[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                             TAX REFORM AND
                    TAX-FAVORED RETIREMENT ACCOUNTS

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

                                HEARING

                               before the

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

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 17, 2012

                               __________

                           Serial No. 112-24

                               __________

         Printed for the use of the Committee on Ways and Means




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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

WALLY HERGER, California             SANDER M. LEVIN, Michigan
SAM JOHNSON, Texas                   CHARLES B. RANGEL, New York
KEVIN BRADY, Texas                   FORTNEY PETE STARK, California
PAUL RYAN, Wisconsin                 JIM MCDERMOTT, Washington
DEVIN NUNES, California              JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
GEOFF DAVIS, Kentucky                XAVIER BECERRA, California
DAVID G. REICHERT, Washington        LLOYD DOGGETT, Texas
CHARLES W. BOUSTANY, JR., Louisiana  MIKE THOMPSON, California
PETER J. ROSKAM, Illinois            JOHN B. LARSON, Connecticut
JIM GERLACH, Pennsylvania            EARL BLUMENAUER, Oregon
TOM PRICE, Georgia                   RON KIND, Wisconsin
VERN BUCHANAN, Florida               BILL PASCRELL, JR., New Jersey
ADRIAN SMITH, Nebraska               SHELLEY BERKLEY, Nevada
AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas
ERIK PAULSEN, Minnesota
KENNY MARCHANT, Texas
RICK BERG, North Dakota
DIANE BLACK, Tennessee
TOM REED, New York

                   Jennifer Safavian, Staff Director

                  Janice Mays, Minority Chief Counsel

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


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of April 17, 2012, announcing the hearing...............     2

                               WITNESSES

Jack VanDerhei, Ph.D., Research Director, Employee Benefit 
  Research Institute.............................................     7
Judy A. Miller, Chief of Actuarial Issues and Director of 
  Retirement Policy, American Society of Pension Professionals 
  and Actuaries..................................................    47
William F. Sweetnam, Principal, Groom Law Group..................    72
David C. John, Senior Research Fellow in Retirement Security and 
  Financial Institutions, The Heritage Foundation................    81
Randy H. Hardock, Partner, Davis & Harman LLP, testifying on 
  behalf of the American Benefits Council........................   102

                       SUBMISSIONS FOR THE RECORD

ACLI, statement..................................................   145
CFE, statement...................................................   151
cfed, statement..................................................   154
Custodia, statement..............................................   158
ESOP, statement..................................................   162
ICI, statement...................................................   170
Kevin Wiggins, statement.........................................   181
NAGDCA, statement................................................   183
Putnam Funds, statement..........................................   191
Savings Coalition, statement.....................................   201
Scorse, statement................................................   209
Susan Crase, statement...........................................   211


                             TAX REFORM AND
                    TAX-FAVORED RETIREMENT ACCOUNTS

                              ----------                              


                        TUESDAY, APRIL 17, 2012

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 10:02 a.m., in 
Room 1100, Longworth House Office Building, Hon. Dave Camp 
[Chairman of the Committee] presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
Tuesday, April 17, 2012
FC-24

                  Chairman Camp Announces a Hearing on

             Tax Reform and Tax-Favored Retirement Accounts

    Congressman Dave Camp (R-MI), Chairman of the Committee on Ways and 
Means, today announced that the Committee will hold a hearing on 
possible reforms to certain tax-favored retirement savings plans that 
might be considered as part of comprehensive tax reform. This tax 
reform hearing--scheduled to occur on tax filing day--will examine one 
source of complexity for individuals and employers by reviewing 
employer-sponsored defined contribution plans as well as Individual 
Retirement Accounts (``IRAs''). The hearing will take place on Tuesday, 
April 17, 2012, in Room 1100 of the Longworth House Office Building, 
beginning at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witness only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.
      

BACKGROUND:

      
    Financial planners and advisors have long identified the major 
components of retirement security as Social Security, employer-
sponsored plans, and personal savings. Financed by payroll taxes paid 
by covered workers and their employers, Social Security provides 
monthly cash benefits to retired or disabled workers and their family 
members and to the family members of deceased workers. Social Security 
is outside the scope of this hearing.
      
    Outside of Social Security, many employers offer employees the 
option of participating in employer-sponsored retirement and pension 
plans, which generally receive favorable Federal income tax treatment. 
Employer-sponsored plans provide for either a defined benefit (which 
generally provides retired employees with an annuity) or a defined 
contribution (``DC''). Defined benefit pension plans represent an 
important source of retirement security, but raise policy questions 
that are outside the scope of this hearing. DC plans receive 
contributions from either employees or employers or both. Employees 
usually own their own accounts, and control the investment of account 
assets, thus bearing the risks and rewards of asset performance. In 
general, contributions to DC plans are deductible to the employer, 
excluded from the employee's income, grow tax-free, and are taxed upon 
distribution. DC plans also generally may offer Roth-style accounts; 
contributions to such accounts are made on an after-tax basis but 
earnings and distributions are tax-free.
      
    Individuals also may be eligible to save through IRAs, which are 
similarly tax-advantaged, although with much lower contribution limits. 
Traditional IRAs are taxed similarly to 401(k) accounts. Contributions 
are deductible from income, earnings are not taxed currently, and 
distributions are taxed. Individuals participating in employer-
sponsored plans cannot contribute to a traditional IRA if they exceed 
certain income levels. Contributions to Roth IRAs, on the other hand, 
are made on an aftertax basis, but earnings and distributions are 
excluded from income. Contributions to non-deductible IRAs are included 
in income, grow tax-free and are taxed at distribution less the amount 
of previously taxed contributions.
      
    There are several types of DC plans, the most common of which are: 
401(k) plans for private employers, 403(b) plans for non-profits and 
public schools, and 457(b) plans for State and local governments. In 
addition to the types of IRAs discussed above, some employers may offer 
IRAs through the workplace, including payroll deduction IRAs, SIMPLE 
IRAs and SEP IRAs. The proliferation of tax-favored retirement accounts 
has occurred as specific needs have led Congress to create new types of 
plans with specific rules. Some commentators, however, have questioned 
whether the large number of plans with different rules and eligibility 
criteria leads to confusion, reducing the effectiveness of the 
incentives in increasing retirement savings. In addition, many 
commentators have offered ideas for increasing participation in 
retirement plans and better targeting the incentives. These ideas range 
from simplification and consolidation of existing plans and accounts to 
changing the default rules governing whether an employee participates 
to additional incentives such as the Savers Credit.
      
    In announcing this hearing, Chairman Camp said, ``Retirement 
security is one of the most important long-term policy priorities we 
face as a Nation. While many argue that the existing menu of tax-
favored retirement plans provides choice and flexibility for families 
and employers alike, others have questioned whether the ad hoc 
development of retirement savings incentives has led to undue 
complexity and inefficiency that reduce the effectiveness of these 
incentives. The general principles of tax reform apply to retirement 
security as well: American families trying to save should have options 
that are simple, fair, and economically efficient.''
      

FOCUS OF THE HEARING:

      
    The hearing will consider the current menu of options for 
retirement savings--both with respect to employer-based defined 
contribution plans and with respect to IRAs. The hearing will explore 
whether, as part of comprehensive tax reform, various reform options 
could achieve the three goals of simplification, efficiency, and 
increasing retirement and financial security for American families.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
written comments for the hearing record must follow the appropriate 
link on the hearing page of the Committee website and complete the 
informational forms. From the Committee homepage, http://
waysandmeans.house.gov, select ``Hearings.'' Select the hearing for 
which you would like to submit, and click on the link entitled, ``Click 
here to provide a submission for the record.'' Once you have followed 
the online instructions, submit all requested information. ATTACH your 
submission as a Word document, in compliance with the formatting 
requirements listed below, by the close of business on Tuesday, May 1, 
2012. Finally, please note that due to the change in House mail policy, 
the U.S. Capitol Police will refuse sealed-package deliveries to all 
House Office Buildings. For questions, or if you encounter technical 
problems, please call (202) 225-3625 or (202) 225-2610.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word format and MUST NOT exceed a total of 10 pages, including 
attachments. Witnesses and submitters are advised that the Committee 
relies on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons and/
or organizations on whose behalf the witness appears. A supplemental 
sheet must accompany each submission listing the name, company, 
address, telephone, and fax numbers of each witness.

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TDD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://www.waysandmeans.house.gov.

                                 

    Chairman CAMP. Good morning. We meet today to continue our 
dialogue about what I hope will result in a bipartisan path 
forward to reform our Federal income tax system. In recent 
weeks much of the discussion about tax reform has centered on 
the corporate side, especially after Japan lowered its 
corporate rate on April 1st, leaving America with the dubious 
distinction of having the highest corporate tax rate in the 
industrialized world. It is simply unacceptable that American 
employers face such an undue burden at a time when we 
desperately need them to get the economy growing and get almost 
13 million unemployed people back to work. But as tax filing 
day reminds us, only comprehensive tax reform ensures that we 
address the needs of American families and all job creators, 
regardless of how they are structured, and as such we must 
consider the individual side of the Tax Code if we are to 
transform today's broken Code from one that impedes to one that 
improves prospects for job creation.
    Last year the IRS processed 142 million tax returns. They 
also received 10.5 million extension forms, at least in part 
due to the complex, costly, and time-consuming nature of the 
Tax Code. With nearly 4,500 changes in the last decade, 579 of 
them in 2010 alone, the Code is far too complex, and this 
complexity has led to ever-increasing costs of complying with 
the Federal Tax Code.
    According to the National Taxpayer Advocate, in 2008, 
taxpayers spent $163 billion complying with the individual and 
corporate income tax rules. American families are not only 
spending more money complying with the Tax Code, they are also 
spending more time. Navigating through the tangled web of tax 
rules has resulted in taxpayers spending over 6 billion hours 
annually to comply with the Code. Whether it is the compliance 
and administrative burdens, the impact of temporary and 
expiring tax provisions, or the effect of convoluted rules on 
financial planning decisions, today's Tax Code is not just 
hampering employers, but it is hampering the ability of 
individuals and families to plan their finances with reasonable 
certainty.
    Turning to the topic of today's hearing, tax incentives for 
retirement saving, it quickly becomes clear why we are taking 
the time to lay the foundation for comprehensive tax reform by 
gathering input from experts. As many Americans work to meet 
the tax filing deadline, today's testimony reinforces the wide 
popularity of these savings vehicles. The overwhelming majority 
of American workers with access to a workplace retirement plan 
are participating in that plan. According to the Bureau of 
Labor Statistics, 78 percent of full-time workers have access 
to a workplace retirement plan, and 84 percent of those workers 
participate in the plan, meaning 66 percent of all full-time 
workers participate. The plans benefit taxpayers of all income 
levels and from all walks of life.
    In 2010, over 70 percent of workers earning $30,000 to 
$50,000 participated in an employer-sponsored retirement plan 
if such a plan was available to them, according to data from 
the Employee Benefit Research Institute. Similarly, IRS data 
indicates that 38 percent of those participating in defined 
contribution plans make less than $50,000 a year, while almost 
three-quarters make less than $100,000 annually.
    The proliferation of tax-favored retirement accounts has 
occurred as specific needs have led Congress to create new 
types of plans with different rules. Some, however, have 
questioned whether the large number of plans with different 
rules and eligibility criteria leads to confusion, reducing 
effectiveness of the incentives and increasing retirement 
savings.
    In addition, many commentators have offered ideas for 
increasing participation in retirement plans and better 
targeting the incentives. These ideas range from simplification 
and consolidation of existing plans and accounts to changing 
the default rules governing whether an employee participates, 
to additional incentives such as the saver's credit. As the 
Committee continues its work toward comprehensive tax reform, 
it is important to keep in mind that these savings vehicles 
affect average people who depend on these resources for their 
retirement, and we must ensure that we do not inadvertently 
take steps that result in unintended consequences that could 
threaten the retirement security of ordinary families.
    As this Committee considers tax reform, I believe there are 
three important principles to keep in mind when evaluating tax-
favored retirement vehicles: one, simplification; two, 
increased participation, particularly by low- and middle-income 
taxpayers; and three, whether the tax benefits are effectively 
and properly targeted.
    Regarding the first of these principles, in August 2010 the 
President's Economic Recovery Advisory Board, also known as the 
Volcker Commission, presented options for simplifying savings 
and retirement incentives in their report on tax reform 
options. These options are worthy of consideration and 
discussion. We also have an expert panel of witnesses before us 
today that will evaluate how existing tax rules measure up to 
these criteria.
    I would like to emphasize that today's hearing isn't about 
drawing conclusions, but it is about making sure that as 
Congress approaches comprehensive tax reform, that we do so 
well armed with information. Washington has spent too much time 
in previous years acting first and asking later. That has 
proven to be the wrong approach. America's families and job 
creators deserve better than a trial-and-error approach to 
crafting policy. This is our opportunity to gather input and 
get the facts, and I look forward to the discussion.
    And I will now yield to the Ranking Member, Mr. Levin, for 
the purpose of an opening statement.
    Mr. LEVIN. Thank you, Mr. Chairman. Welcome. Thank you for 
coming.
    Today's hearing is this Committee's initial examination of 
what tax reform might mean for a very specific set of tax 
provisions, those designed to promote retirement savings. Tax-
preferred retirement savings have benefited tens of millions of 
American families. The estimates of exactly how many vary, but 
most find that 40 to 50 percent of all workers are covered by 
an employer-sponsored retirement plan, some 60 to 70 million 
people. Employer-sponsored plans, including defined 
contribution and defined benefit plans, private and public 
sector, hold assets of $9.3 trillion, held that amount as of 
the end of last year, and an additional 49 million households 
hold $4.7 trillion in IRAs.
    The tax-preferred retirement system is voluntary. Employers 
are not required to offer retirement plans, but I think we will 
hear today that employers basically understand the current 
system and that it works for them in terms of allowing them to 
offer retirement benefits to their workers. I note that most of 
this Committee agrees with that.
    Mr. Gerlach and Mr. Neal have introduced a resolution 
essentially in support of our current system. It has been 
cosponsored by 115 Members, including 26 Members of this 
Committee, reflecting, I think, bipartisan agreement that these 
provisions are vital to encouraging retirement savings.
    That is not to say the current system cannot be improved. 
Of course it can be. Today I believe we will hear about several 
ways to do that, including proposals to expand enrollment in 
401(k)s and IRAs, and to expand the saver's credit. But what 
should be clear is that the basic structure of our current 
system should be preserved, and that this structure should not 
be repealed to pay for tax reform. Tax reform should approach 
retirement savings incentives with an eye toward strengthening 
our current system and expanding participation, not as an 
opportunity to find revenue.
    I think one of our witnesses, Mr. Hardock, summed this up 
very nicely in his--in your written testimony, and I quote, 
``The retirement savings tax expenditures should not be reduced 
or tinkered with to pay for other initiatives, whether inside 
or outside of tax reform process. Those funds are the primary 
retirement nest egg of millions of American families. They 
should not be taxed in order to finance more government 
spending, deficit reduction or to offset other tax initiatives, 
including lower marginal tax rates.''
    Finally, I want to just note that while today's hearing is 
focused on defined contribution plans, our retirement security 
policy in this country has traditionally been a three-legged 
stool. Personal savings constitute just one of those legs. The 
other two legs, defined pension benefit pensions and Social 
Security, are indeed also vital components of ensuring 
Americans' retirement security.
    So thank you again, and all of us look forward to your 
testimony.
    Chairman CAMP. Thank you, Ranking Member Levin.
    Next it is my pleasure to welcome the excellent panel of 
witnesses seated before us today. Today's witnesses have 
extensive experience studying or working with tax-favored 
retirement accounts, and their experience will be helpful as we 
take a look at how the complexities in this part of the Tax 
Code affect individuals and employers.
    First I would like to welcome and introduce Dr. Jack 
VanDerhei, the research director at the Employee Benefit 
Research Institute in Washington, D.C. Dr. VanDerhei has been 
with the Employee Benefit Research Institute since 1988 and has 
published more than 100 papers on employee benefits.
    Second we will hear from Ms. Judy Miller, the chief of 
actuarial issues and director of retirement policy at the 
American Society of Pension Professionals and Actuaries. Ms. 
Miller has specialized in employer-sponsored retirement 
programs for nearly 40 years.
    Third we will welcome Mr. Bill Sweetnam, a principal at the 
Groom Law Group in Washington, D.C. Mr. Sweetnam specialized in 
retirement security at Groom and served as benefits tax counsel 
at the George W. Bush Treasury Department.
    Fourth we will hear from Mr. David John, a senior research 
fellow in retirement security and financial institutions at The 
Heritage Foundation. Mr. John has published and testified 
extensively on the improvement of retirement security plans.
    Finally, we welcome Mr. Randy Hardock, a partner at Davis & 
Harman LLP in Washington, D.C. Mr. Hardock is an ERISA and 
regulatory compliance specialist who maintains a practice 
focused on advising employers and institutions on retirement 
and savings issues. Mr. Hardock is testifying today on behalf 
of the American Benefits Council.
    Thank you all again for your time today. The Committee has 
received each of your written statements, and they will be made 
a part of the formal hearing record. Each of you will be 
recognized for 5 minutes for your oral remarks and, Mr. 
VanDerhei, we will begin with you, and you are recognized for 5 
minutes.

