, Oregon
Richard L. Hanna, New York Rush D. Holt, New Jersey
Todd Rokita, Indiana Susan A. Davis, California
Larry Bucshon, Indiana Raul M. Grijalva, Arizona
Trey Gowdy, South Carolina Timothy H. Bishop, New York
Lou Barletta, Pennsylvania David Loebsack, Iowa
Kristi L. Noem, South Dakota Mazie K. Hirono, Hawaii
Martha Roby, Alabama
Joseph J. Heck, Nevada
Dennis A. Ross, Florida
Mike Kelly, Pennsylvania
Barrett Karr, Staff Director
Jody Calemine, Minority Staff Director
SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS
DAVID P. ROE, Tennessee, Chairman
Joe Wilson, South Carolina Robert E. Andrews, New Jersey
Glenn Thompson, Pennsylvania Ranking Minority Member
Tim Walberg, Michigan Dennis J. Kucinich, Ohio
Scott DesJarlais, Tennessee David Loebsack, Iowa
Richard L. Hanna, New York Dale E. Kildee, Michigan
Todd Rokita, Indiana Ruben Hinojosa, Texas
Larry Bucshon, Indiana Carolyn McCarthy, New York
Lou Barletta, Pennsylvania John F. Tierney, Massachusetts
Kristi L. Noem, South Dakota David Wu, Oregon
Martha Roby, Alabama Rush D. Holt, New Jersey
Joseph J. Heck, Nevada Robert C. ``Bobby'' Scott,
Dennis A. Ross, Florida Virginia
C O N T E N T S
----------
Page
Hearing held on June 14, 2011.................................... 1
Statement of Members:
Andrews, Hon. Robert E., ranking minority member,
Subcommittee on Health, Employment, Labor and Pensions..... 4
Roe, Hon. David P., Chairman, Subcommittee on Health,
Employment, Labor and Pensions............................. 1
Prepared statement of.................................... 3
Statement of Witnesses:
Brill, Alex M., research fellow, American Enterprise
Institute.................................................. 6
Prepared statement of.................................... 9
Delaney, Dennis T., executive vice president, human resources
& administration, Ingram Industries Inc.................... 17
Prepared statement of.................................... 19
Klein, James A., president, American Benefits Council........ 26
Prepared statement of.................................... 28
Richtman, Max, executive vice president and acting CEO,
National Committee to Preserve Social Security and Medicare 23
Prepared statement of.................................... 25
Additional Submissions:
Mr. Andrews:
Prepared statement of Retirement USA..................... 56
Prepared statement of American Association of Retired
Persons................................................ 58
Chairman Roe:
Prepared statement of the American Bankers Association;
the Financial Services Roundtable; the Financial
Services Institute; Insured Retirement Institute;
National Association of Insurance and Financial
Advisors; and the Securities Industry and Financial
Markets Association.................................... 64
Prepared statement of the Employee Benefit Research
Institute.............................................. 72
Prepared statement of the U.S. Chamber of Commerce....... 87
RETIREMENT SECURITY: CHALLENGES
CONFRONTING PENSION PLAN
SPONSORS, WORKERS, AND RETIREES
----------
Tuesday, June 14, 2011
U.S. House of Representatives
Subcommittee on Health, Employment, Labor and Pensions
Committee on Education and the Workforce
Washington, DC
----------
The subcommittee met, pursuant to call, at 11:00 a.m., in
room 2175, Rayburn House Office Building, Hon. Phil Roe
[chairman of the subcommittee] presiding.
Present: Representatives Roe, DesJarlais, Bucshon,
Barletta, Roby, Heck, Kline (ex officio), Andrews, Kucinich,
Loebsack, Kildee, Hinojosa, McCarthy, Tierney, Wu, Holt and
Scott.
Staff Present: Andrew Banducci, Professional Staff Member;
Katherine Bathgate, Press Assistant/New Media Coordinator;
Casey Buboltz, Coalitions and Member Services Coordinator; Ed
Gilroy, Director of Workforce Policy; Benjamin Hoog,
Legislative Assistant; Barrett Karr, Staff Director; Brian
Newell, Deputy Communications Director; Krisann Pearce, General
Counsel; Molly McLaughlin Salmi, Deputy Director of Workforce
Policy; Ken Serafin, Workforce Policy Counsel; Linda Stevens,
Chief Clerk/Assistant to the General Counsel; Alissa
Strawcutter, Deputy Clerk; Aaron Albright, Minority
Communications Director for Labor; Kate Ahlgren, Minority
Investigative Counsel; Tylease Alli, Minority Clerk; Jody
Calemine, Minority Staff Director; John D'Elia, Minority Staff
Assistant; Brian Levin, Minority New Media Press Assistant;
Megan O'Reilly, Minority General Counsel; Julie Peller,
Minority Deputy Staff Director; Meredith Regine, Minority Labor
Policy Associate; and Michele Varnhagen, Minority Chief Policy
Advisor/Labor Policy Director (Counsel).
Chairman Roe. A quorum being present, the Subcommittee on
Health, Employment, Labor and Pensions will come to order.
Good morning. I would like to welcome our guests and thank
our witnesses for being with us today.
Roughly 60 million workers participate in an employment-
based retirement plan. They, like so many Americans, have felt
the impact of the recession and continue to experience tough
times during this slow economy.
As more Americans reach into their retirement savings just
to make ends meet, policymakers have a responsibility to
examine the difficulties facing workers and retirees and
discuss whether Federal policies are hurting or helping efforts
to rebuild retirement savings.
A cornerstone of the Nation's retirement system is pension
private plans. Whether through a defined benefits plan or a
defined contribution plan, a worker's ability to plan and save
for his or her retirement is critical to long-term financial
security. Since 1974, the Employee Retirement Income Security
Act, ERISA, has governed private pension plans, setting
eligibility standards, fiduciary responsibilities for plan
managers and the responsibility to disclose information to
participants regarding the plan's financial health. Lawmakers
have tried to balance the necessary flexibility to allow for
investment opportunities with a demand for clear guidelines
that protect workers.
Unfortunately, the best efforts of Washington cannot
predict the difficulties brought on by deep recession. Today
pension plans face a number of challenges that threaten the
retirement security of American workers. According to one
estimate, defined benefit pension plans were underfunded by
more than $500 billion in 2009. This situation may not improve
if economic growth remains anemic.
This situation threatens to place an even greater strain on
an already burdened Pension Benefit Guaranty Corporation. For
nearly 40 years the PBGC has insured the retirement benefits of
workers enrolled in a defined benefit plan. Today it insures
the benefits of 44 million workers, yet faces obligations that
exceed its resources by nearly $22 billion.
A number of ideas have been put forth seeking a solution,
and I urge the administration to provide greater details about
its own proposals so that we can find a common sense and long-
term solution on behalf of the American people.
Additionally, pension plan sponsors and managers must cope
with an uncertain regulatory environment. Last year, Congress
passed a comprehensive overhaul of the Nation's financial
regulatory system. The law has led to thousands of new pages of
regulations and rules. Regardless of one's views on the
prescription for financial reform, the law has created
substantial changes to investment markets and additional
uncertainty for pension plan sponsors, workers and retirees.
The administration has also introduced a regulatory
proposal that would transform a key part of ERISA. The proposed
change to the defined definition of ``fiduciary'' will
disregard 35 years of regulatory guidance without a full
understanding of the consequences. Federal policy should help
facilitate, rather than undermine, innovation and improvements
to investment services. There are real concerns that the
administration's proposal will take retirement planning in the
wrong direction without a full understanding of the
consequences.
These are concerns shared across party lines. In a letter
addressed to members of the Obama administration members of the
New Democrat Coalition wrote, the proposed rule will result in
``limiting access to investment education and information.''
The letter goes on to say, ``This would result in worse
investment decisions by participants and would, in turn,
increase the costs of investment products, services, and advice
that are absolutely critical parts of a sound investment
strategy for consumers.''
Washington has a responsibility to provide clear rules of
the road to prevent fraud and abuse, but must also be careful
not to create an environment that stifles investment and
ultimately threatens the income and security of America's
retirees. New Democrat Coalition Members of Congress have
called on an administration to restart the fiduciary rule
process, and I hope the administration will do so.
This hearing is our first opportunity to take a closer look
at the challenges facing the pensions and retirement savings of
workers and retirees. In recent years, these issues have
generated a lively debate and yet have generally resulted in a
bipartisan effort to strengthen the retirement security of our
Nation. It would be regrettable at such a critical time for our
country to abandon that spirit of cooperation today. There is
certainly a lot to discuss.
And with that, I will recognize Mr. Andrews, senior
Democrat of the subcommittee, for his opening remarks. Mr.
Andrews.
[The statement of Chairman Roe follows:]
Prepared Statement of Hon. David P. Roe, Chairman,
Subcommittee on Health, Employment, Labor and Pensions
Good morning. I would like to welcome our guests and thank our
witnesses for being with us today.
Roughly 60 million workers participate in an employment-based
retirement plan. They, like so many Americans, have felt the impact of
the recent recession and continue to experience tough times during this
slow economy. As more Americans reach into their retirement savings
just to make ends meet, policymakers have a responsibility to examine
the difficulties facing workers and retirees and discuss whether
federal policies are helping or hurting efforts to rebuild retirement
savings.
A cornerstone of the nation's retirement system is private pension
plans. Whether through a defined benefits plan or a defined
contribution plan, a worker's ability to plan and save for his or her
retirement is critical to long-term financial security. Since 1974, the
Employee Retirement Income Security Act has governed private pension
plans, setting eligibility standards, fiduciary responsibilities for
plan managers, and the responsibility to disclose information to
participants regarding the plan's financial health. Lawmakers have
tried to balance the necessary flexibility to allow for investment
opportunities with the demand for clear guidelines that protect
workers.
Unfortunately, the best efforts of Washington cannot predict the
difficulties brought on by a deep recession. Today, pension plans face
a number of challenges that threaten the retirement security of
America's workers. According to one estimate, defined benefit pension
plans were underfunded by more than $500 billion in 2009. This
situation may not improve if economic growth remains anemic.
This situation threatens to place even greater strain on an already
burdened Pension Benefit Guaranty Corporation. For nearly forty years,
PBGC has insured the retirement benefits of workers enrolled in a
defined benefit plan. Today, it insures the benefits of 44 million
workers yet faces obligations that exceed its resources by nearly $22
billion. A number of ideas have been put forth seeking a solution, and
I urge the administration to provide greater details about its own
proposal so we can find a commonsense and long-term solution on behalf
of the American people.
Additionally, pension plan sponsors and managers must cope with an
uncertain regulatory environment. Last year, Congress passed a
comprehensive overhaul of the nation's financial regulatory system. The
law has led to thousands of pages in new rules and regulations.
Regardless of one's views on the prescription for financial reform, the
law has created substantial changes to investment markets and
additional uncertainty for pension plan sponsors, workers, and
retirees.
The administration has also introduced a regulatory proposal that
will transform a key part of ERISA. The proposed change to the
definition of ``fiduciary'' will disregard 35 years of regulatory
guidance without a full understanding of the consequences. Federal
policy should help facilitate, rather than undermine, innovation and
improvements to investment services. There are real concerns the
administration's proposal will take retirement planning in the wrong
direction, without a full understanding of the consequences.
These are concerns shared across party lines. In a letter addressed
to members of the Obama administration, members of the New Democrat
Coalition wrote the proposed rule will result in ``limiting access to
investment education and information.'' The letter goes on to say,
``This would result in worse investment decisions by participants and
would, in turn, increase the costs of investment products, services,
and advice that are absolutely critical parts of a sound investment
strategy for consumers.''
Washington has a responsibility to provide clear rules of the road
to prevent fraud and abuse, but must also be careful not to create an
environment that stifles investment and ultimately threatens the income
security of America's retirees. New Democrat Coalition members of
Congress have called on the administration to restart the fiduciary
rule process, and I hope the administration will do so.
This hearing is our first opportunity to take a closer look at the
challenges facing the pensions and retirement savings of workers and
retirees. In recent years, these issues have generated a lively debate,
yet have generally resulted in a bipartisan effort to strengthen the
retirement security of our nation. It would be regrettable at such a
critical time for our country to abandon that spirit of cooperation
today.
There is certainly a lot to discuss, and with that, I will now
recognize Mr. Andrews, the senior Democrat of the subcommittee, for his
opening remarks.
______
Mr. Andrews. Thank you, Mr. Chairman. Good morning. Thank
you for calling this hearing and I think it is good to see the
chairman proceeding in a tradition on this subcommittee where
the two sides try to work together on pension issues.
When the present Speaker of the House, Speaker Boehner,
chaired this subcommittee a few years ago, we were able to work
with him quite successfully on the 2006 Pension Protection Act
and I think achieve some good things for the people of our
country, and I am glad to see that you are following in that
tradition, and I appreciate it very, very much.
I think this is a very timely discussion because anybody
who visits retirees in their district now knows the incredible
stress that these families are under.
I live in a State that has a very, very high cost of
living, high property taxes, high utility bills, high cost of
food, all sorts of things. You know, last week was a very hot
and humid week in our district, and I visited a number of
senior citizens. You know, you see them living in one room
because it costs too much to cool the rest of the house so they
try to keep their air conditioning bills as low as possible.
Some might not even turn on the air conditioning at all because
it is a bill that they can't pay.
You know, these are the people that you see at the grocery
store searching for whatever aisle might have the deep discount
markdown stuff, because the boxes are a little bit defective of
cereal or the milk is a little bit older than the rest of the
milk. These are the people who, if they get a gift, they save
the wrapping paper so they can reuse the wrapping paper if they
want to give their grandchild or someone a gift. These are
people living at or very close to the edge of oblivion in their
economic situation.
And so obviously it makes a lot of sense for us to talk
about ways that we can work together to try to enhance and
improve retirement income for America's retirees. I know that
the panel today will have some very good ideas about that. I
would respectfully suggest, though, that there are two things
that we ought to do to help retirees through this very, very
difficult time.
The first, and I say this with all due respect, would be
for the majority to withdraw its ill-considered plan to end
Medicare.
The Congressional Budget Office tells us that the
additional cost of copays and deductibles and premiums, the
additional out-of-pocket health care costs for Medicare
recipients, if the Republican plan goes through, would be an
additional $6,000 a year. Now, put this in perspective. A
person who is 54 years of age today would have to save an
additional $182,000 in their 401(k) or some other account just
to generate enough income to pay the extra health care bills
that the Republican Medicare proposal entails. Put that in some
perspective, most people about 5 years out from retirement only
have $100,000 in their account to begin with.
So if we want to talk about, you know, elevating the
standard of living for America's retirees, we ought to talk
about withdrawing this disastrous proposal on Medicare the
Congress has looked at this spring.
Second, I would say that, again with all due respect, when
it comes to the fiduciary rule that is under consideration
here, look, one of the reasons we had the financial collapse of
this country of 2008 is the disease of conflict of interest
where people were acting on behalf of one set of interests and
representing they were really representing another set of
interests.
For most Americans, second only to their home equity, their
most precious asset is their pension. And I think we definitely
need rules that say when someone gives you advice on investing
your pension, they should be acting in your interests and not
theirs. People should not be receiving advice from someone who
would stand to benefit more if you put your account in this
mutual fund rather than that one or in a mutual fund rather
than a bond fund.
As I understand the proposed rule, it simply says that the
interests of people giving advice have to be aligned with the
interests of people receiving it, and I think that is something
that we need and should be taking a look at.
So I appreciate the chance to explore these issues. I know
this panel is an expert panel. We are glad that you are here.
We look forward to engaging questions, and I thank you again,
Mr. Chairman.
Chairman Roe. I thank the gentleman for yielding. Pursuant
to committee rule 7(c), all members will be permitted to submit
written statements to be included in the permanent hearing
record.
Without objection, the hearing record will remain open for
14 days to allow such statements and other extraneous material
referenced during the hearing to be submitted for the official
hearing record.
It is now my pleasure to introduce our distinguished panel
of witnesses.
Mr. Alex Brill is Research Fellow at the American
Enterprise Institute, where he studies private pension systems.
He is a former Senior Adviser and Chief Economist to the House
Ways and Means Committee and also served on the staff of the
President's Council of Economic Advisers. In Congress and at
the CEA, Mr. Brill worked on a variety of issues, including
dividend taxation, international tax policy, Social Security
reform, defined benefit pension reform, and U.S. trade policy.
Mr. Brill holds a Bachelor's Degree from Tufts University and a
Master's Degree in mathematical finance from Boston University.
Mr. Dennis Delaney is Executive Vice President of Human
Resources & Administration for Ingram Industries, Inc., a book
distributor and inland aquatic freight carrier. He is a member
of the Employee Benefits Committee, chair of the Retirement
Plans Committee, and a member of the Workplace Wellness
Alliance Committee of the U.S. Chamber of Commerce, and the
Unemployment Rights Committee of the Human Resources Policy
Association.
Mr. Delaney is a resident of Nashville, Tennessee--welcome
to a fellow Tennessean--where Ingram Industries has
headquarters. He holds a Bachelor's Degree from Michigan State
University and a Master's Degree from Central Michigan
University and a law degree from the University of Detroit.
Welcome.
Mr. Max Richtman is the Executive Vice President and acting
CEO of the National Committee to Preserve Social Security and
Medicare. He served as a Staff Director to the Senate Special
Committee on Aging from 1986 to 1989 and the Senate Select
Committee on Indian Affairs from 1979 to 1986.
He was born in Munich, Germany, and grew up in Omaha,
Nebraska. He graduated cum laude from Harvard College and
received a law degree from Georgetown University Law School.
Welcome.
Mr. James Klein is President of the American Benefits
Council, a trade association based in Washington, D.C.,
representing primarily Fortune 500 companies that either
sponsor or administer health and retirement benefits covering
more than 100 million Americans. Mr. Klein is a founding board
member of the Americans for Generational Equity and serves on
the Government Liaison Committee of the International
Foundation of Employee Benefit Plans. Mr. Klein graduated magna
cum laude from Tufts University with a degree in bioethics and
graduated with honors from the National Law Center, George
Washington University.
Before I recognize the witnesses, each of you have provided
your testimony, let me briefly explain the lighting system. You
each have 5 minutes for your testimony, and with 1 minute
remaining, the yellow light will come on. When your time has
expired, the red light will come on. If you are in the middle
of a thought or sentence, go ahead, obviously, and finish it.
Please be aware and respectful of the time, and I will try
to do the same as the chair. So with that, I will begin with
Mr. Brill.
STATEMENT OF ALEX M. BRILL, RESEARCH FELLOW, AMERICAN
ENTERPRISE INSTITUTE
Mr. Brill. Chairman Roe, Ranking Member Andrews, and other
members of the subcommittee, thank you for the opportunity to
appear before you this morning and recognizing the importance
of addressing challenges confronting pension and retirement
security issues.
This is a policy area with serious, long-term macroeconomic
and microeconomic consequences. From a macroeconomic
perspective, inadequate national savings reduces investment, a
key determinant in future economic growth and prosperity. From
a microeconomic perspective, increased retirement savings are
essential for the well-being of future retirees.
I have submitted written testimony for the record and in my
oral statement this morning I will briefly cover three areas.
First, I will summarize data described in my testimony
regarding the size and scope of the retirement system and the
shift in recent years from defined benefit, DB, plans, towards
defined contribution plans.
Second, I will discuss problems with underfunding of
retirement plans, both on the defined benefit and defined
contribution side; and, finally, I will examine the recent
recession's effects on retirement savings.
At the end of 2010, retirement assets in the United States
totaled approximately $17.5 trillion, with retirement savings
making up 37 percent of all household financial assets.
IRAs, defined contribution plans, and government pension
plans each accounted for roughly a quarter of all retirement
savings in the United States. The remaining quarter of assets
was in private DB and annuity plans collectively, annuities
collectively.
Total retirement assets have generally grown over time with
the exception of the significant but temporary decline in
equity values that occurred in 2008 and 2009. Retirement
savings in nominal terms have increased 50-fold from $368
billion in 1974 to the present.
At the same time, there has been a shift in the private
sector from DB to DC plans. Today, about two-thirds of private
employer-sponsored retirement assets are in defined
contribution plans, the remaining one-third in defined benefit
plans, an increase from about 50/50 20 years ago. However, the
shift is, in fact, more dramatic as the share of new
contributions to retirement are nearly 90 percent in the form
of defined contribution.
Though assets and participation are rising, serious
problems still persist in these two areas. In terms of
participation, while 65 percent of private sector workers have
access to retirement plans, only 50 percent participate.
New policies, encouraged by the Pension Protection Act of
2006, foster auto enrollment and have been successful, but
greater participation would further improve the well-being of
future retirees.
In terms of underfunding, it is estimated that nearly 50
percent of baby boomers and Generation Xers' defined
contribution plans may be at risk of being inadequate to see
them through retirement. While these estimates are only
tentative, they suggest that more education would be valuable
to encouraging more savings.
Underfunding is also a problem in public and private DB
plans. The Congressional Budget Office recently found that
State and local pension funding levels are below 80 percent by
public pension systems' own metrics and by more standard
accounting measures face funding levels near 50 percent.
Private DB plans are underfunded as well. At the end of
2010, the largest 100 plans were only 85 percent funded, an
improvement from recent years, but a significant gap still
exists.
At the economy's low point, the first quarter of 2009,
retirement savings in the United States had fallen by $2.7
trillion from pre-recession levels. The stock market, as
measured by the S&P 500, recovered by the beginning of 2011.
The damage was done for many approaching or in retirement at
the time of the recession.
However, it should be understood that the greatest impact
of the recession on retirement income is not a result of
fluctuations in stock market values, but rather through labor
market channels. Not only has the high unemployment rate
reduced retirement savings, but anemic wage growth reduces
lifetime incomes and, as a result, reduces future Social
Security benefits.
And, finally, I have been and remain a strong advocate of
policies that establish default savings for retirement savings
that encourage more participation, more appropriate asset
allocation and higher savings rates, policies commonly known as
auto enrollment life cycle investment funds and auto
escalation. But I would like to emphasize that it is important
that these tools be complements to, not substitutes, for active
education, engagement and participation by workers in their own
retirement planning.
From a philosophical perspective, our country has foregone
its commitment to the value of thrift. From a practical
perspective, our workers lack adequate financial literacy.
I would like to thank the committee for the opportunity to
testify, and I look forward to your questions.
[The statement of Mr. Brill follows:]
------
Chairman Roe. Thank you, Mr. Brill.
Mr. Delaney.
STATEMENT OF DENNIS DELANEY, EXECUTIVE VICE PRESIDENT, INGRAM
INDUSTRIES, INC.
Mr. Delaney. Thank you, Chairman Roe, Ranking Member
Andrews, and members of the committee, for the opportunity to
discuss challenges for sponsors of defined benefit and defined
contribution plans.
Ingram Industries is a privately held company headquartered
in Nashville, Tennessee, consisting of the Ingram Marine Group,
which is the largest inland marine transportation company in
the country, and Ingram Content Group, which provides a broad
range of physical and digital services to the book industry.
We administer benefit programs for over 5,000 domestic
associates, we have over 2,400 active associates with a frozen
defined benefit, 765 retirees and over 1,900 terminated vested
plan participants.
While there are challenges, the employer provided
retirement system has been successful in providing retirement
income. One of the greatest impediments to the employer
provided system is a lack of predictability of the rules and
regulatory flexibility to adapt to changing situations.
During the recent financial crisis, plan sponsors were
negatively impacted by inflexible funding rules. The
unpredictability has forced my company to make difficult
choices in balancing the needs of our employees with the need
for prudent sound financial management of our company.
In mid-2003 we looked at our defined benefit plan which had
been in place since 1978. After 18 months of review, the
decision was made to maintain the plan but to close it to new
entrants effective January 1, 2005. In 2006, the Pension
Protection Act changed the funding rules for defined benefit
plans.
A major impetus behind the PPA was to increase the funding
level of pension plans. Most plan sponsors entered 2008 fully
ready to comply, but the severe market downturn at the end of
2008 drastically changed that situation.
Because of the PPA's accelerated funding scenarios, and
notwithstanding Congress' efforts to provide temporary funding
relief, Ingram was faced with having to contribute tens of
millions of dollars beyond our normal costs in a short period
of time to a plan that, by design, was intended to bridge
generations. The reality for Ingram was defined by one of our
owners as unacceptably unpredictable. Consequently, Ingram
froze its DB plan effective December 31, 2010.
Adding to the unpredictability in defined benefit plans is
the present situation, a consideration or proposal to increase
PBGC premiums. Increasing premiums without the opportunity for
discussion of details, consideration of the impact or buy-in
from interested parties would present another challenge to the
defined benefit pension system.
The inclusion of automatic enrollment and automatic
escalation in PPA has furthered retirement security. Ingram
implemented an auto enrollment plan in 2005. New hires are
enrolled in the defined contribution plan at a 3 percent
deferral rate. Participation moved from 70 percent in 2005 to
88 percent in 2010. Currently the average pretax deferral of
all participants is over 5 percent.
Our plan recognizes service with the company is important,
and we match from 50 percent to 100 percent of the first 5
percent, dependent on years of service with the company. To
ensure that participants in defined contribution plans are
getting the most benefit, investment in financial education is
critical. A major concern for employers is the ability to
provide investment advice and financial education without
incurring liability. Legislation to further encourage such
programs would be beneficial.
