[Senate Hearing 112-812]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 112-812
 
   THE POWER OF PENSIONS: BUILDING A STRONG MIDDLE CLASS AND STRONG 
                                ECONOMY 

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

                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

  EXAMINING PENSIONS, FOCUSING ON BUILDING A STRONG MIDDLE CLASS AND 
                             STRONG ECONOMY

                               __________

                             JULY 12, 2011

                               __________

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                                Pensions

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          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                       TOM HARKIN, Iowa, Chairman

BARBARA A. MIKULSKI, Maryland              MICHAEL B. ENZI, Wyoming
JEFF BINGAMAN, New Mexico                  LAMAR ALEXANDER, Tennessee
PATTY MURRAY, Washington                   RICHARD BURR, North Carolina
BERNARD SANDERS (I), Vermont               JOHNNY ISAKSON, Georgia
ROBERT P. CASEY, JR., Pennsylvania         RAND PAUL, Kentucky
KAY R. HAGAN, North Carolina               ORRIN G. HATCH, Utah
JEFF MERKLEY, Oregon                       JOHN McCAIN, Arizona
AL FRANKEN, Minnesota                      PAT ROBERTS, Kansas
MICHAEL F. BENNET, Colorado                LISA MURKOWSKI, Alaska
SHELDON WHITEHOUSE, Rhode Island           MARK KIRK, Illinois
RICHARD BLUMENTHAL, Connecticut
                                       

                    Daniel E. Smith, Staff Director

                  Pamela Smith, Deputy Staff Director

     Frank Macchiarola, Republican Staff Director and Chief Counsel

                                  (ii)



                            C O N T E N T S

                               __________

                               STATEMENTS

                         TUESDAY, JULY 12, 2011

                                                                   Page

                           Committee Members

Harkin, Hon. Tom, Chairman, Committee on Health, Education, 
  Labor, and Pensions, opening statement.........................     1
Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming, 
  opening statement..............................................     3
    Prepared statement...........................................    10
Franken, Hon. Al, a U.S. Senator from the State of Minnesota.....    61

                               Witnesses

Oakley, Diane, Executive Director, National Institute on 
  Retirement Security, Washington, DC............................    12
    Prepared statement...........................................    13
Stephen, Christopher T., Esq., Employee Benefits Legislative 
  Counsel and Senior Associate Director, Government Relations 
  Department, National Rural Electric Cooperative Association, 
  Arlington, VA..................................................    19
    Prepared statement...........................................    21
Bertheaud, Edmond P., Jr., Chief Actuary and Director of 
  Corporate Insurance, The DuPont Company, Wilmington, DE........    47
    Prepared statement...........................................    48
Marchick, David M., Managing Director, Carlyle Group, Washington, 
  DC.............................................................    53
    Prepared statement...........................................    55

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Schaitberger, Harold A., General President, International 
      Association of Fire Fighters...............................    75
    VanDerhei, Jack, Ph.D., Research Director, Employee Benefit 
      Research Institute (EBRI)..................................    76
    The American Council of Life Insurers (ACLI).................    88
    The American Society of Pension Professionals & Actuaries 
      (ASPPA)....................................................    92
    The U.S. Chamber of Commerce.................................   100
    The Tower Watson July 2011 Insider Newsletter Report.........   104
    Response to questions of Senator Enzi by:
        Diane Oakley.............................................   108
        Christopher T. Stephen, Esq..............................   113
    Response to questions of Senator Hagan by Diane Oakley.......   117
    Response to questions of Senator Enzi and Senator Hagan by 
      David Marchick.............................................   117
    Letters:
        American Benefits Council................................   118
        The ERISA Industry Committee.............................   136

                                 (iii)


                    THE POWER OF PENSIONS: BUILDING
                       A STRONG MIDDLE CLASS AND
                             STRONG ECONOMY

                              ----------                              


                         TUESDAY, JULY 12, 2011

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:35 p.m. in Room 
430, Dirksen Senate Office Building, Hon. Tom Harkin, chairman 
of the committee, presiding.
    Present: Senators Harkin, Hagan, Merkley, Franken, and 
Enzi.

                  Opening Statement of Senator Harkin

    The Chairman. The Committee on Health, Education, Labor, 
and Pensions will please come to order. I want to welcome 
everyone to the latest in our series of hearings focusing on 
retirement security. Today we are going to take a close look at 
the important role pensions can play in building a strong and 
vibrant middle class, both in terms of the economic security 
that they provide to retired Americans and because of the role 
they play in growing our Nation's economy and creating jobs.
    This hearing we called the Power of Pensions because 
traditional pensions, defined benefit pensions, really are very 
powerful. They have the power to afford millions of middle 
class families the opportunity to feel secure in retirement, to 
enjoy their older years without being afraid that their money 
is going to run out. Retired Americans need to know that they 
can get that check every month for as long as they live. That 
is real retirement security. Plus, studies show that people 
with pensions are less likely to wind up living in poverty.
    Pensions are a powerful economic tool also for employers. 
They have proven to significantly increase retention. Of 
course, that reduces costs, improves productivity, leads to 
higher returns. Employers can also use pensions to get people a 
much cheaper retirement benefit than a 401(k). That's because 
pensions typically have a better return on their investments 
and they can take advantage of economies of scale to keep down 
the management fees. So, in short, pensions are a better bang 
for the buck.
    But I believe perhaps one of the most overlooked powers of 
pensions is the power to grow our economy. There is somewhere 
between $6 and $9 trillion in the pension system. Now, those 
dollars are not put in a shoe box someplace. They are not 
buried underground. Those dollars are invested back in the 
economy, and they go toward developing, in many cases, most 
cases, long-term development for our country--technology, 
building roads, bridges, and schools. Many communities go to 
pension funds to borrow the money that they need for 
infrastructure projects; good, solid, long-term investments.
    They also invest money in businesses to get them off the 
ground, to fuel innovation, job creation. So I've often said, 
after looking at all this, that pensions really are the grease 
that keeps the economic engine running pretty well.
    But despite all of the economic benefits of pensions, fewer 
and fewer people are earning a new benefit every year. Now, 
most people don't have any retirement plan at all, let alone a 
pension. And millions of Americans are seeing their retirement 
dream slip through their fingers. Our hearings before this have 
pointed out that a quarter of workers do not have any 
meaningful retirement savings at all, none. One out of every 
four working Americans have nothing, zero.
    Nearly half of the oldest baby boomers, those that are 65 
this year, are at a risk of not having sufficient resources to 
pay for basic retirement expenditures and uninsured health care 
costs. That's one out of every two. In other words, they're 
going to run out of money, basically, is what's going to happen 
before they die.
    In September, this committee heard testimony that the gap 
between what people need for retirement and what they actually 
have is somewhere between $4.6 and $6.6 trillion. I don't think 
it has to be like that. We can put a retirement system in place 
that offers the promise that if you work hard and play by the 
rules, you have an opportunity to ensure your later years and 
live with dignity and financial independence. That will go a 
long way toward rebuilding our middle class, and it will go a 
long way toward finding the money that we need for long-term 
growth and economic stability, and that's why this committee 
has been holding hearings on retirement security.
    We're taking a hard look at the private retirement system, 
trying to figure out how we can make it better, how to work for 
every American. I'll be the first to admit, it's not easy. I 
don't have all the answers. But I think we're going to have to 
make some bold changes. That means taking the best of what both 
401(k)s and pensions have to offer.
    Earlier this year, this committee heard testimony about 
some of the things from 401(k)s that have worked, like 
automatic enrollment, simplification, transparency. Today, 
hopefully we're going to hear about some of what has worked so 
well for defined benefit plans, giving people certainty that 
they're going to get a check in retirement, making sure that 
they are being prudently and professionally managed.
    We have an excellent panel of witnesses. I'm looking 
forward to all of your testimony. I thank you all for being 
here. There's so much that we need to learn about this 
important topic. I hope those in the academic and research 
communities will continue to look at the economic benefits of 
pension plans so that lawmakers here in Washington have the 
information they need to make smart policy decisions.
    I'm also looking forward to working with my colleagues on 
this committee in the search for a way to solve the retirement 
crisis, and that's what it is, a retirement crisis. When one 
out of four don't have anything, when the baby boomers, they 
say about half of them will not have enough money to last them 
through the years until they die, we have a crisis out there.
    Retirement issues have always been an area of great 
bipartisan interest, so there's a real opportunity to work 
together to improve retirement security for families all across 
America, and I'm confident that the hearing today will give us 
a lot to think about. And again, I thank all of you for taking 
the time to be here today.
    And with that, I'll recognize Senator Enzi.

                       Statement of Senator Enzi

    Senator Enzi. Thank you, Mr. Chairman.
    Over the past couple of years we've looked at various 
systems within our Nation's retirement security system. Back in 
February, we looked at the defined contribution systems, 
specifically at 401(k) and Individual Retirement Accounts, and 
last year we looked at the multiemployer pension system. Today 
we will review the state of our defined benefit retirement 
system known by many as the traditional pension.
    Looking back at statistics compiled by the Department of 
Labor and the Pension Benefit Guaranty Corporation, the height 
of the traditional defined benefit plan occurred in the mid-
1980s, when there were more than 112,000 plans that were 
counted by the PBGC.
    By 2008, that number shrunk to a little bit more than 
27,000 plans, and I'm sure that the economic downturn caused 
that number to go down even further. More sobering are the 
statistics of traditional defined benefit plans that have 100 
or more participants, the medium to large-size plans. According 
to the Department of Labor, there are only 9,500 of these plans 
left.
    We also have to keep in mind that when companies promise 
too much and can't maintain those promises, then those pensions 
get dumped onto the PBGC. The number of legacy industry 
companies that tried to game the system or promised more than 
they could shoulder led us to the passage of the Pension 
Protection Act in 2006 in order to shore up the PBGC's 
insurance trust fund. Looking back at the beginning of 2008, 
nearly all defined benefit plans were coming close to being 100 
percent fully funded. However, since that time, the number of 
pension plans that dropped to less than 90 percent funded has 
increased, and the PBGC's high deficits are back.
    Through the years I've been a supporter of the traditional 
defined benefit plan system as it forms one of the key legs of 
our three-legged stool of retirement system, along with the 
401(k)s, IRAs and Social Security. I also recognize that if 
people do not save enough through their 401(k)s and IRAs for 
retirement, then these people will place a greater strain on 
our very shaky Federal entitlement programs. The Congressional 
Budget Office tells us that these entitlement programs are 
currently not fiscally sustainable programs, especially in 
light of all the anticipated enrollees stemming from the 
President's health care law.
    However, we have to be realistic. The private sector 
traditional defined benefit system is going toward extinction. 
The system has become too burdensome, too complex, too 
volatile, and too costly for companies to maintain. As an 
example of the complexity of the systems, Hillside Family of 
Agencies, a nonprofit organization that provides services to 
the juvenile and adoption systems, put together a 6-page chart 
showing the number of notices to employees required by Federal 
employee benefit laws. I request unanimous consent to have this 
chart entered in the record.
    [The information referred to follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        
    Senator Enzi. We also have three Federal agencies 
overseeing the defined benefit system, the Employee Benefit 
Security Administration at the Department of Labor, the PBGC, 
and the Internal Revenue Service. One only has to look at the 
regulatory dockets for the Department of Labor's fiduciary rule 
proposal, the IRS' proposal for hybrid pension plans, or the 
PBGC rule proposal on plant closures to recognize that the 
agencies do not work in tandem but each have their own agendas 
for how the retirement system should be run. This is not only 
detrimental to the retirement system, but it also discourages 
the business community from participating in the voluntary 
retirement systems that we have today. I'm very disappointed 
that there was not a greater inclusion of retirement employee 
benefit issues by these agencies in carrying out the 
President's recent Executive order to reduce regulatory burden 
and overlap.
    There's little doubt about the power of retirement dollars 
in our economy. The Investment Company Institute recently 
reported that $18.1 trillion of U.S. retirement assets are 
invested in our economy. However, the greatest share of that 
comes from 401(k) and Individual Retirement Accounts and not 
from traditional pensions.
    Mr. Chairman, I thank you for holding this hearing. I'm 
looking forward to hearing from our witnesses today on what can 
or should be done to help encourage greater participation in 
the private sector and our retirement system, and whether the 
traditional defined benefit system can be saved or is it indeed 
heading for extinction.
    Unfortunately, I will not be able to stay for all of the 
hearing because I had a number of things that were already 
scheduled before this, and many of them involve Wyoming people. 
So I'd like to thank the witnesses for taking the time out of 
their jobs and lives to be with us here today.
    Ms. Oakley, thank you for sharing on behalf of the 
Institute.
    In addition, I'd like to thank Mr. Bertheaud, who I 
invited. He's with the DuPont Company, which has an excellent 
pension plan, and he's also representing members of the 
American Benefit Council.
    I also would like to acknowledge Mr. Stephen with the Rural 
Electric Cooperatives as we did a lot of work with the co-ops 
during passage of the Pension Protection Act in 2006.
    And finally, I understand that Mr. Marchick's family is 
from Cheyenne, WY.
    So we invite all of you, of course, to come to Wyoming.
    I do have questions for the record for each witness, and I 
thank the Chairman for holding this hearing.
    [The prepared statement of Senator Enzi follows:]

                   Prepared Statement of Senator Enzi

    Mr. Chairman, in addition to my full statement above I 
would like to supplement my statement to further illustrate how 
we got to where we are with our traditional defined benefit 
system.
    For its July 2011 newsletter Insider, Towers Watson 
released a report entitled, ``Prevalence of Retirement Plan 
Types in the Fortune 100 in 2011: Account-Based Benefit Plans 
Dominate.'' I am submitting the entire Towers Watson report for 
the committee's hearing record. This report looks at the types 
of pension plans held by Fortune 100 companies since 1985. 
Towers Watson found that in 1985 there were 90 out of the 100 
companies sponsoring defined benefit plans with only 10 
companies offering a defined contribution or 401(k)-type plans. 
Even in 1998, these figures were the same--90 companies 
sponsoring defined benefit plans and 10 companies sponsoring 
defined contribution plans. However, in 2011, there were only 
13 companies that offered a defined benefit plan to new hires 
while 70 companies offered a defined contribution plan. The 
change in statistics is a clear indication that defined benefit 
plans are heading towards extinction.
    The reasons cited by Towers Watson for the decline in 
defined benefit plans include, ``a desire to reduce overall 
retirement costs, . . . greater mobility in the workforce, the 
popularity of account-based designs with employees, government 
and accounting regulations, market trends and board pressures, 
and a belief that such a shift reduces financial risk.''
    Based upon this list, it is clear that fundamental changes 
must be made to the system if we ever hope for defined benefit 
pensions to make a comeback. Hybrid and cash-balance pension 
plans might be a good way to go but Towers Watson found that 
there was a significant decline in the number of companies 
willing to sponsor hybrid pension plans. The regulatory 
uncertainty and regulatory burdens make these plans unappealing 
as well.
    In my statement above, I mention three regulatory 
initiatives by the three Federal agencies with direct oversight 
of the defined benefit pension system. To demonstrate the 
concerns of the business community with the regulatory system 
and its uncoordinated nature, I am submitting the following 
comment letters from the business community:

    (1) Letter from the American Society of Pension 
Professionals and Actuaries dated January 12, 2011, in response 
to a request for comment on proposed additional rules regarding 
hybrid retirement plans issued by the Internal Revenue Service 
on October 19, 2010, (REG-132554-08);
    (2) Letter from the American Benefits Council dated 
February 3, 2011, in response to a request for comment on 
proposed regulations addressing the definition of fiduciary 
issued by the Employee Benefits Security Administration of the 
Department of Labor on October 22, 2010 (RIN1210-AB32); and
    (3) Letter from the ERISA Industry Committee dated November 
12, 2010, in response to a request for comment on proposed 
rules regarding liability for termination of single-employer 
plans: treatment of substantial cessation of operation issued 
by the Pension Benefit Guaranty Corporation on August 10, 2010 
(RIN1212-AB20).
    [The above referenced information may be found in 
Additional Material.]

    Mr. Chairman, thank you again for holding this hearing and 
bringing this distinguished panel of witnesses together.

    The Chairman. Thank you very much, Senator Enzi.
    Again, we're fortunate to be joined by the distinguished 
panel.
    Diane Oakley, executive director of the National Institute 
on Retirement Security. Before joining the Institute, Ms. 
Oakley served as the senior policy advisor to Congressman Earl 
Pomeroy and held leadership positions with TIAA-CREF, a leading 
financial services provider.
    Chris Stephen is an employee benefits legislative counsel 
and senior associate director for the National Rural Electric 
Cooperative Association. Prior to joining NRECA in 2001, Mr. 
Stephen worked for Baker and Hostetler, LLP, the U.S. 
Attorney's Office, and the Office of Counsel to the President.
    Mr. Bertheaud is the chief actuary and director of 
Corporate Insurance for DuPont, where he leads the in-house 
actuarial consulting team that oversees global pension funding 
and accounting. He also serves as DuPont's representative on 
the policy board of directors of the American Benefits Council.
    Finally, Dave Marchick, managing director of the Carlyle 
Group. Prior to joining Carlyle, Mr. Marchick was a partner and 
vice-chair of the International Practice Group at Covington and 
Burling.
    All of your statements will be made a part of the record in 
their entirety. I'd like to ask if you could sort of sum it up 
in 5 minutes so we could have a discussion; I would certainly 
appreciate that. We'll start with Ms. Oakley and work across.
    Ms. Oakley, again, welcome, and if you can sum up in 5 to 7 
minutes, I'd appreciate it.

    STATEMENT OF DIANE OAKLEY, EXECUTIVE DIRECTOR, NATIONAL 
        INSTITUTE ON RETIREMENT SECURITY, WASHINGTON, DC

    Ms. Oakley. Chairman Harkin, Ranking Member Enzi, Senators 
on the committee, I'm the executive director of the National 
Institute on Retirement Security. NIRS and all the research I'm 
going to talk about today is available on our Web site at 
nirsonline.org, and Americans, we found, are very anxious about 
retirement. Eighty-four percent of Americans are concerned 
about their retirement prospects and worry that stock market 
volatility makes it impossible for them to accurately predict 
what they need in retirement savings.
    Americans also believe that the disappearance of 
traditional pensions makes it harder to achieve the American 
dream. This occurs at a time when 15 percent of workers are 
covered by a defined benefit plan, and yet we still find in our 
survey that 81 percent of Americans believe that all workers 
ought to have access to a defined benefit pension so that they 
can be independent in retirement. They appreciate that pensions 
deliver what I'd like to call high-fives all around. They 
deliver $5.4 trillion in assets invested for the future. We 
know that they also provide 5 million Americans sufficiency in 
terms of their income so that they're not subject to poverty.
    It also supports 5.3 million American jobs as retirees 
spend those monthly checks in their communities, and they do it 
at a cost that's nearly 50 percent less than what would happen 
if you tried to provide the same benefits in a defined 
contribution plan.
    In Wyoming, when a retiree receives a payment such as the 
$320 million disbursed by the public system in Wyoming, they 
use it to purchase local goods and services. For this hearing, 
NIRS conducted a very preliminary analysis using our Pension 
Economics Model of the $320 billion in benefits paid from both 
private and public pensions in 2009. Assuming that each dollar 
of retirement income supported $2.36 in economic activity, we 
know that pensions had an economic impact of more than $750 
billion and supported those 5.3 million jobs here in the United 
States.
    Pension payments are particularly vital to small 
communities. For example, Iowa PERS checks go to retirees who 
number 10 percent of the active payroll in Madison County. 
Also, for example, $2 million in pension checks go from the 
Colorado PERA to its employees in rural Costilla County, and 
that comprises 35 percent of the earned income in that county. 
And just this morning, CALPERS released a study of its economic 
impact of the $12 billion in benefit payments throughout 
California, and in Sierra County those payments increased the 
gross regional product by 7\3/4\ percent.
    At the end of the first quarter of 2011, assets in public 
plans--and private plans--stood at about $5 trillion, recouping 
most of the losses that occurred in 2009 and 2006. The numbers 
point to the role that pensions also play in capital 
development, acting as an intermediary in challenging times, 
giving our market steps and liquidity.
    We also know from our pension factor research that 
Americans see their parents being kept out of poverty. In fact, 
5 million older Americans are kept from being considered poor 
or near poor because of the pension, and therefore less reliant 
on their families and on government assistance. The pension 
incomes received by older American households keep hundreds and 
thousands of retirees from experiencing food, shelter, or 
health care hardships. Older Americans with pensions, in fact 
1.35 million of them, are not on our rolls for means-tested 
public assistance. This saves government $7.3 billion.
    We also know that pensions have built-in savings. They're 
more efficient than defined contribution plans. And NIRS has 
determined that with regard to the savings that individuals get 
by using a pension for protecting against running out of money, 
if you looked and tried to take your 401(k) plan over your life 
expectancy, you'd have a 50/50 shot of running out of money. 
Pensions can save people over $100,000 more that they should be 
saving for retirement to assure that they don't run out of 
money in retirement. They also end up delivering benefits or 
investment returns much more significantly than the private 
sector does individually with individuals making those 
investment decisions. If you assume at least 100 basis points 
added return in a defined benefit plan, the pensions end up 
coming up with a 26 percent cost advantage when that's 
compounded over someone's working career and retirement years.
    In short, we know Americans are anxious about their 
retirement, yet our Nation faces a good deal of economic 
challenges. Pensions are one place where the economy delivers 
for American households, for employers, for our communities and 
our financial markets. They should remain a centerpiece of our 
retirement income policy, and I thank you very much, Mr. 
Chairman, Senator Enzi, for examining this issue.
    [The prepared statement of Ms. Oakley follows:]
                   Prepared Statement of Diane Oakley
                                summary
    Americans are highly anxious about retirement. Some 84 percent of 
Americans are concerned about their retirement prospects, while an 
overwhelming majority believes the Nation's retirement infrastructure 
is crumbling and that stock market volatility makes it impossible to 
predict retirement savings. Simultaneously, the Nation faces severe 
fiscal challenges with the economy struggling to recovery, budgets 
under pressure, and millions of Americans are looking for jobs.
    Americans also believe that the disappearance of pensions has made 
it harder to achieve the ``American Dream.'' In the1980s, some 38 
percent of all private sector employees were covered by pensions, and 
only 15 percent have pensions in 2009. Yet, pensions are the most cost-
efficient means for delivering a modest, stable income for older 
Americans so that they can be financially secure. In fact, 81 percent 
of Americans believe all workers should have access to a pension so 
they can be independent in retirement.
Pensions Strengthen National and Local Economies
    The benefits provided by pensions reaches beyond the retirees, as 
they buy goods and services. For this hearing, NIRS conducted a very 
preliminary analysis using its Pensionomics methodology on the $320 
billion in pension benefits paid from State and local pensions and 
private sector pensions. The numbers, while still rough, and the 
finding from 2006 data that each dollar of income supported $2.36 in 
economic activity, suggest that pensions:

     Had a total economic impact of more than $756 billion.
     Supported more than 5.3 million American jobs.
     Supported more than $122 billion in annual Federal, State, 
local tax revenue.
   pensions ensure retirement self sufficiency, prevent elder poverty
    Pension income plays a critical role in reducing the risk of 
poverty and hardship for older Americans. The Pension Factor finds that 
pension income received by nearly half of older American households in 
2006 was associated with:

     1.72 million fewer poor households and 2.97 million fewer 
near-poor households.
     560,000 fewer households experiencing a food hardship.
     380,000 fewer households experiencing a shelter hardship.
     320,000 fewer households experiencing a health care 
hardship.