STATEMENT OF JACK VANDERHEI, PH.D., RESEARCH DIRECTOR, EMPLOYEE 
          BENEFIT RESEARCH INSTITUTE, WASHINGTON, D.C.

    Mr. VANDERHEI. Thank you. Chairman Camp, Ranking Member 
Levin, and Members of the Committee, thank you for the 
opportunity to speak with you today on the issues involved in 
tax reform and tax-favored retirement accounts. I am Jack 
VanDerhei, research director of the Employee Benefit Research 
Institute. EBRI is a nonpartisan institute that has been 
conducting original research on retirement and health benefits 
for the past 34 years. EBRI does not take policy positions and 
does not lobby.
    My testimony today draws on extensive research conducted by 
EBRI over the last 13 years with its Retirement Security 
Projection Model as well as annual analysis of the behavior of 
tens of millions of individual participants from tens of 
thousands of 401(k) plans dating back in some cases as far as 
1996.
    Measuring retirement income adequacy is an extremely 
important and complex topic, and EBRI started to provide this 
type of measurement in the late nineties. Figure 1 of my 
written testimony shows that when we modeled the baby boomers 
and Gen X-ers earlier this year, 43 to 44 percent of the 
households were projected to be at risk of not having adequate 
retirement income for basic retirement expenses plus uninsured 
healthcare costs. Even though this number is quite large, the 
good news is that this is 5 to 8 percentage points lower than 
what we found in 2003.
    It would be my pleasure to explain in more detail later why 
American households are better off today than they were 9 years 
ago, even after the financial and real estate market crises in 
2008 and 2009, but the short answer is the extremely positive 
impact from automatic enrollment in 401(k) plans.
    It is difficult to imagine any voluntary strategy more 
effective at dealing with retirement income adequacy than 
increasing the likelihood of eligibility in a qualified 
retirement plan. Figure 5 of my written testimony shows the 
importance of defined benefit plans for retirement income 
adequacy, and figure 6 shows a similar analysis for 401(k) 
plans. We see that the number of future years that workers are 
eligible for participation in a defined contribution plan makes 
a tremendous difference in their at-risk ratings. Gen X-ers, 
for example, with no future years of eligibility, are simulated 
to run short of money 61 percent of the time, whereas those 
with 20 or more years of future eligibility would experience 
the situation only 18 percent of the time.
    Knowing the percentage of households that will be at risk 
for inadequate retirement income is important for public policy 
analysis; however, equally important is knowing just how large 
the accumulated deficits are likely to be. The aggregate 
deficit number is estimated to be $4.3 trillion for all baby 
boomers and Gen X-ers.
    While trillion-dollar deficits are useful in focusing 
attention on this problem, they do little to help policymakers 
understand exactly where these deficits are coming from. For 
example, figure 3 of my written testimony provides information 
on the retirement savings shortfalls for Gen X-ers. The average 
deficit decreases substantially with additional years of future 
eligibility in a defined contribution plan, and Gen X-ers 
fortunate enough to have at least 20 years of future 
eligibility find their average deficits reduced more than 70 
percent of the average deficits for those with no future years 
of eligibility.
    EBRI research has shown repeatedly that the additional type 
of 401(k) plan under current tax incentives has the potential 
to generate a sum that, when combined with Social Security 
benefits, would replace a sizable portion of the employee's 
preretirement income for those with continuous coverage. Our 
research has also shown that the automatic enrollment type of 
401(k) plan, when combined with automatic escalation 
provisions, appears to have the potential to produce even 
larger retirement accumulations for most of those covered by 
such plans.
    Recently, however, there have been proposals to modify the 
existing tax incentives for defined contribution plans by 
either capping annual contributions or changing the before-tax 
nature of employee and employer contributions in exchange for a 
government matching contribution.
    Last September the Senate Finance Committee held a hearing 
that focused to a large extent on the second type of proposal. 
EBRI presented preliminary evidence at that time of the 
possible impact of such a proposal on future 401(k) 
accumulations. In recent months results from two new surveys 
have allowed EBRI to model these effects even more accurately, 
and last month we published our new results showing the 
projected changes in 401(k) balance at retirement age due to 
expected modifications of plan sponsors and participants in 
reaction to that proposal. Figure 11 of my written testimony 
shows a 22 percent reduction in 401(k) balances at retirement 
for young workers in the lowest income quartile, those most at 
risk for insufficient retirement income. Results are even more 
dramatic for small plans. Figure 12 shows the average reduction 
for low-income employees in these plans is 36 and 40 percent.
    In conclusion, given that the financial fate of future 
generations of retirees appears to be so strongly tied to 
whether they are eligible to participate in employer-sponsored 
retirement plans, the logic of modifying either completely or 
marginally the incentive structure of employees or employers 
for defined contribution plans at this time needs to be 
thoroughly examined. The potential decrease of retirement 
income resulting from either employer modifications to existing 
retirement plans or employees reducing future contributions to 
these plans needs to be analyzed carefully when considering the 
overall impact of such proposals.
    Thank you, and I look forward to your questions.
    Chairman CAMP. Thank you very much.
    [The prepared statement of Mr. VanDerhei follows:]

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    Chairman CAMP. Ms. Miller, you are recognized for 5 
minutes.

  STATEMENT OF JUDY A. MILLER, CHIEF OF ACTUARIAL ISSUES AND 
  DIRECTOR OF RETIREMENT POLICY, AMERICAN SOCIETY OF PENSION 
        PROFESSIONALS AND ACTUARIES, ARLINGTON, VIRGINIA

    Ms. MILLER. Thank you, Chairman Camp, Ranking Member Levin, 
and Members of the Committee. I am Judy Miller, chief of 
actuarial issues and director of retirement policy for the 
American Society of Pension Professionals and Actuaries. 
ASPPA's more than 8,000 members work with retirement plans of 
employers of all types, but our primary focus is plans for 
small business.
    Two key features distinguish retirement savings tax 
incentives from other incentives in the Code: The deferral 
nature of the incentive and the nondiscrimination rules that 
make employer-sponsored plans very efficient at delivering 
benefits across the income spectrum.
    First, unlike other tax incentives, incentives for 
retirement savings are deferrals, they are not permanent 
exclusions. When employer-paid health benefits are excluded 
from income or mortgage interest is deducted, those amounts 
will never be taxed. With the traditional retirement savings 
account, no income taxes are paid on contributions when they 
are added to the account, but those same contributions are 
included in taxable income when the amounts are paid from the 
plan. In other words, every single dollar that is exempt from 
tax now will be subject to income tax in the future. Since most 
of those retirement years are outside the government's 5- or 
10-year budget window, looking at the so-called tax expenditure 
for defined contribution retirement plans on a short-term cash 
basis greatly overstates the cost of this incentive. In fact, 
new estimates by former JCT staff show that a better measure of 
the expenditure for defined contribution plans is more than 50 
percent less than the JCT cash-basis estimate over a 5-year 
period. So as you consider these issues, let us not forget that 
this is a deferral. The amount of revenue you might think you 
are raising if you cut retirement savings incentives today is 
not real revenue gain. It is a bookkeeping fiction.
    The second distinguishing feature is the nondiscrimination 
rules that make sure incentives for retirement plans don't 
discriminate in favor of the highly paid. The result is this 
tax incentive is more progressive than the current progressive 
Tax Code. Households making less than $100,000 pay 26 percent 
of all income taxes, but they get over 60 percent of the tax 
benefit of this incentive for defined contribution plans, and 
this analysis actually understates the benefits for these 
households because it doesn't recognize that a good part of a 
small business owner's so-called tax savings is actually 
transferred to workers in the form of contributions. Let me 
explain.
    A small business owner usually considers a plan when the 
businesses finally become profitable. The owner has shown how 
setting up a retirement plan can save enough money on their 
personal income taxes to pay most of the cost of contributions, 
like matching contributions that are going to be required for 
employees by nondiscrimination rules. It is a beautiful thing 
really. Deferred income taxes for the owner become current 
contributions for the workers.
    Data clearly shows the key to promoting retirement security 
is workplace savings. Over 70 percent of workers earning from 
$30- to $50,000 do participate in a plan at work, but less than 
5 percent go save on an IRA on their own. Bureau of Labor 
Statistics data show 78 percent of full-time workers have 
access to a workplace retirement plan, with 84 percent 
participating.
    Almost 80 percent coverage is a success story. More needs 
to be done, but the Committee should build on the success of 
the system. We support the auto IRA proposal in Mr. Neal's 
bill, for example, as a way to expand workplace savings by 
building on the current structure.
    Recent tax reform proposals include dramatic cuts in 
maximum contribution limits, a cap on the value of the current 
year's exclusion for households making over a certain dollar 
amount, or conversion of the current year's income exclusion to 
a credit. All of these proposals would reduce the incentive for 
small business owners to sponsor a workplace retirement plan 
and would be a big step in the wrong direction.
    I have over 20 years experience actually selling plans to 
small business owners. With rare exceptions, the current year's 
tax savings was a critical factor and often the only factor 
supporting their decision to put in a plan. Now, it is not that 
small business owners are selfish. Quite the contrary. But in 
real life they aren't sitting on lots of cash. Savings 
generated from the retirement plan tax incentives provides cash 
to help make contributions required by the nondiscrimination 
rules. Reducing the incentive literally reduces the cash the 
small business owner has to work with. Now, there is not a 
doubt in my mind that reduced incentives would mean fewer plans 
and less contributions toward workers' retirement.
    One of the questions posed for this hearing is whether or 
not there are too many types of plans. The simple answer is no. 
A proposal to combine all defined contribution plans into a 
single type of plan might look like simplification on paper, 
but in practice combining 401(k), 403(b), and 457(b)s into a 
single plan would disrupt savings for employees of State and 
local governments and other nonprofits. And believe me, when 
you are talking to an employer about setting up a plan, options 
and flexibility are not the enemy, and one size definitely does 
not fit all.
    Now, that is not to say simplification isn't needed. For 
example, we support the Small Business Pension Promotion Act 
sponsored by Representatives Gerlach, Kind and others, and 
would be pleased to work with the Committee on these and other 
simplifications.
    In summary, the road to improved retirement security for 
working Americans is expanded workplace savings. Reducing 
incentives for small business owners to sponsor retirement 
plans is the opposite of what needs to be done.
    I would be pleased to discuss these issues further with the 
Committee or to answer any questions that you may have. Thank 
you very much.
    Chairman CAMP. Thank you very much.
    [The prepared statement of Ms. Miller follows:]

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    Chairman CAMP. Mr. Sweetnam, you are recognized for 5 
minutes.