Ingram has offered workshops for associates nearing
retirement. We communicate retirement information through the
Internet, postcards, fliers, posters, quarterly newsletters and
quarterly reports on investment performance. In addition, we
offer asset allocation guidance through Morningstar.
We have hesitated to offer more robust advice in the form
of investment recommendations, contribution increases and
rebalancing due to the uncertainty of the regulations regarding
advice services.
In general, greater regulation often leads to greater
administrative complexities and burdens. Plan sponsors are
faced with two increasingly conflicting goals, providing
information required under ERISA and providing clear and
streamlined information.
Accounting changes from FASB can also create worry for plan
sponsors. This can discourage participation in the employer
provided retirement system and has had a significant impact,
for example, on the long-term prospects of providing post-
retirement medical benefits.
There has been a shift away from defined benefit plans and
an increase in defined contribution plans. The reasons for this
shift are numerous, cost considerations, changing demographics,
and uncertainty surrounding future liabilities of defined
benefit plans.
We implemented a money purchase plan for a segment of our
employee population in 2007, and under this plan we make an
annual contribution to each associate based on age and years of
service.
The key to ensuring the continuation of the private
retirement system is flexibility and predictability. The mix
and types of benefit plans in the future will be diverse,
consequently it is increasingly important to ensure that there
are no barriers to innovation.
I hope that Congress continues to work with plan sponsors
to enact legislation that will encourage further participation
in the employer-provided system and keep them in the game.
I thank you for the opportunity to testify today and look
forward to any questions you may have.
[The statement of Mr. Delaney follows:]
Prepared Statement of Dennis T. Delaney, Executive Vice President,
Human Resources & Administration, Ingram Industries Inc.
Thank you, Chairman Kline, Ranking Member Miller, and members of
the Committee for the opportunity to appear before you today to discuss
challenges for sponsors of defined benefit and defined contribution
plans. My name is Dennis Delaney, Executive Vice President, Human
Resources & Administration for Ingram Industries Inc.
Ingram is a privately held company with a portfolio of operating
businesses headquartered in Nashville, Tennessee, consisting of Ingram
Marine Group, the largest inland marine transportation company in the
country with over 140 motor vessels and 4,000 barges, and Ingram
Content Group, which provides a competitive suite of physical book and
digital content distribution, print on demand and content management
and fulfillment services for retailers, publishers, libraries and
educators both in the U.S. and internationally.
Ingram administers benefit programs for over 5,000 domestic
associates who live in 36 states. We have over 2,400 active associates
with a frozen defined benefit, 765 retirees and over 1,900 terminated
vested plan participants. My testimony reflects my 34 years of
experience in the human resources field, 14 of which have been with
Ingram Industries and 20 of which were with Ford Motor Company.
I appreciate the opportunity to testify before you today on the
challenges facing plan sponsors and in particular, Ingram's experience
as it relates to our defined benefit and defined contribution plans.
At the outset, I want to emphasize that these challenges do not
just impact plan sponsors--they also have the potential to
significantly impact the financial security of current workers and
retirees. While we can each recognize real problems with the current
retirement system, the employer--provided retirement system has been
overwhelmingly successful in providing retirement income and security
for employees. Private employers, with contributions and fees, spent
over $200 billion on retirement income benefits in 2008 \1\ and paid
out over $449 billion in retirement benefits.\2\ According to the
Bureau of Labor Statistics, in March of 2009, 67% of all private sector
workers had access to a retirement plan at work, and 51% participated.
For full time workers, the numbers are 76% and 61%, respectively.
Eighty-three percent of workers in private sector firms with 100 or
more workers are covered in an employer-provided retirement plan and
68% participate. Because some workers, such as those under age eighteen
or twenty-one, or those waiting to meet a minimum service requirement,
are often not eligible to participate in a plan, these statistics
actually underreport the success of employer-provided retirement plans.
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\1\ EBRI Databook, 2009, Chapter 2.
\2\ EBSA Private Pension Plan Bulletin Historical Tables and
Graphs, 2009
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One of the greatest impediments to the employer-provided system
today is the lack of predictability of the rules and regulatory
flexibility to adapt to changing situations. Since 2002, Congress has
passed five laws that address defined benefit funding.\3\ For over a
decade, the legality of hybrid plans was unresolved and those plan
sponsors were unable to get determination letters.\4\ During the recent
financial crisis, plan sponsors faced unexpected financial burdens due
to inflexible funding rules. These issues have each had a negative
impact on the employer-provided retirement system and have acted as a
disincentive for employers to continue to provide these benefits.
Therefore, I strongly urge Congress to provide legislative solutions
which inject the necessary predictability and flexibility into the
retirement system to ensure that employers can continue to maintain
plans that contribute to their workers' retirement security.
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\3\ Job Creation and Worker Assistance Act of 2002 (PL 107-147
increasing the range of permissible interest rates for determining
pension liabilities, lump sum distributions, and PBGC premiums for
under-funded pension plans to 120% of the current 30-year Treasury bond
interest rate; Pension Funding Equity Act of 2004 replacing the
interest rate assumption for two years; Pension Protection Act of 2006
fundamentally changing the funding rules for both single- employer and
multiemployer defined benefit plans; The Worker, Retiree, and Employer
Recovery Act of 2008 (``WRERA'') providing limited funding relief; The
Preservation of Access to Care for Medicare Beneficiaries and Pension
Relief Act of 2010, providing defined benefit plan funding relief for
both single-employer and multiemployer plans.
\4\ In 1999, the Service's Director of Employee Plans issued a
Field Directive that effectively halted the determination letter
applications of hybrid plans from being processed. In 2002, the
Treasury Department, with input from the Equal Employment Opportunity
Commission and the Department of Labor, issued proposed regulations
addressing the issue of age discrimination in hybrid plans but withdrew
the proposed regulations in 2004 in order to clear a path for Congress
to act. The uncertainty surrounding hybrid plans has been even more
considerable in the litigation arena with contradictory decisions among
various circuit courts.
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Issues Facing the Defined Benefit Funding System
This unpredictability and the resulting inability to assess future
funding needs has forced my company to come to grips with this
uncertainty by making difficult choices in balancing the needs of our
employees with the needs for prudent and sound financial management of
our company.
Subsequent to a major acquisition Ingram made in 2002, we took a
long look at our defined benefit plan which had been in place since
1978. After 18 months of review and 80 iterations of plan design
changes, the decision was made to maintain the defined benefit plan for
active participants but to close it to new entrants as of January 1,
2005.
On August 17, 2006, the Pension Protection Act of 2006 (``PPA'')
was signed into law. The act fundamentally changed the funding rules
for both single-employer and multi-employer 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 prepared to comply with the new funding rules, and based their
contribution estimates on these rules. However, the severe market
downturn at the end of 2008 drastically changed the situation.\5\
Because of the accelerated funding scenarios spelled out in the PPA,
and notwithstanding the efforts of Congress to provide some temporary
funding relief, Ingram was faced with the reality of having to
contribute tens of millions of dollars beyond our normal costs, in a
short period of time, to a plan that, by design was intended to bridge
generations and handle the economic cycles--both good and bad--which
occur over a long period of time. The persistent turmoil in the market
and the interest rate environment created a reality for Ingram that was
defined by one of our owners as ``unacceptably unpredictable.''
Consequently, Ingram froze its defined benefit plan effective December
31, 2010.
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\5\ 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 indicates the following as of October 9, 2008:
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). [cont.]
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.
---------------------------------------------------------------------------
Adding to the unpredictability in defined benefit plans is the
consideration of increases to Pension Benefit Guaranty Corporation
(PBGC) premiums. Increasing PBGC premiums without the opportunity for
discussion of details, careful consideration of the potential impact,
or buy-in from all interested parties would present another challenge
to the private sector defined benefit system.
Raising the PBGC premiums, without making contextual reforms to the
agency or the defined benefit system, amounts to a tax on employers who
have voluntarily decided to maintain defined benefit plans. An increase
in PBGC premiums, when added to the multi-billion dollar impact of
accelerated funding enacted in 2006, could divert critical resources
from additional business investment and subsequent job creation.
The Defined Contribution Plan System
Auto Enrollment and Auto Escalation Programs. The inclusion of
automatic enrollment and automatic escalation in PPA has gone a long
way to further retirement security.
Ingram implemented auto-enrollment on January 1, 2005. New hires
are enrolled in the defined contribution plan at a 3% deferral rate.
Participation moved from 70% in 2005 to 88% in 2010. Currently, our
lowest participation is 77% for the group of associates with 6-10 years
of service. These associates were hired prior to implementation of
auto-enrollment. Our highest participation is 96% for associates with 1
year or less of service. Since implementation of auto-enrollment, the
average pre-tax deferral of all associates eligible for the defined
contribution plan moved from 3.9% in 2005 to 4.6% \6\ in 2010. The
average pre-tax deferral of all participants in the defined
contribution plan moved from 5.57% to 5.31%. This decline is due
largely to the number of associates now participating in the plan at
the auto-enroll deferral rate of 3%.
---------------------------------------------------------------------------
\6\ United States Government Accountability Office, Private
Pensions: Changes Needed to Provide 401(k) Plan Participants and the
Department of Labor Better Information on Fees 5 (2007).
---------------------------------------------------------------------------
Ingram does not currently use auto-escalation. Our plan recognizes
that service with the company is important, and Ingram matches 50% of
the first 5% contributed during an associate's first 5 years of
employment. Between years 5 to 9, Ingram matches 75%, and at 10 years
and beyond, the match is 100%.
Investment Advice. Defined contribution plans require greater
employee participation than traditional defined benefit plans. To
ensure that participants are getting the most benefit from their
defined contribution plans, investment and financial education is
critical. Ninety-two percent of all 401(k) plan participants are
responsible for making investment decisions about their contributions
to their retirement plan.getting the most benefit from their defined
contribution plans, investment and financial education is critical.
Ninety-two percent of all 401(k) plan participants are responsible for
making investment decisions about their contributions to their
retirement plan.getting the most benefit from their defined
contribution plans, investment and financial education is critical.
Ninety-two percent of all 401(k) plan participants are responsible for
making investment decisions about their contributions to their
retirement plan.
In addition to investment advice, some employers would like to
provide general financial education. The financial education would make
employees more knowledgeable, and thus savvier, in financial matters.
Legislation to encourage employers to provide financial advice which
includes appropriate protection from liability would be beneficial even
if employees pay a nominal fee.
Ingram has offered workshops for associates nearing retirement
including overviews of the defined benefit and defined contribution
plans, Social Security, personal savings and investments, information
on insurance needs (including health (Medicare), life, disability, and
long term care), estate planning, common mistakes in retirement, etc.
We actively promote National 401(k) Day and communicate retirement
information through the internet, postcards, flyers, posters, quarterly
newsletters and quarterly reports on investment performance. In
addition, for the defined contribution plan, we currently offer asset
allocation guidance through Morningstar. We have hesitated to offer
more robust advice in the form of investment recommendations,
contribution increases and rebalancing due to the uncertainty of the
regulations regarding advice services. Nearly 30% of our associate
population is considered ``engaged achievers'' (more experienced and
well-established participants who are interested and involved in
retirement planning) or ``aspiring planners'' (associates who have a
high interest in retirement planning and are willing to contribute to
their accounts more than the average). A full 33% are considered
``uninvolved savers''--associates who lack the interest or the time for
retirement planning.
Challenges in the Regulatory System
In general, greater regulation often leads to greater
administrative complexities and burdens. Such regulatory burdens can
often discourage plan sponsors from establishing and maintaining
retirement plans. The following are just a few examples of these
regulatory disincentives.
Notice and Disclosure. Plan sponsors are faced with two
increasingly conflicting goals--providing information required under
ERISA and providing clear and streamlined information. In addition to
required notices, plan sponsors want to make information available that
is pertinent to the individual plan and provides greater transparency.
However, this is difficult given the amount of required disclosures
that currently exist. Although there is usually a good reason for every
notice or disclosure requirement, they have a tendency to overwhelm the
participants with information, making it difficult for them to
distinguish the routine notices, e.g., summary annual reports, from the
important information. It is critical that Congress coordinate with the
agencies and the plan sponsor community to determine the most effective
way to streamline the notice and disclosure requirements.
Accounting Rules. In 2006, the Financial Accounting Standards Board
(``FASB'') undertook a project to reconsider the method by which
pensions and other benefits are reported in financial statements.\7\
They completed Phase I of the project but delayed Phase II, which would
have removed smoothing periods from the measure of liabilities, until a
later date. After significant concerns raised by the plan sponsor
community, FASB indefinitely postponed the implementation of Phase II.
---------------------------------------------------------------------------
\7\ Statement of Financial Accounting Standards No. 158,
``Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans'' (FAS 158). This statement requires companies to
report the net financial status of pension and other benefits on the
company's balance sheet rather than in the footnotes. In addition, plan
assets and benefit obligations must be measured as of the date of the
employer's fiscal year end and employers must use the projected benefit
obligation measure of liabilities.
---------------------------------------------------------------------------
Accounting changes from FASB can create worry for plan sponsors.
These changes can and have had significant ramifications for
businesses--impacting credit determinations and loan agreements--
without having any impact on the actual funding of the plans. This can
discourage participation in the employer-provided retirement system and
has had a significant impact on the long term prospects of providing
post-retirement medical plans for new and existing participants.
Current Trends in Retirement Plans--The Shift from DB to DC Plans
The number of defined benefit plans has been declining over the
past several years.\8\ While there has been a shift away from defined
benefit plans, the number of defined contribution plans has increased
exponentially. Since 1975, the number of defined contribution plans has
almost quadrupled from 207,748 to 658,805 in 2007.\9\ In 1992-93, 32
percent of workers in private industry participated in a defined
benefit plan, while 35 percent participated in a defined contribution
plan.\10\ According to the 2008 National Compensation Survey, the
participation for private industry workers in defined benefit plans
decreased to 21 percent, while participation in defined contribution
plans increased to 56 percent.\11\
---------------------------------------------------------------------------
\8\ In 2007, 54 of the 100 largest employers offered a traditional
pension plan to new workers, down from 58 in 2006, according to Watson
Wyatt Worldwide. That 7% decline compares with a 14% drop as recently
as 2005. Levitz, Jennifer. ``When 401 (k) Investing Goes Bad''. The
Wall Street Journal Online 4 Aug. 2008. http://online.wsj.com/article/
SB121744530152197819.html (accessed August 21, 2009) Also see Private
Pension Plan Bulletin Historical Tables: U.S. Department of Labor,
Employee Benefits Security Administration, June 2010, http://
www.dol.gov/ebsa/pdf/1975-2007historicaltables.pdf (accessed August 11,
2010).
\9\ Private Pension Plan Bulletin Historical Tables: U.S.
Department of Labor, Employee Benefits Security Administration, June
2010, http://www.dol.gov/ebsa/pdf/1975-2007historicaltables.pdf
(accessed August 11, 2010).
\10\ Beckman, Allan. ``Access, Participation, and Take-up Rates in
Defined Contribution Retirement Plans Among Workers in Private
Industry, 2006''. Bureau of Labor Statistics. December 27, 2006. http:/
/www.bls.gov/opub/cwc/cm20061213ar01p1.htm (accessed August 11, 2010).
\11\ ``Percent of Workers in Private Industry With Access to
Retirement and Health Care Benefits by Selected Characteristics:
2008'', Bureau of Labor Statistics, http://www.census.gov/compendia/
statab/2010/tables/10s0639.pdf (Accessed August 11, 2010).
---------------------------------------------------------------------------
The reasons for this shift are numerous: cost considerations;
changing demographics of the workforce; uncertainty surrounding future
liabilities associated with a defined benefit plan; and a sense that
workers undervalue these plans, among other things.
Ingram implemented a money purchase plan for a certain segment of
our employee population in 2007. This was in response to the need to
``replace'' the defined benefit plan, which was closed to new hires in
2005, due to recruiting and retention concerns. Under this plan, Ingram
makes an annual contribution to associates based on a formula that uses
age, years of service and compensation.
Nonetheless, there is still a great need and desire for some of the
characteristics of the traditional defined benefit plan. In many
instances, employers like us are freezing or terminating the defined
benefit plan while adding features to the defined contribution plan
that resemble the benefits of the old plan. For example, employers are
adding annuity options to their defined contribution plans. Moreover,
new defined contribution plan designs are being introduced that
incorporate defined benefit features. Consequently, while the names and
designs may end up being different, it is very possible that many of
the features that are now in the defined benefit system will continue
to be an important part of the private retirement plan landscape. In
Ingram's money purchase plan, contributions are invested in a life path
fund depending on the associates year of birth. This, along with
annuity options, is intended to create a ``defined benefit-like''
retirement plan for associates.
The keys to ensuring the continuation of the private retirement
system are flexibility and predictability. The mix of types of benefit
plans in the future will be diverse--defined benefit, defined
contribution, multiemployer, cash balance, and hybrid plans. In
addition, demographic and competitive needs will spur the creation of
plan designs that we have not even begun to contemplate. Consequently,
it is increasingly important to ensure that there are no statutory,
practical, or political barriers to innovation that would discourage
participation in the private retirement system.
Conclusion
The challenges facing plan sponsors are numerous. As stated before,
these challenges impact not only the employer but also the retirement
security of current and future retirees. I hope that Congress continues
to work with plan sponsors to enact legislation that will further
encourage participation in the employer-provided system and ``keep them
in the game''. I thank you for the opportunity to testify today and
look forward to any questions you may have.
______
Chairman Roe. Thank you, Mr. Delaney.
Mr. Richtman.
STATEMENT OF MAX RICHTMAN, ESQ., EXECUTIVE VICE PRESIDENT/
ACTING CEO, NATIONAL COMMITTEE TO PRESERVE SOCIAL SECURITY AND
MEDICARE
Mr. Richtman. Mr. Chairman, members of the committee, on
behalf of over 3 million supporters of the National Committee
to Preserve Social Security and Medicare, I am honored to be
here to testify. Our members come from all walks of life and
every political persuasion. About one-third identify themselves
as Democrats, one-third as Republicans, and the remaining third
are unaffiliated with a political party. What unites them is
their passion for protecting and strengthening Social Security
and Medicare, not just for themselves but for their children
and grandchildren.
It is critical that any discussion about retirement
security include Social Security and Medicare, because these
two programs form the linchpin of most Americans' retirement.
About 54 million individuals receive Social Security benefits
today, including 37 million retirees, and these benefits are
modest. The average retiree receives about $14,000 in Social
Security benefits each year, women receive about $12,000.
Yet today's retirees are heavily dependent on these
benefits. About one-third have no other income besides Social
Security and two-thirds rely on Social Security for more than
half of their retirement income. Younger generations are likely
to be just as dependent on Social Security as their parents and
grandparents. Just over one-half of the workforce has access to
any kind of retirement plan at work and only about half of
these people choose to participate. And those individuals who
do participate in a retirement plan increasingly must do so
within the context of a defined contribution plan rather than a
defined benefit plan.
Unfortunately, defined contribution plans place the burden
of investment and risk management on individuals. Even in the
best of times, defined contribution plans only work if
individuals are able to save substantially, make good
investment decisions and retain their savings until needed for
retirement, as well as develop a retirement drawdown plan that
assures a continuous stream of income for the remainder of
their lives.
The second major pillar of retirement security for today's
retirees is Medicare. Prior to the creation of Medicare,
millions of retirees had no health insurance and what insurance
existed was very expensive. Private insurance companies shunned
older people because they tended to have more expensive claims.
Today little has changed in the private market. Private
companies who participate in the Medicare Advantage Program are
paid about 10 percent more than it would cost traditional
Medicare to cover these same seniors. Without Medicare, health
care would be unattainable or unaffordable for millions of
seniors.
Even with Medicare, health care costs represent a
significant portion of a retiree's income. About 30 percent of
the average senior Social Security check is spent on Medicare
out-of-pocket costs for Medicare part B and D alone, and this
percentage is expected to grow to almost 50 percent by the year
2085.
Social Security and Medicare help keep low-income workers
out of poverty, and they provide critical support for middle-
class workers who do not earn enough during their working lives
to finance decades of living in retirement. This helps explain
their enduring popularity, and it explains why Americans are so
unwilling to bet their futures on risky schemes to dramatically
restructure these programs.
President Bush discovered this when he proposed allowing
workers to divert a portion of their payroll taxes into Social
Security private accounts in 2005. Although they knew the Bush
plan would not affect them, seniors spoke out to preserve the
program for their children. Likewise, seniors around the
country clearly oppose plans to privatize Medicare and convert
it into a voucher program.
As you know, under the House budget resolution workers age
54 and younger today would purchase their health insurance from
private companies and be given a voucher or premium support
payment to cover a portion of these costs. These dramatic
changes in Medicare will shift trillions of dollars of costs
onto future beneficiaries.
According to the CBO, the cost of purchasing insurance from
private companies will more than double a retiree's out-of-
pocket costs in the first year, and the voucher used to
subsidize the premiums will grow more slowly than health
inflation, further reducing the value of the Federal
contribution.
According to the Center for Economic Policy Research, the
impact of these changes, as the ranking member has stated, will
be that a 54-year-old will need to save an additional $182,000
during the next decade to afford Medicare.
Younger people, just entering the workforce, will need to
save more than $640,000 through their working lives to afford
these additional costs. And because these benefits will no
longer be guaranteed, it is unclear what kind of health care
coverage this extra money will buy.
Mr. Chairman, the National Committee strongly supports
enhancing retirement security for American workers, but we do
not believe this can be accomplished by privatizing Social
Security, Medicare or cutting benefits.
Mr. Chairman, I know my time is up, but I wanted to thank
you for your legislation on the Independent Payment Advisory
Board. As you know, we have come out strongly for your
legislation. We feel that process is the wrong way to go, and
we are working hard to garner additional support.
[The statement of Mr. Richtman follows:]
Prepared Statement of Max Richtman, Executive Vice President and Acting
CEO, National Committee to Preserve Social Security and Medicare
Mr. Chairman and Members of the Committee: On behalf of over 3
million members and supporters of the National Committee to Preserve
Social Security and Medicare, I am honored to testify here today.
Our members come from all walks of life and every political
persuasion. About one third identify themselves as Democrats, one third
as Republicans, and the remaining third are unaffiliated with a
political party. What unites them is their passion for protecting and
strengthening Social Security and Medicare--not just for themselves,
but for their children and grandchildren.
It is critical that any discussion about Retirement Security
include Social Security and Medicare--because these two programs form
the lynchpin of most Americans' retirement. About 54 million
individuals receive Social Security benefits today, including37 million
retirees.
These benefits are modest. The average retiree receives about
$14,000 in Social Security benefits each year. Women receive about
$12,000. Yet today's retirees are heavily dependent on these benefits.
About one-third have no income other than Social Security, and two-
thirds rely on Social Security for more than one-half of their
retirement income.
Younger generations are likely to be just as dependent on Social
Security as their parents and grandparents. Just over one-half of the
workforce has access to any kind of retirement plan at work, and only
about one-half of these workers choose to participate.
And those individuals who participate in a retirement plan
increasingly must do so within the context of a defined contribution
plan, such as a 401(k), rather than in a defined benefit pension plan.
Unfortunately, defined contribution plans place the burden of
investment and risk management on individuals. Even in the best of
times, defined contribution plans work only if individuals are able to
save substantially, make good investment decisions, retain their
savings until needed for retirement, and develop a retirement drawdown
plan that assures a continuous stream of income for the remainder of
their lives.
The second major pillar of retirement security for today's retirees
is Medicare. Prior to the creation of Medicare, millions of retirees
had no health insurance, and what insurance existed was very expensive.
Private insurance companies shunned older people because they tend to
have expensive claims.
Today, little has changed in the private market. Private companies
who participate in the Medicare Advantage program are paid about 10%
more than it would cost traditional Medicare to cover the same seniors.
Without Medicare, health care would be unattainable or unaffordable for
millions of seniors.
Even with Medicare, health care costs represent a significant
portion of a retiree's income. About 30% of the average seniors' Social
Security benefit is spent on Medicare out-of-pocket costs for Medicare
Parts B and D alone. This percentage is expected to grow to almost 50%
by 2085.
Social Security and Medicare help keep low-income workers out of
poverty in retirement. And they provide critical support for middle-
class workers who do not earn enough during their working lives to
finance decades living in retirement. This helps explain their enduring
popularity. And it explains why Americans are so unwilling to bet their
futures on risky schemes to dramatically restructure them.
President George W. Bush discovered this when he proposed allowing
workers to divert a portion of their payroll taxes into Social Security
private accounts in 2005. Although they knew the Bush plan would not
affect them, seniors spoke out to preserve the program for their
children. Likewise, seniors all around the country oppose plans to
privatize Medicare and convert it into a voucher program.
As you know, under the House budget resolution workers age 54 and
younger today would purchase their health insurance from private
companies, and be given a voucher--or premium support payment--to cover
a portion of their costs.
These two dramatic changes in Medicare will shift trillions of
dollars of costs onto future beneficiaries. According to the
Congressional Budget Office, the cost of purchasing insurance from
private companies will more than double a retiree's out-of-pocket costs
in the first year. And the vouchers used to subsidize the premiums will
grow more slowly than health inflation, further reducing the value of
the federal contribution over time.