    The rate of poverty for older households without pension income was 
six times greater than for households with pension. The billions of 
dollars in savings for public assistance due to pensions are 
significant given the fiscal pressures on government safety net 
programs across the country.
Pensions Are the Most Economically Efficient Retirement Plan
    Due to their group nature, pensions possess ``built-in'' savings, 
which make them highly efficient retirement income vehicles, capable of 
delivering retirement benefits at a low cost to the employer and 
employee. NIRS research finds that a pension can deliver the same level 
of retirement income as an individual 401(k) type savings account at 
half the cost.
                                 ______
                                 
    Thank you Chairman Harkin, Ranking Member Enzi, and Senators on the 
Health, Education, and Labor Committee for the opportunity to testify 
today. I am Diane Oakley executive director of the National Institute 
on Retirement Security, or NIRS. NIRS is a not-for-profit research and 
education organization committed to fostering a deep understanding of 
the value of retirement security to employees, employers and the 
economy. Our work is available on our Web site www.nirsonline.org.
    Today, I would like to share our research regarding defined benefit 
(DB) pensions. I will focus on pension trends, how pensions fuel the 
American economy, how pensions ensure Americans can be self-reliant in 
retirement, and the economic efficiencies of pensions.
    Before I get into the details, let me say a few words on the 
current state of retirement security in America.
    For working American families, a key facet of the American Dream is 
to live in dignity and maintain financial independence in later years. 
Simply put, Americans do not want to be a financial burden for their 
families. Unfortunately, NIRS recent polling research finds that some 
75 percent of Americans believe the disappearance of pensions has made 
it harder to achieve the American Dream. (Boivie, Kenneally, & Perlman, 
2011)
    When examining private sector pension coverage trends over the past 
three decades, we find that fewer and fewer employees are participating 
in pensions. In the 1980s, some 39 percent of private sector employees 
were covered by pensions, and this number has plummeted to 15 percent 
of private sector employees in 2009. (EBRI, 2011)
    NIRS research finds that traditional pensions are essential to 
ensuring self-sufficiency for middle class Americans. More 
specifically, pensions enable nearly 5 million older American 
households to stay above the poor or near poor threshold levels, and 
thereby avoid reliance on assistance from family or the government to 
meet their basic daily living expenses.
    Given the disappearance of pensions, it's not surprising that our 
polling research also found that 84 percent of Americans are anxious 
about their retirement prospects. An overwhelming majority also believe 
the Nation's retirement infrastructure is crumbling and that stock 
market volatility makes it impossible to predict retirement savings. 
(Boivie, Kenneally, & Perlman, 2011)
    This high level of anxiety about retirement security is echoed by 
others. An Associated Press/LifeGoesStrong.com poll found that 89 
percent of baby boomers are not convinced that they will be able to 
live in comfort in their later years. (AP/LifeGoesStrong, 2011) Also, 
the 2011 Employee Benefits Research Institute Retirement Confidence 
Survey found confidence in retirement at a low point, with only 13 
percent of respondents feeling very confident about retirement. (EBRI--
RCS, 2011)
    The retirement savings shortfall for Americans is startling. The 
Center for Retirement Research at Boston College, calculated that the 
estimated national retirement income deficit facing American households 
is some $5.2 to $7.9 trillion. (Retirement USA, 2010) This retirement 
under funding for private sector workers could have significant 
negative impacts for individuals, the national economy, and struggling 
government budgets.
    Therefore, we applaud the committee's careful examination of the 
role of pensions for middle class Americans and the broader economy.
            pensions strengthen national and local economies
    The benefits provided by pension plans also have an impact that 
reaches well beyond the retirees who receive pension checks. Public and 
private pensions play a vital role in the national economy as well as 
in local economies across the country.
    The steady, monthly benefit payments offered by pension plans 
provides peace of mind and security for retirees. At the same time, the 
national and local economies benefit from the regular expenditures 
retirees.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    As Figure 1 illustrates, a retiree in Iowa, Wyoming or Colorado, 
who receives a benefit payment from their pension fund, spends the 
money on goods and services in her community, thus supporting the local 
economy and industries. For example, a retiree may purchase food at the 
local diner or grocery store, medical services at their pharmacy or 
hospital, an automobile at the local dealership, clothing at the local 
mall, or tickets at the movie theatre.
    Pension payments are particularly vital to small communities and 
economies across the country where there is a lack of diverse local 
industries or where other steady sources of income may not be readily 
found. For example, the Colorado Public Employees Retirement 
Association made pension benefit payments of $2.1 million in 2009 to 
its retirees in rural Costilla County and those payments comprise 35 
percent of the earned income in that Colorado county.
    In 2006, NIRS conducted the first national economic impact analysis 
of pension expenditures based on public pensions. In Pensionomics 
(2009), NIRS calculated that each dollar of the over $151.7 billion in 
DB pension benefit expenditures made from State and local pension 
benefits in 2006 supported $2.36 in economic activity which:

     Had a total economic impact of more than $358 billion. 
(Almeida & Boivie, 2009)
     Supported more than 2.5 million American jobs that paid 
more than $92 billion in total compensation to American workers. 
(Almeida & Boivie, 2009)
     Supported more than $57 billion in annual Federal, State, 
local tax revenue. (Almeida & Boivie, 2009)
     Nationally, had the largest economic impact in 
manufacturing, health care and social assistance, finance and 
insurance, retail trade and accommodations and food service sectors. 
(Almeida & Boivie, 2009)

    Traditional pensions also have large multiplier effects, especially 
from the viewpoint of each taxpayer dollar contributed to pensions as 
part of public employees' compensation. Each dollar of the $64.5 
billion public employers contributed to State and local pensions 
supported $11.45 in total economic activity.
    NIRS will update the Pensionomics report in early 2012 and we will 
be pleased to share a copy of the final report with the committee. For 
today's hearing, we took a preliminary look at the latest data on 2009 
expenditures made from State and local governmental pensions and 
single-employer private sector pension plans combined. These rough data 
suggest that public and private sector DB pensions:

     Had a total economic impact of $756 billion.
     Supported more than 5.3 million American jobs.
     Supported more than $121.5 billion in annual Federal, 
State, local tax revenue.

    Additionally, one lesson from the recent recession and the sharp 
decline in the stock market values is that reliable sources of pension 
income may be especially important in stabilizing local economies. 
Comparing pensions to individual retirement accounts, we note that 
guaranteed pension income means retirees need not worry about reducing 
spending with every dip in the stock market. Thus, pensions are all the 
more important in times of financial crisis and economic instability. 
Pension expenditures play an important role in providing a stable, 
reliable source of income for the local economies in which their 
retirement checks are spent--and therefore help the national economy 
recover as well.
    It is also important to highlight the magnitude of pension assets. 
According to the Flow of Funds Accounts of the United States released 
by the Federal Reserve System on June 9, 2011, assets in Private Sector 
Retirement Funds and State and Local Government Employee Retirement 
Funds have almost reached their 2007 year-end values, recouping losses 
that occurred as a result of the stock market collapse of 2008-9. At 
the end of the first quarter 2011, the value of financial assets in 
private sector defined benefit stood at $2.32 trillion and the value of 
financial assets held by public pension plans was $3.03 trillion. (BOG, 
2011)
    In the 2 most recent years for which we have complete data (2008 
and 2009), total contributions to pensions exceeded $350 billion. 
Amounts contributed break down by sector as follows: sponsors of 
pensions among the Fortune 1000 companies contributed $96.4 billion 
(Warshawsky, 2011), public sector employers contributed $168.9 billion 
and public employees contributed $76.2 billion to their pension plans. 
(NASRA)
    These numbers call attention to one aspect of pensions and the 
economy that often is overlooked, pensions are critical to our Nation's 
capital development. Because pension plans are long-term investors, 
they can play a critical intermediation role in the economy at the most 
challenging times giving our financial markets depth and liquidity. 
While other lenders may close their doors to many kinds of financing 
due to higher risks during periods of tightening credit, pension plans 
have continued to lend and invest in areas like venture capital that 
grow new companies. Their longer view gives financial markets patient 
capital that can wait for investment returns to be fully realized over 
long periods. Thus, pension plans are compensated with higher returns 
while still maintaining properly diversified investments in their 
portfolios.
   pensions ensure retirement self sufficiency, prevent elder poverty
    In addition to the economic benefits of traditional pension plans, 
they also are of great value to Americans. They provide peace of mind 
and self-sufficiency with a secure, predictable retirement income that 
cannot be outlived.
    Having pension income can play a critical role in reducing the risk 
of poverty and hardship for older Americans. In 2006, the mean annual 
pension income for elderly persons from their own employers was $15,784 
and the mean pension income rose to $18,195 when pension income from a 
spouse was also counted. (Almeida & Porell, 2009)
    NIRS research, The Pension Factor (2009), finds that pension income 
received by nearly half of older American households in 2006 was 
associated with:

     1.72 million fewer poor households and 2.97 million fewer 
near-poor households;
     560,000 fewer households experiencing a food hardship;
     380,000 fewer households experiencing a shelter hardship;
     320,000 fewer households experiencing a health care 
hardship. (Almeida & Porell, 2009)

    Overall, the rate of poverty for older households without pension 
income was six times greater than the rate among households that had 
income from a pension. (Almeida & Porell, 2009)
    Moreover, NIRS found that pensions reduce--and in some cases 
eliminate--the greater risk of poverty and public assistance dependence 
that women and minority populations otherwise would face. (Almeida & 
Pore11, 2009)
    For almost 71 percent of the pension recipients in 2006, the source 
either in whole (63.7 percent) or in part (7 percent) of their pension 
income was a pension sponsored by a private employer they worked for. A 
little more than 36 percent of pension recipients had all or some 
pension income come from a public pension they earned while employed by 
a State or local government. (Almeida & Porell, 2009) Retirement income 
from individual 401(k)-type DC accounts play a lesser role in meeting 
the retirement security needs of elderly Americans, who were more 
likely to be covered by a pension during their careers. Based on DC 
plan income from their former employers, only 5.1 percent of all 
persons age 60 and older had such income and the percentage with DC 
income increased to 7.2 percent when spouses' DC plan income was 
counted.
    When older Americans with pensions are able to be self-sufficient 
in retirement, the financial burdens on governments ease. In 2006, 1.35 
million fewer households received means-tested public assistance as a 
result of having pension income. This translated into a $7.3 billion 
savings in public assistance expenditures, which is about 8.5 percent 
of aggregate public assistance dollars received by all American 
households for the same benefit programs in that year. (Almeida & 
Porell, 2009)
    These impacts are significant, particularly given the pressures on 
safety net programs during the current fiscal crises experienced at all 
levels of government throughout the country. The American public sees 
the value that pensions give to their parents and grandparents today, 
and that could explain why some 81 percent of Americans believe that 
all workers should have access to a pension plan so they can be 
independent and self-reliant in retirement. (Boivie, Kenneally, & 
Perlman, 2011)
      pensions are the most economically efficient retirement plan
    Pensions provide retirees and workers with a secure, predictable 
retirement income that cannot be outlived. One element of pensions that 
is not widely understood is their inherent economic efficiencies. Due 
to their group nature, pension plans possess ``built-in'' savings, 
which make them highly efficient retirement income vehicles, capable of 
delivering retirement benefits at a low cost to the employer and 
employee. NIRS research finds that a pension can deliver the same level 
of retirement income as an individual 401(k) type savings account at 
half the cost. (See Figure 2)
    These savings derive from three principal sources.
    First, pensions better manage longevity risk, or the chance of 
running out of money in retirement. By pooling the longevity risks of 
large numbers of individuals, pensions avoid the ``over saving'' 
dilemma. Half of the retirees who plan on drawing down their savings in 
their 401(k) account over their life expectancy will run out of money. 
To protect against outliving their money, these individual workers 
should save more so they have a bigger nest egg when they start 
retirement. In fact, to assure an adequate retirement income over the 
``maximum life expectancy'' one would need about $100,000 more in a 
401(k) account than what would be required in a pension. (Almeida & 
Fornia, 2008) Consequently, pension plans are able to do more with 
less.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Second, because pensions, unlike the individuals in them, do not 
age, they are able to take advantage of the enhanced investment returns 
that come from a balanced portfolio throughout an individual's 
lifetime. Financial advisors recommend that individuals gradually 
switch away from high risk/high return assets in their 401(k) as they 
approach retirement as a way of avoiding the downside risk of losses in 
stock values, for example. Consistently, maintaining a well-diversified 
portfolio gives a DB pension a 5 percent cost advantage. (Almeida & 
Fornia, 2008)
    Third, professionally managed pensions achieve greater investment 
returns as compared with individual accounts. Research from the global 
benchmarking firm CEM, Inc. concluded that between 1988 and 2005 
pensions showed annual returns 180 basis points higher than DC plans. 
(Flynn & Lum, 2007) Watson Wyatt found that, between 1995 and 2006, 
large pensions outperformed DC accounts by 121 basis points. (Watson 
Wyatt 2008) Also, Morningstar compared returns from retail mutual funds 
with returns from traditional public pensions and found public plans 
outperformed by 3.22 percent. (Morningstar, 2007) A retirement system 
that achieves higher investment returns can deliver any given level of 
benefit at a lower cost. Over time assuming a 100 basis point advantage 
for DB pensions each year compounds to a 26 percent cost advantage for 
the traditional pension. (Almeida & Fornia, 2008)
    One can think of pensions as a buying club similar to Costco or 
BJ's. These buying clubs add value by operating on a large scale and 
using professionals who know markets to find high quality products at 
the lowest price for customers. Similar to buy clubs, pensions operate 
on a scale much larger than the average size individual 401(k) account 
plan, and also utilize professionals to manage pension assets. As a 
result, pensions can deliver a secure retirement income at a lower cost 
thanks to their economic efficiencies, professional asset management, 
lower costs, and better investment returns.
    These findings are contained in NIRS' report, A Better Bang for the 
Buck; The Economic Efficiencies of Defined Benefit Pension Plans. 
Again, this analysis finds pensions can offer the same retirement 
benefit at close to half the cost of an individual account. 
Specifically, the cost to deliver the same level of retirement income 
to a group of employees is 46 percent lower in a pension than it is in 
an individual DC plan. Hence, it makes sense that pensions should 
remain a centerpiece of retirement income policy and practice in light 
of current fiscal and economic constraints facing plan sponsors. 
(Almeida & Fornia, 2008) As a nation, we need to deliver retirement 
benefits in the most economically efficient manner possible.
                               conclusion
    Pensions are the most cost-efficient means for ensuring Americans 
can be self-sufficient in retirement. Moreover, spending of pension 
benefits provides important economic stimulus and jobs nationally and 
across virtually every city and State from coast to coast. Americans 
are highly concerned about their retirement prospects, while the Nation 
continues to face severe economic challenges. As such, policymakers are 
wise to focus on protecting pensions that remain in place, and finding 
ways to expand pension coverage for middle class Americans. I thank you 
for holding this hearing today to examine these issues.
                               references
Almeida, B. and W. Fornia. 2008. A Better Bang for the Buck: The 
    Economic Efficiencies of Defined Benefit Pension Plans. Washington, 
    DC: National Institute on Retirement Security.
Almeida, B. and F. Porell. 2009. The Pension Factor: Assessing the Role 
    of Defined Benefit Plans in Reducing Elder Hardships. Washington, 
    DC: National Institute on Retirement Security.
Almeida, B. and I. Boivie. 2009. Pensionomics: Measuring the Economic 
    Impact of State and Local Pension Plans. Washington, DC: National 
    Institute on Retirement Security.
Associated Press and LifeGoesStrong.com. 2011. ``AP-LifeGoesStrong.com 
    Poll Reveals: 44% of All Baby Boomers are Not Confident That They 
    will Retire Comfortably.'' April 5.
Board of Governors, Federal Reserve System. 2011. Release Z.1 Flow of 
    Funds Accounts of the United States. Washington, DC: BOG.
Boivie, I., K. Kenneally, and B. Perlman. 2011. Pensions and Retirement 
    Security 2011: A Roadmap for Policy Makers. Washington, DC: 
    National Institute on Retirement Security.
Copeland, C., M. Greenwald & Associates, R. Heiman, & J. VanDerhei. 
    2011. ``The 2011 Retirement Confidence Survey: Confidence Drops to 
    Record Low, Reflecting ``the New Normal.'' Issue Brief. Washington, 
    DC: Employee Benefit Research Institute.
Employee Benefit Research Institute. 2011. ``FAQs About Benefits--
    Retirement Issues.'' Washington, DC.
Flynn, C., and H. Lum. 2007. ``DC Plans Underperformed DB Funds.'' 
    Toronto, ON: CEM Benchmarking, Inc.
Morningstar, Inc. and National Conference on Public Employee Retirement 
    Systems. 2007. ``The Relative Performance Record and Asset 
    Allocation of Public Defined Benefit Plans.''
Retirement USA. 2010. ``The Retirement Income Deficit'' http://
    www.retirementusa.org/retirement-income-deficit-0.
Warshawsky, M. 2011. ``Corporate Defined Benefit Pension Plans and the 
    2008-2009 Financial Crisis: Impact and Sponsor and Government 
    Relations.'' Philadelphia, PA: Wharton School of the University of 
    Pennsylvania.
Watson Wyatt. 2008. ``Defined benefit vs. 401(k) plans: Investment 
    returns for 2003-2006.'' Watson Wyatt Insider 18(5).

    The Chairman. Thank you very much, Ms. Oakley.
    Mr. Stephen, welcome. Please proceed.

 STATEMENT OF CHRISTOPHER T. STEPHEN, ESQ., EMPLOYEE BENEFITS 
             LEGISLATIVE COUNSEL AND SENIOR ASSOCI-
        ATE DIRECTOR, GOVERNMENT RELATIONS DEPARTMENT, 
 NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION, ARLINGTON, VA

    Mr. Stephen. Chairman Harkin, Mr. Enzi, members of the 
committee, my name is Chris Stephen. I'm Employee Benefits 
legislative counsel at the National Rural Electric Cooperative 
Association, the national service organization for over 900 
rural electric utilities that provide electricity to 42 million 
people in 47 States, is very well represented here on the panel 
today.
    Most NRECA members, as you know, are consumer-owned, not-
for-profit electric cooperatives dedicated to the delivery of 
safe, reliable and, most importantly, affordable electricity, 
and also contributing to the economic development of our 
consumer owners.
    This committee has long recognized the special, unique 
nature of multiple employer plans sponsored by rural 
cooperatives. Mr. Enzi mentioned it in his opening. This is not 
to be confused, of course, with multiemployer plans that are 
administered subject to a collective bargaining agreement with 
unions.
    Electric co-ops are defined by their employees; and, like 
police, fire, and other emergency personnel, electric co-op 
employees often find themselves in harm's way in carrying out 
their duties sometimes, and sometimes often, during and 
immediately after a natural disaster. Take, for example, in 
January 2011 during an ice storm in Greenfield, IA, when 
Farmers Electric co-op responded to 211 downed lines in the 
middle of the storm to make sure the lights were on as soon as 
possible. Or more recently, just last month in Saratoga, WY, 
when the flooding North Platte River was at 10 percent above 
flood stage and linemen from Carbon Power and Light Cooperative 
donned wet suits, got into rafts, and went into the middle of 
the river, the raging river I was told, to get to an island in 
the middle of the river to make sure that the downed lines were 
up in 4\1/2\ hours instead of 4\1/2\ days, working with the 
National Guard and fire and rescue teams.
    I could go on for hours and hours on this type of work that 
goes on at rural electric co-ops, but today I want to focus on 
trying to keep our rural consumers and our rural Americans in 
our rural areas. Over the last several years, keeping our best 
and brightest at home has become ever more difficult, which has 
just been exacerbated by the economic downturn. The strongest 
recruitment and retention tool that electric cooperatives have 
to keeping our best and brightest at home is our employee 
benefit program, and today I'm going to focus on our defined 
benefit plan.
    NRECA is proud that the vast majority of our members offer 
their employees, 63,000 employees total, both the comprehensive 
defined benefit plan as well the NRECA-sponsored 401(k) plan. 
Both are multiple employer plans under 413(c) of the Internal 
Revenue Code that are operated to maximize retirement savings 
for employees and retirees and provide each and every co-op 
with a convenient and affordable mechanism to pool resources 
and utilize economies of scale that would otherwise be 
unavailable to small businesses like electric cooperatives.
    As you know, our 900-member cooperatives have as few as 4 
employees and a median of 48 employees on the payroll. And 
unlike other sectors, fortunately, electric co-ops see a less 
than 5 percent annual turnover. This allows us to invest in our 
current employees for the long-term, and, in fact, two-thirds 
of co-op employees that leave the co-op retire, spending their 
entire working career in the cooperative family.
    Our DB plan rewards long service and allows our members to 
invest in employees without facing the substantial replacement 
cost to go out and find a new one. As a result of the market 
collapse, unfortunately, contributions to our plan last year 
rose by 35 percent, by $225 million. This dramatically 
increased our short-term liabilities and forced some co-ops to 
make the sometimes impossible choice of either raising 
electricity rates, eliminating or reducing retirement benefits, 
or laying off quality employees to make up the difference. Co-
ops now, on average, contribute 23 percent of payroll to the 
plan, making it an even larger part of total comp.
    A critical goal for cooperatives is to eliminate volatility 
and unpredictability in their annual budgets and ultimately 
electricity rates. The same principles applies to every single 
business that operates a defined benefit plan, including 
electric cooperatives. The Pension Protection Act codified the 
core fundamental principle that a promise made is a promise 
kept. We applaud that effort, supported the legislation, and 
thank you for recognizing that even a bill that has been a 
success in many, many ways, the economic calamity of the last 
several years has shown that even very good legislation does 
need to be refined to recognize new challenges. We thank you 
for passing short-term pension legislation last year.
    Our plan is part of our members' core business strategy to 
recruit and retain long service employees and reward them with 
a financially secure retirement for that effort. The committee 
today has the opportunity to help our employees by supporting 
our plan in four specific ways.
    No. 1, restoring a critical, logical element to when DB 
plans were most popular; that is, to allow companies to 
contribute more during good times and less during bad times 
when capital is at a premium.
    No. 2, reject proposals to allow the PBGC to set its own 
premiums, let alone increase premiums by some $16 billion, 
which amounts to an unfair tax increase on current plan 
sponsors.
    No. 3, prevent the IRS from eliminating or reducing 
benefits earned by employees who attain their plan's normal 
retirement age.
    And No. 4, not impose additional taxes on retirement plans 
to address the national deficit. We believe that taxing 
electric linemen in their retirement savings in addition to 
current tax treatment is not the way to address the debt or the 
deficit.
    We ask you to help us keep our promises by enacting new and 
innovative policies to encourage current plan sponsors to 
remain in the game, particularly multiple employer plans like 
ours, so they remain viable for future generations. I thank you 
for the invitation.
    [The prepared statement of Mr. Stephen follows:]
           Prepared Statement of Christopher T. Stephen, Esq.
                                summary
    Christopher T. Stephen is Employee Benefits Legislative Counsel at 
the National Rural Electric Cooperative Association (NRECA). NRECA is 
the national service organization for more than 900 rural electric 
utilities that provide electricity to approximately 42 million 
consumers in 47 States and sell approximately 12 percent of all 
electric energy sold in the United States.
    Electric cooperatives are defined by their dedicated employees, who 
are committed to providing safe, reliable and affordable electricity to 
their consumer-owners. And, like police, fire and other emergency 
personnel, co-op employees frequently confront life-threatening 
situations and selflessly put themselves at great personal risk.
    The vast majority of our members participate in the NRECA 
Retirement Security Plan (the ``Plan''), a ``multiple-employer'' plan 
under IRC Section 413 (c) that plays a vital role in ensuring that our 
63,000+ participants live with dignity in the communities they once 
served. It also provides a critical tool for our members to recruit and 
retain employees who can often earn higher wages in more urban areas, 
but value the long-term security provided by the Plan.
    Keeping rural America's best and brightest ``at home'' has become 
an increasingly difficult task over the past several years. The 
strongest recruitment and retention tool for electric cooperatives 
continues to be their employee-benefits programs--particularly our 
defined-benefit plan. Unlike most other sectors, co-ops see less than a 
5 percent annual employee turnover, with more than \2/3\ of employees 
spending their entire careers within the cooperative family. Our Plan 
invests in these employees without facing the recruiting, training, and 
development costs for new hires.
    This guaranteed security, however, has become much more difficult 
to sustain in recent years with economic uncertainty and volatility for 
all DB Plan sponsors. Cost uncertainty is anathema to any business, 
especially companies that run ``at cost'' like electric cooperatives. 
Some NRECA members ask, ``If everyone else is cutting their defined 
benefit plans; why aren't we? '' Congress should continually examine 
new and innovative policies to encourage current sponsors to remain 
``in the game'' and reject policies that leave companies no choice but 
to abandon the system. We ask you to consider the following to help 
cooperative employees and retirees:

    (1) Accelerated funding requirements during down financial markets 
dramatically increases volatility and costs. Congress should restore a 
critical, logical element from when DB plans were most popular: permit 
companies to contribute more during good times, and less during bad 
times. The current system often works the opposite way.
    (2) Allowing PBGC to set its own premiums, let alone increasing 
them by $16 billion without one congressional hearing, amounts to an 
unfair tax increase on plan sponsors that must be soundly rejected.
    (3) Prevent IRS from eliminating or reducing benefits earned by 
employees who attain their Plan's normal retirement age (NRA).
    (4) Do not tax retirement plans to address the national deficit. 
Taxing electric linemen on their retirement savings is not the way to 
address the deficit.
                                 ______
                                 
    Chairman Harkin, Ranking Member Enzi, and all committee members, I 
am Christopher T. Stephen, Employee Benefits Legislative Counsel at the 
National Rural Electric Cooperative Association (NRECA). NRECA is the 
national service organization for more than 900 rural electric 
utilities that provide electricity to approximately 42 million 
consumers in 47 States, and sell approximately 12 percent of all 
electric energy sold in the United States. Most NRECA members are 
consumer-owned, not-for-profit electric cooperatives and share an 
obligation to serve their members by providing safe, reliable and 
affordable electric service. I am honored to testify today regarding 
the voluntary employee benefit programs sponsored by our member co-ops 
for their employees, and how our defined-benefit plan remains a 
critical recruitment and retention tool for electric cooperatives.
    The NRECA Retirement Security Plan (the ``Plan'') has long enjoyed 
strong support from this committee. Back in September 2005, this 
committee unanimously approved an amendment to what eventually became 
the Pension Protection Act (PP A) of 2006 (Pub. L. No. 109-280). Led by 
Senator Roberts, and cosponsored by you, Mr. Chairman, along with 
Senators Bingaman, Hatch, Alexander, Isakson and Frist to recognize the 
special nature of multiple-employer plans sponsored by rural 
cooperatives. Thank you all for this strong support, as well as you, 
Senator Enzi, who also strongly supported this effort as chairman of 
this committee during that time.
    Our Plan plays a vital role in ensuring that our employees have a 
secure retirement that enables them to live with dignity in the 
communities they served. It also provides a critical tool for our 
members to recruit and retain employees who can often earn higher wages 
in more urban areas, but value the long-term security provided by the 
Plan. Today, I will discuss who we serve, what we do, and why 
maintaining our Plan is part of our member's core business strategy to 
recruit, retain and reward long-service employees with a secure 
financial retirement. But first, I want to emphasize upfront that this 
committee has the opportunity to help our employees by supporting our 
Plan. Specifically, as discussed further below, we ask you to consider 
the following:

    (1) Accelerated funding requirements during down financial markets 
dramatically increase volatility and costs. We believe in the important 
reforms enacted by PPA. But, we have all seen the need to further 
supplement these important reforms in light of the lessons learned from 
the economic downturn and from the very sad participation decline in 
the defined-benefit system. We are grateful for your leadership to 
enact a short-term adjustment last year. Going forward, we need to 
restore a critical, logical element from when defined-benefit plans 
were most popular: permit companies to contribute more during good 
times, and less during bad times. The current system often works the 
opposite way, unfortunately. We cannot have a vibrant defined-benefit 
system as long as the funding rules require exorbitant contributions at 
exactly the wrong time.
    (2) The Administration's proposal to increase premiums paid to the 
Pension Benefit Guaranty Corporation (PBGC) by $16 billion amounts to 
an unfair tax increase on defined-benefit plan sponsors. This must be 
soundly rejected. No congressional committee has examined the true 
nature of the PBGC's deficit or the value of the coverage provided by 
the PBGC. And PBGC's own annual report notes that the PBGC will not 
have any trouble meeting its obligations for the foreseeable future. In 
that context, it is wrong for the government to even consider taxing 
plan sponsors.
    (3) The IRS has threatened to prohibit us from keeping our promises 
to our employees. The Plan has long promised employees who attain 
normal retirement age (NRA) the right to receive their retirement 
benefits. Our employees need your protection.
    (4) We urge you not to tax retirement plans to address the national 
deficit. Taxing electric linemen on their retirement savings is not the 
way to address the deficit.
Who We Serve
    Last year, Agriculture Secretary Thomas Vilsack confirmed the 
economic downturn greatly impacted rural America, with high poverty 
which is reflected in higher mortality rates for children, higher 
unemployment, and declining populations.\1\ Since the beginning of the 
economic slowdown, rural residents have experienced a greater decline 
in real income compared to other parts of the Nation due to lower rural 
educational attainment, less competition for workers among rural 
employers, and fewer highly skilled jobs in the rural occupational 
mix.\2\ Rural electric cooperatives have far less revenue than the 
other electricity sectors, but support a greater share of the 
distribution infrastructure. The challenge of providing affordable 
electricity is critical when you consider that the average household 
income in most of our service territories is 14 percent below the 
national average. I enclose State demographic data for all committee 
members with rural electric cooperative consumers, as compiled by 
NRECA, as Exhibit 1.
---------------------------------------------------------------------------
    \1\ Statement by USDA Secretary Thomas Vilsack before the 
Subcommittee on Agriculture, Rural Development, Food and Drug 
Administration, and Related Agencies, U.S. Senate, March 2, 2010.
    \2\ Id.
---------------------------------------------------------------------------
Electric Cooperative Employees
    Electric cooperatives are defined by their dedicated employees, who 
are committed to providing safe, reliable and affordable electricity to 
their consumer-owners. Like police, fire and other emergency service 
personnel, electric co-op employees frequently confront life-
threatening situations and selflessly put themselves at great personal 
risk. Amidst the day to day dangers associated with the delivery of 
safe, reliable and affordable electricity--often during or in the 
immediate aftermath of hurricanes, floods, tornados and other natural 
disasters--many co-op employees continuously go above and beyond the 
call of duty:

     During the January ice storm in Greenfield, IA, Farmers 
Electric Cooperative had 18 of their linemen, led by Nick Kintigh, Doak 
Grantham, Paul Weber, Pat Held, Dennis Frank and Pat Armstrong, plus 44 
linemen and two retired linemen from other co-ops in Iowa, Missouri, 
and Kansas reported for emergency duty. Even before the storm ended, 
crews were out to get as many of the 211 poles downed during the storm 
back up and working to keep the lights on.
     On the evening of June 6, the North Platte River uprooted 
a tree that took out transmission lines on an island in the middle of 
the river operated by Carbon Power & Light Cooperative, based in 
Saratoga, WY. With the river 10 percent above flood stage, water ran 
over the broken live lines with the poles still attached. Carbon's 
Operations Manager, Dave Cutbirth, who lives about 50 miles from 
Saratoga, turned around and went back to join Tom Westring, Nick Carey, 
Jeff McCarther, Bryn Hinz, John Saier, Kelly Lang and Bill Dahlke who, 
with the assistance of the local fire and rescue team, were boarding 
rafts in wetsuits in the raging river to get to the downed lines. Even 
more linemen were on either side of the river positioning the raft and 
moving equipment into place. At the same time, WY National Guardsmen 
positioned themselves down river to catch any ``floaters''. This was 
the first time anything like this had happened, so the crew was working 
on pure instinct. This quick thinking and bravery resolved the outage 
in 4\1/2\ hours, that would otherwise have left Saratoga and 
Encampment, WY in the dark for days if they had waited for the water to 
recede.