         STATEMENT OF WILLIAM F. SWEETNAM, PRINCIPAL, 
               GROOM LAW GROUP, WASHINGTON, D.C.

    Mr. SWEETNAM. Chairman Camp and Ranking Member Levin, thank 
you for the opportunity to testify at this hearing. I am a 
principal in the Groom Law Group, a law firm that focuses 
exclusively on employee benefits law. Prior to joining Groom, I 
was the benefits tax counsel at the Office of Tax Policy at the 
Department of Treasury from 2001 to 2005. I will testify today 
about the simplification proposals for retirement savings 
accounts that we developed at the Office of Tax Policy and that 
were included in the Bush administration's budget proposals for 
fiscal years 2004 and 2005. Please note that I am speaking 
today on my own behalf and not speaking on behalf of the firm 
or any firm client in my testimony.
    One of the reasons to simplify, the Code currently provides 
various incentives for individual retirement savings, for 
employer-based retirement savings, and for other savings 
objectives, such as the payment of medical expenses or 
educational expenses. All these savings vehicles have different 
eligibility requirements, and the amount of the tax benefits 
could change based on the individual's income status or his or 
her participation in other savings programs.
    Employer-provided retirement savings vehicles present their 
own level of complexity. Under the Internal Revenue Code, there 
are a number of retirement savings vehicles that employers can 
adopt, including 401(k) plans, 403(b) plans, and 457(b) plans. 
Some rules vary depending on the type of plan, and there are 
limitations on the type of entity that can adopt certain types 
of plans.
    Multiple nondiscrimination rules add complexity to the 
administration of these plans. While nondiscrimination rules 
are a means of making sure that lower-paid employees share in 
the benefits provided under these savings plans, some 
commentators argue that the level of complexity is excessive in 
relation to the benefits that lower-paid employees receive.
    The Administration's 2004 budget proposal outlined a 
simplified system of retirement savings, with only three types 
of tax-favored vehicles: Lifetime savings accounts, LSAs; 
retirement savings accounts, RSAs; and employer retirement 
savings accounts, ERSAs.
    Lifetime savings accounts. Individuals would be able to 
contribute $5,000 on an after-tax basis to an LSA. Amounts 
contributed would grow on a tax-free basis. There would be no 
income limitations on who could contribute to an LSA. 
Distributions from these accounts could be made at any time 
regardless of the individual's age and could be used for any 
reason by the account owner. Those individuals with limited 
means to save might be more willing to contribute to an LSA 
because they could access the money saved in the LSA in the 
event of an emergency, which is different than making 
contributions to a retirement-based system.
    Our next was retirement savings accounts, RSAs. Individuals 
could contribute $5,000 on an after-tax basis to an RSA, with 
account earnings growing on a tax-free basis. Like the LSA, no 
income limits would apply to contributions to an RSA. Qualified 
distributions, i.e., those made after an individual attained 
age 58 or in the event of death or disability, would be tax 
free. All other distributions would be considered nonqualified 
distributions and would be included in income to the extent 
that the distribution exceeds basis.
    Finally, employer retirement savings accounts, ERSAs, would 
be available to all employees regardless of the type of 
employee entity. ERSAs generally would follow the existing 
rules for 401(k) plans, including the 401(k) contribution 
limit, the catch-up contribution limit for employees age 50 and 
above, and the availability of Roth contributions. The 
nondiscrimination testing rules would be simplified and would 
be eliminated if lower-paid employees had high savings rates 
under the plan. Although these simplification efforts did not 
advance in Congress, our efforts to review and recommend 
comprehensive changes to the current retirement savings system 
was, I believe, worthwhile.
    Any effort to advance tax reform will likely include a 
review of retirement savings initiatives. If one goal of tax 
reform is to simplify the current system, I would recommend 
that the Committee examine the work of the Office of Tax Policy 
during the Bush administration.
    Thank you for this opportunity to address the Committee. I 
will be happy to answer any of your questions.
    Chairman CAMP. Thank you, Mr. Sweetnam.
    [The prepared statement of Mr. Sweetnam follows:]

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    Chairman CAMP. Mr. John, you are recognized for 5 minutes.

     STATEMENT OF DAVID C. JOHN, SENIOR RESEARCH FELLOW IN 
 RETIREMENT SECURITY AND FINANCIAL INSTITUTIONS, THE HERITAGE 
                  FOUNDATION, WASHINGTON, D.C.

    Mr. JOHN. Thank you. Chairman Camp and Ranking Member 
Levin, I appreciate the opportunity to testify before you this 
morning on ways to ensure that all Americans have the 
opportunity to save for retirement. I am David John, a senior 
research fellow at The Heritage Foundation and also the deputy 
director of the Retirement Security Project.
    This is an issue that transcends ideological and partisan 
differences. For those who have access to a payroll deduction 
retirement savings account, the current system works fairly 
well. However, millions of Americans still lack that ability. 
In theory they can save in an IRA, but as Jack and Judy have 
shown, only a maximum of about 5 percent actually do so on a 
regular basis. Many of these workers who lack the ability to 
save through payroll deduction are part-time employees of 
smaller businesses, women, members of minority groups, younger 
workers, or all four.
    Social Security, even if it was fully funded, only provides 
about half the retirement income needs of an average-income 
worker. Either we can ensure that everyone has the ability to 
save to provide for themselves in retirement, or a Congress in 
the near future will face demands for additional taxpayer-paid 
benefits. Those demands will be very hard to resist.
    Ensuring that all Americans have the opportunity to save 
will require some hard decisions. The proposal developed by 
Mark Iwry, who was then at Brookings, and I for automatic IRAs 
would provide a relatively simple, cost-effective way to 
increase retirement security for millions of Americans. The 
automatic IRA would enable these Americans to save for 
retirement by allowing them to regularly contribute amounts 
from their own paychecks to an IRA. The plan is simple for both 
employers and employees. Employees would be automatically 
enrolled into their employer's automatic IRA. Automatic 
enrollment is a process that has proven to build participation, 
which employees like, and under which employees have complete 
control ultimately of their own retirement savings decisions.
    To avoid confusion and to keep costs low, all automatic 
IRAs would offer three, and only three, investment choices. For 
employers, the plan is also very simple. They would be asked to 
do the same thing they now do, to withhold income and other 
taxes from an employee's paycheck, except that the money would 
go into an IRA instead of to the Treasury. Employer 
contributions would neither be required nor permitted. 
Employers would not be required to comply with ERISA rules or 
other types of regulations that apply to 401(k)s or a variety 
of other things. These simplifications eliminate almost all the 
costs associated with an automatic IRA, but the plan also 
includes a tax credit designed to cover any remaining start-up 
and administrative costs.
    While the automatic IRA is especially valuable for new 
savers, it would be equally valuable for older savers who 
change jobs from a company that offers a 401(k) plan to a 
smaller company that currently has no type of retirement 
savings plan. Right now these workers stand to have gaps, which 
cripple their ability to build retirement security. However, 
under the automatic IRA, they could roll their 401(k)-type 
accounts into the automatic IRA and continue savings. That 
would also work if they went to a larger company.
    This is not a partisan or an ideological proposal. The 
concept has been endorsed by a number of varied publications, 
such as National Review and the New York Times. It has been 
endorsed by significant conservative and liberal officials and 
other types of officials.
    Earlier this year Representative Richard Neal introduced 
H.R. 4049, the Automatic IRA Act of 2012. While The Heritage 
Foundation, as a 501(c)(3) nonprofit, does not and cannot 
endorse any legislation, let me say that the policy contained 
in his bill would significantly improve our retirement savings 
system.
    My written statement also discusses the value of 
simplifying the current confusing series of retirement savings 
accounts so that ordinary Americans and employers can better 
understand them. In addition, my statement discusses two modest 
proposals, first to use tax information to encourage taxpayers 
to consolidate their retirement accounts if they desire to do 
so, and second to include Social Security on an annual 401(k) 
or IRA statement so that the account owner has a complete 
picture of their expected total retirement income in time to 
make a change so that they could actually increase savings and 
improve their potential outcome. It also discusses the 
desirability of allowing multiple employers to share a 
retirement savings platform, and a thought or two about the tax 
treatment of retirement savings. I would be happy to discuss 
them at any point.
    Thank you for giving me this opportunity to testify. I look 
forward to your questions.
    Chairman CAMP. Thank you very much.
    [The prepared statement of Mr. John follows:]

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    Chairman CAMP. Mr. Hardock, you are recognized for 5 
minutes.

        STATEMENT OF RANDY H. HARDOCK, PARTNER, DAVIS & 
       HARMAN LLP, TESTIFYING ON BEHALF OF THE AMERICAN 
               BENEFITS COUNCIL, WASHINGTON, D.C.

    Mr. HARDOCK. Thank you for the opportunity to speak with 
you today on behalf of the American Benefits Council. I am an 
attorney with over 30 years experience specializing in 
retirement plans. I served as Benefits Tax Counsel at the 
Treasury Department and was the Senate Finance Committee's tax 
counsel responsible for retirement issues during consideration 
of the 1986 Tax Reform Act.
    This Committee, the Ways and Means Committee, has been 
responsible for every major improvement in the retirement 
system. That includes the bipartisan Retirement Security Act 
passed in 2001, the legislation that established the successful 
framework for defined contribution plans and IRAs that is still 
in place today. That 2001 bill was cosponsored by you, Chairman 
Camp, by you, Ranking Member Levin. We thank you both for that. 
It was cosponsored by every senior Republican still serving on 
this Committee and by 10 of the 15 Democrats now serving on 
this Committee. It was cosponsored by Speaker Boehner, Minority 
Leader Pelosi, Majority Leader Cantor, and Minority Leader 
Hoyer. Promoting retirement savings is an area where 
Republicans and Democrats have long been able to agree, and we 
urge you to continue your support in the context of tax reform.
    The current retirement system is working. It is working for 
the almost 80 percent of full-time employees with access to 
retirement plans at work. It works for the almost 100 million 
Americans who have saved through workplace retirement plans or 
IRAs. So, the first and most important principle to consider 
when you discuss tax reform and the retirement system is do no 
harm.
    In 2012, 80 percent of households with defined contribution 
plans said that tax savings were a big incentive to contribute. 
Almost half said they would not contribute at all to any 
retirement savings if it weren't for their defined contribution 
plan.
    Today, coverage and nondiscrimination requirements, the 
saver's credit, and various other rules ensure that the 
benefits in defined contribution plans are delivered fairly 
across all income groups. Current rules also provide balanced 
incentives that encourage business owners to voluntarily 
maintain retirement plans and encourage employee participation.
    Any major restructuring of the system that reduces or tries 
to reallocate existing retirement tax incentives is a gamble we 
cannot afford to take when dealing with the retirement security 
of working and retired Americans. Reducing retirement savings 
tax incentives to pay for other initiatives would be 
counterproductive. Proposals that appear to increase short-term 
Federal tax revenue from changes in the retirement savings 
incentives generally get those additional revenues because 
individuals are saving less for retirement. Making matters 
worse, as Ms. Miller indicated, short-term revenue gain from 
changes in the retirement incentives under the current budget 
rules is an illusion because when a worker saves less money 
today, it will mean smaller distributions and less tax revenue 
when the person retires.
    Just like the short-term budget scoring conventions, the 
tax expenditure scorekeeping also does not paint an accurate 
picture. The bulk of today's estimated retirement tax 
expenditure comes from savings that are already in retirement 
plans and IRAs, not from new contributions. So that big tax 
expenditure number cannot be turned into big new tax revenues 
without retroactively taxing the existing retirement savings 
nest eggs of Americans. That action would rightly be seen as a 
breach of trust by those workers who contributed (and those 
employers who contributed) on the assumption that this money 
would grow tax free and be taxed only at distribution.
    Still, the retirement system can and should be improved for 
all Americans, and especially those with lower incomes who find 
it most difficult to save. Tax reform offers the opportunity to 
do just that--by building on the existing system, not by 
tearing it apart. Today, employer-sponsored plans make 
effective use of payroll deduction, provide fiduciary 
oversight, and typically include an employer contribution. More 
Americans need access to those workplace retirement savings 
plans, and all Americans should be encouraged to save at higher 
levels.
    One area that deserves particular attention is automatic 
enrollment and automatic increase strategies. Those are plan 
designs where workers must opt out of plan participation rather 
than opt in and where the default contribution levels are 
increased each year. These plan designs increase participation 
and savings rates significantly, especially for low-income, 
younger, and minority workers. More employers are adopting 
these designs each year, but greater incentives should be 
considered to accelerate that trend.
    We also believe much could be done to reduce the costs of 
plan administration. For example, regulations on delivery of 
required notices should be brought into the 21st century to 
better accommodate electronic delivery.
    We stand ready to work with the Members of this Committee 
to assist this Committee in continuing its long history of 
promoting retirement savings. Thank you.
    Chairman CAMP. Well, thank you.
    [The prepared statement of Mr. Hardock follows:]