According to the Center for Economic and Policy Research, the
impact of these two changes will be that a 54-year old will need to
save an additional $182,000 during the next decade in order to afford
Medicare under the Ryan plan. Young people just entering the workforce
will need to save more than $640,000 extra through their working lives
to afford the additional costs. And because benefits will no longer be
guaranteed, it is unclear what kind of health care coverage this extra
money will buy.
Mr. Chairman, the National Committee strongly supports enhancing
retirement security for America's workers. But we do not believe that
can be accomplished by privatizing Social Security or Medicare, or by
cutting benefits.
Thank you.
______
Chairman Roe. Thank you. Thank you, Mr. Richtman.
Mr. Klein.
STATEMENT OF JAMES KLEIN, PRESIDENT,
AMERICAN BENEFITS COUNCIL
Mr. Klein. Mr. Chairman, Congressman Andrews, members of
the subcommittee, thank you so much for the opportunity to
testify today. There are many positive features of the employer
sponsored retirement system, and I do sincerely hope that you
ask me some questions about them during that period of the
hearing.
But since the hearing is really about the challenges facing
the retirement system, and I only have 5 minutes, I hope you
will indulge me if I use my time to cite five of our principal
concerns.
First, there are multiple agencies with regulatory
authority over the retirement system. The Department of Labor,
the Department of Treasury and the IRS, Pension Benefit
Guaranty Corporation, the Securities and Exchange Commission,
now the Commodity Futures Trading Commission. While this multi-
agency system may be unavoidable, it does put significant
responsibility on those agencies to harmonize their initiatives
so that regulatory requirements are not duplicative,
inconsistent, or, even worse, contradictory.
An example of this are the proposed Commodity Futures
Trading Commission business conduct rules issued pursuant to
the Dodd-Frank financial reform law that will, if followed,
force certain parties to violate the fiduciary standards of
ERISA that obviously fall within the jurisdiction of this
committee.
Second, Congress needs to assert greater oversight on
agencies that issue regulations that are clearly inconsistent
with legislative intent. An example of this relates to hybrid
convention plans. The statute requires interest crediting rates
not to exceed a market rate of return. The proposed Treasury-
IRS rules specify a certain interest rate and state that any
other higher interest rate will violate the law. So even if the
plan is able to get a higher rate in the market, it cannot use
it. This will force employers to reduce the rate at which it
credits plan accounts to the obvious detriment of plan
participants.
Third, agencies need to give adequate time to comply with
new rules. The Department of Labor recently announced an
extension of the applicability date for new rules governing fee
disclosure between service providers and employer plan
sponsors. And the DOL is also extending the corresponding
transition period for employers to comply with a separate set
of finalized rules governing disclosure of fees to
participants.
We appreciate very much the recognition by the Department
of Labor to extend the date, but the problem here is twofold.
The final rules regarding the service provider to plan sponsor
disclosures have not yet been sent to the Office of Management
and Budget. So it seems very likely that they could come out
very close to the end of the year, at which time both service
providers and plan sponsors are going to have to be scrambling
to comply.
Moreover, and ideally, a new set of separate revised rules
on electronic disclosure of information should really be
effective before the effective date of the rules governing fee
disclosure to plan participants, since those new requirements
are going to cause a vast amount of information to have to be
provided to millions of plan participants. But it seems highly
unlikely that this will happen given the timing of the rules
being issued.
Fourth, clearly, plan sponsors need to be held to an
appropriate standard of care in handling their various
government reporting functions. But when employers are faced
with significant additional premiums for what are obviously
innocent mistakes, it really undermines their willingness to
continue sponsoring a plan.
An example of this is where the PBGC has required
additional premiums from companies that actually paid the
correct amount of the premium on time but made a simple
clerical error when submitting the premiums through the PBGC's
new electronic submission system. The agencies are not so
flawless in all of their operations that they should be so
unforgiving of an inadvertent error that did not even affect
the agency receiving the correct payment in a timely fashion.
Fifth, plan sponsors need predictability. Employers know
that sponsoring a pension plan will be a costly endeavor and
for the most part they are okay with that if they can plan
accordingly. But when they are required to implement funding
rules, such as those prescribed under the Pension Protection
Act that are highly sensitive to minor changes in interest
rates or minor changes in the stock market, it leads to a level
of volatility that erodes the ability of employers to continue
sponsoring plans, especially during tough economic times.
Finally, I must share that employers are very concerned
that in the effort to reduce the Federal deficit, Congress may
look to the tax expenditure for employer-provided retirement
plans that is estimated to be $112 billion in fiscal year 2011
and yet overlook the fact that providing incentives to
employers and workers to save for retirement is a lower cost
way of providing a needed level of personal financial security
than through expanded public programs. For every dollar of tax
expenditure, a plan provides about $5 worth of benefits.
Because members of the Education and the Workforce
Committee inherently understand the value of employer sponsored
retirement plans, you are especially well positioned to be a
voice within the forthcoming budget debate on the need for tax
policy to support, not erode, employer plans and retirement
savings.
Thank you very much.
[The statement of Mr. Klein follows:]
Prepared Statement of James A. Klein, President,
American Benefits Council
Chairman Roe, Ranking Member Andrews, and Members of the
Subcommittee, I am grateful for the opportunity to appear before you on
this critically important topic. My name is James Klein and I am
President of the American Benefits Council. The Council is a public
policy organization representing principally Fortune 500 companies and
other organizations that assist employers of all sizes in providing
benefits to employees. Collectively, the Council's members either
sponsor directly or provide services to retirement and health plans
that cover more than 100 million Americans.
My testimony today will cover three areas. First, I will briefly
contextualize the critical role employers play in ensuring a secure
retirement for American workers. Second, I will identify regulatory
developments that threaten to undermine that role, potentially
prompting some employers to discontinue or scale back their existing
retirement plans, while chilling other employers from adopting new
retirement plans. Finally, I will discuss the importance of maintaining
the established tax incentives both for employers to promote workplace
plans and for employees to contribute to them.
(1) The voluntary system for workplace savings plans
I believe it would be useful to set the stage by briefly reviewing
the scope of our voluntary system for workplace savings plans.
According to the Bureau of Labor Statistics, just over half of all
workers in the private sector participated in an employer-sponsored
retirement plan of some kind in 2007. In particular, only one in five
private-sector workers participated in a traditional pension (i.e., a
defined benefit plan), while about two in five participated in 401(k)
and other defined contribution plans. Meanwhile, upwards of two in five
private-sector workers had no opportunity whatsoever to participate in
a retirement savings plan at work.
There are many recognized advantages of ``qualified'' plans offered
at the workplace. Employers bring unique advantages to bear for
employees when it comes to retirement savings and income:
noncontributory plans that benefit employees who cannot afford to
contribute; matching contribution arrangements that create enormous
incentives to save; educational services underscoring the importance of
savings; bargaining and purchasing power; economies of scale; fiduciary
decision-making and oversight; and access to beneficial products and
services. Employers are also in a strong position to know the
retirement needs of their employee populations and can tailor
retirement programs to these needs.
In short, employers play an important role in promoting a secure
retirement for America's workforce. But given the voluntary nature of
employer plans, policymakers must seek to support employers in
facilitating and, where feasible, financing retirement income for
employees. In particular, policymakers should recognize that providing
retirement benefits is not the core business mission of employers. In
today's globally competitive marketplace, employers are increasingly
sensitive to the costs, risks, and potential liabilities of all their
activities. Government policies that raise the costs, risks, and
potential liabilities associated with retirement plan sponsorship
jeopardize the employer commitment to providing retirement benefits.
This danger is present for employers of all sizes. But given the
importance of expanding workplace retirement plan coverage for
individuals who lack it, policymakers should be particularly sensitive
to the effect of such increased costs, risks, and potential liabilities
on small employers and on their willingness to initiate employer-
sponsored retirement plans for their workers.
(2) Regulatory complexity and burdens
This brings me to my second point: In recent years, the regulation
of employee benefit plans has grown considerably, and the employee
benefits field has become an area of the law that is well-known for its
complexity and burdensome regulatory regime. To be sure, plan sponsors
appreciate the importance of rules that are appropriately protective of
plan sponsors' and participants' interests. But those interests are not
well-served when requirements are unnecessarily broad and overly
burdensome. Rather, the government should establish a coordinated legal
and regulatory regime under which individual savers and employer plan
sponsors can operate effectively.
To achieve these objectives, regulatory activity must be well-
coordinated across all agencies of jurisdiction to avoid conflicting or
inconsistent guidance and enforcement. President Obama acknowledged the
critical importance of this principle and of avoiding such regulatory
conflicts in his January 18, 2011, executive order on Improving
Regulation and Regulatory Review. Yet current examples of inconsistent
guidance abound, particularly between the Department of Labor's current
proposed regulations redefining the term fiduciary, and various
regulations proposed by the Commodity Futures Trading Commission and
the Securities and Exchange Commission under the Dodd-Frank Wall Street
Reform and Consumer Protection Act. On January 18, 2011 the President
issued an Executive Order emphasizing the importance of agency
coordination. This means far more than agencies letting each other know
about regulatory projects being developed. In the President's words,
coordination means ``harmonizing rules'' and avoiding ``inconsistent''
or ``overlapping'' rules. Such coordination among the Department, the
SEC, and the CFTC is essential. The critical need for coordination with
the CFTC is discussed further below
Moreover, compliance burdens on employer plan sponsors can be
unreasonably magnified by requiring employers to comply first with
statutory provisions and subsequently with regulations that articulate
an interpretation of the statute that differs substantially from a good
faith reading. The hybrid plan provisions of the Pension Protection Act
of 2006 (PPA) are one example of this burdensome phenomenon. For
example, the Pension Protection Act of 2006 prohibited cash balance
plans and other hybrid plans from crediting interest at an above market
rate. Treasury has issued proposed regulations that are clearly
inconsistent with the statute and that expressly prohibit the use of
thousands of interest crediting rates available in the market.
Accordingly, these proposed regulations would force countless
substantial plan modifications, as well as causing a very substantial
portion of the cash balance plans in the country to reduce benefits.
This is but one example of a regulatory interpretation that was
issued many years subsequent to the effective date of the statutory
provision and bears limited resemblance to the plain meaning of the
statute. As a result, plan sponsors face costly and unexpected
compliance changes, some of which require substantial plan redesigns.
Regulations should be crafted with an eye to effecting legislative
intent while limiting and mitigating the unintended consequences for
plan administration and plan benefits.
I would like now to turn to some specific developments that
evidence this trend toward increased regulation, uncoordinated
regulations, and undue burdens on employers who are trying to do the
right thing for their workers by providing retirement plans.
(a) Definition of the term ``fiduciary''
In October, the Department of Labor proposed regulations on the
definition of the term ``fiduciary'' under the Employee Retirement
Income Security Act (ERISA). The proposed regulations would set aside
the rule that has defined the term for 35 years. We understand the
Department's desire to update and improve the definition, and we agree
that the employer community would benefit from rules that establish
clear lines between fiduciary advice, on the one hand, and non-
fiduciary education, marketing, and selling on the other hand. But the
proposed regulations create too broad a definition of fiduciary. We are
very concerned that an overly broad definition would actually have a
very adverse effect on retirement savings by inhibiting investment
education and guidance for plans and participants, raising costs, and
shrinking the pool of service providers willing to provide such
investment education and guidance.
There has been some perception that the concerns related to the
proposed regulations only relate to service providers, and primarily
involve IRAs. That is not the case. The proposed regulations raise very
serious issues for plan sponsors.
``May be considered'' standard. Under the proposed regulations, an
individual can become a fiduciary solely by reason of providing casual
investment information that ``may be considered'' by the recipient.
Assume, for example, that a plan participant has consulted with an
advisor and has decided tentatively to invest in a group of investment
options available under the plan. As a last-minute check, the
individual asks a colleague in the employer's human resources
department if the participant's fund selections make sense for an
individual in her situation. The human resources employee says he is
not an expert but the choices make sense to him and are consistent with
what many others are doing. Under the regulation, that casual reaction
is fiduciary advice. Similarly, if the participant were to ask a call
center operator the same question, any answer would be investment
advice. But neither interaction is really investment advice. An ERISA
fiduciary relationship is a very serious relationship with the highest
fiduciary standard under the law. In that context, fiduciary status
should not be triggered by casual discussions but only by serious
communications that reflect a mutual understanding that an adviser/
advisee relationship exists.
If the proposed rule were finalized, plan sponsors may need to
inform human resources departments and call centers never to discuss
investments in any manner. This would hurt and frustrate participants,
which is the last thing that plan sponsors want to do. Nor would that
be a positive development from a policy perspective.
Plan sponsor employees. It is, of course, common for a plan sponsor
to form a committee of senior executives to oversee plan issues,
including plan investment issues. It is certainly clear that such
committee has fiduciary status. But under the proposed regulations,
large numbers of middle-level employees who frame issues and make
recommendations for senior employees to consider would also be
fiduciaries. If all of these employees were fiduciaries, the effects
would be severely negative. For example, the cost of fiduciary
insurance would skyrocket, if such insurance would be available at all
for such employees. These costs would ultimately be borne by
participants in the form of higher costs and lower benefits.
Plan investment menus. Today, one of our greatest challenges in the
retirement security area is broadening retirement plan coverage among
small businesses. Small businesses will generally adopt a retirement
plan only if the process is simple and inexpensive. In this context,
imagine the hardware store owner who would like to adopt a plan for his
12 employees. Assume that the service provider presents its menu of 300
investment options, provides objective data regarding all 300, and
tells the hardware store owner (1) to decide how many options to offer
and (2) to pick the right options for his employees, subject to
fiduciary liability if he picks imprudently. Alternatively, the
hardware store owner can find some independent consultants, interview
them, choose one (subject to fiduciary liability), and pay that
consultant a substantial amount of money to pick and monitor the plan
menu.
Needless to say, if that is the message that the hardware store
owner receives, he will not adopt a plan for his employees. Yet under
the proposed regulations, if the service provider did anything more to
help the hardware store owner, the service provider would be deemed a
fiduciary. So if the rule set forth in the proposed regulations is
finalized in its current form, we are likely to see a marked decline in
retirement plan coverage.
Service providers need a way to provide employers with help in
choosing the plan menu so that the process is simple and inexpensive.
For example, the service provider may screen funds based on objective
criteria that are provided by the plan fiduciary or that are commonly
used in the industry.
Valuation. We believe that the proposed regulation's application of
fiduciary status attributable to the provision of valuation services is
overly broad and needs to be reconsidered. First, it would sweep in
countless routine valuations, such as valuing annuity contracts for
purposes of determining required minimum distributions. Second, even in
the areas that are the object of the Department's express concerns--
such as ESOP valuations--the nature of the fiduciary duty needs work.
The Department wants to ensure an objective valuation. A fiduciary
advocates for participants; a fiduciary is precluded by law from being
objective.
Management of securities. Under the proposed regulations, advice
regarding the management of securities constitutes investment advice.
This raises serious issues for plan sponsors. For example, assume that
a plan decides to change trustees and begins negotiating a trust
agreement with the new trustee. The trustee is involved in the
``management'' of plan assets, and the terms of the trust agreement
affect that management. Are all of the plan sponsor's legal and
compliance personnel fiduciaries by reason of working on the trust
agreement? Under the proposed regulations, the answer is yes. This will
cause the cost of trust agreements and many other routine plan actions
to increase exponentially with the imposition of new duties and large
potential liabilities.
What about the persons working on the agreement for the new
trustee? If such persons make any ``recommendations'' to the plan in
the course of negotiations, they would become fiduciaries because the
seller exemption, on its face, only appears to apply to sales of
property and not services. Any such recommendations would thus trigger
fiduciary status and corresponding prohibited transactions.
There are many similar examples. To avoid such inappropriate
results and enormous new costs and burdens on plan sponsors, the
proposed regulations need significant modification.
Legal and other non-investment advice. Assume that ERISA counsel
advises the plan that entering into a swap with a particular dealer
would raise prohibited transaction issues and counsels the plan not to
enter into the swap for that reason. Under the proposed regulations,
that would clearly constitute investment advice, making the ERISA
attorney a fiduciary. Again, this is an unworkable result for plan
sponsors who need to be advised on compliance issues.
In sum, the increased cost and confusion attributable to the
proposed regulation is a source of significant concern for our plan
sponsors. The Council and many other organizations representing
employers have communicated these concerns to the Department of Labor.
We appreciate the support we have received from many Members of
Congress, and hope that on a bipartisan basis Members of Congress will
continue to join us in warning the Department of the dangers inherent
in an overly broad proposal that does not fully take account of
ramifications that could raise costs or otherwise chill employers from
offering plans in the first place.
(b) Electronic disclosure
ERISA requires the extensive provision by plan sponsors of reports,
statements, notices and other documents. Unfortunately, current
regulations severely restrict the circumstances in which email and
other paperless means of communication can be utilized. The regulations
contemplate the use of electronic media only if a participant either
(i) uses an electronic network (e.g., a computer or a smart phone) as
an integral part of his or her duties as an employee, or (ii)
affirmatively consents to receiving documents electronically in a
manner that demonstrates the ability to access electronic disclosures.
This standard severely restricts the use of email as a means of
communication for many categories of employees and former employees,
even in circumstances where the employer has email addresses and
routinely uses email or other electronic disclosure for other forms of
communication. As a result, the multitude of notices and statements
that plan administrators must provide to plan participants and
beneficiaries are typically provided through labor intensive and costly
paper media.
There are enormous potential cost savings that would benefit
participants, beneficiaries, employers and the environment if the
existing regulation were revised to more broadly accommodate electronic
communication, including use of home computers and personal cell phones
or internet connections. We appreciate that not every participant or
beneficiary has access to a particular system, but believe that these
participants can be accommodated through rules that allow participants
to opt out of electronic delivery and request paper copies of the
relevant materials.
DOL recently instituted a Request for Information Regarding
Electronic Disclosure by Employee Benefit Plans. We appreciate DOL's
initiation of this project, as we believe that appropriate electronic
disclosure is a more user-friendly, efficient, and cost-effective means
of providing necessary information to plan participants and
beneficiaries and is a method that is more popular with participants
and beneficiaries. Effective electronic communications can enhance the
disclosures for the majority of participants while protecting their
rights and ensuring that those who still wish to receive paper notices
are entitled to receive them upon request.
More specifically, we strongly believe that a current Department of
Labor rule in effect with respect to benefit statements would work very
well for all communications. Under that rule, a plan posts information
on a secure website, informs participants by non-electronic means of
the availability of the information on such website, and also informs
participants of their right to receive paper notices. This structure is
very protective of participant rights, is very efficient, and is very
effective in offering participants the best way to find what they need
whenever they need it.
In this regard, we believe that it is critical that all agencies
whose rules affect plans adopt the secure website rule described above.
I note that DOL's current regulation differs materially from the
electronic delivery standards of other regulatory agencies, including
the Internal Revenue Service (IRS) and the SEC which share oversight
responsibility for employee benefit plans with DOL. These different
standards can be very frustrating and burdensome for employers who must
comply, for example, with one set of standards in furnishing DOL-
required notices, another standard in providing IRS-required
disclosures, and a third standard in distributing SEC-required
disclosures. Under the President's Executive Order of January 18,
discussed above, these standards should be harmonized. The Council
recommends that the rules be harmonized by the uniform adoption of the
secure website approach described above.
(c) Use of Swaps
Pension plans use swaps to manage interest rate risks and other
risks, and to reduce volatility with respect to funding obligations. If
swaps were to become materially less available to plans, plan costs and
funding volatility would rise sharply. This would undermine
participants' retirement security and would force employers to reserve,
in the aggregate, billions of additional dollars to address increased
funding volatility. These reserves would have to be diverted from
investments that create and retain jobs and that spur economic growth
and recovery.
In enacting the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Congress adopted ``business conduct'' standards to help
plans and other swap counterparties by ensuring that swap dealers and
major swap participants (MSPs) deal fairly with plans and other
counterparties. However, the proposed regulations issued by the
Commodity Futures Trading Commission under Dodd-Frank would actually
have devastating effects on plans.
The proposed business conduct standards would require swap dealers
and MSPs to provide certain services to retirement plans and other
plans governed by ERISA with respect to swaps (or potential swaps) with
such plans. The required services would likely make the swap dealer or
MSP a plan fiduciary under a regulatory definition of a fiduciary
recently proposed by the Department of Labor (and under the current-law
definition). For example, the proposed business conduct standards would
require a swap dealer or MSP (1) to provide a plan with information
about the risks of a swap, (2) to provide swap valuation services to a
plan, and (3) to review a plan's advisor. Each of these services would
likely make the swap dealer or MSP a plan fiduciary under the DOL's
proposed regulations, and the third would make swap dealers or MSPs a
fiduciary under current law. If a swap dealer or MSP is a plan
fiduciary, it would be a prohibited transaction under ERISA for the
swap dealer or MSP to enter into a swap with the plan. Thus, the
proposed business conduct standards would likely require a swap dealer
or MSP entering into a swap with an ERISA plan to violate ERISA. The
only way to avoid this result is for all swaps with plans to cease,
which would be devastating for plans, as discussed above.
The interaction of the business conduct standards and the DOL's
definition of a fiduciary should be publicly and formally resolved in a
legally binding way by the time the CFTC finalizes the business conduct
standards. If the issue is not resolved before finalization of the
business conduct standards, there would be an immediate chilling effect
on all swap activity due to uncertainty regarding current and future
DOL regulations. Accordingly, prior to finalization of either
regulation, the CFTC and the DOL should jointly announce that no action
required by the business conduct standards shall cause a swap dealer or
MSP to be an ERISA fiduciary.
Furthermore, under the proposed business conduct standards, if a
swap dealer or MSP ``recommends'' a swap to a plan, the swap dealer or
MSP must act ``in the best interests'' of the plan with respect to the
swap. Under the proposed rules, many standard communications used by a
swap dealer or an MSP in the selling process--such as ``this swap may
fit your interest rate hedging needs''--would be a recommendation. In
fact, it seems clear that the term ``recommendation'' would include
information regarding plan risks that the business conduct standards
require a swap dealer or MSP to provide to a plan. This means that swap
dealers or MSPs acting solely as counterparties would be required to
also act in the best interests of the plan. This is not possible and
accordingly would likely cause all swaps with plans to cease. A swap
dealer or MSP as a party to a swap transaction cannot have a
conflicting duty to act against its own interests and in the best
interests of its counterparty with respect to the swap. If a swap
dealer or MSP clearly communicates to a plan in writing that it is
functioning solely as the plan's counterparty or potential
counterparty, no communication by the swap dealer or MSP should be
treated as a ``recommendation.''
Finally, if a swap dealer or MSP is simply acting as a counterparty
or potential counterparty with respect to a swap with a plan, the
proposed business conduct standards require the swap dealer or MSP to
carefully review the qualifications of the advisor advising the plan
with respect to the swap, and to veto the advisor if appropriate. This
rule is problematic for several reasons. First, there is no basis for
this rule in the statute; under the statute, a swap dealer or MSP's
duties are fulfilled with respect to a swap with an ERISA plan if the
swap dealer or MSP determines that the entity advising the plan is an
ERISA fiduciary. Second, if swap dealers or MSPs can veto plan
advisors, plan advisors could potentially be reluctant to negotiate in
a zealous manner against a dealer, thus severely hurting plans. Third,
swap transactions often need to happen quickly to effectively hedge
plan risks; there is no time for investigations of advisors. Last,
reviewing a plan's advisor may well make a swap dealer or MSP a
fiduciary of the plan, which, as discussed above, would in turn make
the swap a prohibited transaction. If an ERISA plan represents to a
swap dealer or MSP that the plan is being advised or will be advised by
a fiduciary subject to the requirements of ERISA, the swap dealer or
MSP should not be required, or permitted, to make any further inquiry
to satisfy the statutory requirement.
These issues pose a serious threat to the ability of defined
benefit plans to manage risk. At a time when plan sponsors face
enormous financial and regulatory challenges in maintaining a plan, we
must ensure that new swap rules do not create a further disincentive to
maintaining the plan.
(d) PBGC disruption of normal business activities
We would also like to express deep concerns regarding the PBGC's
proposed regulations under ERISA section 4062(e). First, the proposed
regulations are not consistent with the statute. Under the statute,
liability is triggered if ``an employer ceases operations at a facility
in any location''. The proposed regulations do not follow the statute,
which was clearly intended to be limited to situations where operations
at a facility are shut down. Instead, under the proposed regulations,
liability can be triggered where no operations are shut down and no
employees are laid off, but rather operations are, for example, (1)
transferred to another employer, (2) moved to another location, or (3)
temporarily suspended for a few weeks to repair or improve a facility.
The proposed regulations need to be revised to conform to the statute,
so as not to disturb normal business transactions that are not within
the intended scope of the statute and pose no risk to the PBGC.
Moreover, the liability created by the proposed regulations can be
vastly out of proportion with the transactions that give rise to the
liability. For example, where a plan has been frozen for many years, a
de minimis business transaction affecting far less than 1% of an
employer's employees can trigger hundreds of millions or billions of
dollars of liability. This needs to be addressed. In addition, as
noted, the proposed regulations would impose enormous liabilities on
plan sponsors even in situations where a plan poses no real risk to the
PBGC. There should be exemptions for small plans and for well-funded
plans. The exemption for well-funded plans should be based on a plan's
funded status for funding purposes. If a company has, for example,
little or no funding obligation with respect to a plan under the
funding rules, it is inappropriate to impose large obligations on such
company based on a theory that the obligations are needed to protect
the PBGC.