    I could go on and on for hours with stories like these from every 
State over the years, not to mention the employees who lost their homes 
during Hurricane Katrina, or more recently from tornadoes in Alabama 
and Oklahoma, who stayed on the job for days before even attempting to 
rebuild their lives.
Electric Cooperatives Role in Our Communities
    Since our humble beginnings in the mid-1930s, electric 
cooperatives' long-term business plan has been to provide safe, 
affordable and reliable electricity for our consumer-owners. A critical 
component of this commitment is to eliminate volatility and 
unpredictability in their annual budgets, and ultimately electricity 
rates. On average, 60 to 80 percent of a distribution electric 
cooperative's annual budget will be the cost of wholesale power, 
distantly followed by salaries and benefits. To prevent sharp spikes in 
electric bills, our power-producing Generation & Transmission (G&T) co-
ops work day-in and day-out to avoid unpredictable and highly volatile 
wholesale electricity prices for our distribution systems that would 
make electricity unaffordable for their consumer-owners.
    These same principles--to eliminate volatility and 
unpredictability--are also critically important to all companies like 
electric cooperatives that sponsor defined-benefit pension plans.
Co-op Commitment to Employees--Retirement Savings Plans
    Economic security in retirement is a leading concern for all 
Americans, including electric cooperative employees. NRECA members are 
committed to preserving and enhancing the voluntary employer-sponsored 
retirement system and the tax policies that support it. NRECA is proud 
that the vast majority of its members offer comprehensive retirement 
benefits to their committed employees through a traditional defined-
benefit plan (the NRECA Retirement Security Plan) and a defined-
contribution plan (the NRECA 401(k) Plan). These ``multiple-employer'' 
retirement benefit plans (under  413(c) of the Internal Revenue Code) 
are operated to maximize retirement savings for employees, retirees and 
their families and provide each co-op employee the financial means to 
enjoy a comfortable and secure retirement.\3\
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    \3\ This permits electric cooperatives to pool experience and 
expenses while being controlled by a single Plan Document with limited 
optional plan features for each employer that is not administered 
subject to a collective bargaining agreement--which differentiates us 
from ``union multi-employer plans.'' The Plan annually files one Form 
5500 with the U.S. Department of Labor. Each participating employer 
must execute an adoption agreement that binds them to the plan terms. 
For this reason we operate as a type of single-employer plan for some 
legal and administrative requirements, but each participating employer 
must meet other requirements, such as IRS nondiscrimination 
requirements, individually. Contributions to the Plan are pooled in a 
single trust and (unlike Master Prototype Plans) are available to pay 
benefits to employees of any of the participating organizations. Also, 
for funding purposes, the Plan is treated as one plan, rather than as a 
collection of single-employer plans, pursuant to Code section 
413(c)(4)(B). This funding regime is very important to us, as it allows 
us to deal with funding issues with one overall approach, instead of 
some 900 different approaches.
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The NRECA Retirement Security Plan
    The NRECA Retirement Security Plan (the ``Plan'') provides 
comprehensive, guaranteed retirement benefits to over 63,000 employees 
and retirees throughout the United States. Our 900+ members have as few 
as four employees, with a median payroll of 48 employees. Our 
``multiple-employer'' defined-benefit pension plan provides 
cooperatives with a convenient and affordable mechanism to pool 
resources, maximize group purchasing power and leverage economies of 
scale that would otherwise be unavailable to small businesses like 
cooperatives. In fact, that is why NRECA created the Plan in 1948--our 
members could not afford all of the administrative expenses to set up 
and operate a plan on their own, and financial institutions were not 
interested in employers of our size.
    When defined-benefit plans were first created, Federal pension 
policies acknowledged that all business activities were cyclical. That 
is, Congress recognized that every sector of the economy had good times 
and bad times, which made defined-benefit plans enormously popular as a 
recruitment and retention tool to reward long-service employees through 
the 1980s. Until Congress amended the ``full funding limit'' rules 
(effective in 1988), the tax code allowed employers to contribute more 
to their retirement plans in good times, and less in bad times, 
recognizing the need for more capital in bad times. For the next 12 
years, the Plan was so overfunded under these rules that electric 
cooperatives were prevented from making any additional contributions at 
all (1988-1993), or at best only permitted partial funding (1994-99). 
Since then, our members have funded the Plan as responsibly as 
possible, but policies like these and others that require more funding 
by companies during down financial markets make funding these plans 
extremely difficult. It is critical to remember that defined-benefit 
plans are invested for the long-term with liabilities extending out for 
decades, so Federal policies should be carefully crafted to balance the 
need to properly fund plans today, while ensuring that companies can 
weather cyclical financial storms to remain in business for the long 
term.
    PPA codified the core, fundamental principle that a promise made is 
a promise kept. That is, it sought to strengthen the private retirement 
plan system with substantially increased funding requirements and 
improved disclosure to participants so that long service employees were 
more able to count on a secure, financial retirement. And, while the 
PPA has already been a success in many respects, the economic calamity 
that followed its passage in 2008 and 2009 with extraordinary 
investment losses for all employer-sponsored retirement savings 
vehicles demonstrated that even very good legislation may need to be 
refined to recognize new, unforeseen economic challenges.
Economic Downturn Impact on the Plan and Employees
    While PPA recognized that by design, NRECA's ``multiple-employer'' 
defined-
benefit plan posed no risk of default to the PBGC and delayed 
implementation of many provisions until 2017, electric co-ops were not 
immune from the unprecedented market losses of 2008 and early 2009. In 
real dollars, the Plan's assets were valued at $3.5 billion on December 
31, 2008, a 30 percent ($1.5 billion dollars) drop from the previous 
year. On December 31, 2009, it had gained back some but not all of the 
previous year's losses. As a result, average Plan contributions in 2010 
were 35 percent higher than in 2009, dramatically increasing short-term 
liabilities that forced some co-ops to make the difficult choice of 
increasing electricity rates, reducing or eliminating retirement 
benefits all together, or even laying off quality employees to pay for 
these increased liabilities. As a result, co-ops now, on average, 
contribute 23 percent of payroll to the Plan, making it an even larger 
part of total compensation.
    In both good times and in bad times, electric co-ops have kept 
their promises to their employees and retirees, which has not always 
been easy. Congress specifically recognized the challenges faced by 
plan sponsors during the economic downturn. As a result, it passed 
legislation (Pub. L. 111-192) that directly permitted plan sponsors to 
implement a ``2 plus 7'' or 15-year extended amortization schedule for 
funding shortfalls. This was supported by nearly every employer and 
labor union that sponsors a plan (including NRECA) because it gave all 
parties more time to make up for the losses of 2008 and early 2009. 
NRECA applauds your efforts to enact this legislation last year.
    We believe providing an employee with a secure retirement is 
critical to reward their commitment to providing our consumer-owners 
with safe, reliable and affordable electricity.
DB Plans Work for Electric Cooperatives, But Financial Challenges are 
        Growing
    As you know, keeping rural America's best and brightest ``at home'' 
has become an increasingly difficult task, with so many young people 
going to more urban areas for other employment and educational 
opportunities. The strongest recruitment and retention tool for 
electric cooperatives continues to be their employee-benefits 
programs--particularly their defined-benefit pension plans. As a 
consumer-owned business, each electric cooperative is focused on 
serving its community though its workforce. While many publicly traded, 
international companies see 20 to 30 percent or more annual employee 
turnover, electric cooperatives see less than a 5 percent annual 
employee turnover, with more than \2/3\ of cooperative employees 
spending their entire working careers within the cooperative family. 
Our members understand the very real recruiting, training, and 
development costs for new hires are 1.0 to 2.0 times annual pay. As 
such, our defined-benefit plan rewards long service employees, and 
allows our members to invest in these key employees without having to 
face these substantial replacement costs.
    Each co-op plan has a uniform benefit formula that treats all 
employees the same regardless of pay--from the CEO to the apprentice 
lineman. Over time, employees are able to accumulate substantial 
benefits for retirement security. This guaranteed security, however, 
has become much more difficult to sustain in recent years because of 
volatility in the financial markets, which leads to economic 
uncertainty and volatility for all businesses that sponsor defined 
benefit plans.
    We are looking toward the future, working with our members to 
maintain our Plan going forward. Cost uncertainty is anathema to any 
business, let alone one that sponsors an increasingly complex and 
expensive defined-benefit plan. This is especially true for companies 
that run ``at cost'' like electric cooperatives. Policies that increase 
volatility in contribution rates and require more funding by companies 
during down financial markets has created a trend over the last decade 
for employers to freeze or completely eliminate defined-benefit plans. 
As such, electric cooperatives sometimes ask us: ``If everyone else is 
cutting their defined benefit plans; why aren't we?'' Thankfully for 
rural America that has not happened, largely due to our business model 
and the unique multiple-employer plan design that reduces complexity, 
and maximizes group purchasing power that would otherwise be 
unavailable while allowing cooperatives to tailor benefits to meet 
their needs. Many in the defined-benefit plan industry are aware that 
the multiple-employer plan model may be one of the best ways to 
encourage employers nationwide to reestablish traditional retirement 
plans. Congress should continually examine new and innovative policies 
to encourage current plan sponsors to remain ``in the game'' and should 
reject policies that leave companies no choice but to abandon the 
system.
Current Policies and Proposals Raise Concerns, Opportunities
    PBGC Premiums--In his 2012 Budget Request to Congress, the 
President proposed giving PBGC the authority to set its own premiums, 
to utilize a company's ``credit rating'' in determining such premiums, 
and estimates premium increases of $16 billion over 10 years to 
alleviate the PBGC's alleged deficit. NRECA strongly believes that 
Congress should not, under any circumstances, cede its taxing authority 
to the Administration or allow PBGC to set its own premiums. Further, 
the idea of using ``credit rating'' or some other creditworthiness 
proxy has been specifically rejected by Congress--the latest time was 
during consideration of PPA. This role for a government agency would be 
inappropriate, especially for private companies and non-for-profit 
entities like electric cooperatives--or even NRECA as a trade 
association--that are not credit rated. PBGC has also stated that their 
$16 billion increase would be focused on ``at-risk'' companies only, 
and the PBGC has further stated that 20 percent of the 100 largest 
defined benefit plans are maintained by companies that are below 
investment grade. For companies already facing financial difficulties, 
massive premium increases would force those employers to discontinue 
providing retirement benefits altogether. We do not believe there is 
any way for PBGC to assess all or even most of this premium increase on 
just 20 percent of defined benefit plan sponsors, which is why even 
``healthy'' companies are opposing this proposal. And finally, there 
are very serious questions about the size of the PBGC's deficit; and, 
by PBGC's own statements, there is no demonstrated basis for the 
drastic measures being considered. The PBGC states in its 2010 annual 
report that ``[s]ince our obligations are paid out over decades, we 
have more than sufficient funds to pay benefits for the foreseeable 
future.'' Since there is no immediate crisis, Congress should not rush 
to relinquish its authority to establish appropriate premium 
requirements, or to raise them unnecessarily. Raising PBGC premiums, 
without any hearings or analysis of the value of the coverage received 
by the plan sponsors amounts to a tax on employers that have 
voluntarily decided to maintain defined benefit plans.
    IRS Regulation Prevents Co-ops from Keeping their Promises to 
Employees--Electric cooperatives understand the realities of the tight 
market for skilled labor in rural America, and value long service 
employees. To prevent co-ops from losing their most valuable employees 
to retirement from these physically demanding jobs, the Plan permits 
employees to ``quasi-retire''--that is, receive ``in service'' 
distributions at the Plan's NRA--including 30 years of benefit service. 
Without this feature, many needed employees would be forced to retire 
in order to obtain the Plan's most valuable benefit. This feature is a 
win-win for cooperatives and employees, and has been a part of the Plan 
for 25 years. While targeting a new ``Cash Balance Plan'' technique, 
the IRS published an immediately effective final regulation on May 21, 
2007 (72 Fed. Reg. 28604, et. seq. (2007)) that could unfairly prevent 
employees with 30 years of benefit service who wish to continue working 
from receiving their benefits. Legislation has been introduced in the 
two preceding Congresses--the ``Incentives for Older Workers Act of 
2010'' (S. 4012) in the 111th, and the ``Aging Workforce Flexibility 
Act of 2007'' (S. 2933) in the 110th--to prevent this from happening. 
We urge Congress to include this legislation in any pension bill before 
the end of this year, as some 500 employees at 188 co-ops who have been 
making life-changing financial decisions could be prevented from 
receiving their earned benefits in 2011 alone; over 2,100 employees at 
291 co-ops could be impacted over the next 5 years because of this rule 
intended to address a completely different issue.
    Eliminating/Limiting Retirement Savings Tax Policies--Congress and 
the Administration are focused on reducing budget deficits and the 
national debt, and are considering changes to the deferred tax 
treatment of defined-benefit plans, defined-contribution plans and 
other retirement savings vehicles that provide the economic and social 
safety net for a secure retirement to generate revenue for the 
Treasury. Eliminating or diminishing the current tax treatment of 
employer-
sponsored retirement plans like the NRECA Retirement Security Plan or 
401 (k) Plan will jeopardize the retirement security of tens of 
millions of American workers, impact the role of retirement assets in 
the capital markets, and create challenges in maintaining the quality 
of life for future generations of retirees. While we work to enhance 
the current retirement system and reduce the deficit, policymakers must 
not eliminate one of the central foundations--the tax treatment of 
retirement savings--upon which today' s successful system is built. As 
you consider comprehensive tax reform and deficit reduction, we urge 
you to preserve these provisions that both encourage employers to offer 
and workers to contribute to retirement plans, and prevent these 
critical plans from becoming ``Piggy Banks'' for the Federal 
Government.
                               conclusion
    NRECA strongly believes that any reforms to the retirement savings 
system should continue to encourage workers to provide for their own 
economic security, while encouraging employers to continue sponsoring 
benefit plans. Going forward, we need to restore a critical, very 
logical element from the period when defined benefit plans were most 
popular: funding rules that allow companies to contribute more during 
good economic times, and less during bad times. The current system 
often works the opposite way. We hope to continue our work with the 
committee to address the challenges of administering and participating 
in a defined-benefit pension plan, particularly ``multiple-employer'' 
plans like NRECA, so they remain a viable vehicle in the future for 
companies trying to do the right thing--providing meaningful retirement 
benefits to their employees. I look forward to answering your 
questions.
                                Exhibits

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The Chairman. Thank you very much, Mr. Stephen.
    Mr. Bertheaud. Bertheaud (Berthode) or Bertheaud 
(Berthoud)?
    Mr. Bertheaud. Thank you. Bertheaud (Berthoud). Thank you.
    The Chairman. Bertheaud. Thank you, Mr. Bertheaud. Please 
proceed.

   STATEMENT OF EDMOND P. BERTHEAUD, JR., CHIEF ACTUARY AND 
     DIRECTOR OF CORPORATE INSURANCE, THE DUPONT COMPANY, 
                         WILMINGTON, DE

    Mr. Bertheaud. My name is Edmond Bertheaud. I'm the chief 
actuary and director of Corporate Insurance for the DuPont 
Company. I serve on the American Benefits Council board of 
directors, on whose behalf I testify today.
    I thank Chairman Harkin, Ranking Member Enzi, and the 
members of the committee for the opportunity to be here today 
to discuss the role of the employer-sponsored defined benefit 
pension plan.
    The American Benefits Council is a public policy 
organization representing principally Fortune 500 companies and 
other organizations that assist employers of all sizes in 
providing benefits to employees. Collectively, the Council's 
members either sponsor directly or provide services to 
retirement and health plans that cover more than 100 million 
Americans.
    DuPont is a science-based products and services company 
founded in 1802. DuPont put science to work by creating 
sustainable solutions essential to a better, safer, healthier 
life for people everywhere. Operating in more than 90 
countries, DuPont offers a wide range of innovative products 
and services for markets, including agriculture and food, 
building and construction, communications and transportation.
    DuPont has operated a defined benefit pension plan for over 
100 years. Beginning in 2007, DuPont chose to change its 
emphasis from defined benefit to defined contribution. The 
defined contribution plan now provides a 3 percent company 
contribution plus a full match of the employee contribution up 
to 6 percent of pay. New employees no longer participate in the 
defined benefit plan, but to help existing employees with the 
transition, accruals in that plan continue for those employees 
at one-third of their previous rate.
    Defined benefit plans are an effective means of providing 
long service employees with a secure retirement. Such plans 
protect employees from investment risk and offer employees 
guaranteed income for life. In that regard, DuPont's defined 
benefit plan has never offered a lump-sum option and was 
designed to provide employees with a steady stream of 
retirement income.
    As a matter of policy, we and many other Council members 
are supportive of the defined benefit system. However, the 
legal and competitive environments have caused many companies 
to move away from that system. We hope that a discussion of the 
reasons for this will be helpful to the committee.
    In brief, here are our primary concerns, together with the 
concerns of other Council members.
    First, publicly traded plan sponsors have financial 
reporting considerations. Under U.S. generally accepted 
accounting principles, defined benefit pension plan assets and 
liabilities are determined annually in a snapshot view. Such 
snapshots affect the sponsor's balance sheet immediately so 
that when a sudden shortfall arises as a result of a severe 
economic downturn such as we experienced in 2008 and 2009, or 
due to low spot interest rates, investors can become concerned.
    Shortfalls also cause volatility in the sponsor's corporate 
income, and the rating agencies consider them in the same 
category as debt.
    By contrast, the cost of defined contribution plans is 
stable as employee compensation, results in no long-term 
company liabilities, and require very little explanation to 
investors.
    Second, defined benefit plan funding rules used to be 
structured to permit companies to contribute less during 
challenging economic times and more during favorable economic 
times. This made defined benefit plans very attractive to 
companies. Unfortunately, over the last 25 years, the pendulum 
has swung in the exact opposite direction. Now the rules are 
less flexible. Extremely large and potentially unfavorable 
contributions are required when times are toughest. Defined 
benefit funding has also become less predictable, which is 
inconsistent with business planning.
    Third, it seems many employees do not value the promise of 
a lifetime income as much as they value retirement accounts. 
Without supportive accounting and funding rules, and with 
employee sentiment favoring defined contribution plans, 
employers are not in a position to educate employees about the 
value of a defined benefit pension plan.
    Fourth, the significant increases in PBGC premiums that are 
being discussed, and the PBGC deficit itself upon which the 
increases are being justified, should be carefully examined by 
Congress so as to avoid burdensome and inappropriate increases. 
There are serious questions about the size and calculation of 
the PBGC's deficit that should be understood by Congress.
    Fifth, the regulation of employee benefit plans has grown 
considerably, and the employee benefits field has become an 
area of the law that is well known for its complexity and 
burdensome regulatory regime. To be sure, plan sponsors 
appreciate the importance of rules that are appropriately 
protective of plan sponsors' and participants' interests. But 
those interest are not well served when requirements are 
unnecessarily broad, when there are conflicting rules from 
agencies, overlapping reporting, and communication requirements 
where the rules are very overly burdensome.
    We look forward to working with the committee to find ways 
to improve the regulatory environment.
    In closing, the employer-sponsored retirement system is 
important to the long-term retirement security of Americans. 
Its strength is dependent on a concerted effort amongst all 
stakeholders--government, employers, and employees. Attaining 
retirement security is dependent on developing consensus on 
policy, a strong and flexible legal and regulatory environment, 
and improved understanding among employees of the importance of 
retirement security and the value of benefits being offered.
    We look forward to working with the committee as they delve 
into these issues. Thank you, and I'm happy to answer any 
questions.
    [The prepared statement of Mr. Bertheaud follows:]
             Prepared Statement of Edmond P. Bertheaud, Jr.
    My name is Edmond P. Bertheaud, Jr., and I am chief actuary and 
director of Corporate Insurance for the DuPont Company. I also serve on 
the Policy Board of Directors for the American Benefits Council (the 
``Council'') for whom I am testifying today. On behalf of DuPont and 
the Council, I want to thank the committee for holding this hearing on 
such a critical topic and for inviting us to testify.
    The Council is a public policy organization representing 
principally Fortune 500 companies and other organizations that assist 
employers of all sizes in providing benefits to employees. 
Collectively, the Council's members either sponsor directly or provide 
services to retirement and health plans that cover more than 100 
million Americans.
    DuPont is a science-based products and services company. Founded in 
1802, DuPont puts science to work by creating sustainable solutions 
essential to a better, safer, healthier life for people everywhere. 
Operating in more than 90 countries, DuPont offers a wide range of 
innovative products and services for markets including agriculture and 
food; building and construction; communications; and transportation.
    DuPont has operated a defined benefit pension plan for over 100 
years. The plan pays monthly benefits based on years of service and 
average pay. The intent of the plan is to provide a retirement income 
stream. There has never been an option to receive pension benefits in a 
lump sum, except as required to preserve benefit forms after 
acquisitions.
    Starting in the early 1970s, DuPont has operated a defined 
contribution plan in addition to the defined benefit plan. This plan 
provided the opportunity for employees to save by payroll deduction and 
was meant to supplement retirement income from the pension plan. For 
most of this plan's existence, the company matched half of the 
employee's contribution up to 6 percent of the employee's base pay.
    Beginning in 2007, DuPont chose to change its emphasis from defined 
benefit to defined contribution. The defined contribution plan now 
provides a 3 percent company contribution plus a full match of the 
employee contributions up to 6 percent of pay. New employees no longer 
participate in the defined benefit plan, but to help existing employees 
with the transition, accruals in that plan continue at one-third of 
their previous rate.
                     views on defined benefit plans
    Defined benefit plans are an effective means of providing long-
service employees with a secure retirement. Such plans protect 
employees from investment risk and offer employees guaranteed income 
for life. As a matter of policy, we and many other Council members are 
supportive of the defined benefit system. However, the legal and 
competitive environments have caused many companies to move away from 
the defined benefit system. We hope that a discussion of those reasons 
would be helpful to the committee.
    In brief, here are our concerns together with concerns of other 
Council members:

    (1) Defined benefit plan funding rules used to be structured to 
permit companies to contribute less during challenging economic times 
and more during favorable economic times. This made defined benefit 
plans very attractive to companies. Unfortunately, over the last 25 
years, the pendulum has swung in the exact opposite direction. Now, the 
rules are less flexible. Extremely large and potentially unaffordable 
contributions can be required when times are toughest.
    (2) Defined benefit funding used to be predictable. Now it is 
significantly unpredictable, which is inconsistent with business 
planning.
    (3) Employees do not value the promise of lifetime income as much 
as they value retirement ``accounts''. Because of the other factors 
listed here, employers have less incentive to educate employees about 
the advantages of defined benefit plans.
    (4) Publicly traded plans sponsors have financial reporting 
considerations. Under U.S. generally accepted accounting principles, 
defined benefit pension plan assets and liabilities are determined 
annually in a snapshot view. Such snapshots affect the sponsor's 
balance sheet immediately, so that when sudden shortfalls arise as a 
result of a severe economic downturn such as we experienced in 2008 and 
2009, or due to low spot interest rates, investors can become 
concerned. Shortfalls can also cause volatility in the sponsor's 
corporate income and the rating agencies consider them in the same 
category as debt. By contrast, the cost for defined contribution plans 
is as stable as employee compensation, result in no long-term company 
liabilities and require very little explanation to investors.
    (5) The PBGC has maintained a practice of intervening in the normal 
business transactions of defined benefit plan sponsors. This is true 
even when there is not increased risk to the PBGC.
    (6) The Administration has proposed imposing a $16 billion tax on 
defined benefit plan sponsors through premium increases for an alleged 
PBGC deficit that plan sponsors generally did not create. PBGC premiums 
should be set only after extensive consideration by Congress of the 
real risks posed to the PBGC by defined benefit pension plans.
    (7) In recent years, the regulation of employee benefit plans has 
grown considerably, and the employee benefits field has become an area 
of the law that is well-known for its complexity and burdensome 
regulatory regime. To be sure, plan sponsors appreciate the importance 
of rules that are appropriately protective of sound objectives. But 
those interests are not well-served when requirements are unnecessarily 
broad and overly burdensome. Rather, the government should establish a 
coordinated legal and regulatory regime under which individual savers 
and employer plan sponsors can operate effectively.
                               discussion
    Funding. Employers can provide substantial help to employees when 
it comes to retirement savings and income with respect to all types of 
retirement plans. Employers are in an excellent position to know the 
retirement needs of their employee populations and can tailor their 
retirement programs to these needs. The government is in a unique 
position to help employers in this regard through supportive public 
policy. Many employers have maintained defined benefit pension plans 
over the years because public policy supported employer actions that 
served employees' needs.
    There has, however, been a steady trend away from defined benefit 
plans for some time now. One reason for this trend is a dramatic change 
in public policy regarding funding. Pursuant to that change, the 
largest, least manageable funding obligations arise during the hardest 
economic times.
    We recognize the great strengths of the Pension Protection Act of 
2006 (``PPA''). It was critical to establish the fundamental principle 
that a promise made is a promise kept. But it is also critical to learn 
from the economic downturn and refine the PPA in ways that respond to 
the lessons from the downturn. To help defined benefit plans, it is 
critical that plan sponsors have the flexibility to contribute less in 
the tough economic times.
    In this respect, when many defined benefit plans were put in place, 
their sponsors considered them to be long-term commitments. Plan 
sponsors expected to fund the plans as needed, but had flexibility to 
do so in a measured way when cash was available. Over time, the focus 
of changes in funding rules has been to view the sponsor's 
responsibility less as a long-term commitment and more as a short-term 
requirement, with much of the flexibility removed. Restoration of this 
flexibility is critical.
    ERISA section 4062(e). The PBGC recently proposed regulations 
regarding various corporate transactions, including the shutdown of 
operations. These proposed regulations would reverse longstanding PBGC 
written policy and would impose potentially enormous liabilities with 
respect to routine transactions that involve no layoffs or shutdowns 
and pose no threat to the PBGC. Companies will find it extremely 
difficult to continue sponsoring defined benefit pension plans if their 
routine business transactions trigger large liabilities unrelated to 
any risk to the PBGC. In our view, this regulatory project is a 
critical test of defined benefit plan public policy. Given the depth of 
our concerns, we were very encouraged when last fall PBGC Director 
Joshua Gotbaum recognized the importance of these proposed regulations 
and extended the comment period to receive further input. We thank the 
Chairman and Ranking Member of this committee for their leadership with 
respect to that extension. We further hope that this hearing will lead 
to an open dialogue among Congress, plan sponsors, and the PBGC so that 
the PBGC rules will encourage rather than discourage plan maintenance.
    PBGC premiums. Recently there has been increased attention paid to 
the possibility of increasing premiums paid to the Pension Benefit 
Guaranty Corporation including the possibility of it being included in 
deficit reduction measures. The Pension Benefit Guaranty Corporation is 
charged with protecting the pension benefits of workers and retirees in 
the event a company sponsoring a defined benefit pension plan goes 
bankrupt. The PBGC is partially financed through premiums paid by the 
sponsors of defined benefit pension plans. We urge Congress to take the 
time to fully analyze the implications of proposals to increase the 
premiums.
    Proponents of increasing PBGC premiums have often cited the PBGC's 
deficit and the need to ensure that companies sponsoring pension plans 
be responsible for that deficit. While many have tossed about the 
figure of $23 billion as PBGC's deficit, there are many serious 
questions about this number which should be critically examined by 
Congress. For example, the $23 billion number is based on a study of 
the cost of buying annuities to satisfy pension liabilities, despite 
the fact that the PBGC does not purchase annuities. This can have a 
very material effect on the size of the deficit. The PBGC actually 
resembles an ongoing pension plan in that it pays out benefits over 
many years.
    Moreover, PBGC's report states that almost 30 percent of its self-
reported deficit is solely attributable to the drop in interest rates 
over 12 months. Interest rates have been low as part of a national 
strategy to address recent economic challenges. It would be 
inappropriate to raise premiums without examining the role interest 
rates play in the PBGC's deficit.
    While we understand the pressures that Congress is facing to 
address budget deficits, significant increases in PBGC premiums must be 
carefully examined--and not adopted based on pressure to find revenue 
raisers.
    Regulatory Burdens. Regulations should not conflict, go beyond the 
statute in interpretation, be overly broad or hastily implemented 
because that causes frustration, extra costs and confusion. President 
Obama acknowledged the critical importance of avoiding regulatory 
conflicts and burdens in his January 18, 2011, executive order on 
Improving Regulation and Regulatory Review.
    One area of current concern is the use of swaps by pension plans. 
Pension plans use swaps to manage interest rate risks and other risks, 
and to reduce volatility with respect to funding obligations. If swaps 
were to become materially less available to plans, plan costs and 
funding volatility would rise sharply. This would undermine 
participants' retirement security and would force employers to reserve, 
in the aggregate, billions of additional dollars to address increased 
funding volatility. These reserves would have to be diverted from 
investments that create and retain jobs and that spur economic growth 
and recovery.
    In enacting the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Congress adopted ``business conduct'' standards to help 
plans and other swap counterparties by ensuring that swap dealers and 
major swap participants (MSPs) deal fairly with plans and other 
counterparties. A conflict has grown out of the business conduct 
standards and the DOL proposed fiduciary definition so that compliance 
with the business conduct standards would create a prohibited 
transaction under ERISA. The interaction of the business conduct 
standards under the Dodd-Frank Act and the DOL's proposed fiduciary 
definition regulations should be publicly and formally resolved in a 
way that provides legal certainty that using swaps will not cause a 
violation of ERISA by the time the CFTC finalizes the business conduct 
standards.
    Furthermore, under the proposed business conduct standards, if a 
swap dealer or MSP ``functions as an advisor to a plan with respect 
to'' a swap, the swap dealer or MSP must act ``in the best interests'' 
of the plan with respect to the swap. Under the proposed rules, many 
standard communications used by a swap dealer or an MSP in the selling 
process would cause the swap dealer or MSP to be treated as an advisor. 
This means that swap dealers or MSPs acting solely as counterparties 
would be required to also act in the best interests of the plan. A swap 
dealer or MSP as a party to a swap transaction cannot have a 
conflicting duty to act against its own interests and in the best 
interests of its counterparty with respect to the swap. If such a 
conflict were to be imposed on swap dealers and MSPs, all swaps with 
plans would cease.
    If a swap dealer or MSP clearly communicates to a plan in writing 
that it is functioning solely as the plan's counterparty or potential 
counterparty, no communication by the swap dealer or MSP should be 
treated as a ``recommendation''.
    Employers are committed to helping their employees save for 
retirement. However, the current defined benefit plan structure does 
not facilitate the creation or maintenance of pension plans. If 
Congress desires more defined benefit plans, significant changes may 
need to be made. The Council and its members look forward to working 
with this committee and Congress to find solutions.
    I appreciate this opportunity to discuss pension issues with the 
committee. Thank you for your time. I would be happy to answer any 
questions.
                                 ______
                                 
               Supplemental Statement of Edmond Bertheaud
    As mentioned in the full written testimony, in addition to a 
defined benefit pension plan that continues to accrue benefits for many 
of our employees, the DuPont Company defined contribution plan provides 
a 3 percent company contribution plus a full match of the employee 
contributions up to 6 percent of pay for a potential total contribution 
of 9 percent of compensation.
    On behalf of the American Benefits Council and the DuPont Company, 
I would like to clarify two points that were raised at the July 12, 
2011 hearing referenced above.
                          employee preferences
    First, the question was raised as to whether there is any support 
for the proposition that employees prefer account-based plans over 
traditional pension plans. The answer is, yes. For example, a 2006 
personal finance poll found that 79 percent of those surveyed preferred 
a defined contribution plan to a defined benefit plan. Wall Street 
Journal Online/Harris Interactive, ``Vast Majority Say the Government 
Should Take Action to Ensure Americans Have Enough to Live on in 
Retirement,'' September 2006. In a 2002 survey, 73 percent preferred a 
plan with company matching contributions over a pension plan 
Transamerica Center for Retirement Studies, ``Transamerica Small 
Business Retirement Survey.'' November 2002.
    We are not suggesting that the literature on this issue is uniform. 
We are suggesting that there is a solid foundation for concluding that 
employees favor defined contribution plans over pension plans. Further 
support is found in the overwhelming shift to defined contributions 
over the last 25 years. It is not realistic to conclude that this shift 
did not reflect the demands of the workforce. Retirement plans of any 
kind are expensive; employers naturally desire to spend this money 
wisely so they are constantly seeking the best plan to recruit and 
retain employees.
    In choosing the right plan for their workforce, employers are 
sensitive to the fact employees have become more mobile. The median job 
tenure--the number of years with a worker's current employer--is now 
4.4 for individuals 16 years and older. Bureau of Labor Statistics, 
``Employer Tenure Summary,'' September 2010. The percentage of employed 
wage and salary workers age 25 with over 10 years or more of tenure 
with their current employer is only 33.1. Bureau of Labor Statistics, 
Employer Tenure Summary, September 2010. As employees have become more 
mobile, many employers have tried to respond to workforce requests for 
retirement plans that grow more evenly across careers by establishing 
or strengthening 401(k) plans that include defined contributions by the 
employer.
    401(k) plans have been met with enormous popularity with employees. 
This is evidenced by the strong opposition employees have to changes to 
the defined contribution plan system and its tax benefits. Fully 88 
percent of all U.S. households disagreed when asked whether the tax 
advantages of defined contribution accounts should be eliminated, while 
82 percent opposed any reduction in account contribution limits. Nearly 
90 percent of all U.S. households disagreed with the idea that 
individuals should not be permitted to make investment decisions in 
their defined contribution plan accounts. Ninety-six percent of all 
account-owning households agreed that it is important to have choice 
in, and control of, the investment options in their defined 
contribution plans. Investment Company Institute, Commitment to 
Retirement Security: Investor Attitude and Actions, January 27, 2011.
    With the popularity of 401(k) plans, it is no wonder that many 
companies maintain very robust plans that include the use of automatic 
enrollment and automatic escalation as well as matching contributions. 
In the case of some of the more robust plans, additional contributions 
not contingent upon contributions made by employees are also made. The 
DuPont Company is one of these plans as was noted in the primary 
testimony.
                     dupont educational initiatives
    I would also like to clarify a second point. DuPont has worked very 
hard to educate its employees about retirement planning, and how to 
achieve a secure retirement. In this regard, we are extremely proud of 
our record.
    We do not provide information to employees about retirement plan 
designs that DuPont does not sponsor, nor are we aware of any company 
that does so or would consider doing so. As discussed below, we are 
dedicated to helping our employees use the very generous programs that 
we provide to attain retirement security.
    We offer several retirement planning tools to our employees through 
our relationships with our Defined Contribution recordkeeper--Bank of 
America Merrill Lynch (BAML) and our Defined Benefit recordkeeper--Aon 
Hewitt. There is no additional cost to the employees to use these 
services.
    Advice Access. Advice Access is a service which helps employees 
determine how much they need to save for retirement. Employees can use 
the tool through the BAML on-line Web site or by phone by talking with 
a BAML Participant Service Representative. The tool automatically 
factors in the employee's DuPont 401(k) and pension plan benefits. 
Employees can provide additional asset information (prior employer 
pension and savings plans benefits, other asset holdings, spouse asset 
holdings, etc.) as well as indicate various cash flow needs (college, 
weddings, second home, etc.) to be factored into the model at various 
retirement ages selected by the participant. The tool will then model 
expected needed savings both inside and outside--if necessary--of the 
401(k) plan so that the participant can generate expected cash flow 
needed at the retirement date. In addition, as part of the model, the 
tool makes recommendations for investment allocations across the 
various funds offered within the 401(k) plan.
    Pre-Retirement Financial Planning. In addition to the above, we 
have piloted a program to a select group of individuals who may be 
within 5-7 years of retirement. Participants in the program are 
encouraged to complete a ``Retirement Readiness'' profile through their 
on-line account at BAML. The profile questionnaire asks questions which 
help the participant think about the things needed in preparation for 
retirement--estate planning, beneficiary elections, elder care, getting 
pension estimates, etc. In addition, on-site seminars have been offered 
at various DuPont locations. These seminars are run by the Financial 
Advisors (FA) in the BAML Retirement Education Services group along 
with DuPont Human Resources. Seminars provide an overview of the DuPont 
benefit plans and Social Security, and help employees think about how 
to plan regarding their DuPont benefits as it relates to retirement. 
Employees also have the option to sign up for a free one-time 
consultation with a BAML FA who will provide specific recommendations 
based on information the employee provides to the consultant.
    The intent is to eventually offer this program to all employees--
tailored to the needs of the various life cycles--young new hire, early 
family, mid-career new hire, mid-career family, and retirement 
eligible.
    DuPont Connection. In addition to the two programs above, pension 
plan participants can ask for detailed projected defined benefit 
pension estimates through our pension recordkeeper--Aon Hewitt. The 
Hewitt Web site also allows for some do-it-yourself on-line retirement 
modeling for the DuPont pension and 401(k) plans at various retirement 
ages, pay assumptions, and savings rates and rates of return.
    New Hires. Upon hire we provide a ``Plan Highlights'' brochure and 
``Investment Choices Guide'' booklet which describe the 401(k) plan 
provisions as well as an overview of the funds offered. The ``Plan 
Highlights'' brochure describes: (1) the plan features (contributions, 
vesting, withdrawals, distributions, etc.), (2) how to enroll--
including a description of our auto-enroll/auto-escalation feature if 
no action is taken by the employee, (3) how employees can access and 
monitor their accounts, and (4) the benefits of early participation in 
the plan through modeling.
    The ``Investment Choices Guide'' describes the basic asset classes 
used by investors (including returns of these general asset classes 
over the past 10 years), discusses the risks and rewards of investing 
and the importance of diversification, and provides an overview of each 
of the funds offered in the plan along with the estimated fees and 
expenses of each fund. Detailed information for each of the funds can 
be found in our quarterly ``Fund Fact Sheets'' which are available on 
the BAML Web site.
    The Advice Access tool is described in both of these packages.

    The Chairman. Thank you very much, Mr. Bertheaud.
    And now we'll wind up with Mr. Marchick.

  STATEMENT OF DAVID M. MARCHICK, MANAGING DIRECTOR, CARLYLE 
                     GROUP, WASHINGTON, DC

    Mr. Marchick. Thank you, sir. Mr. Chairman, members of the 
committee, Senator Enzi, thank you very much for the 
opportunity to testify before you today on this important 
subject.
    I'd like to focus on four points. First, as you said, Mr. 
Chairman, pension funds provide essential liquidity that helps 
grease the U.S. economy. They're absolutely essential.
    Second, as was stated earlier, defined benefit plans tend 
to out-perform defined contribution plans, and therefore help 
to increase savings and consumer spending in the United States.
    Third, pension funds are a critical driver of growth and 
equally importantly are one of the only sources of long-term 
patient capital in the United States.
    And finally, pension funds provide the bulk of funding for 
venture capital, growth capital, private equity, and real 
estate funds, and those investments in turn create millions of 
jobs, more efficient companies, and drive innovation in the 
United States.
    The bottom line is that private and public pension funds 
create jobs and drive economic growth in the United States at a 
time when we desperately need growth and higher levels of 
employment.
    Defined benefit plans create wealth for the middle class, 
as was stated earlier. They out-perform other forms of savings. 
Two studies show that defined benefit plans out-perform defined 
contribution plans by about 1 percent a year. Now, that may 
sound trivial, but over a 35-year period where an individual 
contributes $3,000 a year, that person would have $200,000 more 
at the end of his or her period of employment. So the 
compounding is very significant.
    And let me give you two examples of long-term patient 
investments that have and will continue to create jobs in the 
United States which would not have been possible without a 
robust defined benefit system. Our firm invests in small, 
medium, and large companies in the United States. We've 
invested in about 80 companies in the United States; 75 percent 
of them are small or medium-sized companies.
    One example is an investment we made in 1999 in a company 
called Kuhlman Electric in Kentucky. Kuhlman made large 
transformers for the electric utility industry. And right after 
we made our investment, unfortunately, the entire market 
crashed, the California energy crisis, Enron, electric 
utilities cut capital spending, and we wrote down the 
investment to zero. Because this was long-term patient capital, 
pension funds had committed about 45 percent of the money to 
this particular fund and we had a 10-year investment horizon, 
we were able to weather the storm, put more capital up, and 
were able to ride out the cycle.
    And at the end of our investment period, which is 10 years, 
jobs were up by 25 percent, sales were up, and we were able to 
survive the downturn, turn the company around, and the end 
result was very positive.
    I'll give you another example, which is in Connecticut we 
have developed a partnership with the State of Connecticut to 
refurbish and revitalize the service centers where you stop for 
gas, food, and restrooms on the road on Highway 95. Now, these 
service plazas were built in the 1940s and 1950s, and had not 
been upgraded for 25 years. And obviously, as you all know, the 
State of Connecticut and other States are pressed for cash. So 
we basically structured a 35-year deal where we would put up 
the money, partner with the State of Connecticut. We would 
invest $178 million over 5 years and revitalize, refurbish, 
rebuild the service plazas, and then enter into a revenue-
sharing agreement with the State which will produce a 
significant amount of revenue for both the State and for the 
pension funds that invested with us in this investment. This 
project alone will create 375 jobs.
    We've partnered with the SEIU in the State to create good 
jobs, and the State will share about $500 million in revenue 
from the investment, and we have examples of this in virtually 
every State. In Iowa, for example, we have investments in six 
companies that have about 1,300 employees, and in Minnesota we 
have investments in 10 companies that have about 1,300 
employees; North Carolina--Senator Hagan was here--15 companies 
with 3,700 employees.
    State by State, and basically about 40 percent of the money 
that goes into venture capital, growth capital, real estate 
investing funds come from pension funds, and they would not be 
able to invest in long-term patient projects that can ride out 
the quarterly ups and downs over 5, 7, 10 years without the 
long-term investment horizon of pension funds.
    And so we've heard from you, Mr. Chairman, about the 
benefits that they pay to individuals, and we've heard about 
the huge contributions that the payouts mean for the middle 
class. But the role of pension funds as a driver of liquidity 
in the U.S. economy is absolutely central to the growth and 
vibrancy of our economy. Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Marchick follows:]
       Prepared Statement of David Marchick, Managing Director, 
                           The Carlyle Group
    Mr. Chairman, Senator Enzi and members of the committee, thank you 
very much for the opportunity to testify on the very important subject 
of the role that pension funds play in the U.S. economy. I also want to 
thank the Chairman and Ranking Member for approaching this important 
subject in a bipartisan manner.
    The Carlyle Group is a global alternative asset management firm 
with approximately $150 billion in assets under management. We care 
deeply about the subject of this hearing because our mandate as a firm 
is to generate attractive returns for our investors, the largest groups 
of which are public and private pension funds.
    I would like to focus on four points today:

    1. First, authoritative research demonstrates that pension funds 
provide essential liquidity that helps make U.S. financial markets 
function effectively and efficiently.
    2. Second, defined benefit plans tend to out-perform defined 
contribution plans, particularly where individual, non-professional 
investors make investment decisions.
    3. Third, pension funds are critical drivers of growth and economic 
activity in the United States because they are one of the only 
significant sources of long-term, patient capital. As such, they are 
able to invest in longer-term, less liquid asset classes, and those 
asset classes tend to create jobs and generate efficiencies in the U.S. 
economy.
    4. Finally, pension funds provide the bulk of funding for venture 
and growth capital, real estate and private equity investments, and 
those investments in turn create millions of jobs, and more efficient 
companies, driving innovation in the U.S. economy.

    The bottom line is that private and public pension funds create 
jobs and drive economic growth in the United States at a time when we 
desperately need more growth and lower unemployment.
   1. pension funds are an important driver of liquidity in the u.s. 
                                economy
    The size and scale of pension funds have helped to drive the 
development of the U.S. financial system. Defined benefit pension 
systems depend on asset accumulation to pay benefits, which increases 
demand for new investments and accelerates securities market 
development. World Bank researchers have established a causal 
relationship between pension funds' asset accumulation and stock market 
development in many countries.\1\ In other words, the larger and more 
developed a country's pension funds, the larger and more developed a 
country's stock market. Stock market growth obviously creates growth in 
income and national wealth.
---------------------------------------------------------------------------
    \1\ World Bank Policy Research Working Paper No. 2421.
---------------------------------------------------------------------------
    Pension funds also help stimulate the development of non-bank 
finance channels, including the issuance of corporate bonds and 
commercial paper that reduce businesses' external financing costs 
relative to bank loans.
    At the end of the first quarter of 2011, U.S. private pensions held 
$6.27 trillion in total assets, while State and local government 
employee pension funds held more than $3.03 trillion in assets.\2\ Of 
this $9 trillion of total assets, $4 trillion was invested directly in 
corporate equities, with an additional $2.4 trillion invested in mutual 
funds that invest in corporate securities. In total, private and public 
pension funds accounted for about one-third of the total market 
capitalization of domestic corporations, which the Fed estimates at 
$18.2 trillion. Pension funds play a key role providing liquidity for 
initial public offerings, private placements of equity and debt 
securities, and large block securities trades. Without a large and 
strong pension fund sector in the United States, the cost of capital to 
businesses would increase, slowing growth.
---------------------------------------------------------------------------
    \2\ Federal Reserve, Flow of Funds, June 2011.
---------------------------------------------------------------------------
    Defined benefit pension funds also provide large benefits to 
investors. By pooling savings and risks across beneficiaries, pension 
plans create economies of scale, which results in lower average costs 
for investors. These economies of scale also enable defined benefit 
funds to invest in large investment opportunities, including large-
scale natural resource development and other types of project finance 
that would otherwise be unable to attract competitive financing.
  2. defined benefit (db) plans out-perform defined contribution (dc) 
                                 plans
    DB plans' economies of scale and wide range of investment 
opportunities translate directly to higher returns than other forms of 
savings, including DC plans and individual retirement accounts (IRAs). 
By out-performing other forms of savings, DB plans reduce the amount of 
resources that need to be set aside today to fund a given level of 
future retirement income. In other words, for the same level of savings 
today, DB plans can generate sufficient future investment balances to 
provide higher levels of retirement income. The economy benefits 
because higher returns create more consumer demand, which in turn 
creates more rapid economic growth.
    Two authoritative studies published in the last 5 years show that 
DB plans achieved higher returns than both DC plans and IRAs. A 2006 
paper published by the Center for Retirement Research at Boston College 
found that DB plans out-performed DC plans by 1 percent per year 
between 1988 and 2004. This finding was confirmed by research from 
Watson Wyatt, a leading retirement consulting firm. Watson Wyatt also 
observed a 1.09 percent per year return differential between 1995 and 
2006. The Watson Wyatt study analyzed corporate DB plans and 401(k)s in 
both bull and bear markets and found that larger DB plans out performed 
401(k)s in part because larger plans ``generally have access to a wider 
variety of investment options and economies of scale and, in the case 
of DB plans, more investment expertise.'' That study concluded the 
following:

          ``Trustees for DB plans have a fiduciary responsibility for 
        investment performance. They or the professionals they hire 
        also usually have considerable financial education, experience, 
        discipline and access to sophisticated investment tools--
        advantages not typically shared by individual participants in 
        401(k) plans. These advantages help DB plan investors maximize 
        their returns and maintain well-diversified portfolios, so they 
        can generally ride out market fluctuations more smoothly than 
        401(k) plan participants.''

    Although one may question the benefit of a 1 percent differential, 
the results over time are significant. As shown in the hypothetical 
example below, an individual who made the median annual employee 
contribution of $3,000 for 35 years would realize a difference in the 
end-of-period balance of nearly $200,000 with just a 1 percent increase 
in annual returns.