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    Chairman CAMP. Thank you all for that excellent testimony.
    Today is tax filing day, and it is a deadline which 
Americans have to spend millions of hours preparing their taxes 
because our system is a complex one, and not only is compliance 
complicated, but long-term financial planning is complicated as 
well because of our Code. And I would like to just explore and 
ask each of you how the Tax Code is performing in the area of 
retirement security. Employers who want to offer a retirement 
plan, as many of you--retirement savings option, as you 
mentioned, they have a choice, as many of you said, of many 
different proposals out there with different rules. And 
certainly individuals trying to save for retirement have one 
set of rules; individuals trying to save for health have 
another system with another set of rules; and families trying 
to save for education also have many options available, each 
with its own set of rules.
    But my question is, should the system--and why don't I 
start with Mr. Hardock and go down the line. But should the 
system of existing tax-advantaged retirement savings, should 
those be consolidated to make it easier for individuals to 
save, if you have an opinion on that?
    Mr. HARDOCK. Most Americans that have retirement plans are 
quite happy with the plans they have. The fact is that plan 
participants and most employers do not choose between a 401(k) 
plan or 403(b) plan or 457 plan; they simply have one. Those 
choices are not particularly difficult, and when they do come 
into play, they are made by employers.
    What you get if you try to consolidate is you make everyone 
reconsider and everyone amend their plans. That can be very 
disruptive, disruptive for the individuals involved and 
expensive for the employers that have to do that. I would add 
that the members of the American Benefits Council are also very 
concerned about any proposals that would consolidate retirement 
savings options with savings vehicles for other purposes like 
education or health. Most people save for a purpose, and 
confusing that retirement savings message could be very 
counterproductive.
    Chairman CAMP. All right. Mr. John.
    Mr. JOHN. I understand what my colleague just said, but the 
fact is when we talked to multiple small businesses and the 
like, the number of different types of savings plans and, 
frankly, their rather confusing numbers and names cause a 
fairly great anxiety among small businesses that were 
considering starting some sort of a plan, especially the ones 
that were fairly early in that process. So something that would 
consolidate, something that would simplify, not the least of 
which--as I say, it is a simple marketing technique--just 
changing the name of the blasted things--I mean, what is a 
401(k) when it comes right down to it--would be exceedingly 
useful.
    There is another aspect to this, though, which is that you 
referred to savings for different things, and as you pointed 
out, there are a wide variety of different types of advantages 
or Tax Code treatments of this. It would actually be much 
simpler if you just created all real savings the same way and 
exempted it from income without necessarily having to have one 
level for a 401(k), one for college savings, one for various 
and sundry other savings. Savings that is not consumption is 
actually an exceedingly valuable thing and should be 
encouraged. So to the point that you look at simplification, it 
is not just the matter of the accounts, it is the matter of 
savings itself.
    Chairman CAMP. All right. Thank you.
    Mr. Sweetnam.
    Mr. SWEETNAM. Thank you.
    Well, let me first focus in on the individual retirement 
savings vehicles. First off, I think one of the things that we 
tried to do in the Administration's proposal was to eliminate 
the income limits, because when you have those income limits 
you really weren't quite sure whether you were eligible to make 
a contribution to an IRA. In fact, if any of you remember prior 
to the income limits being put on, banks used to stay open on 
tax day until midnight in order to accept people's IRA 
contributions. There used to be lines in banks to make IRA 
contributions on April 15th. Once we put in the income limits, 
those lines went away. So I think that was one of the things 
that we tried to do in our proposal.
    The second thing that we tried to do, and I think David 
alluded to this, was with our RSA and LSA proposal. Our LSA 
proposal was a means for people to save for any reason and to 
pull money out of those accounts to use for any reason.
    I think one of the things that people have to realize is 
that people's savings needs change over time. Younger people 
may be thinking about savings, but they may not be thinking 
about retirement savings. I have a 30-year-old son now, and he 
is doing saving, but what is he saving for? He is saving to buy 
that house, which I think would be a really good thing. But 
when he gets a little bit older, he is going to be saving for 
retirement. What we tried to do with our LSA proposal was to 
give lower-income people or people who were at the margins of 
savings a way to have a tax-favored vehicle in order to have 
savings.
    On the retirement side, I think one of the things that you 
have seen--I have probably been practicing as long as Randy, 
and what we have seen over the years is Congress legislating to 
make the differences between the various types of retirement 
plans less and less and less, and so that what we were trying 
to do in our proposal was just take that final step. We had all 
of the plans have the same contribution amounts. We said, let 
us just take the final step and eliminate the various Code 
differences between the two. But Congress has been going that 
way over the last few years.
    Chairman CAMP. Thank you.
    Ms. Miller.
    Ms. MILLER. Thank you.
    I would like to focus on the employer side of this, and I 
think it actually ties into the individual, too, in that when 
you are talking to a small employer, it really isn't that 
confusing. I mean, if you poll somebody that is not thinking 
about a retirement plan and say, here is this, this, this, but 
if you are actually talking to an employer saying, do you want 
to put in a retirement plan, you are really saying, do you want 
to have an IRA-based plan, or do you want to have one that has 
a trust that your employees are more likely to leave the money 
in? You know, if you put your money into a 401(k) for them, 
they can't pull it out right away. If you put it into a SIMPLE 
plan, they might run off with it. So you are drawing those 
distinctions. Then you are really talking about how much can 
you afford and what would you like to do.
    This is where I get concerned about the proposals for 
individual savings in that right now we have the $5,000 IRA 
limit, and then you can go up to $10,000 for a SIMPLE plan, and 
then you can go up to $17,000 for the individual deferral in a 
qualified retirement plan. So there really are rewards for 
stepping up and providing better benefits, and I think that is 
why the system really has been working so well.
    If you have--and there is a proposal for, I am sorry, a 
deferral-only safe harbor of like 8- or $10,000. What happens 
is if you have somebody that can put $5,000--a small business 
owner can put $5,000 in an IRA, $5,000 in an LSA. Suddenly 
there is absolutely no reason in the world in terms of what 
they can save on a tax-favored basis for them to put in a 
SIMPLE plan. Right now they have the $5,000 IRA. If they want 
to put in $10,000, they are going up to a SIMPLE plan. So you 
have to be careful that what you do on the individual savings 
side doesn't disrupt the structure that really works pretty 
well on the individual employer side.
    And I think when you look at it from an employer's 
perspective in selling them a plan, there are options, there 
are things you can do as opposed to the IRA charts at the 
beginning of Bill's testimony where it is basically telling you 
when you can't do something. With the employer side, it is here 
is what you can do, here are your options. So it is very 
positive on the employer's side.
    Chairman CAMP. All right. Thank you.
    Mr. VanDerhei.
    Mr. VANDERHEI. Thank you.
    While EBRI doesn't take positions on proposals of this 
sort, I find a lot to agree with in what Randy and Judy just 
said, and I think from a rather abstract viewpoint, if you look 
at what is happening with respect to employers, you would 
introduce a whole new set of nondiscrimination testing if you 
did something like this.
    The other thing you have to keep in mind is many employees 
are very targeted in what they are saving for, and I think what 
you would need to keep in mind is if you make it rather 
amorphous as far as an overall savings target, it is going to 
be much more difficult for any individual to find out whether 
or not they are basically on track for a specific retirement 
income.
    Chairman CAMP. All right. Thank you.
    Mr. Levin may inquire.
    Mr. LEVIN. Well, thank you very, very much for your 
testimony.
    Mr. Chairman, I think this is a hearing that has 
significance for tax reform for this issue and beyond, because 
while there are some differences among you, and while I think 
everyone believes that we can improve the system, I think your 
testimony issues a warning to those who propose to eliminate 
all tax expenditures or those who equate tax expenditures 
loosely with tax loopholes. Because this tax expenditure, I 
think, is not a loophole. It is a policy. And some have 
essentially said, let us start by eliminating them all and go 
on from there, and some propose getting down to a certain 
point, assuming the elimination of all tax expenditures. And do 
any of you favor eliminating this tax expenditure? No.
    Mr. HARDOCK. That is a big no from this end of the table.
    Mr. SWEETNAM. No.
    Ms. MILLER. No.
    Mr. LEVIN. And I am not sure that this is quite the way to 
put it, but, Mr. Hardock, you said here after talking about the 
importance of retirement savings, you say for that reason the 
first and most important principle you urge this Committee to 
consider in the context of tax reform is to do no harm. I am 
not quite sure I would put it that way. But maybe as to this 
area I think that is true, and the same is true in other areas 
relating to policies embraced in tax expenditures.
    So maybe I will leave it at that except to say, Mr. 
Sweetnam, I think there is a distinction between what you save 
for--I am all in favor of supporting, for example, savings for 
education purposes and for buying a house. I think the 
proposals to eliminate the present provision for purchasing a 
house and homeownership, again eliminating that without 
reference to any income level or anything else, is a mistake.
    But I do think you all feel that the retirement structure 
is more or less working, while we still need to improve it. I 
think we need to be careful not to lump everything together and 
lose the emphasis on having a strong Social Security system, 
which is added to by savings for retirement. I think we need 
that combination, and I think the point we want to drive home 
(you mentioned that the percentage now saved for retirement has 
improved a bit) is that we need to try to build that up not by 
eliminating Social Security, but by adding on to it.
    So I really think your testimony has importance today for 
this issue and all other issues relating to tax reform. We need 
to look at it, but with care, and not with such broad strokes 
that we would sweep away a system like retirement savings that 
is working, basically working. Thank you.
    Mr. SWEETNAM. May I respond?
    Chairman CAMP. Thank you. Well, I will do that on somebody 
else's time. I do want to say, though, that I think we are 
having a very good discussion today. I do think it is important 
to point out that I don't think there is anyone who is 
proposing eliminating this area. The closest thing that came to 
it was Simpson-Bowles, the President's Commission on Fiscal 
Responsibility, which capped this, did not eliminate this, and 
there is no proposal to do such a thing itself.
    Mr. LEVIN. Mr. Chairman, let me just say, in the chart that 
is on page 29 of Simpson-Bowles, it has a number of 
alternatives----
    Chairman CAMP. Yes.
    Mr. LEVIN [continuing]. Including eliminating all tax 
expenditures.
    Chairman CAMP. Yes, and that is one reason why I voted 
against the Simpson-Bowles Commission, as did Mr. Ryan.
    So Mr. Herger, you are recognized for 5 minutes.
    Mr. HERGER. Thank you, Mr. Chairman.
    Mr. John, I want to thank you for your work you put in on 
an automatic IRA proposal. As someone who comes from a small 
business background, I know the first question that many small 
business owners will have about any kind of mandated automatic 
IRA is what is this going to cost me. Would automatic IRAs 
create any significant new costs or burdens on employers who 
offer the IRAs?
    Mr. JOHN. No, it actually would not. The way that it is 
structured, it is simple enough that most employers that are 
covered with this, roughly 97 percent according to studies by a 
variety of firms, actually already use some form of payroll-
processing software or an outside payroll processor, and for 
those, having had many discussions with both of those 
industries, this would just simply be a new module that would 
be added.
    Plus the fact there is a tax credit. The tax credit has two 
components to it, one part which applies for 2 years which 
would cover any capital costs of setting up an auto IRA, and 
the other, which would last for 6 and could be extended if 
Congress chose to do so during that period of time, would 
provide a certain amount to cover the costs of actually putting 
employees on and off the system. It is a very simple, easy-to-
understand system, and we found--a major insurance company did 
some market research with employers for us, and they found that 
the more they discussed it with the employers, the stronger the 
employer support for the proposal went up.
    Mr. HERGER. Do the rest of you agree with this or have any 
additional thoughts?
    Ms. MILLER. I definitely would agree with that. Even for 
those that don't use a current payroll provider, we have 
members who are very interested in providing this. An employer 
could do it strictly over the phone. The credits should more 
than cover any cost incurred by the employer.
    Mr. HERGER. Thank you.
    Mr. John, I understand your proposal would utilize private 
financial institutions to administer the automatic IRAs. In the 
past there has been proposals to create personal retirement 
accounts that would be administered by the Social Security 
Administration, and some might argue that it would be simpler 
for small businesses if this could be tied in to the existing 
payroll tax withholding process. Could you comment on the pros 
and cons of these different approaches?
    Mr. JOHN. Sure. This is a very different--this is 
completely separate from the proposal in 2005 and before to set 
up personal retirement accounts in Social Security. There is a 
private sector funds management industry which works 
exceedingly well. We don't see any reason to supplant it by 
government entity for that.
    We do have the ability if the private sector provider so 
chooses to have what is called an R bond, which is a retirement 
savings account. It is somewhat similar to the I bond, which 
has been a U.S. Treasury savings account for a number of years 
now, and that would allow small savers to accumulate roughly 