These proposed regulations would clearly hasten the demise of that
system. By placing an enormous toll charge on plan sponsors that engage
in normal business transactions, these proposed regulations would send
a powerful negative message to those left in the defined benefit plan
system.
(e) PBGC premium filings
We are also very concerned about a pattern that seems to be
developing with respect to the PBGC's review of premium filings. We are
receiving repeated reports from our members that filings are being
rejected and penalties are being imposed for reasons that seem
unnecessarily rigid.
In our view, the relationship between the PBGC and defined benefit
plan sponsors should be a cooperative one that furthers the mission of
the PBGC. The PBGC's mission includes ``encourag[ing] the continuation
and maintenance of voluntary private pension plans for the benefit of
their participants.'' In that context, imposing large premium increases
and penalties seems inappropriate in the case of conscientious sponsors
that are trying to comply with the rules.
Based on our members' experience, we have numerous examples of this
concern, but we will only highlight one here today. In the case of one
of our members, the premium was paid on October 14th, the day before
the deadline. The plan sponsor contacted the PBGC on October 15th to
ensure that the payment had been received; a PBGC representative
confirmed orally that the payment had been made. Then on October 19th,
the PBGC contacted the plan sponsor and said that the payment had been
returned. Apparently, the plan sponsor had made a clerical error with
respect to the account number. On the same day--October 19th--the plan
sponsor made the full premium payment.
This plan sponsor was assessed a large penalty and all of its
requests for reconsideration have been denied. The PBGC stated in its
second denial: ``the payment failure was the result of a clerical error
by the Plan and therefore does not meet reasonable cause. An oversight
is not in keeping with ordinary business care and prudence.''
It is very disturbing that the PBGC's current position is that any
oversight affecting timely payment is a cause for penalties. Regardless
of the care used by the plan sponsor, any error apparently triggers
penalties. We agree that there need to be incentives for plan sponsors
to be conscientious and careful. But in order to be true to its
mission, PBGC needs to balance that objective with the need not to act
in a punitive way with respect to plan sponsors that make inadvertent
errors despite clear evidence of an intent to comply.
The above facts clearly demonstrate the plan sponsor's
conscientiousness does not matter under PBGC's penalty system. If a
plan sponsor makes any mistake affecting timely payment, penalties
apply under PBGC's current system. This is not the right answer. We
strongly believe that inadvertent errors, such as clerical errors, that
are made despite a clear intent to comply should not give rise to
penalties. Any other position would simply be punitive and inconsistent
with the PBGC's mission.
PBGC needs to review its filing program to ensure that filings are
not rejected or subjected to penalties inappropriately. A failure to do
so would just be one more reason--and a very preventable reason--for
companies to leave the defined benefit system.
(3) Essential tax incentives
The U.S. retirement savings system successfully encourages
individuals to save for retirement by providing tax incentives--
typically income tax exclusions or deductions--for contributions to
employer-sponsored defined contribution plans and IRAs, up to certain
limits. This tax incentive structure is a fundamental pillar of our
successful private retirement savings system. It provides a strong
incentive for individuals at all income levels to save for retirement
and encourages employers to sponsor plans that deliver meaningful
benefits to Americans up and down the income scale.
The current pre-tax treatment of retirement savings is a powerful
incentive for individuals. It is viewed by taxpayers as the core of our
retirement savings regime and allows them to save more on a paycheck-
by-paycheck basis than would be the case with after-tax contributions.
This financially efficient approach is particularly important for low-
and middle-income families trying to make the most of scarce dollars.
The payroll tax savings on employer contributions provides another
significant advantage for modest-income households, as does the
deferral on gains that spares families from annual tax bills on their
accumulating savings.
And current incentives efficiently produce retirement benefits.
Repeated analyses have shown that, for every dollar of federal tax
expenditure devoted to tax-preferred workplace retirement plans, four
to five dollars in ultimate retirement benefits result. This extremely
efficient catalyst produces a remarkable amount of benefits for workers
and their families--in 2008, private employer retirement plans paid out
$462 billion in benefits.
Because the employer-sponsored retirement system is premised on its
voluntary nature, tax incentives for contributions by employees are
important in encouraging plan sponsorship. A move to a capped tax
credit that provides a reduced tax benefit could discourage plan
sponsorship. If sponsorship declines and more employees are forced to
save on their own, they would not receive the many protections and
benefits associated with employer-sponsored plans (from ERISA
protection to fiduciary oversight--especially of investments and fees--
to employer contributions).
Employers play an important role in helping to facilitate the
accumulation of retirement savings and income by American workers. We
are proud of the role we have played and the unique advantages we can
bring to bear when it comes to retirement savings and income. And we
urge policymakers to support our role as employers in facilitating and,
where feasible, financing retirement income for employees.
Thank you for this opportunity to testify.
______
Chairman Roe. I thank the panel for their testimony. Our
first questioner will be Dr. Bucshon.
Mr. Bucshon. Thank you, Mr. Chairman. I will make a couple
comments. First of all, I am a physician and I assure you that
I am very concerned about the future of American seniors and
our current seniors, and I just want to go over and remind
everyone that according to the recent Medicare trustees report
that Medicare will be insolvent in 2024, and, again, that is
not my opinion, that is the one that just came out from the
Medicare trustees.
And, with all due respect, I would like to have a request
that the minority propose a solution, if they don't like our
solution, which was, by the way, modeled after what we have as
Members of Congress and also was outlined in a Democrat report,
the Breaux Commission in the 1990s, under President Clinton.
The status quo under the Affordable Care Act will allow for
severe cuts to seniors' benefits in 2024 without action, and
the only proposal to address the issue at all under current law
is a 15-member board, IPAB, that will certainly result in
significant slashes to Medicare funding at the time as we know
that the number of people on Medicare will be doubling by 2030.
So with that said, I have a couple of questions as it
relates to the pension area.
First of all, Mr. Brill, you mentioned that the trend in
retirement security is toward offering more defined
contribution plans, but people still don't save. So to what
extent can public policy help increase participation in
voluntary retirement plans when it really is a matter of
personal responsibility, and how do we promote sufficient
savings for retirement for our American seniors?
Mr. Brill. Thank you, Congressman, for your question. As
you indicated, there is a need for more workers to save and for
those who do save to save more so that they have an adequate
nest egg when they reach their retirement age. I don't think
that there is a single solution that can help us reach that
goal, although I think that there are a set of policies that
one could consider pursuing.
As I mentioned in my testimony, auto enrollment, auto
escalation policies have shown to be effective in getting more
people enrolled and, in particular, getting people enrolled in
DB--I am sorry--in DC plans sooner. And one of the keys to
having an adequate retirement nest egg is starting when you are
young and adopting both that mentality, the value of thrift,
the value of savings, and putting those assets aside as early
as possible so that they have the opportunity to accumulate.
In addition, evidence from economists Olivia Mitchell and
Annamaria Lussardi at Dartmouth College have found that there
is an inadequate amount of financial literacy among many
workers, particularly minorities and women, who are not well
informed about the skills necessary and the appropriate levels
of savings in order to have sufficient amounts of savings.
I think that greater awareness, greater communication by
employers to employees and other activities like that can help
address some of those issues.
Mr. Bucshon. Okay, thank you. Mr. Delaney, we have heard
some testimony that the Department of Labor regulations may
reduce investment flexibility for pension plans. Can you
discuss how important it is for both defined benefit and
defined contribution plans to have access to a wide range of
investment products for our citizens?
Mr. Delaney. Well, I believe it is very important. First of
all, as it relates to a predictability and being able to rely
upon what the guidelines are from any particular piece of
legislation, we certainly want to provide to our associates a
broad range of investment opportunities through the DC plan.
Certainly, if you were to speak with our Treasurer, he
certainly wants to be able to talk with people that he deals
with respect to investment options with respect to the DB
assets. I would tell you that our associates have at this point
17 different investment opportunities in their defined
contribution plan, and we spend a lot of time marketing those.
They have online capability. We do a lot of things with them in
terms of education and being able to provide them with
opportunities to have a wide range of options based on their
risk tolerance and their personal circumstance.
Mr. Bucshon. Thank you. I yield back.
Chairman Roe. Mr. Andrews.
Mr. Andrews. Thank you. I would like to thank the witnesses
for their testimony. It did not disappoint. It was very good
for everybody. Thank you.
Mr. Brill, on page 7 of your testimony you cite a Boston
College study that found that the financial crisis put the
percentage of households at risk of not having sufficient post-
retirement standard of living increased from 44 percent to 51
percent. So a lot of retired people in real trouble.
I assume by ``at risk'' you mean that their incomes would
either stagnate or not go up much and their costs would go up
by a lot. Is that what ``at risk'' means?
Mr. Brill. The trigger for being at risk in the study was
that one's expected retirement income was more than 10
percentage points less than the targeted replacement rate.
Mr. Andrews. Does it take cost into consideration at all,
cost of living?
Mr. Brill. It does in the sense that it is considering
income in real terms, not in nominal terms.
Mr. Andrews. If someone's retirement cost went up by $6,000
because of increased out-of-pocket health care costs, do you
think that would increase the number of senior households at
risk?
Mr. Brill. Congressman Andrews, with regard to the Medicare
issue, what I would note is the greatest concern that I have is
the unsustainability of the current system.
Mr. Andrews. Well, my greatest concern is the answer to my
question. What I asked you was would it put more senior
households at risk if their costs went up by $6,000 a year?
Mr. Brill. I think that what is important is that people
have an awareness of the situation that they are in. If they
have the opportunity to save that additional----
Mr. Andrews. Would they be aware if their out-of-pocket
went up by $6,000 a year that they would be in more trouble; is
that a fair statement?
Mr. Brill. Without warning?
Mr. Andrews. Yes.
Mr. Brill. Without warning, yes.
Mr. Andrews. Well, with or without warning, I mean, say to
somebody here is some news. A few years from now it is going to
cost you 6,000 bucks a year more to live. Does the warning
really do them any good if they don't have the income?
Mr. Brill. If they have the opportunity to save, they can
mitigate those concerns.
Mr. Andrews. If they have the opportunity to save. But your
own testimony says that there--the number of households who
don't have the opportunity to save and therefore at risk grew
from 44 percent to 51 percent because of existing economic
conditions. So do you think they are going to have much of an
opportunity to overcome that?
Mr. Brill. I would agree it is important to strengthen our
retirement security programs, encourage more people to save,
make more people aware of the need to save and facilitate their
DC plans.
Mr. Andrews. Now on page 8 of your statement you say
Medicare, while recognized by some as an unsustainable program
as currently constructed, lacks the bipartisan cooperation
necessary to achieve meaningful savings.
Is it true or false that the Affordable Care Act had $495
billion in Medicare savings in it?
Mr. Brill. I am sorry, could you repeat the question?
Mr. Andrews. The Affordable Care Act, signed by the
President last year, had $495 billion in Medicare savings in
it; is that correct?
Mr. Brill. I believe that--I agree that the----
Mr. Andrews. And isn't it also correct that the Republican
budget resolution, in its baseline, assumed those $495 billion
in savings for future budgets; is that correct?
Mr. Brill. I am not aware.
Mr. Andrews. The record will show that it is.
I want to talk about meaningful savings in Medicare. What
do you think about if idea of permitting the Medicare
administration to negotiate the price of prescription drug the
way the VA does? There are projections, I think, Mr. Richtman's
organization projects that that could save $24 billion a year.
Is that something we should do?
Mr. Brill. I don't think that is a policy we should pursue.
Mr. Andrews. Why not?
Mr. Brill. I am concerned about setting the prices in
pharmaceuticals, because of the effect it may have on the
development of new drugs.
Mr. Andrews. Well, has the VA negotiating prices affected
the development of new drugs?
Mr. Brill. The size of the VA market is smaller than the
size of the retiree market.
Mr. Andrews. So it is your position that we should have a
law that says that the Medicare program should pay whatever the
drug companies demand to be paid for prescription drugs?
Mr. Brill. That is not the current policy.
Mr. Andrews. That is what the law says. They are prohibited
from negotiating the drug prices, aren't they? What's the
current policy?
Mr. Brill. The current policy with regard to part B drugs
is that Medicare reimburses what is referred to as ASP plus 6,
the average sales price as set by the market.
Mr. Andrews. Is CMS allowed to negotiate the price of the
Coumadin pill that it buys?
Mr. Brill. No, they are not.
Mr. Andrews. Well, that sounds to me like the present deal
is you have got to pay whatever the industry demands. Do you
think that is a good idea?
Mr. Brill. No, the current deal is that you are set to pay
what the market demands, not what the industry sets.
Mr. Andrews. But you can't participate in the market by
being a purchaser, you have to wait and see what everybody else
does? I just think that is a meaningful Medicare savings you
don't seem to support.
I yield back.
Chairman Roe. I thank the gentleman.
Dr. Heck.
Mr. Heck. Thank you, Mr. Chair. This is for Mr. Delaney. We
heard testimony about the lack of participation and extent of
savings by employees in the plans that are available and that
education is one of the ways that we can try to change that
behavior. What obstacles do you face as an employer in
providing that type of education, and what could be done to
facilitate that process?
Mr. Delaney. Well, I think as an employer Ingram has done a
very good job of getting information out to our associates. One
of the things that would be a difficult situation for us is we
have a very diverse workforce. We have individuals, for
instance, who spend most of their time in a distribution center
or individuals who spend most of their time on a tow boat. And
so access to online communication is not readily available for
those folks in the workplace for sure. And so we have to take a
multifaceted view and strategy in terms of how we get
information to them.
We have provided, as I mentioned in my statement,
retirement planning workshops, and we send a lot of direct
mails to folks that we consider to be very, very effective.
In terms of general education, we think that basically the
environment today allows us to do what we need to do to get the
word out to get people to save more and to participate in
higher numbers.
Mr. Heck. Is there any concern over liability with
providing financial advice to your employees?
Mr. Delaney. Well, I would tell you that we go up to a
certain line and not, in our opinion, not beyond that. We
certainly don't make advice in terms of what they should put
money into. I mention that we use, for balancing purposes,
Morningstar, a third party, to do that.
But for the most part what we do is we educate. We tell
people what their options are but we do not make, but we do not
make judgments about their particular circumstances and what
they should or should not do with respect to investment.
Mr. Heck. Thank you, Mr. Chair.
Chairman Roe. Mr. Kildee.
Mr. Kildee. Thank you, Mr. Chairman. Mr. Richtman, the Paul
Ryan Republican budget on Medicare indicates that it will
affect only those age 54 and younger. Is that actually correct?
Mr. Richtman. Well, it clearly affects, in a dramatic way,
as has been pointed out already today, those 54 and younger.
But it also has a dramatic effect on current beneficiaries.
Chairman Ryan's proposal repeals the Affordable Care Act.
The Affordable Care Act had some improvements that are very
important for seniors. The well-known and well discussed donut
hole is eliminated in the Affordable Care Act. That disappears
under the chairman's legislation.
All of the improvements in preventive care that eliminated
out-of-pocket contributions for preventive care, that is gone
in the budget that Chairman Ryan has proposed.
So to simply say to seniors, don't worry, this is not going
to affect you, is completely inaccurate.
Mr. Kildee. So the concern, I have talked to others at home
for about 9 days and talked primarily to senior citizens, and,
being one myself, I generally see a lot of them.
And so their concern is not just out of charity for the
younger workers, but they look at their own financial situation
and find difficulties created by the Ryan approach.
Mr. Richtman. That is absolutely true and, as Congressman
Andrews pointed out, by dividing these two groups by age, it
has an impact on the risk pool of older people, and it is
virtually impossible to prevent an adverse impact because of
those consequences on people currently on Medicare.
Mr. Kildee. Could we say, then, and I use this and heard it
when I was back home in Flint, Michigan, Saginaw, Michigan, Bay
City, Michigan, there were a lot of retirees, mostly General
Motors or Delphi retirees, and we assume then that by keeping
it in Medicare for this new program proposed by Mr. Ryan, is he
using an assumed name for this new program?
Mr. Richtman. No. Technically, I suppose it could be
Medicare. I have heard people at the town meetings I
participated in with seniors, our members, call it coupon care.
And, you know, they are okay with clipping coupons for
groceries, but they are not too keen on coupons for purchasing
their health care.
Mr. Kildee. And given, comparable to a food stamp, you have
to go out and try to find the best bargain you can find? A lot
of these people are very, quite old. I am 81 myself, I think I
can still do that myself. I do it for the country, I hope I can
do it myself. But a lot of these people are going to find it
very difficult to have to shop around and look for the most
appropriate policy for themselves.
So I really think it is kind of a--they ought to be honest
and name it something else because Medicare, from the time that
Lyndon Johnson signed that into law, one of the greatest things
since Franklin Roosevelt signed Social Security into law in
1935, Medicare means one thing to these older people. And what
the shell game has done is put something else there and still
call it Medicare. I myself would think that they should not use
an assumed name for this new program.
Thank you very much, and thank you for what you do.
Mr. Richtman. Thank you.
Chairman Roe. Dr. DesJarlais.
Mr. DesJarlais. Thank you, Mr. Chairman. As I sit and
listen to this discussion and as a family practice physician
for the past 18 years prior to coming to Congress, it certainly
gives me pause to listen to the various testimony here today
and listen to some of the discussions about Social Security and
insolvency and Medicare and insolvency. I know a lot of folks
who are in my age group, I am 47, for the past decade have
wondered whether Social Security is even going to be there,
whether Medicare is even going to be there and, you know, we
don't seem to be able to give them a real good answer.
But, you know, Social Security back home, at least with my
constituents, is something that the government has mismanaged,
that they have handled irresponsibly, that they borrowed money
from, and it has created a real problem with that certainty of
what they will get and what they won't get.
As far as Medicare goes, you know, certainly as a
physician, I don't think that I have ever looked at treating a
patient as treating a Democrat or a Republican. I just treated
a patient. And I know that there is a lot of concern about
where the health care is going to come from.
But as far as just talking to the people in general and
talking about the facts of Medicare on a bipartisan basis, we
know for a fact that there are 10,000 new members entering
Medicare every day. We know that in 1965, when Medicare was
created, the average life expectancy of a male was 68 years. So
the plan was designed to cover them for 3 years. Thankfully,
through good medicine males are living at least 10 years longer
and females 12 years longer.
Unfortunately, the government didn't account and adjust for
that. The average couple pays into Medicare about a dollar for
every $3 that comes out.
So to look at Medicare and try to change the name of
Medicare or call it something it is not is irrelevant to me.
The bottom line is Medicare is going broke and it is going to
be insolvent sooner than later. So the cost of doing nothing is
to see to end to Medicare as we know it.
So I just wanted to put that out there whether or not you
are for or against some of the discussions that have been going
on here. I know we can't do nothing.
And getting back to the topic at hand today, Mr. Klein, I
wanted to ask you a question about the Department of Labor's
proposed amendment to the definition of fiduciary. It has
created a lot of uncertainty in the plan's sponsor and
financial service community.
You mentioned that you believe that some service providers
would leave the market. Can you please how explain how this
would negatively impact workers and retirees?
Mr. Klein. Yes, thank you, Congressman, I think that the
concern here is that the uncertainty around what kind of
activity might be deemed to be a fiduciary act would scare away
some service providers from providing information that would be
very valuable to individuals and, you know, to their detriment.
I think it was outlined at the very beginning in the opening
statements how extremely important it is that people have
adequate retirement income.
And, you know, I don't think that, we are certainly not
opposed to the idea of revisiting rules they have been around
for 35 years, recognizing the vast changes that have been made
in the financial marketplace.
But a lot of the uncertainty, as I said, around various
practices, has both service providers, as well as employers,
and it should have participants also very concerned.
Mr. DesJarlais. Thank you. We have heard that defined
contribution plans are becoming more prevalent. What are some
of the industry's best practices that sponsors have taken to
increase financial education and participation?
Mr. Klein. Several interesting things. I think one of the
most fascinating things that represents best practices is the
application of behavioral economic concepts, the notion that
different people respond to different types of incentives and
different kinds of encouragement.
So rather than a one-size-fits-all approach to education,
there is actually a lot of fascinating work that is being done
in terms of segmenting how to approach different people based
upon their different age cohorts, their relationships to their
coworkers and so forth.
Other areas involve greater use of electronic means. That
is one of the reasons that we are so interested in this. It is
much easier for individuals to go on line to model their
particular situation, to understand what it is that they might
need, and then to seek the appropriate advice and so forth. So
these are just a couple of examples.
I guess I would cite one more. There is a lot of awareness
that very often an employee's spouse plays a significant role
in helping make the decision around various investments. And so
a lot of companies sponsor forums not just for their employees,
but invite their spouses to come as well, so there could be a
joint activity with greater results.
Mr. DesJarlais. I see I am out of time. I thank the
witnesses for their testimony. And I know that there are a lot
of American people watching hearings like this, hoping that we
get it right. So we have a lot of work to do.
Thank you. I yield back.
Chairman Roe. Thank you. Mr. Loebsack.
Mr. Loebsack. I do applaud having this hearing on
retirement issues. I should state that at the outset. I think
it is really, really critical, especially when we hear things
that young people don't think that Social Security is going to
be there for them, when we have been talking about the so-
called Ryan budget and ending Medicare, in effect.
But I also wish this hearing could more broadly focus on
ensuring real retirement security, which means focusing on
making sure that the millions of people currently out of work
actually can find a good-paying job and improved opportunities,
because as Mr. Brill mentioned, one of the main reasons why we
have a reduction right now in retirement savings is because of
the recession, because people have been out of work for so
long, and so many people have.
And so we have got to make sure that we focus more
generally, I think, on making sure that we get people back to
work, making sure that we get them good-paying jobs, so that
they can in fact take responsibility for themselves, too, and
afford to save more for their retirement.
And while I generally would agree more with what Mr.
Richtman has said today than the other three of you,
nonetheless, I think there are certain things that we can agree
on, and I think the point about financial literacy is a really
great point. I think we have far too many people in this
country who are financially illiterate. I have a bill also that
promotes statistical literacy. I think that is important as
well and contributes to financial literacy.
I am all for people taking responsibility for themselves,
especially when it comes to retirement. But at the same time,
of course, I have a lot of concerns about the move from defined
benefit to defined contribution. I still think that there is a
place, a very important place, for defined benefit plans. And I
don't want to see us continue to move in the direction of
defined contribution plans.
Also, I hope this hearing really is the beginning of a
larger discussion, as I just said, and some ways on how to
improve people's retirement savings and get them the
information they need. I think that is absolutely critical. But
I am also glad that we can use this hearing to focus on other
retirement security for all Americans, and that is Medicare and
Social Security.
Republicans' budget, as was already mentioned,
unfortunately will end Medicare. And not Medicare as we know
it, but I think as Mr. Kildee said, Medicare. It wants to
replace Medicare with something else. And they can call it
Medicare, but it is not Medicare. It is simply something
different. It turns it into a voucher program.
Just last week some of our Republican colleagues again
introduced legislation that would privatize Social Security. I
thought we had gone through that with the Bush administration
in 2005, but apparently not. And this proposal that was
introduced goes even further than President Bush did. It is not
allowing folks to put 1 or 2 percent into private accounts, but
the full 6.2 percent that they now pay, as I understand it. And
somebody correct me if my information is wrong.
But Mr. Richtman, a question having to do with the
Republican budget to transform Medicare, double seniors' out-
of-pocket health care costs and, really, with so many Americans
already struggling to save enough for retirement, what does
this mean for their retirement planning and for employers'
future costs, this budget that we have already referred to? Mr.
Richtman?
Mr. Richtman. Well, I think that Congressman Andrews tried
to elicit that earlier in the hearing. If a senior on Medicare
is paying twice as much out of pocket, there is no question
that it affects their retirement security. There is less money
to spend on other things, other essentials. At the same time,
Social Security COLAs have been withheld, there was no COLA in
2010, there was no COLA this year in 2011. And I am sure if you
go to your town meetings or any of the members of the
committee, and you tell--ask your seniors, do you think the
price of the things you count on has not changed in the last
year, they are going to laugh because they know everything has
gone up.
So when you combine paying more out of pocket for your
health care, receiving a Social Security benefit that is not
growing to keep up with inflation, it is going to have an
impact on your overall retirement security in my opinion.
Mr. Loebsack. I am nearly at the end of my time. I just
want to ask, Mr. Brill, I think you referred to long-term
trends, and I know that folks who are in favor of defined
contribution plans and those who are in favor of putting some
Social Security funds into private accounts talk about long-
term trends of the stock market and all the rest. But we have
to keep in mind that at any given time there can be a crash as
we saw in 2008, as we have seen previously, and there will be
folks who will have their retirement moneys in the stock
market, invested, when those crashes happen. And we can talk
all we want about long term and how there is a better return
for the money in a private account perhaps than in Social
Security, but we have to think about those folks who get caught
in the middle of those downturns when they have had that money
invested in private accounts. I think that is something that we
have to keep in mind and can never forget.
Thank you all for being here. Thank you, Dr. Roe. I
appreciate it.