                    Extrapolated Return Differentials
------------------------------------------------------------------------
                                                Defined        Defined
                                                benefit     contribution
------------------------------------------------------------------------
Return....................................   10.30 percent  9.21 percent
Years.....................................              35            35
Annual Contribution.......................          $3,000        $3,000
Ending Balance............................     $871,256.12   $678,715.35
------------------------------------------------------------------------

    As a firm that invests in companies throughout the United States, 
we understand the challenges that companies face from a competitive 
position with respect to defined benefit plans. U.S. companies are 
facing huge competitive pressures, and the costs and uncertainties 
associated with escalating retirement and medical obligations have led 
to a trend by corporations away from DB toward DC plans. But this trend 
does not undermine the fact that from a macro-economic perspective, as 
mentioned above, DB plans make enormous contributions to the U.S. 
economy and tend to out-perform other forms of saving.
 3. pension funds are critical drivers of growth and economic activity 
                          in the united states
    Pension funds represent long-term, patient capital--one of the only 
significant sources of stable capital in the United States. This 
approach to long-term investing is necessarily driven by their 
structure: DB plans have liabilities that extend 20, 30 or even 40 
years, and therefore need to invest in assets that will match their 
long-term obligations. While pursuing long-term investment strategies 
is directly in pension funds' self interest, their patient approach 
pays huge dividends for the economy. Pension funds allow firms to issue 
equity and longer-dated securities, which increases capital market 
development and lowers the cost of capital for American businesses.
    The length of time until a liability comes due helps to determine 
the expected return and liquidity characteristics of the investment 
used to fund that obligation. For example, a household with surplus 
cash today will choose different investment options for that savings 
depending on how it is expected to be used. If the money will be 
devoted to next month's cable bill, the household would likely choose 
to put the money in a savings account and accept a lower expected 
return in exchange for less volatility. Conversely, if that money were 
intended for a college tuition payment in 8 years, the more appropriate 
investment would be one that accepts greater short-term volatility in 
exchange for higher expected returns. By nature of the longer time 
horizon, pension funds can accept less liquidity and more short-term 
volatility in exchange for higher expected returns.
    It is widely understood that technological change drives long-term 
economic growth, productivity and improvement in living standards. 
Institutions that hold longer-dated assets are critical to financing 
technological change because the cash flow from new technologies is 
paid out in the distant future, well beyond the investment horizons of 
banks and other investors. For example, consider that the first 
microprocessor was introduced in 1971 with very uncertain commercial 
prospects. By 2010, computer technology had fundamentally transformed 
the economy and society and annual semiconductor sales had reached 
nearly $300 billion. Institutions unable to absorb short-term 
uncertainty and volatility cannot fund investments in transformative 
technologies that increase employment and living standards.
    Consider the following: A large commercial construction project 
that takes 10 years to develop is not likely to be funded by an 
institution that might need to sell its stake 18 months after 
groundbreaking. Similarly, the investor base of a company seeking to 
commercialize a new technology is not likely to be concentrated among 
investors subject to overnight withdrawals that might need to sell 
their interest in the venture during the early development stages.
  4. pension funds provide the bulk of funding for venture and growth 
  capital, real estate funds and private equity, which in turn create 
                 millions of jobs in the united states
    Pension funds are also the largest source of funding for venture, 
private equity and real estate funds--all of which tend to have long-
term investment horizons. More specifically, public and private 
pensions account for 42 percent of all investments in venture capital, 
real estate, infrastructure, and later stage corporate finance.\3\ 
Based on a prorated allocation to current invested capital totals, 
pension funds provide financing for more than $100 billion in venture 
capital investments and more than $400 billion in growth capital and 
later stage corporate private equity investments. In addition, 
according to the Real Estate Roundtable, pension funds currently 
provide approximately $160 billion of needed equity capital to the 
commercial real estate industry in the United States at a time when the 
sector has been under great pressure.
---------------------------------------------------------------------------
    \3\ Preqin, 2011 Global Private Equity Report.
---------------------------------------------------------------------------
    These investments contribute to a larger economy and more jobs. 
According to research from the World Economic Forum, productivity 
growth at private equity-backed companies is 2 percentage points 
greater than at comparable businesses, translating directly to higher 
wages. Private equity investment supports more than 6 million jobs in 
the United States, according to 2009 data compiled by the Private 
Equity Growth Capital Council. An estimated 9 million jobs are 
generated or supported by real estate--jobs in construction, planning, 
architecture, environmental consultation and remediation, engineering, 
building maintenance and security, management, leasing, brokerage, 
investment and mortgage lending, accounting and legal services, 
interior design, landscaping, cleaning services and more. In 2010, 
according to the National Venture Capital Association, more than 1 in 
every 10 private sector workers in the United States was employed by a 
company that had received venture capital funding at one point.
    A smaller DB defined benefit pension base would directly compromise 
the capital markets' ability to fund these types of investments. The 
investment opportunities and potential employment gains would still be 
there, but the lack of patient capital with a sufficiently long 
investment horizon would make financing these projects much more 
difficult.
    The Carlyle Group invests in small, medium and large companies, 
real estate, infrastructure projects and financial services firms. 
Whether an investment is in a small, growing company, a large 
infrastructure project or a real estate asset, our strategy is the 
same: we seek to build long-term value in a company or asset through 
investments, improvements in management, and efficiency enhancements. 
Today, we have investments in approximately 80 companies based in the 
United States, 77 percent of which are small or medium-size businesses 
(fewer than 2,500 employees), as well as about 125 real estate 
projects, which include commercial, residential, and health care or 
data centers. Combined, these companies employ more than 216,000 people 
in the United States in all 50 States.
    We invest in a variety of asset classes, most of which target long-
term investments of 4 to 7 years. Some of our funds have investment 
horizons as long as 10 or 12 years, one of the longest investment 
horizons a pension fund can invest in outside of 30-year bonds.
    My partners at Carlyle make the decisions when to invest, how much 
to invest, and how to manage the investment, but it is our investors' 
money, matched by a commitment of 3-5 percent of our own money, that 
makes an investment possible. In other words, without the long-term, 
patient capital provided by private and public pension funds, private 
equity investment would not be possible.
    Allow me to give you a couple of examples of how long-term, patient 
capital from pension funds has helped to create jobs and economic 
activity in the United States.
    One of Carlyle's earliest buyout funds, Carlyle Partners II, L.P., 
acquired Kuhlman Electric Corporation in October 1999. Public and 
private pension funds accounted for 45 percent of the capital committed 
to that fund. Kuhlman, which is based in Kentucky, was founded in 1894 
and provides power transformers and related products to utility 
companies.
    Carlyle managed our investment in Kuhlman through tough economic 
conditions resulting from California's energy deregulation initiative, 
the collapse of Enron, major reductions in customer capital spending, 
falling wholesale prices, and the sector's challenging credit crisis. 
As a result of these conditions, Carlyle valued the investment at zero.
    However, Carlyle remained committed to Kuhlman. In fact, several 
investors and Carlyle employees personally invested additional capital 
to strengthen the company. Carlyle, together with management, helped 
turn the company around. Nearly 10 years later, in August 2008, Kuhlman 
was sold by Carlyle to ABB, the global power and automation technology 
group, earning our investors an attractive return. For the fiscal years 
2005, 2006 and 2007, Kuhlman's revenue increased by approximately 26 
percent, 26 percent and 45 percent, respectively. In 2007, Kuhlman 
experienced record results in all three of its operating divisions. In 
addition, Kuhlman's overall employment levels increased approximately 
25 percent during Carlyle's ownership. At the time of the sale to ABB, 
the company had approximately 800 employees. During the downturn, 
Kuhlman maintained a positive relationship with its unionized 
workforce, and organized labor was an important part of the turnaround.
    Another Carlyle fund that is focused on infrastructure investments 
has developed an innovative partnership with the State of Connecticut 
to redevelop, operate, and maintain Connecticut's 23 highway service 
areas across the State. Public and private pension funds contributed 42 
percent of the $1.1 billion infrastructure fund that we manage.\4\ In 
this case, Carlyle's infrastructure fund formed a 35-year public-
private partnership with the State of Connecticut to finance the 
redevelopment and operations of highway service areas at a time when 
the State budget was under great stress. Carlyle and our partners plan 
to invest approximately $178 million in improvements and upgrades to 
the service areas over the next 5 years, investments that we estimate 
will create approximately 375 permanent and construction-related jobs--
a 50 percent increase above the 750 jobs that support the service areas 
today. In total, the State is expected to receive nearly $500 million 
in economic benefit from the redevelopment effort.
---------------------------------------------------------------------------
    \4\ The actual amount that fund investors contribute to a 
particular transaction frequently varies from the level of commitment 
those fund investors have made to a particular fund. This differential 
stems from a number of factors, including the investments made by a 
management team or co-investors.
---------------------------------------------------------------------------
    Neither of these investments would have been possible without the 
commitment of long-term capital to Carlyle's funds by private and 
public pension funds in the United States. In both of these cases, 
private and public pension funds contributed capital for 10 years, and 
we are working hard to provide attractive returns to those investors 
who have entrusted their assets with us.
    Thank you once again for the opportunity to testify.

    The Chairman. Thank you, Mr. Marchick.
    Thank you all very much. Very stimulating testimony. And, 
of course, last night I got to read your written testimony, and 
I think I'd like to start 5-minute rounds here.
    First let me start with Mr. Bertheaud. I just remember 
reading it, and I think you mentioned it also, and someone else 
mentioned that we had a number of plans that had gone down. Oh, 
yes, Senator Enzi said that in the 1980s we had 112,000--I 
think that was right--defined benefit plans, and in 2008 we 
only had 27,000.
    I keep asking, Why? What happened? Not just for you, but 
I'll start with you, Ms. Oakley. Why? Why did this happen? If 
it's a good driver in our economy, it's patient capital, 
everything I looked at said it's good investments, it's low 
cost. I forget who had the chart in here about the cost ratio 
between defined benefit and defined contribution, about half. 
So if you get the same benefit at half the cost, why did all 
these plans go by the wayside?
    Ms. Oakley. Mr. Chairman----
    The Chairman. I really want you to think about this because 
I think we have to come to grips with this.
    Ms. Oakley. Senator Harkin, one of the things that's 
interesting in terms of the work that NIRS has done, we're very 
familiar with private and public sector plans. If you look at 
what's happened in the public sector, where defined benefit 
plans continue to cover 80-plus percent of the employees, a lot 
of it is their workforce values that plan.
    It's also because the States have--they're not as regulated 
as the private sector because there's no PBGC, no government 
guarantee. And so the States really are responsible for making 
sure that they deliver those benefits to their employees, and 
they gradually, perhaps more gradually than what is currently 
allowed in the tax law for making contributions to pensions, 
they get to full funding. They get there a little slower, but 
they've gotten there and, again, they've gone through the same 
losses in the market.
    What we've seen when we compare public and private that's 
the most startling is the percentage increase in contributions 
from a year-to-year basis. And the private sector 
contributions, the volatility of those contributions is things 
that we've also heard is very concerning, the unpredictability 
of the contributions, where everything else is predictable in 
the defined contribution--the defined benefit plan, and the 
defined contribution plan has a predictable contribution. 
That's something that's critically important, too, from what we 
understand, for private sector employers.
    The Chairman. It still would seem to me that the business 
community wants more predictability, less volatility. So if 
there's more predictability and stability in defined benefit 
plans, why have we gone from--what did I say?--120,000 down to 
27,000, 112,000 down to 27,000, and I think it was mentioned by 
someone that defined benefit pension plans may be just going 
out the window. It may be the end of it.
    Mr. Stephen, any thoughts on this? I'm trying to come to 
grips with why this is happening.
    Mr. Stephen. I think from the employee side, Mr. Chairman, 
you're right, that it is a predictable, guaranteed retirement 
benefit that the employee or then eventually the retiree can't 
outlive. It's guaranteed income for life if they take the 
annuity stream.
    However, from the employer's side, since the full funding 
limit rules came into effect in 1988, those really--it changed 
the dynamic that began in the 1940s after World War II when DB 
plans were at their most popular clip, because of the way that 
the funding rules worked at the time. Obviously, I wasn't 
there, but my history tells me that the way the funding rules 
worked is business cycle and pension funding cycle were on the 
same page.
    Now we find ourselves 60 years later in a counter-cyclical 
market. So we have pension funding rules in a different cycle 
than business times, which makes you fund more in down markets 
when capital is at a premium, and doesn't let you fund as much 
in good times.
    The Chairman. I've read that in more than one testimony 
that we've had here. When did that happen? When were those 
rules changed? In other words, it makes sense to me. It's just 
common sense.
    Mr. Stephen. Sure.
    The Chairman. I'm not an actuary or anything. If you in 
good times can pre-pay and put in more, then in bad times you 
put in less. Why was that changed? You or Mr. Bertheaud or Mr. 
Marchick.
    Mr. Stephen. Why?, I can't answer. I can tell you when.
    The Chairman. When? When?
    [Laughter.]
    Mr. Stephen. When? It was when the full funding limit rules 
became effective in 1988.
    The Chairman. 1988.
    Mr. Stephen. Yes, sir.
    The Chairman. I've got to find out what that was all about. 
I was here at that time, but I was just a freshman Senator 
then. I just don't remember that.
    Mr. Stephen. If it's any consolation, I was in high school.
    [Laughter.]
    The Chairman. Rub it in, rub it in.
    [Laughter.]
    Mr. Bertheaud, again, OK, is this one of the keys, then, 
that change that was made?
    Mr. Bertheaud. Absolutely. That was one of the keys.
    The Chairman. Wow.
    Mr. Bertheaud. The concept of being able to fund more in 
good times and not to fund as much in bad times is a key for 
employers.
    Another thing, though, was the adoption of the current 
pension accounting rules and their development over the last 
several years, several decades. And where the companies, as 
there are fluctuations in the markets and fluctuations in 
interest rates which affect the amount of pension liabilities, 
these things now appear directly on the balance sheets of 
corporations, and corporations end up having to explain why do 
you have, why are you ending up with so much liabilities on 
your balance sheet, that kind of thing.
    So it ends up being a financial concern to the management 
of corporations.
    The Chairman. But it wasn't before 1988? I'm trying--I 
don't understand----
    Mr. Bertheaud. It was earlier in the 1980s, actually. The 
accounting rules came in about the early to mid-1980s, and they 
have developed over time. And especially just in this past 
decade, when the accounting rules became even more stringent 
and required these liabilities to go immediately onto the 
balance sheet.
    The Chairman. Mr. Marchick, I've gone over my time, but do 
you have a point of view on this?
    Mr. Marchick. Nothing to add. They explained it quite well.
    The Chairman. Senator Franken.