$5,000, but at that point then that would be rolled into the 
private sector. We feel that the private sector is going to be 
more innovative, it is going to create more jobs, and frankly 
it will do a better job of keeping costs lower.
    Mr. HERGER. Thank you.
    Thank you, Mr. Chairman.
    Chairman CAMP. Thank you.
    Mr. Tiberi.
    Mr. TIBERI. Thank you, Mr. Chairman. Thank you for holding 
this hearing today and for your leadership on these issues as 
well as overall tax reform. As someone who has been interested 
in pension and retirement issues since I have been here, I look 
forward to working with you, Mr. Chairman, and others on this 
issue.
    I think strongly that we need to make sure that Americans 
have the tools and the education necessary to feel as though 
they can make the right choices with respect to retirement, and 
one of our panelists did a study with the Employee Benefits 
Research Institute, and in that study, Mr. VanDerhei, only 14 
percent of Americans are confident they will be able to afford 
a comfortable retirement, and more than half of all workers 
reported they have not calculated how much they will need to 
live during retirement. And you are nodding your head in 
agreement. Those are pretty unbelievable numbers.
    I find out there--anecdotally, I have a friend of mine who 
is a lawyer who took a 401(k) plan and put it into an IRA, and 
then ultimately put his IRA into a real estate investment that 
he has a third party, pretty sophisticated and doing really 
well according to him, versus others who have not quite an 
understanding of how much--it has been talked about before--how 
much they can put in because of the contribution limits or what 
they can put it in.
    My question to all of you, and I will start here on my 
right, is whether it is simplification, whether it is reform, 
whatever it is--how do we get more Americans to change that 14 
percent number so they have a better understanding, and can 
make better choices, and can have that--so we can have that 14 
percent number be something substantial, like 75 percent of 
Americans feel they comfortably can live in retirement and 
understand what they need in retirement? How do we get there as 
policymakers? Starting here.
    Mr. HARDOCK. Well, I like to think of the American people 
as falling into three buckets. There are the folks who really 
aren't going to save no matter what you do. If you force them 
to save, they will borrow more money somewhere else. There are 
the folks I call the squirrels, who will save no matter what. 
That is my mother. And then there is almost everyone else, 
certainly including me, that want to do the right thing, know 
they need to save, doesn't know quite how to do it, doesn't 
want the government telling them how to do it, but want to do 
the right thing. Strategies like auto-enrollment and auto-
escalation send a signal to that vast group of people that 
these are the levels you should be achieving to get to 
retirement security.
    So, earlier Mr. Sweetnam talked about his son who felt that 
saving for his first home was more important. Well, my son is 
25 years old. He asked me, I want to buy a home, but I have 
this 401(k) plan at work, and there is a match. I said, put the 
money in the 401(k) plan first. And that goes back to the issue 
I mentioned earlier, people save for a purpose--for retirement. 
We need to set up structures and incentives that let people 
know how much to save, and we will see Mr. VanDerhei's savings 
numbers for the Gen X-ers and others start to go up even more. 
We need to start them young, get them involved and get them 
into the habit of saving, ultimately changing the culture of 
saving in this country.
    Mr. TIBERI. Thanks.
    Mr. John.
    Mr. JOHN. I actually have four thoughts on this. They will 
repeat, and I imagine you are going to hear much of the same 
thing here. Number one is obviously everyone has to have 
access. If you don't have access, we can talk all we want to 
about doing it on your own, but 95 percent of people don't.
    Second is, of course, start young. That is absolutely 
crucial with that.
    Another thing is the auto structures, auto-enrollment, and 
particularly auto-escalation. And one of the things that this 
Committee can do as part of its discussion of tax 
simplification, tax reform, is to look at the 3 percent default 
rate for auto-enrollment. There are a number of studies out 
there that show that people will have precisely the same 
participation rate if it is 5 percent, 6 percent and the like 
to start. People think that they are doing the right thing, and 
that 3 percent, since that is the way it starts, that must be 
the right amount for them to save, and they find themselves in 
a trap later on.
    Mr. TIBERI. Mr. Sweetnam.
    Mr. SWEETNAM. One of the things that we were looking at 
when we did our retirement simplification proposals is that we 
thought that we were trying to harness the industry to do a lot 
more advertising with regard to savings, and one of the things 
that we looked at was by eliminating the income restrictions 
for IRAs, that people--that there would be advertisements to 
get people to come in and do this.
    You know, we actually saw this happen when Congress enacted 
the Roth IRA. I was working on Senator Roth's staff at that 
time. And when the Roth IRA was enacted, we saw for all 
different types of IRAs additional savings because everybody 
was promoting it.
    Mr. TIBERI. All right.
    Chairman CAMP. Thank you.
    I see we are over the time. Mr. McDermott is recognized.
    Mr. MCDERMOTT. Thank you, Mr. Chairman.
    I think this is a very important hearing to have to talk 
about, and I agree, Mr. Tiberi and I probably come at the same 
concern over having people's security. But I fly back and forth 
from Seattle, where United Airlines has its largest base, its 
oldest base. Most of the flight attendants are about 55 to 60 
years old, and one of them told me a story, and I would like 
you guys to respond, and ladies to respond to this.
    Her husband worked for a big bank in Seattle, Washington 
Mutual, and one day they closed the bank, and he lost his 
entire 401(k). Boom, gone. All gone because it was invested in 
the bank. Right? Because he was required to invest it in the 
bank. Now she flies for United Airlines. They have gone into 
bankruptcy twice, and each time they go into bankruptcy, the 
first thing the bankruptcy judge does in response to the 
company's pleadings is to scrape off the retirement. So this 
woman who has flown for United Airlines for 29 years now has a 
guarantee of $231 a month from the PBGC on top of her Social 
Security.
    Now, here are middle-class Americans who did everything 
right, and they got clobbered by the system, and I want to hear 
that this automatic system that we are going to enroll 
everybody in is going to protect those people. This woman said 
to me, I and my husband are going to work until we die because 
we have nothing but Social Security.
    Ms. MILLER. I would like to take a first stab at that, 
because the situations you described are just horrible, and 
Congress has acted to prevent a company forcing an employee to 
put all their money into employer stock.
    That is no longer permissible. And that was--you know, the 
ability was phased out. And you guys did a great job on that. 
So hopefully that one won't happen again.
    I think the key on automatic enrollment is really all the 
defaults, and one of those defaults is investment. And in PPA, 
that was----
    Mr. MCDERMOTT. Let me stop you, though. You heard Mr. 
Tiberi talk about how many people know how to invest or 
understand, 14 percent.
    Ms. MILLER. Right. Uh-huh.
    Mr. MCDERMOTT. So how in the world can anybody sit up here 
and sensibly believe that we can design a system that says we 
are going to give all of you a choice, but only 14 percent of 
them understand what in the world they are in?
    Ms. MILLER. Most people don't take advantage of that 
choice; they will stay where you put them. If you automatically 
enroll them, they will stay in your default investment. So I 
think the key is having a secure and appropriate default 
investment. And again, there were changes made in PPA, and I 
think there has been a recent study----
    Mr. MCDERMOTT. Does that mean then, that the company, the 
small business or whatever, has certain places they could put 
the money that is safe? They will be restricted as well? Or can 
they do whatever they want?
    Ms. MILLER. They choose the provider, but the type of 
investment that is the default investment is defined. It is 
like a target-date fund. Or you could, frankly, that is 
something that you could be considering, what should that be? 
But there is ample evidence that whatever you say the default 
investment can be is where most people are going to end up 
putting their money.
    Mr. MCDERMOTT. So the automatic investment or the automatic 
enrollment would put it into something that is judged to be--by 
whom? Who would say that this is a safe investment? Because I 
would like to know who those people are.
    Ms. MILLER. You define the parameters in terms of the 
individual companies.
    Mr. MCDERMOTT. The Treasury will ultimately put the 
blessing, they will bless the company that is going to make 
these investments; right?
    Ms. MILLER. Right now, it would be the plan sponsor or if 
you are in--would be the one that is choosing their investment 
advisor, and the investment advisor, if they hire an investment 
advisor, would accept fiduciary responsibility--would have 
fiduciary responsibility for choosing a company that provides--
--
    Mr. MCDERMOTT. Who is on the hook if they made a bad 
choice?
    Ms. MILLER. The fiduciary that is responsible for that 
decision.
    Mr. MCDERMOTT. So any investment counselor would then be 
responsible for making the patient--the patient, I am a 
doctor--would be responsible for making the client whole?
    Ms. MILLER. Well, in theory. You know, fortunately, there 
aren't very many situations--now that employer stock is off the 
table--there aren't many situations where you have a company 
that the investment has gone down to zero. When you do have 
responsible people choosing investment providers, it is not--
there are--horror stories are more and more rare.
    Mr. MCDERMOTT. And the flight attendants, I should just 
tell them tough luck; $231 is what you are going to get?
    Ms. MILLER. The defined benefit system is a whole other----
    Mr. MCDERMOTT. It seems to me they ought to be connected 
somehow. Or we should take away the ability of the companies to 
take off the pension at bankruptcy.
    Chairman CAMP. Thank you. Time has expired.
    Dr. Boustany is recognized.
    Mr. BOUSTANY. Thank you, Chairman Camp, for holding this 
very important hearing.
    As we look at tax reform and the very equally important 
area of retirement security, I have taken away a few things 
just from all of this discussion: Number one being that, 
obviously, we need to look at how you can promote personal 
responsibility and savings. Second, whatever we do, I certainly 
appreciate the adage of, first do no harm how. So how do you 
avoid major disruptions? And thirdly, can we simplify yet 
maintain flexibility.
    And so, as I am trying to think through this, I remember 
when I was running a small medical practice and dealing with 
some of these issues after a full day in the operating room and 
focusing on the clinical side of my practice, oftentimes 
individuals come in to work for you, and they have worked 
somewhere else. They have a retirement account, multiple 
retirement accounts. And yet--and they may also have an IRA on 
top of that. And there are a variety of rules that govern this. 
And I remember having to make phone calls to figure out, how do 
you incorporate somebody into your business structure when they 
have had these other outside arrangements in the past.
    Talk to me about the rules, the complexity that these rules 
really present to a business owner trying to work with incoming 
employees and is this an area that we can really simplify? Any 
of you, please.
    Mr. HARDOCK. I will just start by saying that the problem 
you describe has been around for a while. The changes made in 
2001 on portability of assets allowed individuals to combine, 
when they switched jobs, assets from one employer plan to the 
next employer's plan--or an IRA to consolidate those assets in 
one plan. That was a major improvement and really streamlined 
the process and made it possible for a business owner to take 
those assets in for new hires.
    It is still complicated because you have items that may 
have been contributed as pre-tax dollars and others as post-
tax. Those are issues we have to deal with no matter what 
because they exist today and you can't take away someone's 
pretax treatment or post-tax treatment. But we have made 
enormous strides since 2001 in improving those rules.
    Ms. MILLER. Yes, I think there has been an awful lot of 
progress made. And I also think that if you look at the options 
that are available, these days you are more likely to have 
somebody that comes into your practice that also had a 401(k) 
plan at their other arrangement. And so there is a little more 
simplicity because I think sometimes when we talk about 
consolidation, then you are talking about a 403(b), 457, 
401(k); in the medical practice, maybe there was a 403(b), but 
as Randy said, the rules have been simplified to make that an 
easier process.
    But in most instances, you now will have somebody coming 
from a similar type plan to your current arrangement. And I 
think that really smoothes it. I do think--in our written 
testimony, there are some comments on rules that can be changed 
that make it a little easier for small business to not get 
themselves in trouble. And I think we should get rid of those 
rules that trip people up. Frankly, they are rules that apply 
whether it was an ERSA or 401(k). Just plain commonsense stuff.
    Mr. JOHN. And if I may add, the real serious problem is the 
fact that people forget to combine. I have actually an IRA that 
was rolled over from TSP 20-plus years ago, and I keep meaning 
to roll it into Heritage's plan, but I have yet to do that. 
What we see is we have a significant number of people who lose 
their accounts, especially over the years, whether employers go 
out of business, the providers change and the like. And there 
is some suggestion in my written testimony about a way to use 
tax information to enable people to find their lost accounts 
and to encourage them to combine them.
    Mr. BOUSTANY. Thank you.
    One last question. Are there incremental steps that would 
make it easier for employers to offer annuity options as part 
of a defined contribution plan?
    Mr. SWEETNAM. Well, I think that this is something that the 
IRS and the Treasury Department are currently looking at. And I 
think that it has been something that the policymakers are 
really looking to give people that ability to address, to use 
an annuity.
    Now I am not speaking for the current Treasury Department 
or the IRS, but I think what they have been trying to do is to 
eliminate some of the difficulties under the current law to go 
and to move into an annuity product. And that is something that 
I think policymakers have been looking at over a number of 
years.
    Mr. BOUSTANY. Thank you.
    Chairman CAMP. Thank you very much.
    Ms. Jenkins is recognized.
    Ms. JENKINS. Thank you, Mr. Chairman.
    Thank you for holding this hearing, and thank you to all 
the panel for participating. I have a question for you, Ms. 