Chairman Roe. Mr. Barletta.
Mr. Barletta. Thank you, Mr. Chairman. I would like to
yield my time back to the chair.
Chairman Roe. Thank you. Just a few questions and
background. I started in a small medical practice with 12
employees, and when I left we had 350-plus employees. And I
really prided myself, our practice and our group, on providing
retirement benefits. And I agree with you, education is one of
the most important things you can talk about. And I have always
heard investment advisors say the younger you are, the more
aggressive you should be with your investments. I totally
disagree. I think the first dollar that you invest has got the
most times to turn over. We all know the rule of sevens. You
earn 10 percent, your money doubles in 7.2 years.
So we have had employees in our practice for over 30-
something years and they are going to have a very generous
retirement plan. We began with a defined benefit plan and we
looked at that, and for our younger employees we actually could
put more money away for them in a defined contribution plan.
The city where I was mayor--this was a public entity--
changed from a defined benefit plan to a defined contribution.
And I agree with the education that Dr. Loebsack was
talking about is that that is absolutely critical, and Mr.
Delaney talked about in educating your employees. I want you to
discuss the fiduciary role, because I felt the pressure in our
pension meetings in our practice, because you are reluctant to
give advice. And what we have done is exactly what Mr. Delaney
has done. We have offered about a dozen or maybe 15 different
investment options.
And Mr. Loebsack also brought up the idea that the market
can crash. That is true, it can do that. Certainly no one would
recommend that at age 65 you have all of your money in
equities. And there are various plans that can help with those
things.
For instance, in my own personal plan, I use a 401(k). The
plan advisor said how much money do you want to retire on, so I
gave him a number, and 3 years of that, 36 months, is put in
cash. It does not matter what the market does in that time.
There is a 3- to 5-year investment strategy and then a longer-
term investment strategy. Those are strategies you can use to
iron out these things.
But I want to talk about the fiduciary role because that
concerned me when I was in practice, and I think it may have
held down the return because of my inability to really
communicate better with my employees. Mr. Delaney, I think our
problems are similar.
Mr. Delaney. Yes, Mr. Chairman. We approach this on a
number of levels. One, we have an Investment and Retirement
Plans Committee that meets on a quarterly basis that reviews
everything with respect to the defined benefit plan and the
defined contribution plan. We look at the returns each of the
investments for our associates are providing on a regular
basis, both near term and over the course of, say, 5 years. We
review those on a regular basis to make sure that our
associates have access to the types of investments that will
provide them an opportunity to save for retirement and get good
returns.
Chairman Roe. I don't mean to interrupt, but as I read this
in the fiduciary--and you can correct me, Mr. Klein, if I am
wrong--you can't put past performance as part of the formula;
is that correct?
Mr. Delaney. I do not know the answer to that question.
Mr. Klein. I don't believe that is fully correct, that you
can't discuss past performance. I think you are limited--I can
look to my legal counsel sitting behind me--in terms of the
extent to which you make a promise about the future in terms of
past performance.
Chairman Roe. You can at least say the last 5 years this
plan is up 15 percent, or whatever?
Mr. Klein. That apparently is included in a proposed reg
which is not yet finalized about not looking back at past
performance.
Chairman Roe. So it is part of the rulemaking process now
that may be a rule?
Mr. Klein. Might be, yes.
Chairman Roe. I didn't mean to interrupt, Mr. Delaney.
Mr. Delaney. That is okay. We will certainly take a look at
that. There are things that we do individually for associates
who can access information, as I referenced. Morningstar, where
they can do--I believe they can do kind of a questionnaire to
determine tolerance for risk and so on, and be able to make
recommendations in terms of what are the offerings through the
plan that would basically fit their profile.
But all of the discussions that we have had today with
respect to return and saving enough for retirement, there is
probably something beyond that that would make some sense for
our associates to have access to; that at this point, we are a
little bit hesitant to provide because of some potential
fiduciary risks.
Chairman Roe. Thank you. And now I yield to Mr. Holt.
Mr. Holt. Thank you, Mr. Chairman. You know I, like my
colleagues, I thank you for holding this hearing. I wish, I
suppose, that it had been held before the Republican majority
voted to end Medicare and before introducing legislation to
privatize Social Security.
As Mr. Richtman has pointed out, about a third of all
Americans have no income other than Social Security, and about
two-thirds rely on Social Security for most of their retirement
income. We have a responsibility to see that people can enter
their nonwage-earning years with dignity. Privatizing Medicare
and Social Security will return us to a you-are-on-your-own
society, where it used to be to be old meant to be poor. To be
old was to have inferior health care.
You know, according to the Ryan plan, which has now been
approved twice by the Republican majority, the privatization of
Medicare future retirees would have real effects. They claim
that those under 55 are not affected, but as Mr. Andrews has
pointed out, and as the witnesses I think have been forced to
agree, it requires that a 54-year-old would have to set aside
about $182,000 to be prepared for the additional out-of-pocket
costs. Or a 20-year-old, today's 20-year-old would have to set
aside about three-quarters of a million dollars of extra
retirement savings to cover the additional out-of-pocket costs.
So this is on top of the problem that we all face of
Americans are underprepared and are surprised to learn that
they are underprepared; the average American family already a
quarter of a million dollars short from what they think they
need for retirement. And most are not only unprepared for
retirement, they are startled to learn how unprepared they are.
So rather than privatizing Medicare and Social Security, we
should actually be helping workers save for retirement.
My colleague Tom Petri and I have introduced the Lifetime
Income Disclosure Act to inform workers of the projected
monthly income they could expect at retirement where they find
themselves now in this situation with what they have set aside
so far; and it would provide participants with illustrative
conversion directly on their annual statements, such as we
Members of Congress have now started receiving with our Thrift
Savings Plan.
I, like most Members of Congress, I think like most Members
of Congress, don't have a dedicated personal financial advisor
whose time is dedicated to me. And I know that is true for most
Americans so this on the Thrift Savings Plan has actually been
helpful.
Congress and the administration must continue to do all
they can to make sure that people have access to investment
advice. From my own experience, I have seen the benefit of
sound, professional investment advice, and I am going to
continue to encourage the administration and my colleagues here
in Congress to ensure that we don't take actions that could
have the unintended effect of limiting the financial advice and
leaving Americans even less prepared for their retirement
years.
Getting back to Medicare, I mean, really no one disputes
that Medicare works very efficiently. So now the opponents have
taken to saying, well, but it is unsustainable. Mr. Richtman, I
would like to point out what I think should be clear to
everyone; that no health insurance plan is sustainable if we
have 10 percent a year inflation over the overall cost of
living. The problem is not with Medicare, the problem is with
increasing health care costs.
Mr. Richtman, is it not true that Medicare, according to
economic studies, is more effective than private insurers in
keeping down the costs?
Mr. Richtman. Well, the administrative cost of Medicare is
extremely low. Social Security, the administrative cost is
nine-tenths of 1 percent, and all of that is paid for out of
the payroll tax. So these are very efficient programs.
But on the larger point that you have made, I couldn't
agree more. Singling out Medicare without addressing the
overall cost of health care will only lead to a way--a system
of health care for seniors where seniors pay more and get less.
You are absolutely right about that, Congressman Holt. The only
way to address effectively Medicare costs is to address overall
health care costs in our country.
Mr. Holt. So private insurance plans could be just as
unsustainable?
Mr. Richtman. Absolutely.
Mr. Holt. Thank you, Mr. Chairman
Chairman Roe. Mrs. Roby.
Mrs. Roby. Thank you, Mr. Chairman. Thank you to all of you
for being here today answering our questions.
And, Mr. Brill, I just want to ask you a couple of
questions, if you could expand on your testimony. You have data
that shows many defined benefit programs as underfunded, and I
find that to be very alarming, the data that you have. How big
of a problem is this? And is it a hopeless situation going
forward?
Mr. Brill. Thank you for your question. With regard to the
magnitude of the underfunding situation, of course the degree
to which plans are underfunded, if a particular plan is
underfunded, vary significantly from plan to plan and over
time, year to year, as well. Among the largest plans have been
suggested that are underfunded, they are about 85 percent
underfunded, about 15 percent under. That translates into
hundreds of billions of dollars in the aggregate.
A lot of these issues were addressed in legislation in 2006
that Mr. Andrews referenced to help set stricter rules to
require plans to fund to higher targets, to fund towards 100
percent, and to have more strict rules regarding the rate at
which they catch up when they are underfunded. Nevertheless,
there remains these gaps.
With regard to the question of whether it is hopeless, I
think it is not. I think that the shifts we have seen in
different years in terms of the asset allocation among defined
benefit plans and the continued phase-in of the rules from the
2006 act are continuing to improve the solvency of the DB plans
so that we are in a better place now than we were.
Mrs. Roby. Well, just to examine that, the PPA with respect
to funding at the macro level, can you discuss even further the
impact of that, and specifically what are the most successful
aspects of that law as we look forward?
Mr. Brill. Sure. The legislation certainly was a balancing
act of a number of competing forces. The simplest things that I
think were clear positives, as I mentioned earlier, setting a
funding target of 100 percent. So you need to put your money
where your mouth is. If you are making promises to your workers
to have benefits, you have to be putting in the funds at the
time that will allow those workers to receive those benefits.
Previous to the 2006 act, that target was only 90 percent.
So we were only asking people to get 90 cents on the dollar.
Now we are asking people to try to fully fund their plans.
In addition, when a funding gap does originate from a plan,
either as a result of the change in asset values or a change in
interest rates which affect their liabilities, plans amortize
that gap over a 7-year period. Prior law was a hodgepodge of
policies, some depending on the cause of your underfunding;
sometimes that gap wouldn't necessarily be closed for periods
of up to 30 years.
So we want to keep plans closer to fully funded, and
raising the targets and shortening the periods in which gaps
can be closed has helped, and we have seen the results of that
already.
Mr. Klein. Congresswoman, would it be okay if I entered
some thoughts on this also?
Mrs. Roby. Surely.
Mr. Klein. Hank you. First, a number of comments have been
made today about the underfunding of defined benefit plans. And
I think it is really important to keep in mind that anytime you
take a snapshot view of a long-term obligation like a pension,
you are going to get a skewed perspective. And in an
environment where the market has had a downturn and interest
rates are at a historically low level, plans are going to look
today underfunded.
Likewise, you know, when the market was higher and interest
rates were higher, we might have looked at overfunded plans
and, you know, rested on our laurels over that. That would have
been equally a mistake.
So it is important to remember that these benefits are
going to be paid out over decades over many, many different
economic cycles.
The second question, I would just say that the concern that
many employer sponsors of pension plans have around the funding
rules in the Pension Protection Act concerns the fact that very
minor changes in interest rates and minor, let alone
significant, changes in the equity markets can lead to enormous
funding obligations at the worst possible time for the company,
when you want the company, obviously, to be putting money into
retaining jobs and creating opportunities and investing.
Everyone is concerned to make sure that the obligations are
honored, but it is really important to recognize the level path
and that employers will not sponsor plans if they can't have
predictability. And that is what the Pension Protection Act has
injected, some unpredictability.
Mrs. Roby. Thank you. My time has expired.
Chairman Roe. Mr. Hinojosa.
Mr. Hinojosa. Thank you, Chairman Roe and Ranking Member
Andrews for this hearing on retirement security.
It seems to me that in America we are fortunate to have
Medicare and Social Security, a safety net for working families
and middle-class Americans that must be strengthened and
preserved. While I respect my colleagues on the other side of
the aisle, we know the Republican plan to end Medicare as we
know it would be devastating to Americans' retirement security.
I have a question for you, Mr. Richtman. In your testimony
you indicate that Social Security and Medicare help keep low-
income workers out of poverty in retirement and provide
critical support for middle-class workers who do not earn
enough during their working lives to finance their retirement.
So as an expert, why do you believe seniors all across the
country oppose plans to privatize Medicare as we know it and
convert it into a voucher program?
Mr. Richtman. I think the reaction we have seen lately in
the election in New York and also across the country is seniors
and younger people have seen that both of these programs work
and they work well. One of the members of the panel earlier
said the government has not managed Social Security well. I
really don't understand how that statement could be made.
Last summer Social Security celebrated its 75th birthday.
Here is a program that has paid everybody every penny they were
entitled to for 75 years. Now, you as Members of Congress, you
know how many times different parts of the government run out
of money and come to you requesting emergency supplemental
appropriations. Here is a program that has been sound for 75
years; has, as I mentioned, administrative costs of nine-tenths
of 1 percent.
Mr. Hinojosa. I agree with you. I agree with you, and the
cost of operating it is extremely cheap for us Americans. And I
agree with you.
Tell me, what are your thoughts on 401(k)s? Are they
fulfilling the promise to help American workers build their
retirement assets?
Mr. Richtman. Well, my 401(k) stopped fulfilling my promise
a couple of years ago when it became--somebody said a
``201(k).'' That is why I am so glad to be invited to this
hearing. They are an important part of what has been called a
three-legged stool for retirement. Social Security is the one
that we really need to make sure continues.
Mr. Hinojosa. I agree with you. I remember having town hall
meetings when we were going to privatize Social Security under
the Bush administration. And now when I run into some of those
constituents, they tell me thank goodness we did not, because
my retirement would have dropped at least 40 percent.
I have a question for Mr. Brill. From your testimony, I
understand you want American workers to take more
responsibility for their retirement savings and expanded
financial education to help them achieve their goal. I believe,
as you know, financial literacy is extremely important,
especially in low-income and minority communities.
What is it that you would advise us? How do we ensure that
financial advisors act in the workers' best interest when they
are giving us advice?
Mr. Brill. Thank you, Congressman. With regard to financial
literacy, I would note that on the employer's side there is, of
course, important disclosure and fiduciary responsibilities.
There is no question that those issues are clear. And as Mr.
Klein noted in his remarks, if it is time to review those
policies--it may be--I would hope that it would be undertaken
in an open and transparent process.
I am also concerned, however, and in fact more concerned
with the inadequate amount of education for many workers. You
mentioned low-income workers, but it extends to middle-income
workers as well.
Mr. Hinojosa. Let me stop you, because the Chris Dodd-Frank
bill has a component known as Consumer Financial Protection
Bureau which creates a financial literacy bureau that would be
working out there. Do you support it?
Mr. Brill. I am not familiar with the provision in Dodd-
Frank. I know that at the Treasury Department there were
efforts to study and promote these issues. Those are certainly
good concepts. I don't see in the data a significant change in
the level of financial literacy. So I think we need to do more.
Mr. Hinojosa. My time has expired.
Chairman Roe. Thank you.
Just a few questions, one on the employer's side. One of
the reasons that you want to get very good advice is the fact
that my 401(k) is tied exactly into what my employees are
doing. So I have a vested interest in getting the best advice I
can, because I am doing that. And I also understand that there
are people out there who--and I understand what we were trying
to do with the fiduciary, is if there is someone giving advice
where just they benefit and not the employee and so forth, I
get that. I understand that. Those incentives have to be
aligned where the person giving you advice benefits and you
also benefit.
And as I have said many times, in a particular plan if
somebody has 10 percent load and they make me 15 percent, I do
better if someone has a half a percent load and they make me 2.
It is just common sense that you go out and try to find the
best yield and return and do that for your employees. They are
happy and the employer is happy; because most of the time, as
Mr. Delaney has said, his 401(k) and his retirement plan is
tied right in with the employees of the company because that is
where he works.
The other thing I think that was brought up a minute ago by
the ranking member, Mr. Brill, was asking you about
competition. I think he probably did not use a good example
when he used Coumadin in the market. You can get that for $4 a
month. So the market system works pretty well in that, and
being able to keep those drug prices down.
The real problem, as we all know, is bringing a new
molecule to market. That is incredibly expensive. And I agree
with you that that will dry up and we are seeing it dry up, the
new medications being brought to market. And that is a concern
for me as a physician being able to prescribe for patients.
I think one of the most important things we can do, we
ought to get the financial education even down to elementary
and high schools, to educate folks that you need to start
planning for your retirement now, at the beginning of your
life. And I would like to see us--this is not a new idea at
all--is to start saving at birth. We deliver 4 million children
a year in America, and I would like to see a retirement plan
put away right then for your health care and your retirement, a
$2,000 account for each at birth, and let that go for 65 years
in addition to what we are already doing. I think that is
something we need do. It would relieve a lot of pressures on
future liabilities that we have if we did that.
I think the other thing you can do in your office that I
have done time after time after time, I had an employee one
time that took $30,000 out of retirement plan, paid the tax,
paid the penalty, and bought a car. That was about a $300,000
car, because over time you have a chance to grow that into a
very large sum of money. And so I think education is absolutely
critical.
Folks watching this may not understand why businesses, at
least ours, looked at changing with cost structures. In a
defined contribution plan you put away so much money each year,
and some of it is usually matched by your employer. Whereas a
defined benefit plan, you get a certain benefit at the end of
that time, at 30 years or 20 years or whenever it might be.
I think an employer like me was more likely to go with a
defined contribution, because each year I knew what my cost
was. And in a very volatile market now, I think that is why we
are looking and seeing it more and more and more.
The auto-enrollment idea, I would like some comment on
that. I think that is a wonderful idea in education. Mr. Klein,
if you would.
Mr. Klein. Sure. Auto-enrollment is one of those examples
of behavioral economics that I was referring to in response to
an earlier question. It definitely--the data has definitely
shown that those employers who put that in because of general
human nature, people who did not get around to participating
were perfectly fine for the most part with being automatically
enrolled in a plan. They still have the option to opt out or
change the allocation or change the amount that is going in.
But there is no question that that is a very simple way to
increase participation.
Chairman Roe. Mr. Brill brought up a great point a minute
ago. How you get more people involved in a pension plan is to
give more people a job. Quite frankly, that is the biggest
problem in America. When I go around today, the first question
I ask is, do you feel that this recession is over? And nobody
holds their hand up. And the reason they don't hold their hand
up is because they can't go out and find a job. If they could
go out and find a job, the recession would be over and many of
those jobs would have retirement benefits.
And it just creates, the job creation, the job market now
is a disaster in this country and we have to get that
straightened out.
All of what we are talking about, what Mr. Richtman is
talking about, what everybody is talking about, is amplified
and made worse because right now our people cannot find work.
And the ones who are working, frankly, are underemployed. You
go talk to people in my community at home, and I talked to I
don't know how many in the last week that couldn't find a job
doing anything. So I think that is the issue we have got to
deal with now is to get people back to work.
My time has expired. Mr. Tierney.
Mr. Tierney. Thank you. I don't want to deviate from what
my questions are going to be, but I do want to say that we are
all happy to talk about jobs. We have been here about 160 days
and we are still waiting for the majority to put forth any kind
of proposal that would help on the jobs front. And that would
certainly play into security and retirement. But we have not
seen any bills about infrastructure, banks being created,
nothing about research and development, uncertainties going
forward, nothing about Workforce Investment Act of any
consequence.
So by all means, let's talk about jobs and that will help
everybody's security. But for now at this particular hearing,
Mr. Richtman, we are supposed to be talking about security
retirement. So I think you said one-third of the current
retirees rely on Social Security for all of their income.
Mr. Richtman. That is correct.
Mr. Tierney. And that is an average of about $14,000 a
year?
Mr. Richtman. Fourteen. And for women it is an average of
12,000.
Mr. Tierney. And two-thirds rely on Social Security for
half of their income, or more.
Mr. Richtman. That is correct.
Mr. Tierney. If we were to privatize Social Security so
that people didn't get their payments out, as they do under the
current system, but instead had to rely on the volatility of
the market and investments, would that one-third or two-thirds
be more secure or less secure?
Mr. Richtman. Well, they would be suffering is the way I
would characterize it. They would be suffering quite a bit. And
we are grateful that the Congress did not pursue that approach
to Social Security privatization.
Mr. Tierney. So for people in general, but specifically for
people at the lower end who are earning only enough to get that
minimum benefit or to have that minimum benefit be half of
their retirement, if they had a defined benefit plan that they
could have counted on a certain payout under the formulas for
that, but switched to a defined contribution plan where they
were subject to the vagaries of the market and their
investments on that, would that individual be more secure or
less secure?
Mr. Richtman. No, it would be less secure. I guess--I think
what you are pointing out, at least the way I see it, we need
to have one source of retirement revenue that is secure, that
you can count on, that is not subject to the whims of the
market.
And as was pointed out earlier, there are ups and downs in
the market, but you retire at a certain time and you can't
predict whether it is going to be at the top of the market or
at the bottom or anywhere in between.
Mr. Tierney. So for those individuals who are now paying
about 25 percent of the cost of Medicare, under the Republican
proposal they would be paying eventually over 60 percent, 65
percent of that. So obviously I assume that would make it a
less secure environment for them, less certain. But also right
now if you get Medicare you have--stop me if I am wrong--a
guaranteed set of benefits; right?
Mr. Richtman. That is correct.
Mr. Tierney. You have preventive care now and well-being
visits.
Mr. Richtman. After the passage of the Affordable Care Act;
that is correct.
Mr. Tierney. You have your choice of provider. Everyone who
accepts Medicare, has to accept particular patients. So you
have a choice of all those providers; correct?
Mr. Richtman. Correct.
Mr. Tierney. And is it also true that if you are older and
sicker, you don't get penalized for that? Your premiums don't
go up through the roof because of that.
Mr. Richtman. That is one of the beauties of the system.
Mr. Tierney. So if we switch to the Republican plan on
that, do you see any guarantee that an insurance company must
provide a plan?
Mr. Richtman. The only guarantee I see is that seniors
would pay more and get less. That is the guarantee that I see.
Mr. Tierney. But you don't see a guarantee that an
insurance company would have to offer a plan?
Mr. Richtman. That is correct.
Mr. Tierney. Nobody is assuming that they will. If they do
offer a plan, there is no guarantee that they would offer a
plan with the same basic guarantees of the Medicare system.
Mr. Richtman. Congressman, you can look at history. Before
we had Medicare, what you are describing was a fact of life. At
the National Committee to Preserve Social Security and
Medicare, our concern is that this whole approach, whether it
is privatizing Social Security or privatizing Medicare, is
really an effort to go back to the 19th century when, as one of
your colleagues said, you are on your own. Good luck, you are
on your own. And I don't think most Americans want to go there.
And I was asked why people support the program, both
programs. It is because we don't want to go back to that era.
Mr. Tierney. I guess that sums it up fine. I yield back.
Chairman Roe. I yield to Mr. Scott.
Mr. Scott. Thank you, Mr. Chairman.
Mr. Richtman, you were talking about retirement security
challenges and the gentleman from Massachusetts just pointed
out that about a third of people over 65, they get virtually
all of their income from Social Security; is that right?
Mr. Richtman. That is correct.
Mr. Scott. And two-thirds get most of the their income from
Social Security. For those who get all of their income from
Social Security and have essentially no pension, how would they
be helped with education and advice in investments?
Mr. Richtman. Well, that is--I am not sure how they would
be helped. They wouldn't have much money to be investing,
obviously.
Mr. Scott. Whatever kind of education and advice we have,
there would be a lot of people that will essentially get to 65
and be virtually dependent on Social Security, and education
and advice for those who are broke would be meaningless; is
that right?
Mr. Richtman. Once someone pays their rent, their heat,
their electricity, there is not going to be much use, no matter
what the education would be.
Mr. Scott. Now, that is for retirement income. The other
challenge, of course, is health care. Now, let's talk about
this little voucher scheme that is going on. Is there anything
in that voucher scheme that will reduce or increase costs?
Mr. Richtman. Not that I know of.
Mr. Scott. It will not reduce costs. Will it increase costs
going to the private sector because the private sector has
commissions, advertising, corporate CEO salaries, additional
expenses, dividends, expenses that Medicare does not have?
Mr. Richtman. By definition, the private sector is
interested in profit.
Mr. Scott. So you increase costs. Now, the voucher will not
pay the whole cost when it starts. Is it true that the Medicare
beneficiaries would be about $6,000 short of what they need?
Mr. Richtman. That is correct. The way I understand it, the
voucher is not designed to keep up with health care inflation,
so it is virtually certain that individuals will be paying more
and more out of pocket.
Mr. Scott. So when it starts they are about $6,000 short,
and in 10 years they are about $12,000 short?
Mr. Richtman. That is correct.
Mr. Scott. Does this scheme improve because they say they
are going to delay it for 10 years?
Mr. Richtman. I am sorry?
Mr. Scott. Does it improve because they delay it for 10
years? They tell senior citizens it is not going to apply to
you, we won't start it for 10 years. Does that improve the plan
at all?
Mr. Richtman. It does not improve the plan for current--the
plan, it does not for current or future----
Mr. Scott. It is not a better scheme because you wait 10
years to inflict it on people?
Mr. Richtman. The longer you wait----
Mr. Scott. It is the same bad plan.
Mr. Richtman. The longer you wait, the younger you are when
you get into this new plan if it becomes law, the more you will
pay out of pocket.
Mr. Scott. The promise is that it won't be inflicted on
those 55 and above. Ten years from now, what would prevent
Congress, which would be composed of people who did not make
that promise, from changing its mind and imposing that plan on
everybody, rather than protecting those that are 55?
Mr. Richtman. The only thing that would prevent it would be
more people in Congress such as yourself.