                      Statement of Senator Franken

    Senator Franken. Thank you, Mr. Chairman, for calling this 
very important hearing, and thank you all for your testimony.
    I'll followup on exactly what the Chairman was talking 
about later. I had just one bit of confusion in reading Mr. 
Bertheaud's testimony from yesterday. I'm sorry I came in late. 
I was at another meeting.
    But you basically say that employees prefer defined 
contribution to defined benefit plans. That has not been my 
experience when I talk to people who work for a living and who 
would be the people who would choose between those. And Ms. 
Oakley said that, in her testimony, 75 percent of Americans 
think that the decline of pensions have made it harder to 
achieve the American dream. And also I've heard from experts in 
previous hearings that Americans have difficulty 
conceptualizing what a 401(k) account balance means in terms of 
monthly retirement income.
    Can anyone respond to this, Mr. Bertheaud? Anybody else? 
You asserted this as a fact, and I'm wondering is it just your 
opinion? Is it based on something other than your opinion?
    Mr. Bertheaud. It's been the experience of members of our 
association that many employees, especially younger employees, 
when you're going out to hire employees, that they expect to--
they value more the account-based type, because they can watch 
it grow. They can watch their contributions go in, they can 
watch them grow. They can watch their company's contributions 
go in and grow, and they have value for it.
    Traditional defined benefit plans, and there may be other 
designs that are available, but traditional defined benefit 
plans often are stated in terms of benefits at age 65, and it's 
hard for a younger employee in the early parts of their career 
to appreciate that as much as an account that they can watch 
grow.
    Senator Franken. Is it because people don't see their life 
at one company the way people used to? Is that part of it?
    Mr. Bertheaud. That's quite a bit of it. And the 
traditional design, which is the plan that DuPont had sponsored 
for many years, if your career is broken at any point, even in 
two different employers, or maybe three different employers, 
often you leave a lot of value behind in that kind of an 
arrangement. So that the portability of the defined 
contribution type plan has become something that people value.
    Senator Franken. Right. Ms. Oakley, did you have something 
to say about this?
    Ms. Oakley. Yes, Senator. Senator, I think when we recently 
did some opinion surveys, and what we also found was that 8 out 
of 10 Americans think that everybody ought to have access to a 
traditional pension. We had to explain to some people what a 
traditional pension was because they didn't know about them. 
But when they heard what it was and what it delivered, I think 
especially in light of the last decade of investment returns, 
individuals really do value that type of lifelong income 
security that they can't outlive and a benefit that gives them 
a promise of a certain replacement of their income.
    It is a difficult thing for some people when they're 
younger to understand that, but clearly I think as we've seen 
particularly in the public sector, where employees have a long 
career as a teacher, a police officer, a firefighter, they 
value those benefits.
    Senator Franken. Those are all sort of public sector jobs.
    Ms. Oakley. Right.
    Senator Franken. And Mr. Bertheaud is the actuary at 
DuPont. So I think there's a difference. I mean, we kind of 
pinpointed some of this, which is that most people who work in 
the private sector, and even people who work in the public 
sector, don't expect necessarily to do that job for their whole 
life. A policeman or a firefighter probably does, a teacher 
might, but not necessarily someone who works at DuPont, someone 
who works at DuPont may see themselves changing jobs.
    You're an actuary, right? So you deal with numbers, and you 
trust numbers. You have a lot of faith in numbers. You're an 
actuary. Did you have any numbers? Are there numbers? Did you 
do any, or is this anecdotal?
    Mr. Bertheaud. I don't have numbers for you.
    Senator Franken. OK, because you made an assertion that 
was, I guess, based on your opinion, but you didn't state it as 
based on your opinion, and I find that troubling because as a 
Senator taking testimony, I'd really like to be able to 
understand what's fact versus opinion, especially coming from 
someone as distinguished as yourself.
    I guess I'm out of time. OK, we'll do another round.
    The Chairman. I want to pick up on Senator Franken. I can 
understand why a younger worker, if looking at a defined 
contribution plan and a standard defined benefit plan, would 
think to himself or herself, I like that defined contribution 
plan. I can understand that because I might leave DuPont. I 
might go someplace, and I take it with me. I can still remember 
in the 1980s, I was here. I was in the House at the time. I 
came over here in the mid-1980s.
    But I remember, that was the big deal about defined 
contribution plans. You could move it with you. And because the 
workforce had changed, people don't work at one company. They 
change four, five, six, seven times. Now you had portability, 
and at any point in time you could go in and see how much you 
had.
    That appeals to people. It appeals to me, and especially--
well, maybe not at my age, but it appeals to younger people, I 
would think. So I can understand that a younger person 
presented with just this or that might say, ``hmmm, I like that 
defined contribution.'' I don't have numbers, but I could just 
sense that that would be true, that they would like a defined 
contribution plan better.
    I think the problem is, as somebody mentioned, education. 
How are they being educated about their lifespan and how long 
they can live and the difference between a defined 
contribution, defined benefit? Also, and this is what intrigues 
me, and I've been wrestling with since we started this set of 
hearings, isn't there some kind of a hybrid out there, 
something that you brilliant people could come up with that has 
the aspects of defined benefit but which you can take with you 
and move as you go from company to company?
    Mr. Stephen, you have your plans in your rural electric 
cooperatives. You said employees tend to stay there, but what 
if they went from one rural electric to another, to another? 
Would they still have that same plan?
    Mr. Stephen. In our plan, Mr. Harkin, in fact--I was going 
to jump in. In our plan, in the NRECA Retirement Security Plan, 
if you stay within the cooperative family and you go from one 
co-op to the other, and both co-ops have a retirement plan, you 
continue to accrue. So you still have that portability inside 
of our multiple employer plan.
    Now, if you start working at a co-op and then you go work 
for DuPont, obviously that benefit is not portable from the co-
op to DuPont. However, they would roll it over to an IRA and 
then take it eventually. But inside the cooperative multiple 
employer plan, if you go from a co-op in Iowa to a co-op in 
Wyoming, it's a portable benefit. It's a unique thing to our 
multiple employer plan.
    The Chairman. Let's take that a step further.
    Mr. Stephen. Sure.
    The Chairman. This is what I'm wrestling with. So you've 
got small businesses.
    Mr. Stephen. Yes.
    The Chairman. Which employ most of the people in America.
    Mr. Stephen. Yes.
    The Chairman. Sorry, DuPont, but it's mostly small 
businesses out there. By the way, my brother worked all his 
life for DuPont, so I have very strong feelings about what a 
great company it is.
    But small businesses, if they could join some kind of a 
cooperative--did you guys say that?--or something----
    Mr. Stephen. We'd like for you to say that. Yes, sir.
    [Laughter.]
    The Chairman. Well, I don't know what it would be, but some 
kind of a network, because we all know insurance. Insurance, 
the broader the base, the cheaper it is for everybody, and the 
more stable it is.
    Mr. Stephen. Correct.
    The Chairman. And so if you had a system whereby small 
businesses could join in on defined benefit plans, so that if I 
worked for the ABC Company that had 10 employees, and then I 
went to work for the XYZ Company that had 30 employees and 
moved around like that, that each of them would have a stake in 
the defined benefit plan and I would somehow take it with me. 
Is that impossible?
    Mr. Stephen. I would just answer and say nothing is 
impossible, but it's going to be inherently difficult because 
of the myriad of existing regulations on----
    The Chairman. Well, if nothing else has come out of these 
hearings it's that we've got to look at these regulations. What 
you all have brought up here I've heard before, and something 
has got to be done about this. So we're going to zero in on 
that.
    I keep thinking that defined benefit plans aren't really 
dead. Sure, there's been this big cutback, but now what we're 
seeing are the fruits of that. People now are retiring without 
enough money to last them, one out of four without any assets 
at all in terms of retirement. The retirement stool was built 
on three legs, right? There's Social Security, a pension, and 
savings. So now we're down to two, down to Social Security and 
savings, savings being the defined contribution plan. So we've 
pulled one leg of that stool out from underneath it, and I want 
to know is there any way of reversing it.
    Ms. Oakley. Senator Harkin, there is a model too in small 
communities. For example, we just at NIRS did a study on six 
case studies of well-funded plans that survived the financial 
market meltdown. One of those plans was a plan in the State of 
Illinois, and many people might say that they'd be surprised 
that Illinois has a well-funded public pension, but this 
municipal plan which enables small communities in Illinois, 
small cities, towns to come into a larger plan that then 
provides benefits for all of their employees in a defined 
benefit structure is one of the best funded plans in the 
country.
    And so there are models out there that do work and provide 
that.
    The Chairman. I just asked him to get me all the data he 
could on that.
    I'm sorry. Senator Franken.
    Senator Franken. Well, again, Ms. Oakley, that again is for 
public employees, and I think we have to make the distinction. 
I mean, I have a defined benefit plan from being a member of a 
union where we had multiple employees, where I wrote for NBC, I 
wrote for Paramount, I wrote for on and on. But they paid into 
the Writer's Guild for me, and I have a defined benefit plan 
there. So that's a common defined benefit plan, right?
    Mr. Stephen. Just to clarify, yes, it is, Senator, in 
answer to your question, but there is a huge difference. And I 
know it's a term of art between multiemployer plan, which 
you're talking about.
    Senator Franken. Yes.
    Mr. Stephen. Which is subject to a collective bargaining 
agreement.
    Senator Franken. Right.
    Mr. Stephen. And a multiple employer plan like ours, which 
is not. We're under the single employer rules for all of our 
funding and reporting obligations.
    Senator Franken. OK.
    Mr. Stephen. But we do have multiple employers with a 
common employment bond in our plan. For example, we're all 
electric cooperatives.
    Senator Franken. Right. And I love electric cooperatives.
    Mr. Stephen. And we appreciate that.
    Senator Franken. We have a great electric cooperative in 
Minnesota, and I'm for increasing RUS loans, and I'm big on 
rural electric co-ops. Great.
    Mr. Stephen. And we thank you.
    Senator Franken. Absolutely. You're welcome.
    [Laughter.]
    OK. Now, on the regulation that we were talking about, Mr. 
Bertheaud, you talked to a number of these things, and Mr. 
Stephen, you talked to this, too, about the requirements at a 
down period to put in a lot of money when that isn't a good 
time to do it, and at a high point that your contributions are 
actually capped. Is that right, Mr. Bertheaud?
    Mr. Bertheaud. Yes. I think those caps, when it came about 
in 1988 and caused quite a bit less funding I think at that 
time, those caps have been relaxed somewhat by PPA in some of 
the more recent legislation, and that has allowed employers to 
contribute more when times are good. But it's still--the 
problem is that the requirements when times are bad can be so 
harsh----
    Senator Franken. Right.
    Mr. Bertheaud [continuing]. That it causes a lot of trouble 
for employers.
    Senator Franken. Did Congress do anything in the wake of 
this last downturn, the meltdown especially, to alleviate that 
at all?
    Mr. Bertheaud. Yes.
    Senator Franken. And what were those measures?
    Mr. Bertheaud. Yes. There was some relief given, and the 
idea in the PPA which passed in 2006, that any shortfalls 
needed to be funded over 7 years, amortized over 7 years. What 
the funding relief allowed was to amortize that just for a 
couple of years, not forever but just for a couple of years of 
shortfalls, to amortize it over 15 years or interest only for 2 
years and then over 7 years after that.
    Senator Franken. A longer period.
    Mr. Bertheaud. Right.
    Senator Franken. Let me ask you this, because the Chairman 
spoke to this and about education, and I think you kind of 
talked to it, about your employees wanting to have the defined 
contribution rather than defined benefit.
    Do you make an effort? Do you make an effort to educate 
your employees about what a defined benefit is and what the 
advantages are? I mean, we've had testimony on what the 
advantages are to the company and society in terms of patient 
capital. And I think everyone should understand that that's 
patient, like I have a lot of patience, as opposed to a doctor 
having a lot of patients, but patient, like long-term capital, 
and it's a good thing, right? As opposed to someone who is in a 
defined contribution plan and is jumping their investments all 
over the place.
    So do you educate your employees?
    Mr. Bertheaud. And I would say, the employers in our 
organization, the defined benefit rules and the contribution 
rules and the accounting rules that have kind of put a burden 
on us from that standpoint have really not put us in a position 
to educate our employees that defined benefit is the way to go 
because it presents such a burden for us as a corporation.
    Senator Franken. So you feel it's not in your interest to 
educate them, or it's not in their interest, or both?
    Mr. Bertheaud. That's----
    Senator Franken. I'm running out of time.
    [Laughter.]
    Mr. Bertheaud. I'm sorry, I'm sorry.
    Senator Franken. No, I'm sorry. I was kidding. You take 
your time on that one.
    [Laughter.]
    Mr. Bertheaud. I guess, I'm not sure that employers who are 
burdened by the regulation, etc, accounting rules, really find 
that it would make sense for them to be convincing people a 
defined benefit is the way to go when it presents such a burden 
to the corporation.
    Senator Franken. OK. Thanks for your honest answer. And I 
know, Mr. Chairman, if it's OK, Ms. Oakley seemed to want to 
respond as well.
    The Chairman. Please.
    Ms. Oakley. I did want to say, Senator Franken, one of the 
things that NIRS asked employees when we did this nationwide 
survey of people, both in defined benefit, defined contribution 
public/private, we said should the government make it easier 
for employers to offer defined benefit plans, and 50 percent of 
the people we surveyed who responded strongly agreed with that 
statement. Eight out of ten people agreed with it. So I think, 
again, there is a perceived value. Perhaps it's because they 
see the pension their parents have, the pension their 
grandparents have, and how it's enabled them to sort of get 
through the financial crunch, and they wonder about themselves 
not having a pension and wanting to have that flexibility.
    Senator Franken. Thank you.
    Mr. Stephen. Mr. Chairman, may I have one moment to----
    The Chairman. Sure, sure.
    Mr. Stephen. To Senator Franken, to your point on 
education, we actually have a total--and lawyers shouldn't use 
numbers, but we have 349 full-time employees between our 
Arlington headquarters and our Lincoln services operation that 
have something to do with administering our three benefit 
plans, our DB, our 401(k), and our group benefits trust. Of 
that number, we have 39 full-time people in our investments 
department, a subset of which, I believe it's a number of 10, 
that are personal investment retirement counselors, that are 
all about investment education on a one-on-one basis, on a 
group basis, and on a co-op basis. So we do retirement plans, 
asset allocation, long-term savings strategies and how to save 
to augment those three benefits together. And if you're a 
participant in one of the plans, you have a right to that for 
free.
    In addition, we have just under 20 what we call 
relationship managers. They are field reps inside of different 
regions of the State. For example, Karen Alexander is our 
representative in Minnesota. She has Minnesota and Wisconsin, 
doing employee meetings, retirement planning 10 years out, 5 
years out, one-on-one, as well as group settings, to try and 
prepare people, even in their 20s, on the value of retirement 
savings.
    Senator Franken. So that seems like a stark difference 
between you and DuPont. And thank you, Mr. Bertheaud, for your 
really honest response to that, which is that DuPont kind of 
feels it's not in its interests because of what you feel is the 
regulatory impediments to do this. So I thank you all for your 
testimony.
    Mr. Bertheaud. And, Senator Franken, understand that I'm 
also speaking not just for DuPont but for the American Benefits 
Council.
    Senator Franken. Oh, yes. I'm sorry.
    Mr. Bertheaud. I'm involved in that.
    Senator Franken. Thank you.
    The Chairman. Well, again, Mr. Bertheaud, going over your 
written testimony, you said DuPont has operated a defined 
benefit pension plan for over 100 years, and there's never been 
an option to receive pension benefits in a lump sum. Then 
starting in the early 1970s, DuPont started a defined 
contribution plan in addition to the defined benefit plan. So 
you have both now at DuPont.
    Mr. Bertheaud. We do have both now.
    The Chairman. And then, let's see, you match up to 6 
percent on the defined contribution, up to that.
    Mr. Bertheaud. Yes, plus a 3 percent contribution that does 
not require the employees to contribute.
    The Chairman. Oh, you put in. So if I work for DuPont and I 
want to have a defined contribution plan, if I didn't put in 
anything, you'd still put in 3 percent.
    Mr. Bertheaud. Yes, sir. Yes.
    The Chairman. And then how much would you put into the 
defined contribution plan? Then 3 percent?
    Mr. Bertheaud. Well, that is the defined contribution. We 
put 3 percent in----
    The Chairman. I mean defined benefit.
    Mr. Bertheaud. OK. The defined benefit plan right now is 
continuing only for existing employees.
    The Chairman. New employees don't get into it.
    Mr. Bertheaud. New employees do not get into the defined 
contribution plan.
    The Chairman. So you said that started in the 1970s. They 
offered it in addition to the defined benefit. When did you 
stop offering a defined benefit plan?
    Mr. Bertheaud. In 2007.
    The Chairman. Wow, just recently.
    Mr. Bertheaud. To new employees.
    The Chairman. Oh, I see. You said beginning in 2007, DuPont 
chose to change its emphasis from defined benefit to defined 
contribution. They didn't change emphasis, they changed the 
whole thing.
    Mr. Bertheaud. For new employees, yes. Current employees 
continue to accrue a portion of their benefits.
    The Chairman. So again, why in 2007 would DuPont end 
something they've done seemingly quite well for 100 years? Why 
would they end that in 2007?
    Mr. Bertheaud. It gets back to the burdens that we've 
talked about, the way the accounting rules end up putting the 
volatility of markets and the volatility of discount rates 
right on our balance sheet of corporations, and that combined 
with the funding rules that have become difficult for 
corporations to manage the fluctuations and having to 
contribute in down times, and these various reasons have caused 
employers to look more toward the defined contribution 
environment.
    The Chairman. Could you help us out a little bit more than 
that and maybe in writing or something?
    Mr. Bertheaud. We'd be happy to--the ABC staff would be 
happy to follow up with your staff, absolutely.
    The Chairman. A little bit more detail on that.
    Mr. Bertheaud. Absolutely.
    The Chairman. I'm still trying to get to why--OK, I 
understand the rules on pre-paying more and not paying. I get 
that.
    Mr. Bertheaud. Right.
    The Chairman. I get maybe some of the other reporting 
requirements. I don't understand completely some of the IRS 
problems there, but we ought to look at that, too.
    Is it in your opinion, Mr. Bertheaud, now not as DuPont but 
now wearing your other hat, the American Benefits Council, is 
it worth us to really look at how we can save and maybe re-grow 
a defined benefit plan in America for the reasons that Mr. 
Marchick talked about in terms of patient capital, long-term 
investment, stability? Is it worth it? And assuming that we can 
look at some of the rules changes, IRS changes, regulatory 
changes, to make them better and to figure out some way of 
making them portable, is it worth it?
    Mr. Bertheaud. I think it is worth it.
    The Chairman. Well, we'd like to do that. That's what we're 
trying to get our hands on. Like I told you at the beginning, I 
said I don't have the answers.
    Mr. Bertheaud. Right.
    The Chairman. But it seems to me everything that we've 
heard, not only from here but in previous sessions we've had, 
is that there is something good for the long-term interests of 
our country in terms of the long-term interests of the middle 
class of America, in terms of retirement, that other leg of 
that stool, that really is very compelling for a defined 
benefit program. So then I keep thinking, well, if that's the 
case, why are we losing them all? So that's what I want to try 
to figure out. As the Chairman of this committee, and I hope I 
speak for other members of the committee on both sides, that we 
try to figure that out and see if there's a path forward, if 
you believe they're really worth saving.
    Do you believe they're worth saving, Mr. Marchick, I mean 
defined benefit plans?
    Mr. Marchick. I think the idea that you've articulated is 
one that is well worth exploring. I understand the pressures 
from the business side as a company that invests in business, 
and we hear from management about these pressures all the time. 
But if you can take the individual flexibility of a defined 
contribution plan where people can take it with them, it's 
portable, they can make choices, combined with the benefits of 
a defined benefit plan where you have large pools of savings, 
professional management, and a very long-term investment 
horizon, that's a very attractive option.
    I don't know how you structure that from new legislation 
requirements, but if you could do that, that would be very, 
very attractive, and I think that would be a wonderful thing to 
do on a bipartisan basis because it takes the ideas that many 
on the Republican side advocate in terms of individual choice 
and individual flexibility, individual mobility, with the ideas 
of many on the Democratic side in terms of pooled savings, and 
it would be a very, very creative bipartisan approach to pursue 
that strategy for the benefit of the country.
    The Chairman. Mr. Stephen.
    Mr. Stephen. Mr. Chairman, I wouldn't say it's important 
that we do what we can, I'd say it's critical that we do what 
we can. And I think that with your leadership in this 
committee, with your dedication to this, we can come up with 
something that makes sense for business and ultimately for 
employees, which is the whole point.
    I would say that when you're looking at DB funding, we were 
trying to figure out what happened. Well, if you look at it 
from a company standpoint, you're looking at a long-term 
unfunded liability with unpredictable contribution rates year 
by year that are dependent on returns in the equity market, the 
financial market, and interest rates on the DB side.
    When you look at the DC side, at 401(k)s, I can look at my 
payroll for this year, know that I'm going to make a 1 percent 
negative election or a 1 percent base contribution or a 4 
percent match, and I know exactly what my number is going to be 
every year within a percentage point or two. I can budget for 
it. It's sure, it's predictable, and it's easy to follow.
    DB funding is completely different. It's an unfunded long-
term liability that the company now--if a company is now 
starting, if you're starting a small business, to your point, 
if we're in Iowa starting a small business, once I get past all 
of the FICA taxes and unemployment and everything that I'm 
doing to get my start-up company done, why am I going to have 
this new unfunded liability that I'm going to have no idea what 
my costs are going to be in 3 years, let alone I'm trying to 
survive to the next quarter?
    So it's a difference in the world marketplace where, to 
Senator Franken's point, when you look at anecdotal data, of 
course, but real data shows--the Department of Labor--that an 
average American will change jobs seven to eight times in their 
working career. Without that portability on the DB side, 
someone who works for a company for a year-and-a-half doesn't 
accumulate much, and the compliance costs and the start-up 
costs for that company to get that account set up for that 
person for a year-and-a-half there is upside-down, under 
water--use the analogy you want.
    So when you're looking at it that way, there's a difference 
between long-term employees with very low turnover where a long 
kind of legacy plan, if you will--I know that's a bad word 
sometimes when you're talking about pension plans--makes sense. 
For us, it makes sense. For a very different market, for 
example, I know of a company that has several gas station 
convenience stores, I believe their annual turnover is 166 
percent a year. They pay folks with no-fee debit cards. Those 
aren't the kind of people that should be having a DB plan. It 
makes no sense. They come and work for 2 weeks and then they 
don't show up again.
    So it's different depending on your market, depending on 
your business, and depending on your long-term goal.
    The Chairman. That's very good, very good.
    Yes, Ms. Oakley.
    Ms. Oakley. Senator Harkin, I think one of the other 
interesting things to look at and maybe learn a little bit from 
what happens in the public sector. A lot of people aren't aware 
that public sector employees make a significant contribution 
toward their defined benefit plans, just as sometimes happens 
in the multiemployer side. They do that, and it does help. It 
helps reduce the cost for the employer directly. It gives some 
predictability to the funding.
    It also gives the employees a stake in the game. That 
forced savings helps them get that ownership and start to value 
that defined benefit plan. So that even today as we're seeing a 
lot of reforms around the State, increased employee 
contributions, quite often that's done in an environment 
legislatively where there's discussion back and forth, or it's 
done on collective bargaining situations where employees agree 
willingly to contribute more because they value those defined 
benefit plans.
    So I think there are ways. And, in fact, I believe that one 
small piece of the Pension Protection Act that really hasn't 
gotten off fully was something called the DBK, which was a way 
of combining a defined benefit plan with 401(k) plans. And 
maybe there's some hope to go back and look at the DBK where 
you get that tax benefit for the employees and still have a 
defined benefit plan that's there to provide a benefit for the 
employees in the private sector.
    The Chairman. Very good.
    Senator Franken.
    Senator Franken. Well, I'm going to go look back at the 
DBK.
    Who, Mr. Bertheaud, makes up the American Benefits Council?
    Mr. Bertheaud. It's principally Fortune 500 companies and 
other organizations that assist employers in providing benefits 
to employees.
    Senator Franken. OK, because it seems to me here that we're 
talking about a whole bunch of different things that are 
happening all at once, different factors, one of which--and you 
talked about all the different uncertainty that faces a 
company, and Mr. Stephen talked to that a little bit. And 
talking about start-ups, DuPont, obviously, is not a start-up. 
Probably many of the Fortune 500 companies aren't start-ups, 
almost by definition.
    So what it seems to me is that what we're talking about 
here is a shift of the uncertainty from the corporation, from 
the business to the employee. And because this has happened 
over the last 20, 30 years, we're seeing--this is part of the 
middle class squeeze, if you will, or just another part of it, 
which is a shift of the burden from corporate America to people 
who are working and to the middle class. And that's why I was 
wondering whether you did education about the benefits of this.
    I want to ask Mr. Marchick a question just so that he can 
speak to the benefits, because you spoke to investments. How 
does a shift from defined benefit plans to defined contribution 
plans affect entrepreneurs and their access to capital, and 
could that shift have larger effects on the economy as a whole?
    Mr. Marchick. That's a great question. One of the key 
distinctions between investments in a typical DC plan versus a 
DB plan is that the DB plan can invest in long-term illiquid 
assets, a very long-term corporate investment, a long-term real 
estate investment, a long-term infrastructure investment, 10, 
20, 30 years.
    A defined contribution plan has to be liquid. And so 
therefore with liquidity, it's typically going to larger, 
publicly traded companies that are large enough to be on a 
stock market. So that money is not going into small and medium-
sized companies typically because they're not large enough to 
have liquidity.
    And so one of the benefits of a defined benefit plan is 
they support venture capital investments. They support real 
estate investments. They support growth investments, which are 
investments in companies that may or may not make it, but the 
ones that make it grow so much faster than the ones that don't 
make it that there's a risk/reward ratio that overall benefits 
the United States and benefits our economy and makes it the 
most dynamic economy in the world.
    And so creating pools of capital that can fund those long-
term riskier investments is essential for the vibrancy of our 
economy.
    Senator Franken. So the vitality, the dynamic nature of our 
economy is helped by defined benefits.
    Mr. Marchick. By large pools of savings that can invest in 
the whole range of assets, some liquid, some illiquid, some 
short-term, some long-term, that can create the most balanced 
portfolio to not only create attractive investments but also 
create better returns for those beneficiaries.
    Senator Franken. And is it in the interest of large 
corporations perhaps not to have that dynamism in the short 
term?
    Mr. Marchick. I think for large corporations--and again, we 
invest in small, medium and large. We see the pressures from 
the corporate side. Many large corporations, the uncertainty 
and the costs, the liability costs associated with long-term 
health care, long-term retirement obligations are very, very 
significant, particularly in the up and down of a market. And 
so there are pros and cons for large corporations.
    Obviously, large corporations want a dynamic U.S. economy. 
They want people to have as much money as they can that drives 
consumer demand. But the costs on their balance sheet, as Mr. 
Bertheaud said, are very, very high. And so in a highly 
competitive economic environment, there are very, very strong 
competitive pressures on large U.S. companies that have driven 
many of those companies to move toward defined contribution 
plans.
    Senator Franken. What about all this money that we hear 
that is being sat on, this $2 trillion? I just want to ask you, 
Mr. Marchick, why is that not being invested?
    Mr. Marchick. I think a lot of it is not being invested 
because of lack of confidence about the future, that companies, 
investment firms make investments if they believe that the 
long-term return on that investment will be attractive. And in 
a very uncertain economic environment, it's very hard to make 
those investment decisions if you don't have confidence about 
the future in terms of your ability to sell a product, sell a 
new service, provide new opportunities for the consumers, 
either individual consumers or business consumers of a 
particular product, because many investments take 3, 5, 7, 10 
years to pay off, and if you're uncertain about the future of 
the economy, you sit on cash.
    Senator Franken. OK. Well, my time is up. But it seems to 
me that we're in a bit of a vicious cycle here. I don't think 
that's a new observation.
    So thank you, Mr. Chairman.
    The Chairman. Senator Franken, in just talking about risk, 
I couldn't help but think--my staff always carries it for me--
about shifting risk, The Great Risk Shift by Jacob Hacker. It 
talks exactly about this, about shifting risk, and I think 
that's all right. In some circumstances that's OK.
    But in terms of something that's so important to our 
country as retirement because we're living longer, we wish 
people would save more money, but they don't. And in tough 
times, it's hard for a family making $45,000 a year and they've 
got two or three kids, it's hard to save any money on that kind 
of an income.
    So it seems to me that if we make a decision that defined 
benefit plans are worth saving, worth re-growing, not just sort 
of stabilizing but actually growing it, and that it's good for 
the long-term interests of our Nation to do that, then maybe we 
ought to re-think perhaps the structure of defined benefits. 
Ms. Oakley talked about that.
    For example, for defined benefit plans, the employer puts 
in all the money. The employee doesn't put in anything. So an 
employee says, not bad, they put it all in, I don't have to 
worry about it. Of course, now it's not portable. If I leave 
the company, I don't get it. So that makes a defined 
contribution look better to me.
    On a defined contribution, the employee puts in the money, 
and the employer may or may not contribute to it, may or may 
not.
    But what if you had a defined benefit plan where employees 
had to contribute? Just like they do with a defined 
contribution plan now. We talked about someone who went to work 
for a couple of weeks and then moved on. Well, they got a 
paycheck. But if some of that had to be sliced off to go to a 
DB plan which would be there no matter where they went, it 
would seem to me that if you could work something out like 
that, that that would be in the long-term best interests for 
our country.
    Why can't employees contribute to a defined benefit plan? 
Is there something, maybe a law against it?
    Mr. Bertheaud. No. Certainly, it's not necessarily typical, 
but certainly it's permissible.
    The Chairman. It is.
    Mr. Bertheaud. Employees can contribute to a defined 
benefit plan.
    Mr. Marchick. On an after-tax basis.
    Mr. Bertheaud. On an after-tax basis.
    The Chairman. On what? Oh, after-tax basis.
    Mr. Bertheaud. Right, after-tax basis. But this kind of 
creative thinking is the kind of thing I think that we need to 
try to at least take a step toward reviving the defined benefit 
system.
    The Chairman. Well, I need more information.
    Ms. Oakley. Yes, Senator. One of the things I think, just 
sitting here on the panel listening, public and private plans 
are definitely different, but there's a lot to be learned from 
public plans understanding what the private sector does, and 
private sector plans understanding how the public sector plans 
work. And I think you've done so much today in this hearing to 
bring light to that.
    In the private sector, they said employees can contribute, 
but it's with after-tax dollars, and 401(k) plans highlight if 
you can do it with before-tax dollars, maybe that makes it 
easier for many people to do it.
    The Chairman. So 401(k) plans is before-tax dollars.
    Ms. Oakley. Exactly.
    The Chairman. Defined benefit, as the public employees put 
in, that's after-tax dollars.
    Ms. Oakley. Well, actually, there's a provision--this gets 
into where the tax code goes through these numbers and letters 
all the time. There's another provision in the tax code that 
allows something called an employer pick-up for public 
employees so that that money is treated as before-tax dollars. 
So public employees can contribute to their employer's pension 
with before-tax dollars, and that does make an incentive. It 
makes it more palatable for those contributions.
    The Chairman. That's Federal tax dollars.
    Ms. Oakley. Federal.
    The Chairman. Is that true all over the country? If so, 
then that's true for everyone, right?
    Ms. Oakley. It's available to everyone.
    The Chairman. So it's really not after-tax dollars. It's 
before-tax dollars.
    Ms. Oakley. In the public sector, by and large, it's 
probably before-tax dollars.
    The Chairman. But in the private sector, it would be after-
tax dollars.
    Ms. Oakley. Right.
    Mr. Bertheaud. That's correct.
    The Chairman. Well, now, that's interesting. We'll have to 
think about that one.
    Ms. Oakley. And that's what the DBK proposal was going to 
try to address. It would let you put the before-tax dollars----
    The Chairman. I'll ask Michael about that. He said they 
still haven't got rules out on that. What did you say?
    Ms. Oakley. Haven't issued rules.
    The Chairman. They're still working on it. Well, that's who 
we ought to--let's get them up here sometime, find out where 
they are on that.
    Mr. Stephen. Can we submit questions for the record on 
that?
    The Chairman. Absolutely. Yes, I could use some questions, 
absolutely. In fact, I invite that. If you've got questions 
that we need to be asking them, I'd invite that to come to this 
committee. Please submit them to this committee, absolutely. As 
I said, I don't have any set idea on what to do. I just have 
this sense from your testimony and others that the defined 
benefit plans really do have a value, a great value to our 
country, and it's a shame to see them going down and almost 
being done away with.
    Now, if the consensus was that everybody said, ``no, 
they're not worth a darn or valueless, they don't do the good 
things you talked about,'' well, OK, fine, let them go.
    But that's not what I've heard here. I haven't heard this 
today, and I haven't heard it in the other two or three 
hearings that we've had on this. But it seems like they're 
dwindling and going away because no one is paying attention to 
it or no one is doing anything about it. And that's what I want 
this committee to focus on.
    So I don't know if I have any more questions. You've all 
been very forthright in your testimony, and I thank you for 
that. I would just ask you if you have some questions you'd 
like us to submit to get more of what IRS is up to; second, Mr. 
Bertheaud, you were going to give me some information, too. 
What was it I asked for? Now I can't remember. I asked you to 
give me something here for the committee. I'm sorry; what was 
that?
    Mr. Bertheaud. It was information about the regulation that 
changed the system back in the 1980s.
    The Chairman. Thank you. Yes, I need that kind of 
background stuff, and any advice and suggestions that each of 
you have on how we change the regulatory structure. You all 
outlined them in your testimonies, that there's a problem 
there. I'm sorry to say, I don't see any solutions in here, OK? 
So I need you to, if you've got some ideas on how we change it, 
I really invite you to submit that to the committee.
    Mr. Bertheaud. We will. Mr. Chairman, the American Benefits 
Council would be happy to work with the committee on this.
    The Chairman. That would be wonderful. I'd appreciate it.
    Mr. Stephen. The NRECA will continue to work with you.
    The Chairman. I would appreciate that.
    Ms. Oakley. We'll be happy to do that as well, sir.
    The Chairman. Thank you.
    Mr. Marchick.
    Mr. Marchick. I'm in.
    The Chairman. You're in? OK, good. Thank you.
    [Laughter.]
    Anything else for the record that anybody would like to 
bring up? Something we might have missed, we overlooked?
    [No response.]
    No. Well, listen, you've been a great panel. You obviously 
all really know the system well, and we thank you so much for 
this. And help us try to work through this to see where we can 
move ahead in the future, OK?
    Thank you all very much.
    Mr. Bertheaud. Thank you, Mr. Chairman.
    Ms. Oakley. Thank you, Mr. Chairman.
    The Chairman. The committee stands adjourned.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

   Prepared Statement of Harold A. Schaitberger, General President, 
               International Association of Fire Fighters
    Chairman Harkin, Ranking Member Enzi, and distinguished members of 
the HELP Committee, I thank you for holding today's critically 
important hearing on ``The Power of Pensions: Building a Strong Middle 
Class and Strong Economy.'' As the General President of the 
International Association of Fire Fighters (IAFF), I have the honor of 
representing nearly 300,000 men and women who risk their lives daily to 
provide fire, rescue and emergency medical services protection to over 
85 percent of our Nation's population. It is on behalf of these 
dedicated Americans that I wish to offer my thoughts on retirement 
security.
    In addition to speaking on behalf of IAFF members in all 50 States, 
I also speak as someone who has spent the better part of his 
professional life focusing on retirement security issues for first 
responders and other public employees. After serving as a Lieutenant in 
the Fairfax County Fire Department, I served as a public member of the 
County's pension board. Upon my arrival in Washington, DC, I served as 
Counsel to both the National Conference on Public Employee Retirement 
Systems and the National Association of Government Deferred 
Compensation Administrators. And as President of the IAFF, I have 
greatly expanded our organization's emphasis on retirement issues, 
creating a new Pension Department. In total, I have spent the better 
part of four decades championing retirement security for working 
Americans.
    It is from this background that I have come to fully appreciate the 
essential role that defined benefit pensions play both in our economy 
and in the everyday lives of retired Americans. I don't believe it is 
hyperbole to say that defined benefit pension plans were one of the 
reasons why our parents' generation retired with dignity. 
Unfortunately, the increasing absence of DB plans in compensation 
packages is a critical threat to the retirement security of both our 
generation, Mr. Chairman, and our children and grandchildren's 
generations.
    For emergency responders in particular, defined benefit pension 
plans are simply irreplaceable. Any movement away from them--and you 
only have to pick up the newspaper to see that our pension plans are 
under attack in State capitals and city halls across America--would 
decimate the retirement security of fire fighters and their families.
    As a matter of public policy, State and local governments have 
adopted earlier retirement ages for public safety officers than other 
occupations. Many jurisdictions have mandatory retirement ages which 
require fire fighters and law enforcement officers to leave their job 
at a certain age. Working together with management and legislators, 
IAFF Locals have helped structure defined benefit pension plans that 
reflect these public safety realities. Defined contribution plans, 
which are dependent solely on the amount of money contributed rather 
than a benefit formula, undermine the policy goal of having a younger, 
more physically fit, public safety workforce. We do not believe it is 
wise public policy to force a fire fighter to remain on the job after 
they are no longer capable of performing their duties solely because a 
market downturn robbed their DC plan of the funds they needed to 
retire.
    Our DB plans also address the high rates of disability in public 
safety occupations by providing a secure retirement even for those who 
suffer a career-ending injury early in their careers. And our plans 
provide for the survivors of fire fighters who make the ultimate 
sacrifice in the line of duty. 401(k)-style defined contribution plans 
offer no such security for those who place their lives on the line each 
day to protect their neighbors, and who all too often pay a huge price 
for their service.
    The advantages of DB plans, however, are not limited to fire 
fighters and other public safety officers. In an apples-to-apples 
comparison, DB plans simply beat DC plans in several ways. Perhaps the 
most important way is in actual plan performance. In a Watson Towers 
study that compared DB and DC investment returns between 1995 and 2007, 
the study found that DB plans outperformed DC plans by 1 percentage 
point per year. And 1 percentage point does not amount to pocket 
change. With a $5,000 annual contribution spanning 40 years, a 
difference between an 8 percent return and a 7 percent return is over 
$330,000.
    DB plans are also cheaper to run. Administration and investment 
costs for DC plans can cost as much as four times what a DB plan would 
cost. And who bears the full brunt of these additional costs? The 
employee. Again, these additional costs equal real money. According to 
the Illinois Municipal Retirement Fund, the administrative and 
investment costs associated with switching to a DC plan could cost them 
up to $250 million more than what they currently pay with their DB 
plan.
    DC plans also punish people who are unable to put as much into 
their retirement accounts as they would like. Many people are unable to 
contribute to DC plans because a family member has high medical bills 
or other circumstances beyond their control. DB plans provide a secure 
retirement to workers regardless of other expenses the worker has to 
meet.
    But even those who conscientiously make maximum annual payments to 
their defined contribution plans do far better under a defined benefit 
scheme. A fire fighter who works for 30 years, starting at age 25 
earning $30,000, would have to contribute more than $1,000 every month 
to even come close to providing the retirement income offered by a 
typical DB plan. It is simply not reasonable to assume that a family 
making $30,000 can devote 40 percent of their income toward retirement.
    And then there is the predictability and security of knowing that 
in retirement, you will get a check every month to cover your expenses, 
or cover your spouse's expenses should you pass away. As the saying 
goes, that kind of peace of mind is truly priceless. That's why 
retirement annuities that take your 401(k) nest egg and convert them to 
a steady income stream are on the rise. People are scared that they 
will outlive their savings, so they are willing to pay extra fees in 
order to convert them to fixed annuities that act as de facto pension 
plans.
    Wouldn't it have been better to have just had a DB plan in the 
first place, so these hard working Americans could have taken advantage 
of the higher investment returns and lower administrative costs of a DB 
plan over their lifetime, and cut out the middle-men at the brokerage 
firms collecting their commissions and fees?
    Those of us in occupations that are still covered by defined 
benefit plans are often asked why we should continue to enjoy the 
benefits of these plans when so many others have lost them in the 
recent migration to defined contribution plans. But this question 
suggests that there should be a race to the bottom in retirement 
planning. Rather than promoting a race to the bottom, the IAFF believes 
that our Nation should be exploring ways to ensure that all hardworking 
Americans can retire with dignity. Instead of pension envy, we should 
be fostering pension pride.
    That's why I commend you, Chairman Harkin, for trying to find ways 
to increase defined benefit pension plans in the private sector as well 
as being a true champion of DB plans in the public workforce. I look 
forward to working with you and the members of this distinguished 
committee to find ways to foster pension pride for all Americans.
    Prepared Statement of Jack VanDerhei, Ph.D., Research Director, 
              Employee Benefit Research Institute (EBRI)*
---------------------------------------------------------------------------
    * The views expressed in this statement are solely those of Jack 
VanDerhei and should not be attributed to the Employee Benefit Research 
Institute (EBRI), the EBRI Education and Research Fund, any of its 
programs, officers, trustees, sponsors, or other staff. The Employee 
Benefit Research Institute is a nonprofit, nonpartisan, education and 
research organization established in Washington, DC, in 1978. EBRI does 
not take policy positions, nor does it lobby, advocate specific policy 
recommendations, or receive Federal funding.
---------------------------------------------------------------------------
                              introduction
    According to EBRI estimates,\1\ the percentage of private-sector 
workers participating in an employment-based defined benefit plan 
decreased from 38 percent in 1979 to 15 percent in 2008. Although much 
of this decrease took place by 1997,\2\ there have been a number of 
recent developments \3\ that have made defined benefit sponsors in the 
private sector re-examine the costs and benefits of providing 
retirement benefits through the form of a qualified defined benefit 
plan.\4\ However, these plans still cover millions of U.S. workers and 
have long been valued as an integral component of retirement income 
adequacy for their households. In this testimony, we make use of an 
EBRI simulation project that has been ongoing for more than 10 years to 
evaluate the importance of defined benefit plans for households 
assuming they retire at age 65.
    In 2010, EBRI updated its Retirement Security Projection Model \5\ 
(RSPM) and determined that the overall retirement income adequacy for 
households currently ages 36-62 had substantially improved since 2003 
(VanDerhei and Copeland, 2010). Almost one-half of Baby Boomers and Gen 
Xers were determined to be at risk of not having sufficient retirement 
income to cover even basic expenses and uninsured health care costs. 
The results, not surprisingly, were even worse for low-income 
households, as 70 percent of households in the lowest one-third when 
ranked by pre-retirement income were classified as ``at risk.'' 
Moreover, 41 percent of those in the lowest pre-retirement income 
quartile are predicted to run short of money within 10 years of 
retirement.
    Although the 2010 version of RSPM assumed all households retired at 
age 65, the model was updated in 2011 to allow retirement income 
adequacy simulations for deferred retirement ages through age 84 
(VanDerhei and Copeland, 2011). The percentage of households with 
adequate retirement income at a 50, 70 or 80 percent probability level 
obviously increased as the deferral period beyond age 65 increased but 
the results cast suspicions on the conventional wisdom that merely 
working a few more years beyond age 65 would be adequate for all 
retirees (especially for those in the lowest-income quartile).
    EBRI received several requests to focus on what the average present 
values of retirement income deficits would be for various cohorts of 
future retirees, and what the aggregate value of those deficits are 
likely to be in current dollars. The 2010 Retirement Savings Shortfalls 
(RSS) were determined as a present value of retirement deficits at age 
65 for the same three age cohorts in VanDerhei (September 2010):