Miller. The President's 2013 budget proposal includes a 
proposal capping certain individuals' itemized deductions to 28 
percent.
    Ms. MILLER. Right.
    Ms. JENKINS. And the limitation on deductions under the 
proposal include the exclusion or above-the-line deduction for 
pretax employee contributions to defined contribution plans and 
contributions to traditional IRAs. Given that the tax break for 
retirement savings is a deferral, not a permanent write-off, 
wouldn't limiting deduction on the front end but not when the 
amount is distributed result in double taxation? And what are 
your thoughts on how the President's proposal would affect 
retirement savings rates and also on small business owners' 
decision to set up or maintain retirement plans for their 
employees?
    Ms. MILLER. I appreciate that question.
    I was very disappointed to see retirement savings included 
in that proposal because you are right, it would be double 
taxation if you have someone who--because this is a deferral. 
So if you have someone who is at a 31 percent marginal rate and 
you are giving them 28 percent cap on that, then they are 
paying that 3 percent now. But when they pull it out, there is 
no special accounting. I am not saying there should be because 
that would be a wreck. But when you pull it out, they are 
paying taxes on it again. So it really literally is double 
taxation.
    And if you are being honest when you are talking to an 
employer, why would they want to put themselves in that 
position? So I do think it would be harmful and anything that 
reduces the tax incentive for a small business owner, to me, I 
think will discourage coverage.
    Ms. JENKINS. Okay. Thank you.
    Mr. Sweetnam, your testimony mentioned that following the 
Bush administration's proposal simplifying this area, many 
interested parties were concerned about the proposal resulting 
in fewer savings opportunities being available to small 
businesses, causing them to opt out of offering an employer-
based savings vehicle. You also mentioned that the 2005 budget 
proposal addressed some of those concerns. Can you just 
elaborate for us on what you heard during your proposal and 
what changes you made to the 2005 budget? And if Congress were 
to move forward to meaningful reforms, what are some of the 
transition rules that you might advise us to keep in mind?
    Mr. SWEETNAM. Well, the two big things that were problems, 
one, in 2004, we had the LSA and the RSA contribution amount at 
$7,500, and we reduced it to $5,000. And what we heard from 
some of the policy folks, particularly ASPPA being one, was 
that by having that high of a tax-favored savings amount, some 
smaller businesspeople might say, well, you know what, I can 
put in $7,500 in my LSA, $7,500 in my RSA. I have sheltered 
everything; I don't need any further savings through an 
employer-provided plan.
    The other thing that we did was in our ERSA proposal, we 
tried to simplify some of the nondiscrimination rules. And one 
of the things that we did was we eliminated all the various 
testing methodologies that are currently available, thinking 
that that was simplification. Well, as I think Judy has said 
before, one person's simplification is another person's 
opportunity to make various changes. And so we listened to them 
and what we did was we just reduced the general complexity of 
the test. We didn't reduce some of the opportunities that small 
businesses would have in order to create more flexible types of 
plans.
    Ms. JENKINS. Thank you.
    I yield back.
    Chairman CAMP. Thank you. Mr. Neal is recognized.
    Mr. NEAL. Thank you, Mr. Chairman.
    Mr. Chairman, I have had a long-standing issue and I think 
pretty strong credentials in this area. Just to recount 
quickly, I worked with Bill Thomas before he was Chairman of 
this Committee on raising IRS rates. As you recall, that was 
not a favorite of Mr. Rostenkowski at the time. And I carried 
the RSA proposal for the Clinton administration with Bob Rubin, 
recalling that the Clinton proposal in terms of differentiating 
itself from the Bush proposal was, the Clinton RSA proposal was 
as an addition to Social Security; the Bush RSA proposal was as 
a substitute for Social Security.
    And I have carried this auto IRA proposal for a long period 
of time. Now, I introduced this bill 5 years ago, and at least 
three of the panelists I know have already endorsed it, and I 
suspect the other two have some sympathy for it. Now this 
proposal would raise the national savings rate by nearly $8 
billion a year. Endorsed by Brookings and now with hard work 
from David John and The Heritage Foundation, we have developed 
this proposal. I have kidded David many times; it is not every 
day that a Massachusetts Democrat's legislation is endorsed by 
The Heritage Foundation. We have done just that.
    Let me tell you who else supports this legislation: The 
AARP, Latinos for a Secure Retirement, the Black U.S. Chamber 
of Commerce, Putnam Prudential, Natixis. And I must say with 
some grave disappointment, since Phil English left, I can't get 
one Republican to sign on to this legislation.
    Mr. Herger I thought was headed in the right direction. He 
was headed in the right direction as he began to question Mr. 
John. He couldn't bring himself to say it was the Neal 
proposal, but came very close to going to the altar without 
saying ``I do.''
    Now, David, why does Heritage support this proposal?
    Mr. JOHN. Heritage supports this for two reasons. And we 
have enjoyed working with you over the years. Although, for 
some of my colleagues, it has been a little--I tell some of 
them I just went to a bar.
    I have also enjoyed working with your staff, both Melissa 
initially and Kara Getz now.
    Conservatives support the auto IRA for two very good 
reasons. Number one is that savings changes behavior. It takes 
people and it brings them closer to the community. It makes 
them more future-oriented and makes a variety of cultural 
changes that are very important.
    A second one which is equally important, crucial that every 
American has the opportunity to save, is the alternative: If we 
don't have a retirement savings system that applies to all and 
allows people to start at one company and move to another and 
continuously save, inevitably, we are going to see the data 
that Jack had initially, where people do not have sufficient 
retirement savings, and they are going to come to Congress, and 
they are going to say: Please, sir, we need more taxpayer 
benefits. We don't have the money for that right now.
    Mr. NEAL. Also endorsed by The Brookings Institution, that 
is important.
    Ms. Miller, could you tell me why you have endorsed the IRA 
proposal that I have offered?
    Ms. MILLER. Yes, we are very supportive because it really 
does build on the current employer structure. And we think once 
employers--first of all, people need to have an opportunity to 
save at work and you just can't do that without having the 
employer involved. When you get over that hurdle, then we feel 
that once employers are used to doing payroll deductions and 
feel comfortable with that, it will be easier to approach them 
and say, listen, you have been doing this; can you afford to do 
a little more? Maybe a simple plan would work for you or a 
401(k). And once they are in the system, they will more 
comfortable moving up and providing some employer contributions 
as well.
    Mr. NEAL. It would require no matching contributions from 
the employer.
    Ms. MILLER. It would require no matching contributions from 
the employer. And just the way--you know, 30 years ago, it was 
a different story, but right now with the development of 
electronic systems, it would be so easy and so little trouble 
for the employer to make this work.
    Mr. NEAL. Particularly good for the small employer.
    Mr. Hardock, why do you like the proposal?
    Mr. HARDOCK. The good thing about the proposal is that it 
sends a signal that we need to get more employers into auto-
enrollment and auto-escalation. The proposal is one way to move 
in that direction.
    As Dr. John indicated, providing incentives to employers to 
do that--making it attractive to employers to go in that 
direction--is something that I think is well worth exploring. 
Providing those incentives, getting more employers to do it, 
and giving employees that option of the auto IRA if they don't 
have a plan of their own, is valuable. So it expands the reach.
    I think there is a question of how quickly you can get 
there.
    Chairman CAMP. Thank you.
    Mr. Buchanan is recognized.
    Mr. BUCHANAN. Thank you, Mr. Chairman.
    And I also want to thank our witnesses today.
    As you know, we have 10,000 Baby Boomers retiring every 
day, they claim, for the next 30 years, 20 years. But a lot of 
them are very uptight, frankly, about planning on retiring with 
all of these concepts that they had, and now they are getting 
to the point where they can retire, 60, 65; they don't know if 
they are going to have enough money, if they are going to get 
the return on their assets because they like to put them in 
more conservative assets going forward. And then the other 
thing is they are not sure, maybe at one point, they thought 
they were going to live to 75; now my mother-in-law is 92. They 
are all concerned about it.
    What can Congress do, do you think, if anything, to help 
bring a little bit more security and dignity? What incentives 
or what would be one thing that we could do that we are not 
doing to make a difference? I can tell you I am slowly getting 
to that age, and a lot of our friends who thought they were 
fine 10 years ago in terms of retirement are very, very 
concerned today. They are working longer; they are not sure. 
Any thoughts on that.
    I will start with you, Ms. Miller.
    Ms. MILLER. Yes, thank you. When we are talking Baby 
Boomers with such a short timeframe, I think one thing that you 
should do is, when you are looking at tax reform, keep those 
catchup contributions in. Because as a Baby Boomer, I can say 
that I am a lot more conscious of how much I need to save now 
that it is too late. And it would be very good to keep those 
options there.
    I think looking further down the road, it is really 
important to engage younger people. And automatic enrollment 
and auto-escalation are critical.
    But I also think we need to look more at e-delivery of 
things. We are all very supportive of all sorts of disclosures, 
but when people get a stack of paper, they don't necessarily 
look. And if we could approach people more with something that 
is interactive, it could be easier for them to plan, easier for 
them to get engaged, and they really would like you to enable 
more electronic delivery.
    Mr. BUCHANAN. Mr. John, would you comment?
    But let me just mention, I was reading in USA Today, they 
were talking about where they are at in terms of retirement. I 
think it was 60 percent, an enormous number, that was just 
relying on Social Security, and they don't have much beyond 
that. It is pretty scary to think you worked 40 years of your 
life, and there is not something in place. Do you have anything 
you want to add to that?
    Mr. JOHN. Let me add two things if I may. First, of course, 
is to take this as an object lesson. The fact is if you reach 
55 or 60, you don't have nearly the flexibility that you used 
to have. And we need to make sure through the auto IRA and a 
wide variety of other things to make sure that this doesn't 
happen to the next generation.
    But we have a second crisis that is coming with the Baby 
Boomers. The first one is going to be not having enough money, 
and the second is not managing it properly so that they run out 
of money at the time when they are 80 or 85. We need to very 
carefully examine the question of guaranteed lifetime income, 
annuity type products, whether they are ones that kick in at 
the age of 80, whether they are ones that are purchased at the 
time of retirement, to make sure that we don't have the same 
individuals who are worried now even more worried when they are 
85 and their bank account is empty.
    Mr. BUCHANAN. Let me ask one more quick question just in 
terms of Congress helping small business. I am concerned there 
are a lot of small employers out there where employees would 
like to have some kind of retirement; they don't offer it. 
What--you know, that is tax deductible--what incentive can we 
help with small businesses in terms of making sure that as many 
of them as possible would provide some kind of retirement 
package, 401(k) or whatever else that is available out there?
    Mr. Hardock, do you have any comments on that?
    Mr. HARDOCK. I think many Members of this Committee, both 
Republicans and Democrats, have supported incentives, for 
example start-up credits for small business to send the signal 
that if you set up this kind of plan the government will help 
you with that initial administrative expense. I think doing 
more on that front would be helpful.
    I think Mr. Neal now has a bill in. But others on this 
Committee have in the past supported that concept, and it could 
easily be expanded on because that is where our problem is. 
Small businesses that are not covering their employees partly 
because of the costs. Electronic delivery would help there, 
too. It is amazing how expensive it is to send out all of this 
paper.
    Mr. BUCHANAN. Thank you.
    Mr. Chairman, I yield back.
    Chairman CAMP. Thank you.
    Mr. Marchant is recognized.
    Mr. MARCHANT. Thank you, Mr. Chairman.
    Mr. VanDerhei and Ms. Miller, you both state in your 
testimony that despite what some may claim, studies show that 
current tax incentives for savings for retirement are quite 
progressive. What would be the effect on progressivity if you 
lowered the top marginal rate to 25 percent?
    Ms. MILLER. That is a very complicated question and depends 
in part on what else you have done when you have lowered that 
marginal rate to 25 percent. I mean, it is a fact that as the 
top rate declines, there is less incentive for tax deferral 
because you are saving less money when you contribute. But 
there are other competing ways to save. It depends in part on 
what is happening with capital gains and dividends. If you have 
no tax to be paid on an investment, as David would like to see 
generally, then it becomes very difficult to incentivize an 
employer to put in a plan unless you specifically have a 
targeted tax credit or some other specific benefit to encourage 
that employer to put in a plan.
    So I think that this is something that is particularly 
sensitive to what else is happening. But it is true that as the 
rate declines, the incentive, cash that is freed up by putting 
it in this plan, also declines. So you have to be careful not 
to give it a double hit certainly by also--maybe you need to 
increase the contribution limits in order to maintain an 
incentive there for employers to put in plans.
    Mr. MARCHANT. Thank you.
    Mr. VANDERHEI. I agree with what Judy said and would like 
to amplify it a bit. We had done some work last summer looking 
more at the Simpson-Bowles type proposal, but a lot of that 
could be expanded to this type of proposal. If you are reducing 
the marginal tax rates, especially for the small business 
owners, you are changing the calculus of what their cost-
benefit analysis is of providing that to the employees. And 
Judy has in her written testimony a graph that we worked on 
last year that actually shows--I believe we had as much as an 
11 percent decrease in the number of small plans, defined as 
plans with less than 100 employees, because of the 20-20 