Mr. Scott. Well, that is supposing. But if you had the plan
and people were getting older and older, there is nothing to
prevent Congress from saying we are going to impose this thing
on everybody.
Mr. Richtman. Absolutely.
Mr. Scott. And the people who are making the promise today,
most of them are not going to be there in 10 years. Now, are we
expecting younger people to pay for a Medicare program that
they are not going to get anything out of?
Mr. Richtman. You know, when I was asked earlier why people
have such strong support for Medicare and Social Security, it
is because historically they have seen that the benefits are
there when they do retire. And if there are questions raised,
doubts raised, I think that support dissipates pretty quickly.
Mr. Scott. In the Judiciary Committee, my other committee,
we are considering this thing called the Balanced Budget
Amendment, which incidentally does not require a balanced
budget. Everybody is discussing the title. There is a provision
in there that would require a two-thirds vote to spend more
than 18 percent of GDP. We haven't gotten that low in terms of
GDP since before Medicare.
What do you think would happen to Medicare if that
provision--would Medicare necessarily be in jeopardy if we
actually passed--enacted that legislation?
Mr. Richtman. I think both Medicare and Social Security
would be in jeopardy. And our organization has opposed every
version of the balanced budget that has come through the
Congress.
Mr. Scott. And most of the discussion has been on the
title, not on the provisions. Like you can reduce benefits with
a 50 percent vote, but you need 60 percent to save Medicare or
Social Security by raising taxes. That is under the title.
Mr. Richtman. Yes.
Mr. Scott. Those kinds of things jeopardize both Social
Security and Medicare if we adopt the plan as we are
considering it in the Judiciary Committee.
Mr. Richtman. That is correct.
Mr. Scott. Thank you, Mr. Chairman.
Chairman Roe. Mr. Kucinich.
Mr. Kucinich. Thank you very much, Mr. Chairman, for
calling this hearing.
To Mr. Richtman, you may have answered this already, so you
know, indulge me on this. There are many older baby boomers who
are deferring their retirement right now; is that correct?
Mr. Richtman. Many of them have to continue working; that
is correct.
Mr. Kucinich. Because?
Mr. Richtman. Their costs are too high. They don't have a
secure retirement arranged for themselves.
Mr. Kucinich. And so let's talk about this concept of
retirement. Because you know, overarching this entire
discussion is the theory of retirement, the idea that let's say
40 years ago, 50 years ago, when people entered the workforce,
they had some thought that at the end of all their years of
work there was going to be something there for them. They are
now finding in many cases that is just not true for a lot of
reasons.
What is different from this period of time, though, than
maybe a few decades ago is the level of unemployment that
exists. There aren't opportunities for people to supplement
their income. There are 15 million people unemployed and over
20 million at least underemployed, so there is a labor market
that is extraordinarily difficult for people who are trying to
supplement their income.
What is the practical effect on older workers who are
forced to continue working? Are they able to make more money or
less? Are they able to put away money for what will finally be
their golden years, or are they in their golden years finding
that their standard of living is eroding?
Mr. Richtman. I am not really prepared to give you any
statistics, but from what I have observed many older people
stay in the workforce to make ends meet. The average Social
Security check comes out to $14,000 a year. And there are, of
course, parts of the country where it is easier to get by on
that and many where it is not.
Mr. Kucinich. But we have Social Security, but we also know
when we are talking about private pension plans, which many
people have used to supplement their Social Security, we see
that the PBGC, depending on who you talk to, is anywhere from
$5 billion to $23 billion underfunded. That also depends on
interest rate assumptions.
So if we have Social Security benefits on one hand
sustaining most people's retirements; but then people who were
in the private workforce and had separate pension funds, and
they find those funds are not there the way they counted on,
that has to have an extraordinary impact on people's standard
of living when they reach their senior years; wouldn't you
agree?
Mr. Richtman. I would agree with that.
Mr. Kucinich. Mr. Chairman, what we are looking at here is
a condition where this so-called American dream that people
bought into when they were in their twenties and in the
workforce, it is a myth. It has evaporated. And my concern is
that our society isn't paying enough attention to the effects
of higher taxes, real estate taxes on seniors who are
homeowners, to the limited effects that seniors have to be able
to supplement their income, to the impact of Medicare Part D on
a lot of seniors' budgets because--you know, the government
should be getting a rate similar to what veterans pay, but they
are going to be paying a little bit more on prescriptions,
depending on what the changes are long term through the
Affordable Health Care Act.
And if retirement is about planning, what we are finding is
that with employers not willing to pay higher premiums and more
and more burdens being put on the Pension Benefit Guaranty
Corp., underfunded, and more and more companies in the last
years going bankrupt and jettisoning their retirement plans and
throwing them into a place where people are lucky to get
pennies on the dollar once it goes through the PBGC process, we
are creating a whole new potential for poverty among elderly
people that the reason why we set a retirement program in place
in the first place is being essentially negotiated. It is like
everything is coming full circle.
When Roosevelt came forward in 1934 to create Social
Security, he did so because elderly people were being driven
into poverty. Social Security has rescued them from that. But
also people relied on trying to maintain their middle-class
status through these pension programs that they had through
private sector and other services. This is all changing.
So we are looking at really a very dangerous situation here
where we could be--we could see this icy hand of poverty
enveloping a senior population that thought that it was going
to be okay, thought they saved for a rainy day, thought they
worked to get ahead. And they arrived, and all of a sudden it
is gone.
I wanted to share that concern with you, Mr. Chairman,
because all of these decisions that we are making are affecting
tens of millions of elderly Americans who are really looking at
serious financial troubles.
Chairman Roe. Your time has expired. Mr. Wu.
Mr. Wu. No questions.
Chairman Roe. I thank you. And Mr. Andrews, for any closing
comments.
And I do have a unanimous consent request to enter into the
record a letter from Retirement USA and other statements for
the record submitted by the AARP.
Without objection, so ordered.
[The information follows:]
Prepared Statement of Retirement USA
We are pleased that the Subcommittee on Health, Employment, Labor,
and Pensions is holding this hearing today on retirement income
challenges. Retirement USA is a national campaign working to address
the challenges facing the nation's private retirement system and to
promote the development of a universal, secure, and adequate retirement
income system that, in conjunction with Social Security, will provide
future generations of workers with sufficient income for retirement.
The Pension Rights Center, a nonprofit consumer rights organizations,
is submitting this statement on behalf of the five organizations
convening Retirement USA--the AFL-CIO, the Economic Policy Institute,
the National Committee to Preserve Social Security and Medicare, the
Pension Rights Center and the Service Employees International Union--
and our 23 supporting organizations.
In recent months, attention has been focused on the long-term
federal deficit facing the country. Retirement USA is concerned about
another kind of deficit--the massive and growing Retirement Income
Deficit that is facing millions of Americans. The Retirement Income
Deficit is the gap between what people have currently saved for
retirement and what they should have saved by today to be able to meet
a basic level of sufficiency in retirement. This deficit is traceable
principally to the freezing and termination of private pension plans,
the failings of 401(k) plans, and the overall low coverage rates in
employer-sponsored retirement plans.
The Center for Retirement Research at Boston College last year
calculated the Retirement Income Deficit at $6.6 trillion. To put it in
perspective, this is more than four times the size of the federal
deficit in 2009. To arrive at this number, the Center on Retirement
Research used the same conservative methodology they used to calculate
its National Retirement Risk Index. They looked at households in their
peak earning years, between 32 and 64 years old, assumed that people
would continue to earn pensions and contribute to 401(k)s, and factored
in the value of home equity for retirement income.
We are concerned that proposed cuts in Social Security, Medicare
and public plans will only worsen the massive Retirement Income Deficit
already facing American workers--and will particularly affect future
generations of retirees.
What is needed to address the Retirement Income Deficit?
First and foremost, policymakers must keep Social Security strong.
All of the participants in Retirement USA are committed to protecting
and improving Social Security. Social Security is the economic lifeline
that millions of Americans rely on to survive. For the average worker,
Social Security provides only slightly more than $14,000 a year. Fully
one out of five retirees relies on this steady stream of income for all
for all of their income, and two-thirds rely on it for more than half
of their income. Social Security is doing an unparalleled job of
providing a basic foundation of income for retirees. Cutting Social
Security benefits--for example, by increasing the statutory retirement
age or changing Social Security's indexing--would increase the
Retirement Income Deficit that millions of Americans are already
facing--and decimate the retirement prospects for future retirees.
Second, there should be no cuts to Medicare benefits. Voucherizing
Medicare will put health costs out of reach for millions of Americans
who are already faced with inadequate retirement income. Privatizing
Medicare will not control costs. It will simply make healthcare
unaffordable and reduce the income that people need to make ends meet.
Cuts in Medicare will only make the Retirement Income Deficit worse.
Third, Congress should not undercut state and federal pension plans
that have provided critical benefits to millions of teachers,
firefighters, and other public servants who have worked to make our
society a better place. The average public-sector employee earns a
pension of about $22,000 a year, modest benefits that enable retirees
to keep spending on goods and services in their communities--thereby
helping to strengthen the economy. Despite the financial crisis and the
deepest recession in 75 years, state plans are as well-funded as
corporate pension plans. Efforts to weaken public plans, especially by
turning guaranteed pension plans into 401(k) plans, will only make the
Retirement Income Deficit worse.
Fourth, employers, employees, and policymakers must work together
to fix pension problems for private-sector workers. As it is, only 50
percent of the private workforce is covered by any kind of pension or
savings plan on top of Social Security. In addition, far too many
companies are freezing, terminating, or cutting back on defined benefit
plans--pension plans that typically provide guaranteed lifetime income
to retirees. Most private-sector retirement plan participants are in
401(k) plans. The problem is that, even in the best of circumstances,
these plans only work if people are able to set aside significant
amounts of money, make the correct investment choices, keep the money
locked in until retirement, and then figure out how to make the money
last for the rest of their lives. Even before the recession, retirement
savings were low. In 2007, half of all families with 401(k)-type plans
or IRA accounts had less than $45,000 saved in these accounts. For
families that are headed by older workers, the median account balance
was just $98,000.
All the participants in Retirement USA believe in a two-tiered
approach to addressing the challenges of the private system. First, we
want to do everything possible to encourage and stabilize defined
benefits plans, strengthen protections in 401(k) plans, and improve
coverage in existing plans.
However, in the long-run, to truly address the need for
supplemental income on top of Social Security, Retirement USA believes
that we need to start developing a visionary approach to economic
sufficiency in retirement. To that end, we have developed 12 principles
that incorporate the best parts of defined benefit pension plans and
401(k) savings plans, and include some additional features. We believe
these principles should underlie a new system that supplements Social
Security.
There are three overarching principles that we believe should guide
the reshaping of our pension system for future generations of workers.
These are:
(1) Universal Coverage. Every worker should be covered by a
retirement plan. A new retirement system that supplements Social
Security should include all workers unless they already are in plans
that provide equally secure and adequate benefits.
(2) Secure Retirement. Retirement shouldn't be a gamble. Workers
should be able to count on a steady lifetime stream of retirement
income to supplement Social Security.
(3) Adequate Income. Everyone should be able to have an adequate
retirement income after a lifetime of work. The average worker should
have sufficient income, together with Social Security, to maintain a
reasonable standard of living in retirement.
Other principles include
Shared Responsibility. Retirement should be the shared
responsibility of employers, employees, and the government.
Required Contributions. Employers and employees should be
required to contribute a specified percentage of pay, and the
government should subsidize the contributions of lower- income workers.
Pooled Assets. Contributions to the system should be
pooled and professionally managed to minimize costs and financial
risks.
Payouts Only at Retirement. No withdrawals or loans should
be permitted before retirement, except for permanent disability.
Lifetime Payouts. Benefits should be paid out over the
lifetime of retirees and any surviving spouses, domestic partners, and
former spouses.
Portable Benefits. Benefits should be portable when
workers change jobs.
Voluntary Savings. Additional voluntary contributions
should be permitted, with reasonable limits for tax-favored
contributions.
Efficient and Transparent Administration. The system
should be administered by a governmental agency or by private, non-
profit institutions that are efficient, transparent, and governed by
boards of trustees that include employer, employee, and retiree
representatives.
Effective Oversight. Oversight of the new system should be
by a single government regulator dedicated solely to promoting
retirement security.
Social Security, of course, meets all of the core Retirement USA
principles other than ``adequacy.'' Social Security benefits for the
average retiree are less than the federal minimum wage. All of the
organizations participating in Retirement USA believe that if there
were the political will to do so, expanding Social Security to provide
an adequate level of income would be the most efficient and effective
way of strengthening workers' retirement security.
But our groups recognize that our tradition of providing retirement
security in America has been a mix of public and private systems. For
that reason, our principles focus on features that we believe must be
part of a new private system to supplement Social Security. There are
proposals and programs both from this country and overseas that meet
our principles that we would be pleased to share with Subcommittee
members.
We hope that you will consider options for developing a new private
retirement system for the 21st century. This would be the best way of
meeting the needs of employees--and ultimately of employers and society
as well. We look forward to working with you to meet the retirement
income challenge.
______
Prepared Statement of American Association of Retired Persons
On behalf of our members and all Americans age 50 and over, AARP
appreciates the opportunity to submit written comments on some of the
significant issues surrounding the current and future state of
retirement security of American workers and their families. A major
priority for AARP has long been to assist all Americans in accumulating
and effectively managing the resources they need to supplement Social
Security and maintain an adequate standard of living throughout their
retirement years. Unfortunately, several key factors and trends over
recent decades have made the necessity of achieving and maintaining an
adequate income in retirement more challenging than ever before.
These key factors and recent trends require the thoughtful and
timely attention of Congress, the President and Executive Branch
agencies. They also serve to underscore the critical importance Social
Security plays, and will play, in the retirement security of both
current and future generations of Americans. Historically, Social
Security was designed to provide only a foundation of an individual's
retirement security and was never intended to be the sole source of
income for people who have retired. Due to shortcomings in other
traditional components of retirement security that help individuals
achieve an adequate level of income for their golden years--employer-
based pension plans, personal savings, home values and affordable
health care--the median annual income of households in which the head
or spouse was 65 or older was just over $30,000 in 2008.\1\
Unfortunately, many Americans rely, and will continue to rely, on
Social Security as their primary, if not sole, source of family income
for their retirement.
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\1\ Congressional Research Service, Income of Americans Aged 65 and
Older,1968 to 2008,(November 2009) Because of the importance of these
issues, AARP would like to thank Chairman Roe and Ranking Member
Andrews for convening today's hearing.
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Employer-Based Pension Coverage
It is widely accepted that workplace retirement plans can be an
efficient and effective means for individuals to save for their own
retirement. As a result, AARP strongly believes that all workers need
access to a workplace retirement plan that supplements Social
Security's strong foundation. Since the enactment of the Employee
Retirement Income Security Act (ERISA), the focus has been on three
central issues: coverage and participation; security; and adequacy.
Unfortunately, overall pension coverage in the U.S. private-sector
labor force has generally hovered only near 50 percent for decades,\2\
with larger employers more likely than smaller ones to offer retirement
plans.\3\ This means roughly 78 million American workers do not have
access to a workplace retirement plan, such as a pension or 401(k)
plan. As a result, very few of these individuals save for retirement on
their own, and many are currently retired, or will retire, with less
than enough money to meet their basic needs.
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\2\ S. Mackenzie & K.B. Wu, The Coverage of Employer Provided
Pensions: Partial and Uncertain at 7 (AARP 2008).
\3\ Id. at 15.
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In response to this significant problem, AARP has been a strong
supporter of proposals such as the Auto IRA, which would help bridge
this coverage gap and provide access to a workplace retirement vehicle
to tens of millions of American workers. Specifically, this proposal
would allow workers without access to an employer plan to voluntarily
fund their own individual retirement accounts (IRA) through payroll
deductions. Harnessing the power of regular, automatic payroll
deductions at work would encourage and simplify saving and
significantly improve the retirement security of millions of Americans.
Moreover, these accounts would be portable, so workers could take them
to another job.
In addition, these automatic accounts involve little or no cost for
most employers. Because Auto IRA would establish simple individual
retirement accounts rather than employer-sponsored retirement plans,
employer responsibilities under this proposal are much more limited.
For instance, Auto IRA employers would neither select, hold, nor manage
investments, nor would they be required to provide contributions to
employee accounts. Finally, Auto IRA provides tax credits for employers
to help offset any limited costs of setting up these accounts.
In addition to coverage issues, the actual participation rate of
workers in private-sector pension plans varies with age, income,
education, ethnicity, size of employer and type of employment. Older,
better-educated, full-time, better-paid workers are more likely to be
plan members than younger, less educated, part-time, lower-paid
workers.\4\
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\4\ S. Mackenzie & K.B. Wu, The Coverage of Employer Provided
Pensions: Partial and Uncertain 2, 7-12 (AARP 2008).
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In an effort to increase participation rates in 401(k) plans, AARP
supported the auto-enrollment provisions in the bipartisan Pension
Protection Act. A May 2011 Aon Hewitt study found that ``(t)hree in
five employers automatically enrolled employees into their defined
contribution plans in 2010, up from 24 percent in 2006. For employees
who were subject to automatic enrollment, Aon Hewitt's analysis found
that 85.3 percent participated in their DC plan, 18 percentage points
higher than those that were not subject to automatic enrollment.'' \5\
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\5\ Aon Hewitt News Release, May 24, 2011 (http://
aon.mediaroom.com/index.php?s=43&item=2285)
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The Move from Defined Benefit to Defined Contribution
For those workers who are fortunate to work for employers who offer
access to a workplace retirement vehicle, many of their employers have
moved away from providing defined benefit (DB) plans and increasingly
offer only defined contribution (DC) plans, such as 401(k) plans. While
DC plans can be valuable to many, they transfer investment, longevity,
inflation, and interest rate risks entirely to the individual, and
could make it more likely that an individual would outlive his or her
retirement nest egg. Today, only about 17 percent of workers have DB
pension coverage on their current job, compared to 41 percent who have
DC plan coverage.
The shift away from DB plans to DC plans places significant
responsibility on individuals to make appropriate decisions concerning
their contributions, their investments and how they will manage their
money once they retire so that they will have adequate income to fund
their retirement years. Unfortunately, many individuals are simply not
prepared to handle these risks and responsibilities. While DC-type
plans can be an effective savings vehicle for retirement--especially if
individuals take all the right actions and markets achieve historical
rates of return--in practice this is not the case, and many people make
mistakes at every step along the way, as evidenced by generally less
than adequate DC account balances. Moreover, even if DC plan members
make all the right decisions, if they happen to retire in a down
market, much like the recent economic downturn, their account balances
may still not be adequate for retirement. There is also substantial
confusion among 401(k) plan participants as to the fees they pay. The
fee information participants currently receive about their plan and
investment options is often scattered among several sources, difficult
to access, or nonexistent. Even if fee information is accessible, plan
investment and fee information is not always presented in a way that is
meaningful to participants. Fees are important because they reduce the
level of assets available for retirement.
The Government Accountability Office estimated that $20,000 left in
a 401(k) account that had a 1 percentage point higher fee for 20 years
would result in an over 17 percent reduction--over $10,000--in the
account balance. We estimate that over a 30-year period, the account
would be about 25 percent less. Even a difference of only half a
percentage point, or 50 basis points, would reduce the value of the
account by 13 percent over 30 years. In short, fees and expenses can
have a huge impact on retirement income security levels. 401(k) plan
participants therefore have a need and a right to receive timely,
accurate, and informative fee disclosures from their 401(k) plans to
help them better prepare for a financially secure retirement.
Because fees reduce the level of assets available for retirement,
we have supported both Congressional and regulatory efforts to increase
disclosure requirements so that fiduciaries and participants can
receive the information they need to make informed choices about these
investments. AARP supports increased disclosure of fees charged by
service providers to fiduciaries.\6\ Provider fees should be disclosed
both to participants and employers, and clearly explained to
participants on their annual statements. Participants should have the
right to receive more detailed fee information on request.
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\6\ S. Mackenzie, Determining whether 401(K) plan fees are
reasonable: Are disclosure rules adequate? (AARP Sept. 2008), available
at http://www.aarp.org/research/ppi/econ-sec/pensions/articles/i8--
fees.html. In contrast, DB plans generally provide a predictable
monthly retirement benefit to employees, lower fees, and professional
management of retirement assets. DB plans are also more efficient--that
is, they cost less to achieve a particular level of retirement income
than defined contribution plans.
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The Shift from Annuitized to Lump-Sum Distributions
The share of traditional plans offering a lump-sum option has
increased in part because plan sponsors shed longevity risk and pension
costs by increasing the take-up of lump-sum distributions by plan
members. As for DC plans, although more of their participants may be
interested in the annuity option than had been previously thought, the
lump sum option is still the overwhelming choice.\7\
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\7\ An AARP survey of the distribution choices made by workers and
retirees with pension plans found that there was definite interest in
the annuity option. Specifically, it found that about 31 percent of
workers and 25 percent of retirees with DC plans that offered one or
more options other than lump sum withdrawal were planning to select or
had already selected the annuity option. See Kathi Brown et al. 2010.
Annuities and Other Lifetime Income Products: Their Current and Future
Role in Retirement Security. AARP Public Policy Institute, Factsheet
189 (May).
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Traditional DB plans have historically provided lifetime streams of
income, while only a small fraction of DC plans offer an annuity or
other lifetime income option. Moreover, many DB plan sponsors today
offer lump-sum benefits and many retirees are opting for them. Younger
workers are more likely than older workers to have only a DC plan, and
the number of workers retiring and receiving their retirement account
balances as a lump-sum is growing. It is not clear how, or how well,
beneficiaries will manage those assets throughout decades of
retirement.
The lifetime monthly equivalent of a lump sum distribution of
$100,000 would be worth approximately $600, or about half the typical
Social Security retirement benefit. However, according to a 2011
Fidelity report, the average 401(k) account balance was still only
$71,500 at the end of 2010.\8\
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\8\ Fidelity News Release, February 23, 2011 (http://
www.fidelity.com/inside-fidelity/employer-services/q4-2011-401k-update)
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AARP is concerned that--unlike Social Security benefits--many
Americans will outlive the retirement assets they have accumulated due
to the combined effects of longer life expectancies and the overly
optimistic assumptions many individuals make when spending down these
assets. Effectively managing this decumulation phase of retirement can
be especially complicated, but it is essential for the long term
economic security of millions of American workers who can no longer
count on the guaranteed lifetime income stream once overwhelmingly
provided by workplace DB pension plans.
AARP is therefore pleased to support H.R. 677, the bipartisan
Lifetime Income Disclosure Act--legislation that would provide
individuals with a better understanding of the lifetime value of their
401(k) plan assets by including in a yearly benefit statement a
conversion of their total accrued benefits into a monthly dollar amount
as if they had opted to receive a lifetime annuity. This conversion
would help provide a more meaningful long term perspective to 401(k)
plan participants by giving them a more accurate picture of the
lifetime value of their plan and helping them make better decisions
about how much they may need to save and how best to manage their
retirement assets.
Fiduciary Standards
The impact of bad actors such as Enron, Worldcom and Bernie Madoff
on individuals' private retirement savings has been devastating.
Accordingly, the importance of strong fiduciary standards cannot be
understated and are necessary to protect the security of individuals'
hard earned retirement assets both now and in the future.
Because the growth in 401(k) plans places significant
responsibility on individuals to make appropriate investment choices so
that they have adequate income to fund their retirement, AARP supports
the goal of increasing access to investment advice for individual
account plan participants so that participants may achieve their
objectives. To that end, we have consistently asserted that such advice
must be subject to the Employee Retirement Income Security Act's
(ERISA) fiduciary rules, based on sound investment principles and
protected from conflicts of interest. The recent financial turmoil and
scandals on Wall Street once again underscore the imperative that such
advice be independent and non-conflicted.
AARP supports regulations to ensure that participants are provided
with objective, non-conflicted investment advice. Consistent with a
recent AARP poll, Americans believe that advice should be suitable for
their needs, objectives and risk tolerance. AARP supports the
Department of Labor's review of the definition of fiduciary regulation
given that the current manner in which employee benefits are provided
is significantly different from the situation in 1975, as is evident
with the shift from defined benefit plans to defined contribution
plans. Not only has the emphasis shifted to individual investment
advice in 401(k) plans, but the variety and complexity of investments
has radically changed. Consequently, AARP believes that a revision of
this regulation to reflect the practices in the current market place
would better protect the interests of plans and their participants and
beneficiaries.
Healthcare
Another key factor to consider when evaluating the retirement
security of Americans and their families is the impact of high, and
increasing, healthcare costs. Skyrocketing costs plague our entire
health care system, burden individuals and employers, and threaten the
sustainability of Medicare and Medicaid, vital programs that more than
93 million Americans who are older, living with disabilities, or on
very limited incomes rely on. Seniors spend a disproportionate share of
their income (about 30 percent on average) on health care costs, which
continue to increase at rates well above the rate of overall inflation.
We must transform the delivery of health care and bring down costs
throughout the system to keep Medicare and Medicaid affordable now and
strong for future generations.