     Early Boomers (born between 1948-54, now ages 56-62).
     Late Boomers (born between 1955-64, now ages 46-55).
     Generation Xers (born between 1965-74, now ages 36-45).

    The aggregate RSS for these age cohorts expressed in 2010 dollars 
is $4.55 trillion, for an overall average of $47,732 per individual \6\ 
still assumed to be alive at age 65.\7\ Figure 1 in VanDerhei (October 
2010a) shows that the average RSS varies by age cohort as well as 
gender and marital status. The RSS per individual is always lowest for 
households (varying from $29,467 for Early Boomers to $32,098 for Gen 
Xers), somewhat higher for single males (19-34 percent depending on age 
cohort), and more than twice as large for single females (110-135 
percent depending on age cohort). Even though the present values are 
defined in constant dollars, the RSS for any gender/marital status 
combination increases for younger cohorts. This is largely due to the 
impact of assuming health care-related costs will increase faster than 
the general inflation rate.
    In testimony before this committee last year (VanDerhei, October 
2010b), we used this model to demonstrate the importance of Social 
Security retirement benefits. We estimated that if those benefits were 
to be eliminated, the aggregate deficit would jump to $8.5 trillion and 
the average would increase to approximately $89,000.
 the importance of defined benefit plans for retirement income adequacy
    Previous EBRI studies were able to document the degree to which 
eligibility for participation in defined contribution plans matters 
with respect to ``at-risk'' status. For example, the at-risk 
probability for Gen Xers varies from 60 percent for those with no 
future years of eligibility in a defined contribution plan to 20 
percent for those with 20 or more years. However, RSPM had never been 
used in the past to quantify the importance of accruals in defined 
benefit plans.\8\ For purposes of this testimony, we assumed that all 
households retire when the oldest wage earner reaches age 65.\9\ We 
bifurcated each household in terms of whether it had a defined benefit 
accrual at age 65 \10\ to assess the impact of these benefits on 
retirement income adequacy.\11\ We then ran the results for all Baby 
Boom and Gen Xer households and found that overall the presence of a 
defined benefit accrual at age 65 reduces the at-risk percentage by 
11.6 percentage points.
    Figure 1 shows the impact of a defined benefit accrual at age 65 on 
at-risk probabilities by age cohort. The greatest impact is on the 
early boomers as the percentage of households without any defined 
benefit accruals considered to be at risk of insufficient retirement 
income is 67 percent compared with only 41 percent for their 
counterparts with some defined benefit accruals. As expected, the 
defined benefit advantage (as measured by the gap between the two at-
risk percentages) narrows for younger cohorts. For late boomers the at-
risk percentage is 59 percent for those with no defined benefit 
accruals versus 38 percent for those with some defined benefit accrual. 
The gap narrows even more for the Gen Xers: 55 percent for those with 
no defined benefit accruals versus 38 percent for those with some 
defined benefit accrual.
    Figure 2 provides similar information to Figure 1 although this 
time the impact is displayed as a function of pre-retirement income 
level.\12\ The greatest defined benefit advantage (as measured by the 
gap between the two at-risk percentages) is for the lowest-income 
quartile: the percentage of households without any defined benefit 
accruals considered to be at risk of insufficient retirement income is 
86 percent compared with only 68 percent for their counterparts with 
some defined benefit accruals. The absolute value of the differences 
decrease as the relative pre-retirement income quartiles increase (10.3 
percentage points for the second income quartile, 9.0 percentage points 
for the third-income quartile and 8.7 percentage points for the highest 
income quartile); however, the relative value (when compared with the 
at-risk levels for those without defined benefit accruals) remain quite 
high.\13\
    Figure 3 shows the impact of a defined benefit accrual at age 65 on 
at-risk probabilities by age cohort and pre-retirement income level. In 
each case the greatest defined benefit advantage (as measured by the 
gap between the two at-risk percentages) is for the lowest-income 
quartile. The absolute difference for the lowest income quartile is 
20.0 percentage points for Early Boomers and 20.7 percentage points for 
the Late Boomers. It decreases somewhat for Gen Xers but still 
decreases the at-risk rating for the lowest-income quartile in that 
cohort by 15.8 percentage points.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Even though the overall finding that the presence of a defined 
benefit accrual at age 65 reduces the at-risk percentage by 11.6 
percentage points is quite impressive, this impact is undoubtedly muted 
to some extent by the interaction of defined contribution plan 
accumulations. Although the greater heterogeneity produced by defined 
contribution plans precludes a simple bifurcation of whether or not a 
plan balance exists at age 65, we are able to distinguish the overall 
impact of eligibility in a defined contribution plan by tracking the 
number of future years of simulated eligibility and displaying the 
impact of the presence of a defined benefit accrual in one of four 
categories:

     Zero future years of eligible participation.
     1-9 future years of eligible participation.
     10-19 future years of eligible participation.
     20 or more future years of eligible participation.

    Figure 4 provides the results for this analysis. As expected, the 
overall impact of a defined benefit accrual at age 65 is much larger 
for those households with no future years of eligible participation in 
a defined contribution plan (23.6 percentage points) and decreases as 
the future years of defined contribution eligibility increases (11.3 
percentage points for 1-9 years, 8.5 percentage points for 10-19 years 
and 6.4 percentage points for those with 20 or more years).
                                summary
    The analysis performed for this testimony shows the tremendous 
importance of defined benefit plans in achieving retirement income 
adequacy for Baby Boomers and Gen Xers. Overall, the presence of a 
defined benefit accrual at age 65 reduces the ``at-risk'' percentage by 
11.6 percentage points. The defined benefit plan advantage (as measured 
by the gap between the two at-risk percentages) is particularly 
valuable for the lowest-income quartile but also has a strong impact on 
the middle class (the reduction in the at-risk percentage for the 
second and third income quartiles combined is 9.7 percentage points 
which corresponds to a 19.5 percent relative reduction).
    It should be noted that this analysis does NOT attempt to do a 
comparison between the relative effectiveness of defined benefit vs. 
defined contribution plans in providing retirement income adequacy; 
however, it does show that when the value of a defined benefit plan is 
analyzed for those without any future eligibility in a defined 
contribution plan, the impact on the at-risk ratings increases to 23.6 
percentage points. In other words, for those households without future 
years of defined contribution eligibility, the presence of a defined 
benefit accrual at age 65 is sufficient to save nearly 1 out of 4 of 
these households in the Baby Boomer and Gen Xer cohorts from becoming 
``at risk'' of running short of money in retirement for basic expenses 
and uninsured medical expenses.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                Appendix
                        brief chronology of rspm
    The original version of Retirement Security Projection Model 
(RSPM) was used to analyze the future economic well-being of the 
retired population at the State level. The Employee Benefit Research 
Institute and the Milbank Memorial Fund, working with the governor of 
Oregon, set out to see if this situation could be addressed for Oregon. 
The analysis \14\ focused primarily on simulated retirement wealth with 
a comparison to ad hoc thresholds for retirement expenditures, but the 
results made it clear that major decisions lie ahead if the State's 
population is to have adequate resources in retirement.
    Subsequent to the release of the Oregon study, it was decided that 
the approach could be carried to other States as well. Kansas and 
Massachusetts were chosen as the next States for analysis. Results of 
the Kansas study were presented to the State's Long-Term Care Services 
Task Force on July 11, 2002,\15\ and the results of the Massachusetts 
study were presented on December 1, 2002.\16\ With the assistance of 
the Kansas Insurance Department, EBRI was able to create Retirement 
Readiness Ratings based on a full stochastic accumulation model that 
took into account the household's longevity risk, post-retirement 
investment risk, and exposure to potentially catastrophic nursing home 
and home health care risks. This was followed by the expansion of RSPM, 
as well as the Retirement Readiness Ratings produced by it, to a 
national model and the presentation of the first micro-simulation 
retirement income adequacy model built in part from administrative 
401(k) data at the EBRI December 2003 policy forum.\17\ The basic model 
was then modified for Senate Aging testimony in 2004 to quantify the 
beneficial impact of a mandatory contribution of 5 percent of 
compensation.\18\
    The first major modification of the model occurred for the EBRI May 
2004 policy forum. In an analysis to determine the impact of 
annuitizing defined contribution and IRA balances at retirement age, 
VanDerhei and Copeland (2004) were able to demonstrate that for a 
household seeking a 75 percent probability of retirement income 
adequacy, the additional savings that would otherwise need to be set 
aside each year until retirement to achieve this objective would 
decrease by a median amount of 30 percent. Additional refinements were 
introduced in 2005 to evaluate the impact of purchasing long-term care 
insurance on retirement income adequacy.\19\
    The model was next used in March 2006 to evaluate the impact of 
defined benefit freezes on participants by simulating the minimum 
employer contribution rate that would be needed to financially 
indemnify the employees for the reduction in their expected retirement 
income under various rate-of-return assumptions.\20\ Later that year, 
an updated version of the model was developed to enhance the EBRI 
interactive Ballpark E$timater worksheet by providing Monte Carlo 
simulations of the necessary replacement rates needed for specific 
probabilities of retirement income adequacy under alternative risk 
management treatments.\21\
    RSPM was significantly enhanced for the May 2008 EBRI policy forum 
by allowing automatic enrollment of 401(k) participants with the 
potential for automatic escalation of contributions to be included.\22\ 
Additional modifications were added in 2009 for a Pension Research 
Council presentation that involved a winners/losers analysis of defined 
benefit freezes and the enhanced defined contribution employer 
contributions provided as a quid pro quo.\23\
    A new subroutine was added to the model to allow simulations of 
various styles of target-date funds for a comparison with participant-
directed investments in 2009.\24\ In April 2010, the model was 
completely re-parameterized with 401(k) plan design parameters for 
sponsors that have adopted automatic enrollment provisions.\25\ A 
completely updated version of the national model was produced for the 
May 2010 EBRI policy forum and used in the July 2010 Issue Brief.\26\
    The new model was used to analyze how eligibility for participation 
in a defined contribution plan impacts retirement income adequacy in 
September 2010.\27\ It was also used to compute Retirement Savings 
Shortfalls for Boomers and Gen Xers in October 2010.\28\
    In October 2010 testimony before the Senate Health, Education, 
Labor, and Pensions Committee, on ``The Wobbly Stool: Retirement 
(In)security in America,'' the model was used to analyze the relative 
importance of employer-provided retirement benefits and Social 
Security.\29\
    In February 2011, the model was used to analyze the impact of the 
2008/9 crisis in the financial and real estate markets on retirement 
income adequacy.\30\
    Finally, an April 2011 article introduced a new method of analyzing 
the results from the RSPM.\31\ Instead of simply computing an overall 
percentage of the simulated life paths in a particular cohort that will 
not have sufficient retirement income to pay for the simulated 
expenses, the new method computes what percentage of the households 
will meet that requirement more than a specified percentage of times in 
the simulation.
                retirement income and wealth assumptions
    RSPM is based in part on a 13-year time series of administrative 
data from several million 401(k) participants and tens of thousands of 
401(k) plans,\32\ as well as a time series of several hundred plan 
descriptions used to provide a sample of the various defined benefit 
and defined contribution plan provisions applicable to plan 
participants. In addition, several public surveys based on 
participants' self-reported answers (the Survey of Consumer Finances 
[SCF], the Current Population Survey [CPS], and the Survey of Income 
and Program Participation [SIPP]) were used to model participation, 
wages, and initial account balance information.
    This information is combined to model participation and initial 
account balance information for all defined contribution participants, 
as well as contribution behavior for non-401(k) defined contribution 
plans. Asset allocation information is based on previously published 
results of the EBRI/ICI Participant-Directed Retirement Plan Data 
Collection Project, and employee contribution behavior to 401(k) plans 
is provided by an expansion of a method developed in VanDerhei and 
Copeland (2008) and further refined in VanDerhei (2010).
    A combination of Form 5500 data and self-reported results was also 
used to estimate defined benefit participation models; however, it 
appears information in the latter is rather unreliable with respect to 
estimating current and/or future accrued benefits. Therefore, a 
database of defined benefit plan provisions for salary-related plans 
was constructed to estimate benefit accruals.
    Combinations of self-reported results were used to initialize IRA 
accounts. Future IRA contributions were modeled from SIPP data, while 
future rollover activity was assumed to flow from future separation 
from employment in those cases in which the employee was participating 
in a defined contribution plan sponsored by the previous employer. 
Industry data are used to estimate the relative likelihood that the 
balances are rolled over to an IRA, left with the previous employer, 
transferred to a new employer, or used for other purposes.
                         defined benefit plans
    A stochastic job duration algorithm was estimated and applied to 
each individual in RSPM to predict the number of jobs held and age at 
each job change. Each time the individual starts a new job, RSPM 
simulates whether or not it will result in coverage in a defined 
benefit plan, a defined contribution plan, both, or neither. If 
coverage in a defined benefit plan is predicted, time series 
information from the Bureau of Labor Statistics (BLS) is used to 
predict what type of plan it will be.\33\
    While the BLS information provides significant detail on the 
generosity parameters for defined benefit plans, preliminary analysis 
indicated that several of these provisions were likely to be highly 
correlated (especially for integrated plans). Therefore, a time series 
of several hundred defined benefit plans per year was coded to allow 
for assignment to the individuals in RSPM.\34\
    Although the Tax Reform Act of 1986 at least partially modified the 
constraints on integrated pension plans by adding Sec. 401(l) to the 
Internal Revenue Code, it would appear that a significant percentage of 
defined benefit sponsors have retained Primary Insurance Amount (PIA)-
offset plans. In order to estimate the offset provided under the plan 
formulas, RSPM computes the employee's Average Indexed Monthly 
Earnings, Primary Insurance Amount, and covered compensation values for 
the birth cohort.
                       defined contribution plans
    Previous studies on the EBRI/ICI Participant-Directed Retirement 
Plan Data Collection Project have analyzed the average account balances 
for 401(k) participants by age and tenure. Recently published results 
(VanDerhei, Holden and Alonso, 2009) show that the year-end 2008 
average balance ranged from $3,237 for participants in their 20s with 
less than 3 years of tenure with their current employer to $172,555 for 
participants in their 60s who have been with the current employer for 
at least 30 years (thereby effectively eliminating any capability for 
IRA rollovers).
    Unfortunately, the EBRI/ICI database does not currently provide 
detailed information on other types of defined contribution plans, nor 
does it allow analysis of defined contribution balances that may have 
been left with previous employers. RSPM uses self-reported responses 
for whether an individual has a defined contribution balance to 
estimate a participation model and the reported value is modeled as a 
function of age and tenure.
    The procedure for modeling participation and contribution behavior 
and asset allocation for defined contribution plans that have not 
adopted automatic enrollment is described in VanDerhei and Copeland 
(2008). The procedure for modeling contribution behavior (with and 
without automatic escalation of contributions) for 401(k) plans is 
described in VanDerhei (2010). Asset allocation for automatic 
enrollment plans is assumed to follow average age-appropriate target-
date funds as described in VanDerhei (2009). Investment returns are 
based on those used in Park (2009).
                        social security benefits
    Social Security's current-law benefits are assumed to be paid and 
received by those qualifying for the benefits under the baseline 
scenario. This funding could either be from an increase in the payroll 
tax or from a general revenue transfer. The benefits are projected for 
each cohort assuming the intermediate assumptions within the 2009 OASDI 
Trustee's Report. A second alternative is used where all recipients' 
benefits are cut 24 percent on the date that the OASDI Trust Fund is 
depleted (2037).
                        expenditure assumptions
    The expenditures used in the model for the elderly consist of two 
components--deterministic and stochastic expenses. The deterministic 
expenses include those expenses that the elderly incur in their basic 
daily life, while the stochastic expenses in this model are exclusively 
health-event related--such as an admission to a nursing home or the 
commencement of an episode of home health care--that occur only for a 
portion of retirement (if ever), not on an annual or certain basis.
                         deterministic expenses
    The deterministic expenses are broken down into seven categories--
food, apparel and services (dry cleaning, haircuts), transportation, 
entertainment, reading and education, housing, and basic health 
expenditures. Each of these expenses is estimated for the elderly (65 
or older) by family size (single or couple) and family income (less 
than $20,000, $20,000-$39,999, and $40,000 or more in 2008 dollars) of 
the family/individual.
    The estimates are derived from the 2008 Consumer Expenditure Survey 
(CES) conducted by the Bureau of Labor Statistics of the U.S. 
Department of Labor. The survey targets the total noninstitutionalized 
population (urban and rural) of the United States and is the basic 
source of data for revising the items and weights in the market basket 
of consumer purchases to be priced for the Consumer Price Index. 
Therefore, an expense value is calculated using actual experience of 
the elderly for each family size and income level by averaging the 
observed expenses for the elderly within each category meeting the 
above criteria. The basic health expenditure category has additional 
data needs besides just the CES.
                                 health
    The basic health expenditures are estimated using a somewhat 
different technique and are comprised of two parts. The first part uses 
the CES as above to estimate the elderly's annual health expenditures 
that are paid out-of-pocket or are not fully reimbursed (or not 
covered) by Medicare and/or private Medigap health insurance.
    The second part contains insurance premium estimates, including 
Medicare Part B and Part D premiums. All of the elderly are assumed to 
participate in Part B and Part D, and the premium is determined 
annually by the Medicare program and is the same nationally with an 
increasing contribution from the individual/family on the basis of 
their income. For the Medigap insurance premium, it is assumed all of 
the elderly purchase a Medigap policy. A national estimate is derived 
from a 2005 survey done by Thestreet.com that received average quotes 
for Plan F in 47 States and the District. The estimates are calculated 
based on a 65-year-old female. The 2005 premium level is the average of 
the 47 State average quotes. The 2010 premium level was estimated by 
applying the annual growth rates in the Part B premiums from 2006 
through 2010 to the average 2005 premium.
    This approach is taken for two reasons. First, sufficient quality 
data do not exist for the matching of retiree medical care (as well as 
the generosity of and cost of the coverage) and Medigap policy use to 
various characteristics of the elderly. Second, the health status of 
the elderly at the age of 65 is not known, let alone over the entire 
course of their remaining life. Thus, by assuming everyone one has a 
standard level of coverage eliminates trying to differentiate among all 
possible coverage types as well as determining whether the sick or 
healthy have the coverage. Therefore, averaging of the expenses over 
the entire population should have offsetting effects in the aggregate.
    The total deterministic expenses for the elderly individual or 
family are then the sum of the values in all the expense categories for 
family size and family income level of the individual or family. These 
expenses make up the basic annual (recurring) expenses for the 
individual or family. However, if the individual or family meet the 
income and asset tests for Medicaid, Medicaid is assumed to cover the 
basic health care expenses (both parts), not the individual or family. 
Furthermore, Part D and Part B premium relief for the low-income 
elderly (not qualifying for Medicaid) is also incorporated.
                          stochastic expenses
    The second component of health expenditures is the result of 
simulated health events that would require longterm care in a nursing 
home or home-based setting for the elderly. Neither of these simulated 
types of care would be reimbursed by Medicare because they would be for 
custodial (not rehabilitative) care. The incidence of the nursing home 
and home health care and the resulting expenditures on the care are 
estimated from the 1999 and 2004 National Nursing Home Survey (NNHS) 
and the 2000 and 2007 National Home and Hospice Care Survey (NHHCS). 
NNHS is a nationwide sample survey of nursing homes, their current 
residents and discharges that was conducted by the National Center for 
Health Statistics from July through December 1999 and 2004. The NHHCS 
is a nationwide sample survey of home health and hospice care agencies, 
their current and discharge patients, that was conducted by the 
National Center for Health Statistics from August 2000 through December 
2000 and from August 2007 through February 2008.
    For determining whether an individual has these expenses, the 
following process is undertaken. An individual reaching the Social 
Security normal retirement age has a probability of being in one of 
four possible assumed ``health'' statuses: Not receiving either home 
health or nursing home care; Home health care patient; Nursing home 
care patient; and Death, based upon the estimates of the use of each 
type of care from the surveys above and mortality. The individual is 
randomly assigned to each of these four categories with the likelihood 
of falling into one of the four categories based upon the estimated 
probabilities of each event. If the individual does not need long-term 
care, no stochastic expenses are incurred. Each year, the individual 
will again face these probabilities (the probabilities of being in the 
different statuses will change as the individual becomes older after 
reaching age 75 then again at age 85) of being in each of the four 
statuses. This continues until death or the need for longterm care.
    For those who have a resulting status of home health care or 
nursing home care, their duration of care is simulated based upon the 
distribution of the durations of care found in the NNHS and NHHCS. 
After the duration of care for a nursing home stay or episode of home 
health care, the individual will have a probability of being discharged 
to one of the other three statuses based upon the discharge estimates 
from NNHS and NHHCS, respectively. The stochastic expenses incurred are 
then determined by the length of the stay/number of days of care times 
the per diem charge estimated for the nursing home care and home health 
care, respectively.
    For any person without the need for long-term care, this process 
repeats annually. The process repeats for individuals receiving home 
health care or nursing home care at the end of their duration of stay/
care and subsequently if not receiving the specialized care again at 
their next birthday. Those who are simulated to die, of course, are not 
further simulated.
    As with the basic health care expenses, the qualification of 
Medicaid by income and asset levels is considered to see how much of 
the stochastic expenses must be covered by the individual to determine 
the individual's final expenditures for the care. Only those 
expenditures attributable to the individual--not the Medicaid program--
are considered as expenses to the individual and as a result in any of 
the ``deficit'' calculations.
                           total expenditures
    The elderly individuals' or families' expenses are then the sum of 
their assumed deterministic expenses based upon their retirement income 
plus any simulated stochastic expenses that they may have incurred. In 
each subsequent year of life, the total expenditures are again 
calculated in this manner. The base year's expenditure value estimates 
excluding the health care expenses, are adjusted annually using the 
assumed general inflation rate of 2.8 percent from the 2009 OASDI 
Trustees Report, while the health care expenses are adjusted annually 
using the 4.0 percent medical consumer price index that corresponds to 
the average annual level from 2004-9.\35\
                               References
Combes, Andrea. ``U.S. Retirement Income Deficit: $6.6 Trillion.'' 
    SmartMoney (September 16, 2010).
Copeland, Craig, and Jack VanDerhei. ``The Declining Role of Private 
    Defined Benefit Pension Plans: Who Is Affected, and How.'' In 
    Robert L. Clark and Olivia Mitchell, eds., Reorienting Retirement 
    Risk Management (Oxford University Press for the Pension Research 
    Council, 2010): 122-136.
Park, Youngkyun. ``Public Pension Plan Asset Allocations.'' EBRI Notes, 
    no. 4 (Employee Benefit Research Institute, April 2009).
Olsen, Kelly and Jack VanDerhei. ``Defined Contribution Plan Dominance 
    Grows Across Sectors and Employer Sizes, While Mega Defined Benefit 
    Plans Remain Strong: Where We Are and Where We Are Going.'' In 
    Retirement Prospects in a Defined Contribution World. Washington, 
    DC: Employee Benefit Research Institute, 1997): pp. 55-92.
VanDerhei, Jack. Testimony for the U.S. Senate Special Committee on 
    Aging Hearing on Retirement Planning: ``Do We Have a Crisis in 
    America? Results From the EBRI-ERF Retirement Security Projection 
    Model,'' Jan. 27, 2004 (T-141).