limits. If that is something you would be interested in, we 
could very easily modify that to look at what the impact of 
decreasing marginal tax rate would be apart from the 
20-20 limits. I could get back to you on that if you are 
interested.
    Mr. MARCHANT. I think we would be interested in that in all 
our proposals, that that tax rate be capped at 25 percent. And 
for Mr. John, what would be the overall effect on retirement 
savings of adopting the 20-20 proposal as was proposed by the 
Bowles commission?
    Mr. JOHN. I am not a micro or macro economist, so I have 
not really modeled it. I usually tend to defer to Jack on 
issues along that line.
    Mr. MARCHANT. Okay. Well, Jack.
    Mr. VANDERHEI. The 20-20? Actually, we have a figure in the 
written testimony that takes a look at what would happen. I 
don't think, surprisingly, the biggest hit would be on the 
highest income quartile. We found, for example, that people 
currently 36 to 45 if it were applied today would have a 15 
percent reduction on average in their retirement balances. What 
I think comes as a surprise to many, though, is that the second 
biggest hit actually comes on the lowest-income quartile and 
that is because of the 20 percent, not the 20,000. And one 
thing that many people ignore is that oftentimes, people will 
come back into the workforce later on in their age. They may be 
a spouse, and they may find that because of catch-up or 
whatever, they have the ability to put much more of their 
income in. We find that they are the ones who typically end up 
triggering the 20 percent as opposed to the high income, who 
trigger the 20,000. But even for what we found for 36 to 45, 
almost 10 percent for the lowest-income quartile, 10 percent 
reduction in average account balances because of 20-20.
    Ms. MILLER. I think that is actually understated for the 
lower paid, because small business owners, they would have 
about zero incentive for putting a plan in, and the safe harbor 
contributions they make for rank and file workers would be 
gone. And so I think that really understates the negative 
impact.
    Mr. MARCHANT. Thank you, Mr. Chairman.
    Chairman CAMP. Thank you.
    Mr. Thompson is recognized.
    Mr. THOMPSON. Thank you, Mr. Chairman.
    And thank you for holding this hearing. I think it is 
extremely important, and it is an area where we ought to have a 
lot of common agreement. This is something we can actually do 
to help people. A lot of young folks out there who could really 
benefit from good work that this Committee could do.
    I want to follow up on a couple of questions that were 
asked by other Members. Mr. Buchanan asked about what to do to 
encourage small business folks to participate.
    Ms. Miller, in your written testimony, you mentioned that 
employers who don't offer any sort of retirement plan for their 
employees cite business concerns. Could you elaborate on what 
those business concerns are? And did your research show any 
downturn or any of the folks who were offering it, did they 
jettison those programs during this recession?
    Ms. MILLER. Sure, I don't have any data on that last piece, 
although our members certainly anecdotally if a business goes 
out of business, obviously, the plan is gone. And certainly as 
a small business, when your resources are drained, you will cut 
back on contributions if nothing else.
    But when employers say they are not putting a plan in for 
business reasons, there are a few that are top line reasons. 
One is that they don't think the employees care. And if the 
employees say, give me cash, then the employer would rather 
just give them cash if they have it.
    The second is that small businesses are notorious for not 
lasting very long. And if you aren't sure you are going to 
survive, then you are hesitant to do something that really 
says, hey, I have arrived, I can plan long term, too.
    And the third is the cost. I think there is--some employers 
don't understand how inexpensive it is to actually set up a 
plan. But most commonly the issue is that they don't feel they 
can afford to make a contribution or to promise to make a 
contribution. And that is why really we are supportive of the 
auto IRA proposal, because it could get employers in without 
out-of-pocket costs themselves. And we think that they will 
find that employees do actually appreciate it, and we can get 
over a couple of hurdles at the same time.
    Mr. THOMPSON. I think Mr. Neal's bill would speak to that 
issue.
    Ms. MILLER. Absolutely. Yes. Yes.
    Mr. THOMPSON. For public record, I told him a minute ago 
that I would coauthor the bill. I think it is a good one.
    Mr. John, you have done some research on retirement savings 
plans in other countries. Was there anything there that really 
knocked your socks off?
    Mr. JOHN. There were actually a couple both good and bad. 
If we look, for instance, at New Zealand, New Zealand has a 
form of the auto IRA, but given the fact that they only have 3 
million people, it is a much more centralized form. But it 
works exceedingly well early on.
    The one that is a huge mistake is the United Kingdom. The 
United Kingdom went through and back in 1997, then Chancellor 
of the Exchequer, Gordon Brown, increased the taxes of 
retirement plans by about 5 billion pounds a year. The net 
result obviously was a collapse. The second thing they did was 
the U.K. continuously tinkers. They come up, they set up a 
program, they actually have a brilliant program called NEST, 
National Employment Savings Trust, that starts to go into 
effect this fall, except that the government just announced 
within the last week or so that now they are looking at a 
completely different approach. And what that does is to breed 
confusion and distress.
    Mr. THOMPSON. Is there anything that we should take from 
the different foreign programs that you evaluated and look at 
putting in place here?
    Mr. JOHN. The ones that work the best are the ones that 
have the broadest coverage and start people young and keep them 
saving throughout. Australia has a mandatory system which works 
exceedingly well. I am not suggesting that the United States 
move to something along that line, but the broader the 
coverage, the better it is. And it is possible to do a very 
simple system, like the auto IRA, and keep it cheap. Frankly, 
we studied overseas systems very extensively in developing it.
    Mr. THOMPSON. Thank you all very much for being here.
    Thank you, Mr. Chairman.
    Chairman CAMP. Mr. Berg is recognized.
    Mr. BERG. Thank you, Mr. Chairman.
    You know, obviously, the goal in this whole thing is, how 
do you make it simple and easy to pick the right plan for each 
individual? And you know, obviously someone's understanding of 
financial markets and what is best for them and trying to make 
a lifelong decision rather than a short-term decision, so I was 
intrigued by the automatic IRAs.
    And in part of your testimony, Mr. John, you talked about 
simplifying things but also having an automatic IRA. So kind of 
my question to you, does the simplification come first, or do 
you do the automatic IRAs and then simplification after that?
    Mr. JOHN. I anticipate that, given the direction of things, 
that the auto IRA comes first. The auto IRA is crucial, because 
if people don't save, if they do not get started early on, it 
doesn't matter if you simplify or not.
    Mr. BERG. Thank you.
    I just had one kind of out-of-the-box question. And it 
seems like so many people are going through a lot of different 
jobs today and sort of the new normal is several different 
careers, several different jobs. And a lot of younger people 
that I know have been to two or three different employers in a 
short period of time. So each time you are trying to analyze 
what is the best retirement program? Here is what the employer 
is offering. Has there been anything done like out of the box 
and looking at a plan that would just be an individual's plan, 
and this plan would follow the individual, even though they are 
an employee but, again, they would make the decisions on what 
is the right package for them for their working career? And as 
they went in and out of different careers and different jobs, 
those employers might pay into their individual plan rather 
than the employer sponsoring a separate plan?
    Mr. JOHN. There have been some examinations of that sort of 
thing, but the key factor is that most people, especially when 
they are starting out, don't have the expertise to make that 
kind of choice. And the natural human reaction when you are 
faced with a choice that you don't understand is that you do 
nothing. So people stop. That is the value of both an employer-
sponsored plan, where you have the payroll deduction and the 
auto-enrollment and the auto-escalation. And what we find as 
time goes on that a certain proportion of people who started 
out in auto-enrollment later learn and take more control over 
their activities.
    Mr. BERG. Any other comments on more of an individual plan 
that follows an individual?
    Ms. MILLER. I think it is very hard to motivate an employer 
to participate in that kind of an arrangement, because the 
employer, once they feel financially secure enough to put in a 
plan, they are looking at the tax benefits. They are also 
looking at what works for their company. And what sometimes, I 
think, gets forgotten in talk about a single, simple plan is 
that employers will use--they still use vesting schedules. If 
they are putting in a contribution for workers, it might be 
fully vested because it is a safe harbor, but if there is 
something more than that, they don't like the idea of giving 
money to somebody that is coming and going right away. And so 
the money won't necessarily all be vested right away. And it 
will vest after a few years, or maybe a graduated schedule, it 
is 5 years.
    So that really doesn't work when you have an individual 
account. And so there are things that employer--flexibility 
that the employer has under an employer-based arrangement that 
would disappear and I think make them less engaged.
    Mr. BERG. Thank you.
    I yield back.
    Chairman CAMP. Mr. Reed is recognized.
    Mr. REED. Thank you, Mr. Chairman. To follow up on Mr. 
Berg's sentiment, one of the issues I see is the need--we talk 
a lot about employers and the government here in Washington 
being the ones to choose best what individuals should do with 
their futures, especially when it comes to retirement. And we 
kind of have this attitude up here sometimes that I try to 
fight every day that Washington knows best; just trust us, we 
will take care of it. And I want to get to ways to try to 
enhance individual accountability and responsibility for 
people, allowing them to control their own destiny.
    So are there things that we could be doing to encourage 
literacy when it comes to financial planning? Any ideas, 
thoughts from the panel as to where we could really change the 
mindset of individuals as they go into the workplace of 
actually being aware that 20, 30 years will come, and we need 
to have something in the bank to take care of us? Are there any 
proposals that anyone could share with us that they would say 
we should be taking a real close look at and advancing?
    Ms. MILLER. I have to get back to electronic delivery and 
really getting people engaged. There are some amazing things 
going on out there in terms of enrolling people and having 
their own individual information set up on their iPad or 
handing them out when people come in to get enrolled and 
letting them work through and see what it is really going to be 
like.
    And yet there are constraints on how everything has to be 
handled right now that minimizes what you can do. And so it 
almost ties--you know, this market is incredibly competitive 
and creative and can't always get to do everything it could do 
because----
    Mr. REED. Could you give me some examples of those 
constraints? When you say there are constraints, are they 
regulatory constraints?
    Ms. MILLER. Yes, regulatory constraints. For example, right 
now, we have all of this paper that is due out for disclosure 
on investments, and it is going to be--we support the 
disclosure, but people are going to be getting a stack of 
paper, and I don't think they are going to read it.
    And if you were able to--if you had their email address, I 
mean, we give people at work an email address. You can't 
necessarily use that if they aren't--you know, that is not a 
routine part of their job and all of this other stuff and even 
though they may have used our Web site. So if somebody uses the 
Web site, you should be able to drive them to that Web site to 
get this information. Once they are there, there are fun things 
you can do. There are people working on games to encourage 
people to save. We need to really be able to get them involved.
    But right now, you have to send them that stack of paper 
unless they went through certain steps. And it is just really a 
major expense, and it really discourages creativity and truly 
engaging people, especially younger people that are so much 
into electronics. If we can't deliver this information on their 
iPhone, they are not reading it. And right now, we can't.
    Mr. REED. Mr. John, I see you nodding over there.
    Mr. JOHN. I agree with everything that Judy has said, as I 
usually do.
    But there are other areas--for instance, the U.K. has 
something called the Platform Account, which combines the 
retirement savings account with a variety of other types of 
savings and investment vehicles. And one of the things that 
they have found that works exceptionally well over there is 
that because the employer knows how old this employee is and in 
what stage of life they are, they can shoot them little target 
videos. So if the individual has just got a child, they can 
shoot them a video talking in 2 minutes about, here is what you 
can do to start saving for your child's future. Or if you just 
married, here is what you can do to start saving for a house. 
And we found in studies that these work exceptionally well, and 
they work even better if the person who is being recorded is 
someone that is someone like a coworker or someone who has some 
sort of a connection to that individual.
    Mr. REED. How about in the educational, like our high 
schools, elementary school? Any thoughts on that type of forum?
    Mr. JOHN. Yes, my older daughter, who is 25, went through 
one of the finest high schools in the United States up in 
Montgomery County. And she took a variety of courses in 
photography, cooking with amazing results, and I think she 
didn't have to take a single financial literacy course.
    Mr. REED. That is a great point.
    With that, I yield back, Mr. Chairman.
    Chairman CAMP. Thank you.
    Mr. Lewis is recognized.
    Mr. LEWIS. Thank you very much, Mr. Chairman.
    Mr. Chairman, I want to apologize to members of the panel. 
I had to run out and speak to a group of eighth grade students. 
So they kept me for a while.
    I heard your testimony, and I want to thank you all for 
being here. And thank you for your service.
    Ms. Miller, it is good to see you again. Thank you also for 
all that you do.
    Ms. Miller, many of the people who criticize or question 
our tax incentives for retirement savings argue that they are 
for the wealthy. They say that these laws favor high-income 
people. In your experience and research, do you find this to be 
true? Do you have any ideas as to how we can further increase 
participation among lower- and middle-income workers? How can 
we make it easier for people to save for retirement?