These healthcare cost trends are not sustainable and Congress must
work thoughtfully to find ways to hold down these costs, not simply
shift them to other payors. However, it is important to realize that
Medicare is just one part of our nation's health care system, which
includes a vast array of other payers including public, individual, and
employer-based health insurance. For families and workers, soaring
costs compound job losses and other financial problems. For the past
eight years, premiums for a family of four outpaced both earnings and
overall inflation.\9\ The average annual premium for family coverage
increased to $12,680 in 2008, almost double the figure in 2000.\10\ And
the more employees must pay, the less likely they are to enroll in
employer plans.\11\ People with private non-group insurance are even
worse off; they often spend more than 10 percent of their income on
health care.\12\
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\9\ HRET/Kaiser Family Foundation. 2008 Employer Health Benefits
Survey
\10\ Ibid.
\11\ Kaiser Family Foundation. February 2007. Snapshots: Health
Care Costs. Insurance Premium Cost-Sharing and Coverage Take-up.
\12\ Jessica Banthin, ``Out-of-Pocket Burdens for Health Care:
Insured, Uninsured, and Underinsured'' presentation. September 23,
2008.
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As you examine how to address the growing cost of health care
programs, we urge you to reject arbitrary limits and cost shifting and
focus instead on ways to make the delivery of health care to all
Americans more efficient and cost-effective. Arbitrary cuts simply
shift costs on to other payers of health care services, particularly
beneficiaries and their families, and undermine current and future
beneficiaries' access to quality care.
Social Security
AARP strongly believes that the above trends and factors, as well
as the recent economic crisis, highlight the importance of Social
Security's guaranteed benefit as the foundation of retirement income
for all Americans. In the face of declining traditional pensions or the
outright lack of pension coverage, shrinking savings, diminished home
values, longer life expectancies and higher healthcare costs, the
guaranteed benefit of Social Security will be increasingly important to
future generations of Americans.
Social Security is currently the principal source of income for
nearly two-thirds of older American households receiving benefits, and
roughly one third of those households depend on Social Security
benefits for nearly all (90 percent or more) of their income. Despite
its critical importance, Social Security's earned benefits are modest,
averaging only about $1,200 per month for all retired workers in March
2011. Nonetheless, Social Security keeps countless millions of older
Americans out of poverty and allows tens of millions of Americans to
live their retirement years independently, without fear of outliving
their retirement income. Social Security also provides critical income
protection for workers and their families who become disabled or
deceased.
Social Security benefits are financed through payroll contributions
from employees and their employers, each and every year, throughout an
individual's working life. The program is separate from the rest of the
federal budget and has not contributed to our large deficits. According
to the Social Security Trustees, the program has sufficient assets to
pay 100 percent of promised benefits for a quarter century, and even
with no changes, can continue to pay approximately 75 percent of
promised benefits thereafter.
AARP believes that the nation's long-term debt requires attention
and we are committed to lending our support to a balanced approach that
addresses the nation's long-term fiscal challenges. However, AARP
members recognize that Social Security is a self-financed program that
has run surpluses for nearly 30 years and has not contributed to our
large deficits. Accordingly, they firmly believe that using the Social
Security benefits Americans have earned to remedy a problem that Social
Security did not create is simply unfair.
Given the already modest benefits current Social Security
beneficiaries receive, the program's continued critical importance to
future generations' income and retirement security, the system's
dedicated financing, and the lack of a contributory impact on our
current large deficits, AARP firmly believes that Social Security
should not be targeted for cuts for deficit reduction or as part of a
budget exercise to satisfy arbitrary spending thresholds. While Social
Security faces a long-term shortfall, targeting it now for arbitrary,
across-the-board cuts is unfair and unnecessary, and will most
assuredly mean significant reductions in benefits for not only current
beneficiaries, but for their children and grandchildren as well. To the
contrary, Social Security solvency deserves to have its own national
conversation that focuses on preserving and strengthening the
retirement security of Americans and their families for generations to
come.
Finally, Congress should work to encourage those who can work
longer to do so by removing barriers that deter individuals who either
wish to stay--or by necessity must stay--in the workforce. Encouraging
job creation and job sustainment for those over age 60, including
combating age stereotypes, are particularly important, as requiring
people to work longer when there are no jobs is simply ineffective. For
those who are able, working longer can have positive impacts both
personally and financially, especially as it pertains to an increase in
the Social Security benefits many people receive when they retire.
Moreover, delayed claiming of one's Social Security benefit is a cost-
effective way to increase the share of a retiree's annuitized wealth.
At the same time, Congress should ensure that, for those who cannot
continue to work, adequate protections are in place for the disabled as
well as lower-income groups, who often have below-average life
expectancies.
Conclusion
Over the past 25 years, there has been a slow and steady erosion of
the adequacy and security of employer provided pensions, an important
component of our retirement security framework. As a nation, we need to
refocus on the need for strengthened workplace retirement plans,
especially given longer life spans and the need for added income to
supplement Social Security. Once again, AARP would like to thank
Chairman Roe and Ranking Member Andrews for holding today's important
hearing. We look forward to working with you and the other Members of
this Committee to help ensure that as many Americans as possible are
able to achieve a secure and adequate retirement.
______
Mr. Andrews. I would like to again thank the witnesses for
their preparation and for the way they have informed the
committee.
I would like to thank the chairman for having the hearing,
and just briefly say that we can, will, and should work
together to find ways to increase income for our retirees by
strengthening the private pension system.
But I think there are two other issues that are looming
over that discussion. The first is protecting the integrity of
Social Security so it is never subject to the wild fluctuations
of the marketplace and is a rock-solid promise on which
retirees can depend. And second, Medicare shares that same
status; that it is not you will have health benefits if we get
around to it or if the market conditions are right. Medicare is
an intergenerational promise and it is one that ought to be
honored. We don't think that the majority plan does that and we
are committed to making sure that promise is honored.
I thank the chairman for the hearing.
Chairman Roe. I thank you all for attending today.
And just a couple of things to touch on. There have been a
number of important issues talked about today: plan funding,
regulatory challenges, worker participation, education. This is
just the first of a number of hearings we are going to have. In
subsequent weeks we are going to talk about this in more
detail.
And just to summarize and finish, when I came to Congress
just 2\1/2\ years ago, I really came here to look at our health
care system in this country because it is a such a driver for
costs, 17 percent of the U.S. economy. The single biggest
problem with the American health care system was it costs too
much money. It is too expensive. If it was more affordable, we
could all have it. We had a segment of our population that
could not afford it. We had a liability problem.
Also as we looked at these numbers going forward, we had a
huge budget deficit in this country and we have a huge jobs
deficit in this country, as Mr. Kucinich pointed out. In going
forward, when we look at Medicare--and certainly you have to
look at Medicare. When it began in 1965 it was a $3 billion
program. Government estimators said that in 25 years this would
be a $15 billion program; it was a $100 billion program. Today
it is over $500 billion.
The Affordable Health Care Act that was passed--as Mr.
Andrews pointed out it is referred to as a savings--I would say
that when you take $500 billion out of an already underfunded
program you haven't saved it, you have created some real issues
with that program because we are adding about 3 million new
seniors per year for the next 20 years.
On top of that, as Mr. Richtman pointed out, we have got a
program called the IPAB, which is already part of the law, an
independent panel advisory board. Fifteen bureaucrats
appointed. And I don't want them appointed by a Republican or
Democrat. These are administratively appointed people that do
not look at quality and access to care; they look at simply
costs. So if our costs go above a certain number we are
advised--and the Congress has extricated itself from that
unless we have a two-thirds majority. It is amazing they gave
up that kind of power.
And, frankly, I will tell you in the House of
Representatives, our bill did not contain that. That was the
Senate bill. And it was later voted on and confirmed by the
House. It is a very bad idea, as Mr. Richtman--that will lead
to rationing of care. There is no other way around it. When you
have 30-something million people chasing 500 billion less
dollars, you are going to have less access and costs are going
up. So why are we having this discussion? Because the current
system is unsustainable.
My mother, right now in Medicare part A, lives on a Social
Security check. A small pension. She pays exactly the same
thing as Warren Buffett does. And when I heard on the campaign
trail when I was out 3 years ago, and now we are out in our
town hall meetings, is we don't think that is right. And so the
plan is not a voucher, as I understand it, where you get mailed
something in the mail and you go out and negotiate a fee or
price.
What the Ryan plan is saying is that the Federal Government
will negotiate these plans, a multitude of plans as we
currently have, and that we will have, that a citizen will have
exactly the same benefit that I have right now as a U.S.
Congressman. I heard that 2 years ago during this plan as ``I
want what you have.'' And so we feel like that is a fair thing
to do. And also a higher-income senior like myself is going to
get a bigger part of the bill. We will not be like Warren
Buffett. We will be paying more. If you are sick and you have
preexisting conditions, you will pay a lot less.
Why does anybody think this will work? Is this just some
wild experiment? No, because we tried Medicare Part D as the
only government health care program that I know of that has
come in under budget. The CBO estimated that this would be a
$670 billion program in 10 years and it turned out that it was
41 percent lower. Why? Because seniors had a choice to pick
what they wanted, not what someone else picked for them.
We have a difference of opinion here about that, and I
could not agree more, we need to have this security for our
citizens.
It has been a great hearing. I can't thank you enough for
being here.
Mr. Andrews. I neglected one other point.
Chairman Roe. I yield to the gentleman.
Mr. Andrews. Thank you very much. Sara Outterson, who is
behind me on the screen, is finishing her tour of duty with our
office this week, and I wanted to thank her for the work she
has done for our constituents and for our committee. She is
moving on to another office on Capitol Hill; obviously, not one
as enlightened as ours, Mr. Chairman. But I wanted to thank her
very much for the excellent work and wish her well.
Chairman Roe. I thank you and the ranking member, and this
meeting is adjourned.
[Additional submissions of Chairman Roe follow:]
Prepared Statement of the American Bankers Association; the Financial
Services Roundtable; the Financial Services Institute; Insured
Retirement Institute; National Association of Insurance and Financial
Advisors; and the Securities Industry and Financial Markets Association
I. We support retirement security
The undersigned organizations\1\ share the Congress' and the Obama
Administration's goal of increasing opportunities for Americans to save
and plan for their retirement. We support increased incentives and
opportunities for Americans to save and invest. It is our belief that
providing these opportunities for Americans is important because
savings increase domestic investment, encourage economic growth, and
result in higher wages, financial freedom, and a better standard of
living. We believe that most Americans should approach retirement with
a comprehensive strategy that incorporates a number of retirement
vehicles. Consumer education about retirement savings products can help
consumers make sound investment decisions and allow them to maximize
their retirement savings.\2\ Further gains can be achieved through
better use of investment advice, and by promoting policies that provide
for more diversified, dynamic asset allocation, and exploration of new
and innovative methods to help individuals make better investment
decisions.
As a partner with the Congress and the Obama Administration in our
collective efforts to protect Americans' retirement security, we
strongly believe that one of the largest challenges currently
confronting pension plans, plan sponsors, small business owners,
individual retirement account owners, employees, and retirees is the
Department of Labor's (the ``Department'') proposed rule that would
expand the definition of the term fiduciary\3\ under Title I of the
Employee Retirement Income Security Act of 1974 (``ERISA'').\4\ In our
view, the Department's Proposal will negatively impact the ability of
hard-working Americans to save and plan for their retirement. Moreover,
the Department's Proposal would substantially increase the categories
of service providers who would be deemed fiduciaries for purposes of
ERISA,\5\ and thereby decrease the availability of retirement planning
options for all Americans.\6\ We respectfully request the Department
formally withdraw its proposed definition of fiduciary\7\ and re-
propose a more narrow definition of fiduciary that targets specific
abuses.
II. We believe that the proposed expansion of the definition of
fiduciary would jeopardize the retirement security of millions
of Americans
Most Americans rely on retirement plans to supplement Social
Security and private savings.\8\ For instance, Americans have increased
their participation in 401(k) plans by 250 percent over the last
twenty-five years.\9\ In addition, a 2009 study showed that over two-
thirds of ``U.S. households had retirement plans through their
employers or individual retirement accounts (``IRAs'').''\10\
IRAs are the fastest growing retirement savings accounts.\11\ IRAs
are widely held by small investors\12\ who seek to maximize return by
minimizing overhead on their accounts. According to the OLIVER WYMAN
REPORT, smaller investors overwhelmingly prefer to use a brokerage
account for their IRAs (rather than an advisory account) \13\ because
of the lower operating costs associated with brokerage accounts. In
fact, 98% of IRAs with less than $25,000 in assets are serviced by
securities brokers.\14\
We believe that the sheer breadth of the proposed expansion of the
definition of fiduciary would have the unintended--but entirely
foreseeable--consequence of reducing alternatives available to hard-
working Americans to help them save for retirement, and increasing the
costs of remaining retirement savings alternatives. The resulting
increase in the number of persons who could be subject to fiduciary
duties, increased costs, and increased uncertainty for retirement
services providers will very likely reduce the level and types of
services available to benefit plan participants and IRA investors by
making benefit plans and IRAs more costly and less efficient.\15\
Thus, if the Department were to adopt the expanded definition of
fiduciary in its present form,\16\ we believe it is clear that fewer
Americans would have access to the advice they need to help them make
prudent investment decisions that reflect their financial goals and
tolerance for risk as they prepare for their retirement because of
their reluctance to pay the increased costs that will likely be
associated with professional investment advice.\17\
We also are concerned that the Department's Proposal could lead to
lower investment returns, and ultimately, a reduced amount of savings
for retirement.\18\ Moreover, if the Department were to adopt its
expanded definition of fiduciary in its present form, millions of hard-
working Americans are likely to have reduced access to meaningful
investment services or help from an investment professional,\19\ and
likely would incur greater expense to access the broad range of product
types associated with brokerage accounts.\20\ We find the potentially
adverse consequences that the Department's proposed expanded definition
of fiduciary would have on our nation's retirement system and the
retirement security of all Americans to be untenable.
In summary, our specific concerns with the Department's proposed
expansion of the definition of fiduciary are:
The Department has not demonstrated that the current
definition needs to be completely re-written.
The proposed expansion of the fiduciary definition to
encompass IRAs is ineffective and counterproductive.
The Department's rule could result in significantly fewer
retirement accounts and less retirement savings.
The Department has not evaluated the economic impact on
small business owners.
Consultation and coordination with each of the relevant
regulatory authorities is needed, including without limitation the
Securities and Exchange Commission and the Commodity Futures Trading
Commission.
The Department provided insufficient regulatory analyses.
Given the substantive concerns raised in the public
comment record concerning the adverse impact of the rule, the
Department should publish notice of its proposed revisions to the
definition of fiduciary, and solicit public comment on the proposed
revisions.
1. The Department has not demonstrated that the current definition
needs to be completely re-written.
Despite 35 years of experience with the current definition
of fiduciary,\21\ the Department has not provided adequate
justification for its wholesale revisions to the current definition.
The Department's stated rationale is to pursue bad actors
(i.e., pension consultants and appraisers) who allegedly have provided
substandard services and who failed to recognize or disclose conflicts
of interest.\22\ If this is the goal, then the Department should more
narrowly tailor the proposed changes to reach those particular bad
actors.
The Department also should consider whether other
regulations (including those enforced by other authorities) already
provide adequate safeguards. For example, the Department's recent
disclosure regulations will require pension consultants to disclose all
direct and indirect compensation they receive before entering into a
service arrangement with a plan.\23\ This may address the Department's
concerns.
2. The proposed expansion of the fiduciary definition to encompass
IRAs is ineffective and counterproductive.
The proposed expansion of the definition of fiduciary
would constrain the availability of lower-cost commission-based IRAs,
which would increase costs for IRA owners and reduce retirement
savings.\24\
The Department previously expressed the view that
regulatory initiatives designed for ERISA employee benefit plans were
neither necessary nor appropriate for IRAs.\25\
Sales practices for IRAs currently are subject to
oversight by the Securities and Exchange Commission and FINRA. If the
Department is concerned about oversight of sales practices, it should
work together with those regulators to address those concerns, as
opposed to overhauling a much broader regulatory regime.
Service providers to IRAs should be expressly excluded
from any definition of fiduciary for purposes of Title I of ERISA.
3. The Department's rule could result in significantly fewer
retirement accounts and less retirement savings.
The Department issued the Proposal without having done any
study or survey--or providing any data--on the Proposal's projected
impact or effect on IRA owners or IRA service providers.\26\
According to the OLIVER WYMAN REPORT, the effect of the
Department's rule ``could well result in hundreds of thousands of fewer
IRAs opened per year.''\27\
``Nearly 90% of IRA investors will be impacted by the
proposed rule.''\28\
The Department's Proposal would make service providers
fiduciaries when merely providing a valuation of a security or other
asset held in the account. This may lead service providers to withdraw
from providing valuation services for real estate, venture capital
interests, swaps, or other hard to value assets. As a consequence,
investors will have far fewer investment choices available to diversify
assets in their accounts as they seek to increase their retirement
savings.
4. The Department has not evaluated the economic impact on small
business owners.
Small plan sponsors are not likely to be able to absorb
the potentially substantial increase in costs arising from the expanded
definition of fiduciary.\29\
Small business owners are struggling to recover in the
U.S. economy.\30\
We urge the Department to ensure that its regulations not
only protect retirement plan participants and beneficiaries, but also
remove undue burdens that constrain the feasibility for small business
owners to provide retirement plans for their employees.
5. Consultation and coordination with each of the relevant
regulatory authorities are needed, including without limitation the
Securities and Exchange Commission,\31\ FINRA, and the Commodity
Futures Trading Commission.
Investors and retirement services providers need a
regulatory regime that provides clarity and certainty.
Regulations that establish conflicting rules create
confusion, increase costs to service providers, and tend to lessen the
availability of retirement services overall.
6. The Department provided insufficient regulatory analyses.
The Department was obligated under Executive Order
12866\32\ to determine whether its proposed expansion of the definition
of fiduciary was a ``significant'' regulatory action.\33\ Even though
the Office of Management and Budget determined the Department's
proposed definition was economically significant,\34\ the Department
performed an insufficient Regulatory Impact Analysis of the
Proposal.\35\
The Department stated ``it is uncertain about the
magnitude of [the] benefits and potential costs'' of its regulatory
action.\36\ Yet, the Department failed to provide any data whatsoever
in support of its Regulatory Impact Analysis, in which the Department
``tentatively conclude[d] that the proposed regulation's benefits would
justify its costs.''\37\
The Department's Initial Regulatory Flexibility Analysis
failed to provide either an estimate of the number of affected small
entities\38\ or the increased business costs small entities would incur
if they were determined to be fiduciaries under the proposal as
required by the Regulatory Flexibility Act.\39\ As a consequence, it
appears that the Department of Labor performed an insufficient analysis
under the Regulatory Flexibility Act when it estimated the impact of
its rule proposal on small businesses, a segment of the market also
impacted by the proposed expansion of the definition of fiduciary.
On January 18, 2011, President Barack Obama issued
Executive Order 13563 ``Improving Regulation and Regulatory
Review.''\40\ The Order explains the Administration's goal of creating
a regulatory system that protects the ``public health, welfare, safety,
and our environment while promoting economic growth, innovation,
competitiveness, and job creation,''\41\ while using ``the best, most
innovative, and least burdensome tools for achieving regulatory
ends.''\42\
The Department's Proposal contravenes the Obama
Administration's publicly articulated goal to ``identify and consider
regulatory approaches that reduce burdens and maintain flexibility and
freedom of choice for the public.''\43\
7. Given the substantive concerns raised in the public comment
record concerning the adverse impact of the rule, the Department should
publish notice of its proposed revisions to the definition of
fiduciary, and solicit public comment on the proposed revisions.
The definition as proposed would require substantial
changes to address concerns identified in the public comment file.\44\
It is likely that class exemptions will be necessary and
should be part of the rule itself, so that hard-working Americans do
not lose access to investment products they need to fund their
retirement while the financial services markets wait for the Department
to adopt the required prohibited transaction class exemptions.
The current definition of fiduciary\45\ has informed
almost 35 years of Department guidance on investment advice for ERISA
retirement plans and IRAs. Revisions to such a mature rule ordinarily
should not require ancillary exemptions in order for the final rule to
work in the real world.
III. In light of the substantive concerns raised by the public, we
believe the Department should withdraw its proposed expansion
of the definition of fiduciary, and re-propose a defintion of
fiduciary that addresses deficiences noted in the public
comment file
We and other parties have filed comments and supplemental materials
with the Department that generally have raised these and other concerns
about the adverse impact of the Proposal.\46\ At present, it is our
understanding that the Department is considering substantial revisions
to its Proposal in response to the views expressed during the public
comment period.\47\
It is in the interest of the millions of hard-working Americans who
are saving for retirement that the Obama Administration and the
Congress collaborate actively with the private sector--in particular,
the small business community and the retirement security community--to
develop a regulatory regime that will benefit consumers and expand
Americans' retirement savings.
IV. Conclusion
In closing, strengthening the retirement security of all Americans
is our priority. Strong and vibrant retirement programs benefit
employees and their beneficiaries. As well, it strengthens the
financial health and well-being of our nation. We, therefore, reiterate
our request that the Department withdraw and re-propose a definition of
the term fiduciary.
While we support policies that encourage safeguards in retirement
savings programs to protect consumers and our markets from fraudulent
practices, we vigorously oppose regulations that would discourage
participation by employers and employees in retirement programs or
would imperil retirement security for millions of hard-working
Americans.
We urge policymakers to work with us to preserve a retirement
system that helps strengthen retirement security for all Americans. We
encourage the Congress to support policies that help promote retirement
savings and enable the financial services industry to better meet the
long-term retirement needs of hard-working Americans.
We stand ready to work with you and the Department on this
important issue.
Respectfully submitted,
American Bankers Association,
The Financial Services Roundtable,
The Financial Services Institute,
The Insured Retirement Institute,
National Association of Insurance and Financial Advisors,
Securities Industry and Financial Markets Association.
end notes
\1\ The American Bankers Association represents banks of all sizes
and charters and is the voice for the nation's $13 trillion banking
industry and its two million employees. Many of these banks are plan
service providers, providing trust, custody, and other services for
institutional clients, including employee benefit plans covered by the
Employee Retirement Income Security Act of 1974. As of year-end 2010,
banks held over $8 trillion in defined benefit, defined contribution,
and retirement-related accounts (Source: FDIC Quarterly Banking
Profile, Table VIII-A (Dec. 2010)).
The Financial Services Roundtable represents 100 of the largest
integrated financial services companies providing banking, insurance,
and investment products and services to the American consumer. Among
the Roundtable's Core Values are fairness (``We will engage in
practices that provide a benefit and promote fairness to our customers,
employees or other partners.''); integrity (``[E]verything we do [as an
industry] is built on trust. That trust is earned and renewed based on
every customer relationship.''); and respect (``We will treat the
people on whom our businesses depend with the respect they deserve in
each and every interaction.''). See Roundtable Statement of Core
Values, available at http://www.fsround.org/.
Roundtable member companies participate through the Chief Executive
Officer and other senior executives nominated by the CEO. Roundtable
member companies provide fuel for America's economic engine, accounting
directly for $92.7 trillion in managed assets, $1.2 trillion in
revenue, and 2.3 million jobs.
The Financial Services Institute, which was founded in 2004, is the
only advocacy organization working on behalf of independent broker-
dealers and independent financial advisors. Our vision is that all
individuals have access to competent and affordable financial advice,
products, and services delivered by a growing network of independent
financial advisors affiliated with independent financial services
firms. Our mission is to create a healthier regulatory environment for
independent broker-dealers and their affiliated independent financial
advisors through aggressive and effective advocacy, education, and
public awareness. Our strategy supports our vision and mission through
robust involvement in FINRA governance, constructive engagement in the
regulatory process, and effective influence on the legislative process.
The Insured Retirement Institute has been called the ``primary
trade association for annuities'' by U.S. News and World Report and is
the only association that represents the entire supply chain of insured
retirement strategies. Our members are the major insurers, asset
managers, broker dealers and financial advisors. IRI is a not-for-
profit organization that brings together the interests of the industry,
financial advisors and consumers under one umbrella. Our official
mission is to: encourage industry adherence to highest ethical
principles; promote better understanding of the insured retirement
value proposition; develop and promote best practice standards to
improve value delivery; and to advocate before public policy makers on
critical issues affecting insured retirement strategies. We currently
have over 500 member companies which include more than 70,000 financial
advisors and 10,000 home office financial professionals.
National Association of Insurance and Financial Advisors
(``NAIFA'') comprises more than 700 state and local associations
representing the interests of approximately 200,000 agents and their
associates nationwide. NAIFA is one of the only insurance organizations
with members from every Congressional district in the United States.
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. According to a Fall
2010 survey, nearly two-thirds of NAIFA members are licensed to sell
securities, and 89% of NAIFA member clients are ``main street''
investors who have less than $250,000 in household income. 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.
Securities Industry and Financial Markets Association (``SIFMA'')
brings together the shared interests of hundreds of securities firms,
banks and asset managers. SIFMA's mission is to support a strong
financial industry, investor opportunity, capital formation, job
creation and economic growth, while building trust and confidence in
the financial markets. SIFMA, with offices in New York and Washington,
D.C., is the U.S. regional member of the Global Financial Markets
Association (GFMA). For more information, visit www.sifma.org.
\2\ The financial services industry has developed numerous
financial literacy initiatives, including initiatives directed toward
elementary and high school students and programs presented to investors
in the local community. See The Financial Services Roundtable,
COMMUNITY SERVICE IMPACT REPORT at 64-69 (2010), available at http://
www.fsround.org/publications/pdfs/CS10-ImpactReport.pdf; Insured
Retirement Institute, Retirement Planning Resources for Consumers,
available at http://www.irionline.org/consumers/
retirementPlanningResources; Securities Industry and Financial Markets
Association Foundation, available at http://www.sifma.org/Education/
SIFMA-Foundation/About-the-SIFMA-Foundation/; Investment Company
Institute, available at http://ici.org/#investor--education; and FINRA,
available at http://www.finra.org/Investors/.
\3\ Definition of the Term ``Fiduciary'' [RIN: 1210--AB32], 75 Fed.
Reg. 65263 (Oct. 22, 2010) (the ``Proposal'').
\4\ 29 U.S.C. Sec. 1001, et seq.
\5\ See Oliver Wyman, Inc., OLIVER WYMAN REPORT: ASSESSMENT OF THE
IMPACT OF THE DEPARTMENT OF LABOR'S PROPOSED ``FIDUCIARY'' DEFINITION
RULE ON IRA CONSUMERS at 13 (Apr. 12, 2011) (the ``OLIVER WYMAN
REPORT''), available at http://www.dol.gov/ebsa/pdf/1210-AB32-PH060.pdf
(noting that ``practically every investment-related conversation or
interaction with a client [could become] subject to [a] fiduciary
duty''). ``Even * * * discussions with call center and branch staff[ ]
could be curtailed (so as to avoid inadvertently establishing a
fiduciary duty.'' Id. at 15. The OLIVER WYMAN REPORT is based on
aggregate proprietary data furnished by ``[twelve] financial services
firms that offer services to retail investors.'' Id. at 1. These firms
``represent over 19 million IRA holders who hold $1.79 trillion in
assets through 25.3 million IRA accounts [or roughly forty percent
(40%) of IRAs in the United States and forty percent (40%) of IRA
assets].'' Id.
\6\ OLIVER WYMAN REPORT, supra note 5 at 19-20. If the Department
were to adopt the Proposal, the likely result would be a ``[r]educed
choice of investment professional, level of investment guidance, and
investment products,'' according to the OLIVER WYMAN REPORT. Id. at 19.
\7\ It also would afford the Department an opportunity to receive
further information and analyses from the public on the effectiveness
of the proposed revisions. See Natural Resources Defense Council v.
Environmental Protection Agency, 279 F.3d 1180, 1186 (9th Cir. 2002)
(reviewing the ``notice and comment'' requirements, the court stated
that ``one of the salient questions is `whether a new round of notice
and comment would provide the first opportunity for interested parties
to offer comments that could persuade the agency to modify its rule'
'').
\8\ Insurance Information Institute and The Financial Services
Roundtable, THE FINANCIAL SERVICES FACT BOOK at 37 (2011) (``THE
FINANCIAL SERVICES FACT BOOK''), available at http://www.fsround.org/
publications/pdfs/2011/Financial--Services--Factbook--2011[1].pdf.
\9\ Retirement Security: 401(k)s (Sept. 23, 2010) (``Retirement
Security''), available at http://www.fsround.org/fsr/pdfs/fast-facts/
2010-09-23-RetirementSecurity.pdf. In 2009, $2,121 billion of
retirement assets were held in defined benefit plans compared to $3,336
billion of assets in defined contribution plans. THE FINANCIAL SERVICES
FACT BOOK, supra note 8 at 43 (2011) (Source: Securities Industry and
Financial Markets Association).
\10\ THE FINANCIAL SERVICES FACT BOOK, supra note 8 at 37.
\11\ OLIVER WYMAN REPORT, supra note 5 at 4.
\12\ Id. at 10 (``[A]pproximately half of IRA investors in the
report sample have less than $25,000 in IRA assets, and over a third
have less than $10,000.'').
\13\ Id. at 12. Investors who hold IRA assets in a brokerage
account pay commissions to the brokers who buy or sell securities for
their IRAs. In the alternative, investors can hold IRA assets in an
``advisory'' account and pay a fee that is a percentage of the assets
held in the IRA. A study of 7,800 households conducted by Cerulli
Associates found that more affluent investors also ``prefer paying
commissions.'' See Fee vs. commission: No doubt which investors prefer,
BLOOMBERG (June 8, 2011), http://www.investmentnews.com/apps/pbcs.dll/
article?AID=/20110608/FREE/110609950 (reporting that the survey
examined ``households with more than $50,000 in annual income or more
than $250,000 in * * * assets'').
\14\ OLIVER WYMAN REPORT, supra note 5 at 2.
\15\ Id. at 19-22.
\16\ Proposal, supra note 3 at 65277-78.
\17\ See OLIVER WYMAN REPORT, supra note 5 at 2; Fee vs.
commission, supra note 13.
\18\ OLIVER WYMAN REPORT, supra note 5 at 22 (``These increased
investment costs would serve as a drag on long-term investment gains,
and therefore on the ultimate retirement savings available to impacted
[IRA] holders.'').
\19\ Id. at 19.
\20\ Id. at 20.
\21\ 40 Fed. Reg. 50842 (Oct. 31, 1975). See also, Mercer Bullard,
DOL's Fiduciary Proposal Misses the Mark (June 14, 2011), available at
http://news.morningstar.com/articlenet/article.aspx?id=384065 (``It is
unfair to the industry because it disregards decades of administrative
law and practice under ERISA. It is bad for investors because it strips
them of fiduciary protections when they are needed most.'').
\22\ Proposal, supra note 3 at 65271 (citing a Securities and
Exchange Commission staff report that found a majority of the 24
pension consultants examined in 2002-2003 ``had business relationships
with broker-dealers that raised a number of concerns about potential
harm to pension plans''); GAO, Conflicts of Interest Can Affect Defined
Benefit and Defined Contribution Plans, GAO-09-503T, Testimony Before
the Subcommittee on Health, Employment, Labor and Pensions, Education
and Labor Committee, House of Representatives at 4 (Mar. 24, 2009),
available at http://www.gao.gov/new.items/d09503t.pdf (noting that 13
of the 24 pension consultants examined by the Securities and Exchange
Commission's staff ``had failed to disclose significant ongoing
conflicts of interest to their pension fund clients'').
\23\ Fiduciary Requirements for Disclosure in Participant-Directed
Individual Account Plans; Final Rule [RIN: 1210--AB07], 75 Fed. Reg.
64910 at 64937 (Oct. 20, 2010).
\24\ OLIVER WYMAN REPORT, supra note 5 at 2 (noting that
``estimated direct costs would increase by approximately 75% to 195%
for these investors'').
\25\ See Preamble to Interim Final 408(b)(2) Regulations, 75 Fed.
Reg. 136 (July 16, 2010).
``The Department does not believe that IRAs should be subject to
the final rule, which is designed with fiduciaries of employee benefit
plans in mind. An IRA account-holder is responsible only for his or her
own plan's security and asset accumulation. They should not be held to
the same fiduciary duties to
scrutinize and monitor plan service providers and their total
compensation as are plan sponsors and other
fiduciaries of pension plans under Title I of ERISA, who are
responsible for protecting the retirement security of greater numbers
of plan participants. Moreover, IRAs generally are marketed alongside
other personal investment vehicles. Imposing the regulation's
disclosure regime on IRAs could increase the costs associated with IRAs
relative to similar vehicles that are not covered by the regulation.
Therefore, although the final rule cross references the parallel
provisions of section 4975 of the [Internal Revenue] Code, paragraph
(c)(1)(ii) provides explicitly that IRAs and certain other accounts and
plans are not covered plans for purposes of the rule.'' Id.
\26\ Proposal, supra note 3 at 65274-76.
\27\ OLIVER WYMAN REPORT, supra note 5 at 2.
\28\ Id. at 19-20 (IRA holders who cannot qualify for an ``advisory
account'' would be ``forced to migrate to a purely `low support'
brokerage model * * * and have little access to investment services,
research and tools'' to support their IRA savings goals.). See also,
Most Americans Haven't Planned for Retirement and Other Areas of
Concern, WALL ST. J., June 6, 2011, available at http://blogs.wsj.com/
economics/2011/06/06/most-americans-havent-planned-for-retirement-and-
other-areas-of-concern/ (``Efforts to make people essentially their own
money managers may also be futile. Only 21% to 25% of respondents said
they have used information sent to them from Social Security.'')
\29\ While the costs associated with providing various employee
benefits (including retirement plans) impact all employers, smaller
companies typically are more sensitive to the costs associated with
these programs. To the extent that service providers' expenses
increase, those costs are passed through to their clientele. An example
of expenses associated with the Department's Proposal is the legal cost
associated with the initial ``compliance review.'' According to the
Department, the cost of legal review would average sixteen (16) hours
of time at a rate of $119 per hour. Proposal, supra note 3 at 65274.
This rate, however, is significantly lower than the average billing
rate of $295 per hour for 10,913 lawyers surveyed by the National Law
Journal. SURVEY OF LAW FIRM ECONOMICS, NAT'L L. J. (2010) (``LAW FIRM
SURVEY''), available at http://www.alm.com/pressroom/2011/02/10/alm-
legal-intelligence-releases-2011-survey-of-billing-and-practices-for-
small-and-midsize-law-firms/.
\30\ See, Kelly Greene, Retirement Plans Make Comeback, With
Limits, WALL ST. J., June 14, 2011, available at http://
professional.wsj.com/article/
SB10001424052702303714704576384072497942338.html (reporting that in the
face of a ``slowly improving job market, [many companies] seek to
balance the need to retain highly skilled workers with the need to
limit costs'').
\31\ The Securities and Exchange Commission released a study
evaluating the regulatory regimes applicable to investment advisers and
broker-dealers who provide advice to retail customers, as required by
section 913 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act [Pub. L. No. 111-203, Sec. 913, 124 Stat. 1824 (2010)
(the ``Dodd-Frank Act'')]. STUDY ON INVESTMENT ADVISERS AND BROKER-
DEALERS AS REQUIRED BY SECTION 913 OF THE DODD-FRANK WALL STREET REFORM
AND CONSUMER PROTECTION ACT (Jan. 21, 2011), available at http://
sec.gov/news/studies/2011/913studyfinal.pdf. Section 913(f) authorized
the Commission to engage in rulemaking to address the legal or
regulatory standards of care applicable to investment professionals who
provide ``personalized investment advice about securities'' to retail
customers. Section 913(f) of the Dodd-Frank Act, 124 Stat.1827-28.
\32\ 58 Fed. Reg. 51735.
\33\ 75 Fed. Reg. at 65269.
\34\ Id. (According to the Office of Management and Budget, the
Department's proposed rule ``is likely to have an effect on the economy
of $100 million in any one year.'').
\35\ For example, the Department estimated that service providers
would incur about sixteen (16) hours of legal review at a rate of $119
per hour. While the complexity of the compliance review likely would
far exceed the Department's estimate of sixteen (16) hours, an
allocation of just $119 per hour for legal services vastly understates
the cost of legal services in the United States. See LAW FIRM SURVEY,
supra note 29 and accompanying text.
\36\ 75 Fed. Reg. at 65275 (``[The Department's] estimates of the
effects of this proposed rule are subject to uncertainty.'').
\37\ Id.
\38\ Id. at 65276.
\39\ Id.
\40\ Improving Regulation and Regulatory Review--Executive Order
13563 (Jan. 18, 2011), available at http://www.whitehouse.gov/the-
press-office/2011/01/18/improving-regulation-and-regulatory-review-
executive-order.
\41\ Id. at Section 1.
\42\ Id.
\43\ Id. at Section 4.
\44\ See infra note 46.
\45\ 29 C.F.R. Sec. 2510.3-21(c).
\46\ See, e.g., Employee-Owned S Corporations of America (Jan. 12,
2011), available at http://www.dol.gov/ebsa/pdf/1210-AB32-040.pdf;
American Council of Engineering Companies (Jan. 19, 2011), available at
http://www.dol.gov/ebsa/pdf/1210-AB32-048.pdf; American Institute of
CPAs (Jan. 19, 2011), available at http://www.dol.gov/ebsa/pdf/1210-
AB32-050.pdf; National Association of Realtors (Jan. 20, 2011),
available at http://www.dol.gov/ebsa/pdf/1210-AB32-052.pdf; Glass Lewis
& Co. (Jan. 20, 2011), available at http://www.dol.gov/ebsa/pdf/1210-
AB32-053.pdf; Securities Law Committee of Business Law Section of the
State Bar of Texas (Jan. 11, 2011), available at http://www.dol.gov/
ebsa/pdf/1210-AB32-039.pdf; Retirement Industry Trust Association (Jan.
26, 2011), available at http://www.dol.gov/ebsa/pdf/1210-AB32-064.pdf;
International Corporate Governance Network (Jan. 21, 2011), available
at http://www.dol.gov/ebsa/pdf/1210-AB32-065.pdf; New York City Bar
Committee on Employee Benefits & Executive Compensation (Jan. 28,
2011), available at http://www.dol.gov/ebsa/pdf/1210-AB32-070.pdf;
Investment Adviser Association (Feb. 2, 2011), available at http://
www.dol.gov/ebsa/pdf/1210-AB32-082.pdf; International Data Pricing and
Reference Data, Inc. (Feb. 2, 2011), available at http://www.dol.gov/
ebsa/pdf/1210-AB32-082.pdf; The ERISA Industry Committee (Feb. 2,
2011), available at http://www.dol.gov/ebsa/pdf/1210-AB32-090.pdf;
Institutional Shareholder Services Inc. (Feb. 2, 2011), available at
http://www.dol.gov/ebsa/pdf/1210-AB32-104.pdf; U.S. Chamber of Commerce
(Feb. 3, 2011), available at http://www.dol.gov/ebsa/pdf/1210-AB32-
111.pdf; CFA Institute (Feb. 2, 2011), available at http://www.dol.gov/
ebsa/pdf/1210-AB32-128.pdf; Business Roundtable (Feb. 3, 2011),
available at http://www.dol.gov/ebsa/pdf/1210-AB32-139.pdf; and
Committee of Federal Regulation of Securities of the Section of
Business Law of the American Bar Association (Feb. 3, 2011), available
at http://www.dol.gov/ebsa/pdf/1210-AB32-152.pdf
\47\ Definition of the term ``Fiduciary'' Proposed Rule Public
Comments, available at http://www.dol.gov/ebsa/regs/cmt-1210-AB32.html.
______
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Prepared Statement of the U.S. Chamber of Commerce
The U.S. Chamber of Commerce would like to thank Chairman Roe,
Ranking Member Andrews, and members of the Subcommittee for the
opportunity to provide a statement for the record. The topic of today's
hearing--challenges confronting plan sponsors, workers, and retirees--
is of significant concern to our membership.
Despite the challenges facing plan sponsors, the voluntary
employer-provided retirement system has been overwhelmingly successful
in providing retirement income. Private employers spent over $200
billion on retirement income benefits in 2008 \1\ and paid out over
$449 billion in retirement benefits.\2\ According to the Bureau of
Labor Statistics, in March of 2009, 67% of all private sector workers
had access to a retirement plan at work, and 51% participated. For full
time workers, the numbers are 76% and 61%, respectively. Nonetheless,
the success of this system is being threatened and we urge Congress to
work to remove these threats.
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\1\ EBRI Databook, 2009, Chapter 2.
\2\ EBSA Private Pension Plan Bulletin Historical Tables and
Graphs, 2009.
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The greatest challenge facing the employer-provided system today is
the need for predictability of the rules and flexibility to adapt to
changing situations. Our statement today focuses on two areas where
this need is overwhelming--PBGC premiums and regulatory requirements.
PBGC Premium Payments Must Be Predictable
A matter of recent concern involves premium payments to the Pension
Benefit Guaranty Corporation (PBGC). Congress is considering a proposal
to increase PBGC premiums as part of the current budget discussions.
Changes of the type and magnitude being discussed would undermine the
private sector defined benefit pension system, hinder the economic
recovery and could create an ill-advised precedent of government
intrusion into normal business activities.
Raising the PBGC premiums, without making contextual reforms to the
agency or the defined benefit system, amounts to a tax on employers
that have voluntarily decided to maintain defined benefit plans.
Proposals, like those included in the President's budget, that purport
to raise $16 billion in additional PBGC premiums are flawed and, even
if they were feasible, would result in an increase in PBGC premiums of
almost 100 percent. Even less draconian PBGC premium increases, when
added to the multi-billion dollar increases enacted in 2006, would
divert critical resources from job creation and business investment.
Furthermore, a creditworthiness test, like the one proposed by the
Administration, would inevitably result in the PBGC becoming an entity
that makes formal pronouncements about the financial status of American
businesses. This role for a government agency would be inappropriate,
especially for private companies and non-profit entities. Leaving aside
the question of whether the PBGC can establish accurate mechanisms for
measuring and adjusting an employer's credit risk across industries and
across the country, even modest year-to-year changes in those
government credit ratings could have implications well beyond PBGC
premiums, potentially affecting stock prices or the company's access to
other credit sources. We understand the pressures to address the budget
deficits, but massive increases in PBGC premiums are not the solution.
Regulatory Requirements are Overly Burdensome
In general, greater regulation often leads to greater
administrative complexities and burdens. Such regulatory burdens can
often discourage plan sponsors from establishing and maintaining
retirement plans. The following are just a few examples of where the
regulatory burden is overwhelming.
Notice and Disclosure: Plan sponsors are faced with two
increasingly conflicting goals--providing information required under
ERISA and providing clear and streamlined information. In addition to
required notices, plan sponsors want to provide information that is
pertinent to the individual plan and provides greater transparency.
However, this is difficult with the amount of required disclosures that
currently exist. Although there is a reason, even a good reason, for
every notice or disclosure requirement, excessive notice requirements
are counterproductive in that they overwhelm participants with
information, which many of them ignore because they find it difficult
to distinguish the routine, e.g., summary annual reports, from the
important. Excessive notice requirements also drive up plan
administrative costs without providing any material benefit. It is
critical that Congress coordinate with the agencies and the plan
sponsor community to determine the best way to streamline the notice
and disclosure requirements.
Accounting Rules: In 2006, the Financial Accounting Standards Board
(``FASB'') undertook a project to reconsider the method by which
pensions and other benefits are reported in financial statements.\3\
They completed Phase I of the project but left Phase II, which would
have removed smoothing periods from the measure of liabilities, until a
later date. After significant negative feedback from the plan sponsor
community, FASB indefinitely postponed the implementation of Phase II.
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\3\ Statement of Financial Accounting Standards No. 158,
``Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans'' (FAS 158). This statement requires companies to
report the net financial status of pension and other benefits on the
company's balance sheet rather than in the footnotes. In addition, plan
assets and benefit obligations must be measured as of the date of the
employer's fiscal year end and employers must use the projected benefit
obligation measure of liabilities.
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In 2010, FASB issued two proposals concerning accounting
requirements for businesses that participate in multiemployer plans.
Each proposal would have required the participating employer to include
estimated withdrawal liabilities on their statement regardless of the
likelihood of withdrawal. As you are aware, the information included on
financial statements is used to determine the credit-worthiness of a
company. Therefore, disclosing an estimated withdrawal liability could
be misleading and negatively impact an employer's ability to get
appropriate financing either from banks or bonding agencies. In
addition, even if an individual employer is not directly impacted, that
employer may be indirectly impacted if other employers who participate
in the plan suffer financial trouble due to the disclosure of this
information. FASB recently revised this proposal at the urging of the
business community.
The threat of accounting changes from FASB is a constant worry of
plan sponsors. These changes can have significant ramifications for
their businesses--impacting credit determinations and loan agreements--
without having any impact on the actual funding of the plans. This
persistent threat discourages participation in the employer-provided
retirement system.
PBGC Rule on Cessation of Operations: In August of 2010, the PBGC
published a proposed rule under ERISA section 4062(e) which provides
for reporting the liabilities for certain substantial cessations of
operations from employers that maintain single-employer plans. If an
employer ceases operations at a facility in any location that causes
job losses affecting more than 20% of participants in the employer's
qualified retirement plan, the PBGC can require an employer to put a
certain amount in escrow or secure a bond to ensure against financial
failure of the plan. These amounts can be quite substantial.
We believe that the PBGC proposed rule goes beyond the intent of
the statute and would create greater financial instability for plan
sponsors. Furthermore, we are concerned that the proposed rules do not
take into account the entirety of all circumstances but, rather, focus
on particular incidents in isolation. As such, the proposed rule would
have the effect of creating greater financial instability for plan
sponsors.
The PBGC recently announced that it is reconsidering the proposed
rule. However, we continue to hear from members that the proposed rule
continues to be enforced. This type of uncertainty is an unnecessary
burden on plan sponsors and discourages continued participation in the
defined benefit plan system.
Alternative Premium Funding Target Election: The PBGC's regulations
allow a plan to calculate its variable-rate premium (VRP) for plan
years beginning after 2007, using a method that is simpler and less
burdensome than the ``standard'' method currently prescribed by
statute. Use of this alternative premium funding target (APFT) was
particularly advantageous in 2009 because related pension funding
relief provided by the Internal Revenue Service served for many plans
to eliminate or significantly reduce VRP liability under the APFT
method. However, in both 2008 and 2009 PBGC determined that hundreds of
plan administrators failed to correctly and timely elect the AFPT in
their comprehensive premium filing to the PBGC, with the failures due
primarily to clerical errors in filling out the form or administrative
delays in meeting the deadline.
In June of 2010, the PBGC responded to the concerns of plan
sponsors by issuing Technical Update 10-2 which provides relief to
certain plan sponsors who incorrectly filed. We appreciate the PBGC's
attention to this matter and its flexibility in responding to this
situation. However, we are concerned that the relief provided does not
capture all clerical errors or administrative errors that may have
occurred and, therefore, some plan sponsors remain unfairly subject to
what are substantial and entirely inappropriate penalties. As such, we
believe that the rules established under the current regulation and the
Technical Update should be considered a safe harbor. The regulation
should be revised to state that if the safe harbor is not met, the PBGC
will still allow use of the APFT if the filer can demonstrate, through
appropriate documentation to the satisfaction of the PBGC, that a
decision to use the APFT had been made on or before the VRP filing
deadline. Proof of such a decision could be established, for example,
by correspondence between the filer and the plan's enrolled actuary
making it clear that, on or before the VRP filing deadline, the filer
had opted for the APFT. It is important that this regulatory change be
made on a retroactive basis, so as to provide needed relief to filers
for all post-PPA plan years.
Rulemaking under Section 6707A of the Internal Revenue Code:
Section 6707A of the Internal Revenue Code imposes a penalty of
$100,000 per individual and $200,000 per entity for each failure to
make special disclosures with respect to a transaction that the
Treasury Department characterizes as a ``listed transaction'' or
``substantially similar'' to a listed transaction. The Treasury
Department announces on an ad hoc basis what is a listed transaction.
There is no regulatory process or public comment period involved in
determining what should be a listed transaction. The penalty applies
even if the small business and/or the small business owners derived no
tax benefit from the transaction. The penalty also applies even if on
audit the IRS accepts the derived tax benefit. The penalty is final and
must be imposed by the IRS and cannot be rescinded under any
circumstances. There is no judicial review allowed. In the case of a
small business, the penalties can easily exceed the total earnings of
the business and cause bankruptcy--totally out of proportion to any tax
advantage that may or may not have been realized. If a transaction is
not ``listed'' at the time the taxpayer files a return but it becomes
listed years later, the taxpayer becomes responsible for filing a
disclosure statement and will be liable for this penalty for failing to
do so. This is true even if the taxpayer has no knowledge that the
transaction has been listed. Consequently, we recommend an immediate
moratorium on the assessment and collection of the IRC Section 6707A
penalty until the ``listed transactions'' can be thoroughly reviewed
and recommendations can be made to carry out the intention of Congress
without the disproportionate and probable unconstitutional impact of
current law on small businesses and their owners.
Cash Balance Plan Regulations: On October 18, 2010, the Internal
Revenue Service issued long-awaited regulations affecting cash balance
benefit plans under the Pension Protection Act of 2006. In addition to
the delay in receiving this regulatory guidance, plan sponsors were
disappointed that the regulations deviated from clear Congressional
intent. The Chamber is engaged in on-going conversations with the
Treasury Department and is asking Treasury and the IRS to set forth a
clear and rational approach to PPA compliance for Pension Equity Plans.
Moreover, because of the complexity of hybrid plans and their
regulation, we are requesting additional guidance to ensure that plan
sponsors have sufficient clarity and flexibility to adopt and maintain
hybrid pension plans with legal certainty.
Top-Heavy Rules: The top-heavy rules under ERISA are an example of
extremely complex and burdensome regulations that do not offer a
corresponding benefit.\4\ We recommend that this statute be eliminated
altogether.
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\4\ IRC section 416.
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Conclusion
The best way to encourage plan sponsors to maintain retirement
plans is to create a predictable and flexible benefit system. This
statement highlights two areas where Congress could work to
significantly improve predictability and flexibility. We look forward
to working with this Subcommittee and Congress to enact legislation
that will encourage further participation in the employer-provided
system rather than driving employers out of it. Thank you for your
consideration of this statement.
______
[Whereupon, at 12:54 p.m. the subcommittee was adjourned.]