    Ms. MILLER. That is a very good question. I think if you 
look at the retirement savings incentives, first of all there 
is a cap on compensation that can be considered. It is at 
$250,000. So when we hear a lot of talk about let's cut 
incentives for people who make over $250,000, I cannot help but 
think, we already cap it. We can't include compensation over 
$250,000.
    That applies also when you are testing for 
nondiscrimination. So somebody might make a million dollars, 
but when you are comparing their percentage of pay in this plan 
to the lower-income person's percentage of pay, you use the 
$250,000. So we already have something that is built in to 
limit that.
    The nondiscrimination rules generally will say that if the 
business owner wants to put in the maximum of $50,000, those 
workers are going to be getting a contribution; 3 percent, 5 
percent, you know, depending on the arrangement. They are going 
to be getting the employer money. And it really is additional 
money.
    There have been some people who will say, oh, they would 
have been getting that as pay anyway, but there was a really 
good recent look at this by Eric Toder and somebody else, I 
forget, showing that for lower-income groups, if there is a 
401(k) plan, it is new money. It is largely new money. They 
have like 89 percent, but for small business, it is more like 
100. It really is additional money.
    So I think these nondiscrimination rules do that. It is a 
matter of getting access to more people, and that is why we are 
strongly supportive of something like the auto IRA program, 
that would make these arrangements available to more workers 
and just grow what we have here.
    Mr. LEWIS. Mr. Sweetnam, you mentioned that in another time 
in another period, that the banks would stay open. And I 
remember rushing down to the bank when I was much younger, had 
all my hair, with my wife before the banks closed to get a 
$2,000 IRA. What happened to that spirit? What happened? Should 
we bring it back?
    Mr. SWEETNAM. That was one of the things that we proposed 
doing in the Bush administration simplification proposals.
    What happened was that we put income limits on who could 
make contributions to IRAs. So when you and I were seeing the 
lines going in and the banks staying open, it meant that 
everyone could make a $2,000 IRA contribution. Now, everyone 
cannot make a $2,000 or--can't make a deductible IRA 
contribution. It depends on what their adjusted modified 
adjusted gross income is and whether they are an active 
participant in an employer plan.
    You will see in my testimony, I have two pages worth of 
charts that talk about who can and can't make contributions. 
Before, you didn't have that, and everyone could go in, and the 
banks could say, come on in, and we will set up your IRA. That 
is the difference. That is the difference now.
    Mr. LEWIS. Thank you.
    Mr. Chairman, could I yield the balance of my time to the 
gentleman from Oregon?
    Chairman CAMP. There is only 30 seconds left, but you will 
get your own time in a few minutes.
    Mr. BLUMENAUER. Then I will wait.
    Chairman CAMP. Mr. Paulsen is recognized.
    Mr. PAULSEN. Thank you, Mr. Chairman. We have had a lot of 
good discussion. I appreciate the testimony in the hearing. One 
thing that we haven't talked about is ESOPs, Employer Stock 
Ownership programs that enable workers to accumulate 
substantial amounts of retirement savings, as compared to some 
of these other defined-contribution retirement plans. And there 
are studies that even show that the value of the retirement 
accounts of an employee that works for, say, an S ESOP, as an 
example, for that firm, would average $100,000 in 2008, and you 
compare that to only about a $45,000 average of an employee 
with an average 401(k) account. So I think these statistics 
definitely show that ESOPs have been tremendously successful 
when it comes to helping workers save for retirement.
    Mr. Sweetnam, if I can just ask you, should Congress make 
sure that we protect ESOPs in the context of successful 
retirement savings vehicles as we tackle tax reform and also 
attempt to simplify the defined-contribution retirement system 
as well?
    Mr. SWEETNAM. When we looked at the retirement 
simplification when I was part of the Treasury Department, we 
thought that the ESOPs worked perfectly fine, and we didn't try 
to modify them at all. I have dealt with ESOPs and S ESOPs over 
my career, and they have provided very good benefits for 
people. So I think that one of the things you are hearing from 
everyone here is that we shouldn't be cutting back on 
retirement benefits and ESOPs and S corporation ESOPs are an 
important benefit, and I think that everybody is fine with 
continuing on.
    Mr. PAULSEN. Ms. Miller, you are nodding your head a little 
bit, too. But should ESOPs or S ESOPs be used, that structure 
serve a little bit as a model for tax reform or just having 
that encompass?
    Ms. MILLER. I think that it is important to maintain them. 
I am not sure that I could say they are a model because when 
you are dealing with an employer and what they should be doing, 
when it fits a situation, it is a wonderful thing, but it 
doesn't always fit a situation. I think it sits alongside other 
retirement programs.
    Mr. PAULSEN. Let me ask a question for some of the other 
panelists, too. There has been a lot of mention of some of the 
current--or some mention, I should say, of some of the current 
law, the nondiscrimination rules that apply to 401(k) plans 
that make sure that lower-income workers also can benefit from 
these plans. Can you talk a little bit about how these rules 
work from the perspective of how a tax incentive could help the 
owner of a small business afford the contributions that would 
be required for those type of rules? Anyone?
    Ms. MILLER. I can speak to that. I think, most commonly, if 
you are dealing with a small business who has--probably their 
accountant has said, go see so-and-so about putting in this 
retirement plan, and they have gotten to the point where they 
are finally making some money, and they are coming to the end 
of the year, and they are going, wow, I have this $30,000 
sitting there. I am going to take it out as a bonus, and I am 
going to pay all sorts of income tax on that money.
    You can show them if they put in a qualified retirement 
plan and make a contribution for themselves and save on that 
for income tax purposes, they can use some or close to all of 
that tax savings to make the required contributions for other 
people. And that way, then you say to them, okay, you can take 
this bonus home and you can write out a check to Uncle Sam for 
28 or 31 percent of it or 36. Or you can put in this plan and 
give that money--you find out the receptionist's name when you 
go in, of course, you can give that money to your employees. 
And most times, they are very eager to have retirement savings 
themselves and help their employees save as well. So that tax 
incentive, though, is a key part of it. You have to show them 
how it can be better used than to just take it home.
    Mr. PAULSEN. Anyone else?
    Thank you, Mr. Chairman.
    Chairman CAMP. Mr. Blumenauer is recognized.
    Mr. BLUMENAUER. Thank you very much, Mr. Chairman.
    I apologize, I have been in the Budget Committee defending 
the interests of the Ways and Means Committee.
    Chairman CAMP. Thank you for that service.
    Mr. BLUMENAUER. It is a pleasure.
    And I am sorry that I was not able to be more of a part of 
this. I had a chance to review some of the material. It strikes 
me as something that would be--our time is well spent. With all 
of the vagaries that are surrounding tax changes, some of the 
budget pressures, retirement security seems to me to loom very 
large.
    And I appreciate advice and admonition from the panel 
members about looking at the big picture, about things that 
encourage employers to provide a range of choices. I know at 
times, it may be bewildering, which is why I have supported the 
automatic IRA enrollment. It is why I am a lead cosponsor on 
the ESOP; where it is appropriate, it is very powerful.
    But I was struck by something Mr. John said about the 
experience in Great Britain. Be careful about tinkering--about 
taking an already confused and confusing system and, with all 
the best of intentions, changing it again.
    It seems to me that with your help and advice, and Mr. 
Chairman and the Committee, zeroing in on things that truly are 
refinements, not sea change, I am willing to explore all sorts 
of modifications in the Tax Code, including in some cases, 
raising taxes on myself and others. But I think that the 
investments that have been made in the Tax Code to incent 
retirement savings, insurance, these are things that a lot of 
people are relying on. These are things that it takes a while 
for the consumer to be educated. And there are opportunities 
for a whole host of unintended consequences if we are not 
careful.
    So I just wanted to express my strong support for the 
Committee working on this for the advice and counsel about 
refinement at a time when Americans have hit choppy water 
economically; where millions of people have lost what they 
thought was the value of their home, maybe it was artificially 
inflated, but they borrowed against it, and they were counting 
on it; where retirement savings and college education accounts 
have been diminished.
    I think the advice that we are getting here about 
refinement, not tinkering, moving forward is well taken. And I 
hope it is something that we can work on together to strengthen 
these retirement opportunities, send clear signals, 
automatically enroll, incent innovative approaches but have 
continuity and follow through. It seems very, very important to 
me.
    And I appreciate the courtesy. I am sorry I wasn't with you 
more, but I think your contribution is very important, and this 
hearing I think is very important.
    Thank you very much, Mr. Chairman.
    Chairman CAMP. Thank you very much. And to another Ways and 
Means Member who also serves on Budget Committee, Dr. Price.
    Mr. PRICE. Thank you, Mr. Chairman, and I, too, apologize 
for not being here for the entire hearing.
    I want to thank you for your testimony on what is, I think, 
an incredibly important issue. And I want to hone in, and it 
may have already been discussed, but ask Mr. VanDerhei and Ms. 
Miller, if you would, my sense, the small business folks at 
home, people that I talk to tell me that there are impediments 
and obstructions into both the employer and the employee being 
able to contribute to what might be a more open, flexible, and 
I think you called it creative plan. Ms. Miller, if you had to 
identify the greatest impediment that the government puts in 
place to either the employer or the employee for setting up a 
flexible, responsive retirement plan, what would that be? Mr. 
VanDerhei.
    Mr. VANDERHEI. Well, I will focus on the responsive part of 
that. One of the major improvements we have had in the 
retirement system in this country, certainly since 2006, is the 
increased adoption of automatic enrollment and automatic 
escalation of contributions. For a variety of reasons, a number 
of employers have adopted a safe harbor approach, this 
automatic escalation, which unfortunately currently has a 
maximum cap of 10 percent.
    I think if you talk to most financial planners, they would 
say that in addition to what the employer is probably matching, 
perhaps 3 percent, you need, especially for employees who are 
starting this process late in their careers, something more 
than just a 10 percent contribution per year, and I think if 
there were ways to not only, first of all, have employers 
increase the default contribution rate, as David had already 
mentioned, from perhaps 3 percent to 6 percent or more, but to 
allow those employees who want to automatically allow their 
contributions to escalate over time, to go beyond the 10 
percent.
    Mr. PRICE. You would increase the cap?
    Mr. VANDERHEI. Yes.
    Mr. PRICE. Increase the cap.
    Mr. HARDOCK. Mr. Price, on that same issue there is some 
data in our testimony that shows that when you do that, it is 
like telling your kid a C is a good enough grade, you will get 
a C. If you tell him an A is the grade you want, you are going 
to get closer to an A. And then the data we have seen shows 
that if you set that bar higher, even the people who don't do 
the automatic escalation do more because they see the bar, and 
they say, oh, that is what I am supposed to do.
    Mr. PRICE. Ms. Miller.
    Ms. MILLER. Yeah. I think one important point to make here 
is that auto-enrollment isn't as popular with smaller employers 
as it is with larger ones, and the reason is that it is too 
easy--practitioners don't recommend it to them because it is 
too easy to trip up, and then you get hit with penalties on it.
    And I think we need to take a look at some issues that 
would make it easier for small employers to do this kind of 
thing without incurring additional expense. And, you know, an 
example is if you are automatically enrolling, then when 
someone completes their year of service, you sign them up. With 
a small business, sometimes you forget that, that date passes, 
and you didn't do it, and you get to the end of the year, and 
whoever is doing your retirement plan work says, oh, so-and-so 
should have been enrolled. Well, if they happen to only have 
missed a few months, that is okay, you can get them signed up, 
but if they were out for close to a year, the small business 
owner, to do this automatic--this safe harbor correction not 
only has to put in whatever match they would have made, but 
they have to put in the automatic enrollment contribution, too, 
so the employee got their salary, but they also get the 
employer money. And it just is so much hassle that they just 
don't want to bother, and that makes no sense. If they have to 
make the match, yes, but not to have to put the contribution 
in.
    Also, small business deals with top-heavy rules where if 
over 60 percent of benefits are for key people, then there is a 
minimum contribution of 3 percent of pay, which is fine, but if 
the owner wants to be nice and let everybody contribute to the 
plan, even if they haven't had a year of service in, suddenly 
they have to make the contribution for everybody, which, as I 
mentioned, if they are going to be short term, they really 
don't want to. So they really are constrained by some of these 
things that are particularly difficult for small business and 
really would be pretty easy to clean up.
    Mr. PRICE. Thank you.
    My sense is that there has to be a right balance between 
this competitive and creative market that we want out there and 
regulation.
    Ms. Miller, would you say that that balance has been struck 
right now, or are we out of balance?
    Ms. MILLER. There is room for improvement, let me--
definitely room for improvement.
    Mr. PRICE. Great.
    I thank you. I would appreciate each of the panelists, if 
you desire, to follow up on that score, identifying those areas 
where the regulatory environment is actually less helpful to 
employers and employees.
    Thank you, Mr. Chairman.
    Chairman CAMP. Thank you, Dr. Price.
    Again, I want to thank our panelists for excellent 
testimony today. Some good information was transmitted to us as 
many good points were made. And with that, this hearing is now 
adjourned.
    [Whereupon, at 12:06 p.m., the Committee was adjourned.]
    [Submissions for the Record follow:]

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