    __.  ``Projections of Future Retirement Income Security: Impact of 
Long-Term Care Insurance.'' American Society on Aging/National Council 
on Aging joint conference, March 2005.
    __.  ``Defined Benefit Plan Freezes: Who's Affected, How Much, and 
Replacing Lost Accruals.'' EBRI Issue Brief, no. 291 (Employee Benefit 
Research Institute, March 2006).
    __.  ``Measuring Retirement Income Adequacy: Calculating Realistic 
Income Replacement Rates.'' EBRI Issue Brief, no. 297 (Employee Benefit 
Research Institute, September 2006).
    __.  ``Retirement Income Adequacy After PPA and FAS 158: Part One--
Plan Sponsors' Reactions.'' EBRI Issue Brief, no. 337 (Employee Benefit 
Research Institute, July 2007).
    __.  ``How Would Target-Date Funds Likely Impact Future 401(k) 
Contributions.'' Testimony before the joint DOL/SEC Hearing, Target 
Date Fund Public Hearing, June 2009.
    __.  ``The Impact of Automatic Enrollment in 401(k) Plans on Future 
Retirement Accumulations: A Simulation Study Based on Plan Design 
Modifications of Large Plan Sponsors.'' EBRI Issue Brief, no. 341 
(Employee Benefit Research Institute, April 2010).
    __.  ``Retirement Income Adequacy for Today's Workers: How Certain, 
How Much Will It Cost, and How Does Eligibility for Participation in a 
Defined Contribution Plan Help?'' EBRI Notes, no. 9 (Employee Benefit 
Research Institute, September 2010): 13-20.
    __.  ``Retirement Savings Shortfalls for Today's Workers.'' EBRI 
Notes, no. 10 (Employee Benefit Research Institute, October 2010a): 2-
9.
    __.  Testimony before the Senate Health, Education, Labor, and 
Pensions Committee, on ``The Wobbly Stool: Retirement (In)security in 
America'' (T-166). Oct. 7, 2010b.
    __.  ``A Post-Crisis Assessment of Retirement Income Adequacy for 
Baby Boomers and Gen Xers.'' EBRI Issue Brief, no. 354 (Employee 
Benefit Research Institute, February 2011).
    __.  ``Retirement Income Adequacy: Alternative Thresholds and the 
Importance of Future Eligibility in Defined Contribution Retirement 
Plans.'' EBRI Notes, no. 4 (Employee Benefit Research Institute, April 
2011): 10-19.

VanDerhei, Jack, and Craig Copeland. Oregon Future Retirement Income 
    Assessment Project. A project of the EBRI Education and Research 
    Fund and the Milbank Memorial Fund, 2001.

    __.  Kansas Future Retirement Income Assessment Project. A project 
of the EBRI Education and Research Fund and the Milbank Memorial Fund, 
July 16, 2002.
    __.  Massachusetts Future Retirement Income Assessment Project. A 
project of the EBRI Education and Research Fund and the Milbank 
Memorial Fund, December 1, 2002.
    __.  ``Can America Afford Tomorrow's Retirees: Results From the 
EBRI-ERF Retirement Security Projection Model.'' EBRI Issue Brief, no. 
263 (Employee Benefit Research Institute, November 2003).
    __.  ``ERISA At 30: The Decline of Private-Sector Defined Benefit 
Promises and Annuity Payments: What Will It Mean?'' EBRI Issue Brief, 
no. 269 (Employee Benefit Research Institute, May 2004).
    __.  ``The Impact of PPA on Retirement Income for 401(k) 
Participants.'' EBRI Issue Brief, no. 318 (Employee Benefit Research 
Institute, June 2008).
    __.  ``The EBRI Retirement Readiness Rating:TM 
Retirement Income Preparation and Future Prospects.'' EBRI Issue Brief, 
no. 344 (Employee Benefit Research Institute, July 2010).
    __.  ``The Impact of Deferring Retirement Age on Retirement Income 
Adequacy.'' EBRI Issue Brief, no. 358 (Employee Benefit Research 
Institute, June 2011).

VanDerhei, Jack, Sarah Holden, and Luis Alonso. ``401(k) Plan Asset 
    Allocation, Account Balances, and Loan Activity in 2008.'' EBRI 
    Issue Brief, no. 335 (Employee Benefit Research Institute, October 
    2009).
                                Endnotes
    1. www.ebri.org/publications/benfaq/index.cfm?fa=retfaq14, last 
accessed July 26, 2011.
    2. For a historical review of causes of this decline see Olsen and 
VanDerhei (1997).
    3. See VanDerhei (2007) for a summary of the responses of defined 
benefit sponsors to the implementation of the new funding requirements 
under the Pension Protection Act of 2006 as well as the potential 
pension expense volatility under new FASB requirements.
    4. This does not necessarily imply that many existing defined 
benefit sponsors have or will terminate their existing defined benefit 
plans. Instead the process of freezing these plans for current and/or 
new workers has increased substantially in recent years. For more 
information on the impact of plan freezes on workers see VanDerhei 
(March 2006). For an analysis of whether ``frozen'' workers have been 
financially indemnified via enhanced employer contribution to defined 
contribution plans, see Copeland and VanDerhei (2010).
    5. A brief description of RSPM is included in the appendix.
    6. Household deficits for married couples are divided equally 
between the two spouses.
    7. Boston College's Center for Retirement Research has recently 
estimated a figure of $6.6 trillion in retirement income deficits or 
``about $90,000 per household if you count all 72 million households 
ages 32 to 64'' (Coombes, 2010). The proper interpretation of this 
number is somewhat problematic in that it appears that they are 
assuming virtually none of the 72.6 million households in that age 
range in the 2007 Survey of Consumer Finances die prior to age 65.
    8. This was primarily due to the increased likelihood of future 
eligibility in a defined contribution plan relative to a defined 
benefit plan.
    9. This assumption will be relaxed in a later study.
    10. The term ``accrual at age 65'' does not denote that an employee 
age 65 accrued a benefit in that year. Instead, it is meant to indicate 
that they had a previously accrued benefit that has not been cashed out 
prior to age 65.
    11. It is important to note that this is not the same as assessing 
the importance of all defined benefit plan accruals. Whenever an 
employee is assumed to leave a job in RSPM, the present value of the 
vested defined benefit accrual from the current job is compared with 
the year-specific involuntary cash-out threshold and converted to a 
terminated vested status if greater. Any present values less than the 
threshold are assumed to be cashed out.
    12. Specifically, each household is placed into one of four 
quartiles based on age-specific remaining career income.
    13. The value of the absolute difference divided by the at-risk 
percentage without defined benefit accruals is 21 percent for the 
lowest-income quartile, 18 percent for the second-income quartile, 21 
percent for the third-income quartile and 33 percent for the highest-
income quartile.
    14. VanDerhei and Copeland (2001).
    15. VanDerhei and Copeland (July 2002).
    16. VanDerhei and Copeland (December 2002).
    17. VanDerhei and Copeland (2003).
    18. VanDerhei (January 2004).
    19. VanDerhei (2005).
    20. VanDerhei (March 2006).
    21. VanDerhei (September 2006).
    22. VanDerhei and Copeland (2008).
    23. Copeland and VanDerhei (2010).
    24. VanDerhei (2009).
    25. VanDerhei (April 2010).
    26. VanDerhei and Copeland (2010).
    27. VanDerhei (September 2010).
    28. VanDerhei (October 2010a).
    29. VanDerhei (October 2010b).
    30. VanDerhei (February 2011).
    31. VanDerhei (April 2011).
    32. The EBRI/ICI Participant-Directed Retirement Plan Data 
Collection Project is the largest, most representative repository of 
information about individual 401(k) plan participant accounts. As of 
December 31, 2009, the database included statistical information about:

     20.7 million 401(k) plan participants, in
     51,852 employer-sponsored 401(k) plans, holding
     $1.21 trillion in assets.

    The EBRI/ICI project is unique because it includes data provided by 
a wide variety of plan recordkeepers and, therefore, portrays the 
activity of participants in 401(k) plans of varying sizes--from very 
large corporations to small businesses--with a variety of investment 
options.
    33. The model is currently programmed to allow the employee to 
participate in a nonintegrated career average plan; an integrated 
career average plan; a 5-year final average plan without integration; a 
3-year final average plan without integration; a 5-year final average 
plan with covered compensation as the integration level; a 3-year final 
average plan with covered compensation as the integration level; a 5-
year final average plan with a PIA offset; a 3-year final average plan 
with a PIA offset; a cash balance plan, or a flat benefit plan.
    34. BLS information was utilized to code the distribution of 
generosity parameters for flat benefit plans.
    35. While the medical consumer price index only accounts for the 
increases in prices of the health care services, it does not account 
for the changes in the number and/or intensity of services obtained. 
Thus, with increased longevity, the rate of health care expenditure 
growth will be significantly higher than the 4.0 percent medical 
inflation rate, as has been the case in recent years.
   Prepared Statement of the American Council of Life Insurers (ACLI)
    The American Council of Life Insurers (ACLI) commends this 
committee for holding hearings on the growing retirement security 
crisis. We applaud Chairman Harkin (D-IA) and Ranking Member Enzi (R-
WY) for holding this particular hearing because of its focus on the 
benefits of retirees receiving lifetime income. ACLI believes that 
individuals should convert some of their savings to lifetime income at 
retirement to cover anticipated expenses in retirement. A number of 
studies demonstrate that retirees receiving lifetime income felt the 
most secure in their retirement.\1\
---------------------------------------------------------------------------
    \1\ EBRI, May 2011 Issue Brief, ``Retirement Income Adequacy with 
Immediate and Longevity Annuities.'' EBRI, 2011 Retirement Confidence 
Survey Fact Sheet.
---------------------------------------------------------------------------
    The American Council of Life Insurers is a national trade 
organization with over 300 members that represent more than 90 percent 
of the assets and premiums of the U.S. life insurance and annuity 
industry. ACLI member companies offer insurance contracts and 
investment products and services to qualified retirement plans, 
including defined benefit pension, 401(k), 403(b) and 457 arrangements 
and to individuals through individual retirement arrangements (IRAs) or 
on a non-qualified basis. ACLI member companies' also are employer 
sponsors of retirement plans for their employees. As service and 
product providers, as well as employers, we believe that saving for 
retirement and managing assets throughout retirement are critical 
economic issues facing individuals and our Nation.
    Lifetime income products are a vital piece of the retirement income 
security puzzle. The General Accounting Office (GAO) released a report 
on June 7, 2011, titled ``Retirement Income: Ensuring Income throughout 
Retirement Requires Difficult Choices,'' noting that

          ``Experts we interviewed tended to recommend that retirees 
        draw down their savings strategically and systemically and that 
        they convert a portion of their savings into an income annuity 
        to cover necessary expenses or opt for the annuity provided by 
        an employer-sponsored DB pension, rather than take a lump 
        sum.''

    Many current retirees are fortunate in that they are receiving 
lifetime monthly income from both Social Security and an employer-
provided defined benefit (DB) pension. That situation is rapidly 
changing. Today, more workers have retirement savings in defined 
contribution plans, which generally do not offer the option to elect a 
stream of guaranteed lifetime income. This change leads to questions of 
how individuals will manage their savings to last throughout their 
lifetime. Attached as an addendum to this statement, ACLI has outlined 
a number of legislative and regulatory initiatives that can help 
employers assist their employees in obtaining guaranteed lifetime 
income in the same way they have assisted employees in obtaining life 
insurance, disability insurance, and other financial protection 
products. A number of these initiatives were included in the recently 
issued GAO report.
    In addition to employers offering lifetime income options to their 
workers, workers need to understand the value of their retirement 
savings as a source of guaranteed lifetime income. The ``Lifetime 
Income Disclosure Act,'' which is co-sponsored by Senators Bingaman, 
Isakson and Kohl, will help workers think of their defined contribution 
plan savings as not only a lump sum balance, but also as a source of 
guaranteed lifetime income. The legislation would provide every worker 
with a lifetime income illustration directly on their 401(k) 
statements. The Federal Thrift Savings Plan has successfully 
incorporated this feature on Federal workers' statements this year. 
With this additional information, workers will receive a ball park 
estimate, which, when coupled with their Social Security statement, 
visually displays how much monthly income they could potentially 
receive in retirement based on their current savings. Workers can 
better decide whether to increase their savings, adjust their 401(k) 
investments or reconsider their retirement date, if necessary, to 
assure the quality of life they expect in retirement.
    Last, about one-half of workers are not covered by an employer-
provided retirement savings plan, so they need to be disciplined to 
save for their own retirement. For these individuals, nonqualified 
(``individual'') annuities continue to play an important role in their 
retirement planning. Individuals can contribute to their individual 
annuities during their working years and convert some of their savings 
at retirement into lifetime income. Last year, legislation was passed 
which included a provision to more easily allow individuals to 
partially convert their annuity savings into a lifetime income stream. 
However, more can be done. ACLI supports the implementation of a 
national strategy for financial literacy and education that helps 
Americans recognize the importance of retirement savings, managing 
these savings to last a lifetime and how insurance products help 
families manage risk and protect savings.
    Over the long-term, the Nation will benefit because people who 
address their long-term financial security needs today are less likely 
to need public assistance tomorrow. Government policies that encourage 
prudent behavior, such as long-term savings, should not only be 
maintained, they should be enhanced. Therefore, ACLI continues to urge 
lawmakers to maintain the availability of annuities and other financial 
protection products for all Americans and their families by rejecting 
proposals that would make these products more expensive.
    In conclusion, lifetime income products play a vital role in any 
retirement income security plan. Middle class families feel the most 
secure in their retirements when they are receiving lifetime income. 
ACLI has outlined a number of initiatives that would help facilitate 
the securement of lifetime income. ACLI looks forward to working with 
the committee in taking these important steps today to help address 
tomorrow's retirement income security crisis.
                                Addendum
    New laws and regulations can help employers assist their employees 
in obtaining guaranteed lifetime income in the same way they have 
assisted employees in obtaining life insurance, disability insurance, 
and other financial protection products. New laws and regulations can 
also create an incentive to use guaranteed lifetime income as part of 
an employee's overall retirement income plan.
Recommendations to Encourage Employers to Offer Annuities
    1. Provide Employers with Guidance on Lifetime Income and 
Education. The ACLI urges the DOL to revise and extend Interpretive 
Bulletin 96-1 beyond guidance on investment education to include 
guidance on the provision of education regarding lifetime income and 
other distribution options, both ``in-plan'' and outside the plan, to 
assist participants and beneficiaries in making informed decisions 
regarding their distribution choices.
    2. Help Employers Select an Annuity Provider. The DOL took an 
important step by changing the so-called ``safest annuity standard'' in 
Interpretive Bulletin 95-1 by adopting a safe harbor for the selection 
of annuity providers for individual account plans. While this 
regulation provided some helpful guideposts, it contains a requirement 
that the fiduciary ``conclude that the annuity provider is financially 
able to make all future payments.'' This standard is difficult to meet, 
in part because it is hard to know how to draw this conclusion. While 
it is part of a ``safe harbor,'' this prong makes it difficult to use 
the safe harbor and thus is an impediment to the offer of annuities in 
defined contribution plans. ACLI believes that changes can be made to 
these rules which will make it easier for employers to meet their 
duties while at the same time ensuring a prudent selection. We plan to 
work with the Department of Labor to simplify this requirement so that 
an employer can more easily and objectively evaluate the financial 
stability of the annuity provider.
    3. Annuity Administration. Employers take on a number of duties in 
administering a retirement plan, and the administration of an annuity 
option would increase those duties. The qualified joint and survivor 
annuity (``QJSA'') rules provide important spousal protections. The 
notice and consent requirements provide spouses with an opportunity to 
consider the survivor benefits available under a joint and survivor 
annuity. However, these rules add an additional layer of administrative 
complexity as well as technical compliance issues that most plan 
sponsors choose to avoid by excluding annuities from their plans.
    There are a number of ways that the rules can be modified to make 
it easier for employers to administer this important requirement while 
protecting survivors, including:

     model plan amendments for employers to add guaranteed 
lifetime income options;
     simplify QJSA notice requirements; and
     the use of electronic signatures, widely accepted in 
financial transactions today.

    ACLI proposes allowing those employers who choose to do so to 
transfer the duties and liabilities of administering qualified joint 
and survivor annuity rules to an annuity administrator. Also, employers 
need guidance that confirms that a participant's purchase of 
incremental deferred payout annuities should not be subject to the QJSA 
rules until the participant has elected to take the annuity payout.
    4. Partial Annuitization Option. Some employers view annuitization 
as an ``all-or-nothing'' distribution offering. In our RFI submission, 
we asked the Departments to provide guidance making clear that plans 
may provide retirees with the option to use a portion of the account 
value to purchase guaranteed lifetime income, including model 
amendments to simplify the adoption of such provision.
Recommendations to Encourage Workers to Elect Annuities
    1. Illustration. To reframe retirement savings as a source of 
lifetime income, ACLI supports legislative proposals to include an 
illustration of participant accumulations as monthly guaranteed 
lifetime income on defined contribution plan benefit statements. ACLI 
thanks Senators Kohl, Bingaman and Isakson for their bipartisan 
sponsorship of S. 2832, the Lifetime Income Disclosure Act, in the 
111th Congress. This bill would help workers understand how their 
retirement savings might translate into guaranteed lifetime income.
    2. Information. The ACLI has asked the Treasury Department to 
modify the 402(f) rollover notice requirements and the safe harbor 
notice to include information on guaranteed lifetime income, including 
the importance of income protections and the availability of lifetime 
income plan distribution options, if any, as well as lifetime income 
options available outside the plan.
                                 ______
                                 
                              Attachments
                                                      February 2009
        Encourage Annuity Options for Defined Contribution Plans
    Problem: Currently, about one-half of employees' retirement savings 
is in defined contribution plans. Most defined contribution plans do 
not contain guaranteed lifetime income (annuity) distribution options 
notwithstanding that annuitization of account balances on retirement is 
the best way of assuring that retirement funds will not be exhausted 
during the participant's life. Early exhaustion of account balances may 
also adversely affect surviving spouses.
    A major reason that defined contribution plans do not provide 
guaranteed lifetime income options is that, if they do so, the plan 
must then comply with burdensome statutory requirements relating to 
joint and survivor annuities. The J & S rules impose costly and 
burdensome administrative requirements involving notifications to 
spouses, waivers by spouses, and prescribe the form and amount of 
spousal benefits. A major reason for the shift to defined contribution 
plans is a desire by employers to avoid the administrative cost and 
complexity associated with defined benefit plans, including compliance 
with joint and survivor annuity requirements.
    A potential solution to this problem would be for the plan sponsor 
to outsource the administration of the joint and survivor annuity rules 
to the annuity provider. However, in the event of a failure of the 
annuity provider to properly administer the rules, the plan and plan 
sponsor would still be liable for a claim for benefits under Section 
502 of ERISA.
    Solution: Where the plan sponsor and the annuity provider have 
agreed that the annuity provider will be responsible for administration 
of the joint and survivor annuity rules, provide that enforcement 
actions for failure to comply with the joint and survivor annuity rules 
may only be maintained against the annuity provider, provided that the 
plan sponsor or administrator has prudently selected and retained 
selection of the annuity provider. Make this provision applicable only 
to administration of the joint and survivor annuity rules under defined 
contribution plans. The electronic delivery rules should be modified to 
allow greater use of electronic means for administration of the J & S 
rules.
    Rationale: The ability to shift responsibility for the 
administration of the joint and survivor annuity rules would make 
guaranteed lifetime income (annuity) options more attractive to plan 
sponsors and could result in significantly wider availability of such 
annuity payment options under defined contribution plans. While this 
approach would retain the cost and complexity of the annuity rules, it 
would preserve spousal protections and would permit the plan and plan 
sponsor to shift responsibility to an experienced third party annuity 
provider. This provider would be an insurance company with experience 
in annuity administration and a secure financial ability to pay 
annuities. These factors makes shifting responsibility to annuity 
issuers more beneficial to and protective of plan participants, 
beneficiaries (including surviving spouses) and the plan sponsor than 
leaving responsibility with the plan and plan sponsor.
    Electronic administration is more cost efficient and has become 
more widely used. DOL has indicated that they are modifying their 
regulation on electronic delivery, although it is not known whether the 
modification will cover the QJSA rules.

SECTION_

(a) AMENDMENTS TO THE EMPLOYEE RETIREMENT INCOME SECURlTY ACT OF 
    1974.--
(I) In General--Section 402(c) of the Employee Retirement Income 
Security Act of 1974 (29 U.S.C. 1102(c)) is amended--
          (A) in paragraph (2) by striking ``or'' at the end;
          (B) in paragraph (3) by striking the period at the end and 
        inserting ``; or''; and
          (C) by adding at the end the following new paragraph:
                  ``(4) that a named fiduciary, or a fiduciary 
                designated by a named fiduciary pursuant to a plan 
                procedure described in section 405(e), may appoint an 
                annuity administrator or administrators with 
                responsibility for administration of an individual 
                account plan in accordance with the requirements of 
                Section 205 and payment of any annuity required 
                thereunder.''
(2) Section 405 (29 U.S.C. 1105) is amended by adding at the end the 
following new subsection:
          ``(e) Annuity Administrator
          If an annuity administrator or administrators have been 
        appointed under section 402(c)(4), then neither the named 
        fiduciary nor any appointing fiduciary shall be liable for any 
        act or omission of the annuity administrator except to the 
        extent that----
                (1) the fiduciary violated section 404(a)(l)--
                        (i) with respect to such allocation or 
                        designation, or
                        (ii) in continuing the allocation or 
                        designation; or
                (2) the fiduciary would otherwise be liable in 
                accordance with subsection (a).''
(3) Section 205(b) (29 U.S.C. 1055) is amended by adding at the end the 
    following new sentence:
          ``Clause (ii) of subparagraph (C) shall not apply if an 
        annuity administrator or administrators have been appointed 
        under section 402(c)(4).''
(b) AMENDMENTS TO THE INTERNAL REVENUE CODE OF 1986--
(1) In General--Section 401(a)(11) of the Internal Revenue Code of 1986 
(relating to requirements of joint and survivor annuities and 
preretirement survivor annuities) is amended by adding at the end the 
following new sentence:
           ``Clause (iii) (II) shall not apply if an annuity 
        administrator or administrators have been appointed under 
        section 402(c)(4) of the Employee Retirement Income Security 
        Act of 1974.''
(c) ELECTRONIC DELIVERY
(I) In General--The Secretary of the Department of Labor shall modify 
    the regulations under section 104 or section 205 of the Employee 
    Retirement Income Security Act of 1974 to provide a broad ability 
    to administer the requirements of section 205 of the Employee 
    Retirement Income Security Act of 1974 by electronic means.
                                 ______
                                 
    ``ACLI Retirement Choices Study,'' by Mathew Greenwald & 
Associates, Inc, April 2010. (see http://www.acli.com/Issues/Documents/
f3ce56cc76ca4060a5cb9fae03ce5
f96Report_ACLIRetirementChoicesStudy.pdf)

    [Editor's Note: Due to the high cost of printing, previously 
published materials are not reprinted.]
   The American Society of Pension Professionals & Actuaries (ASPPA)*
        Comments on Proposed Additional Rules Regarding Hybrid 
                            Retirement Plans
    The American Society of Pension Professionals & Actuaries (ASPPA) 
appreciates this opportunity to comment on the proposed additional 
rules regarding hybrid retirement plans as issued by the IRS and 
Treasury on October 19, 2010 (REG-132554-08).
---------------------------------------------------------------------------
    * Department of Treasury, Internal Revenue Service (26 CFR Part 1 
[REG-132554-08])
---------------------------------------------------------------------------
    ASPPA is a national organization of more than 7,500 retirement plan 
professionals who provide consulting and administrative services for 
qualified retirement plans covering millions of American workers. ASPPA 
members are retirement professionals of all disciplines, including 
consultants, investment professionals, administrators, actuaries, 
accountants and attorneys. Our large and broad-based membership gives 
ASPPA unique insight into current practical applications of ERISA and 
qualified retirement plans, with a particular focus on the issues faced 
by small- to medium-sized employers. ASPPA's membership is diverse but 
united by a common dedication to the employer-sponsored retirement plan 
system. All credentialed actuarial members of ASPPA are members of the 
ASPPA College of Pension Actuaries (ASPPA COPA), which has primary 
responsibility for the content of comment letters that involve 
actuarial issues.
    References are to the Internal Revenue Code of 1986 and Treasury 
regulations unless otherwise specified.
                       summary of recommendations
    The following is a summary of ASPPA COPA's recommendations which 
are described in greater detail in the Discussion of Issue section.

    I. Final regulations should provide  411(d)(6) relief for changing 
the method of calculating immediate annuity options.
    II. Final regulations should provide a safe harbor definition of 
``reasonable assumptions''.
    III. Final regulations should provide additional guidance about 
statutory hybrid plans and  411(a)(9).
    IV. Final regulations should include a ``set and forget'' 
conversion rule.
    V. Final regulations should make it clear that general testing 
rules are not available to show compliance with  411 if the market 
rate of return and preservation of capital rules are not satisfied.
    VI. Final regulations should clarify that a plan using segment 
rates can reference either current or prior stability period rates to 
determine the current stability period interest credit.
    VII. Final regulations should clarify that partial interest credits 
are permitted on amounts distributed between interest crediting dates.
    VIII. Final regulations should allow for the use of an interest 
crediting rate based on an index.
    IX. Final regulations should provide that when certain events occur 
a plan would be permitted to substitute a comparable RIC or index based 
on the stated investment objectives of the original RIC, without 
concern for protected benefit rights under  411(d)(6).
    X. Final regulations should clarify that, for plans that use a 
crediting rate equal to the trust's actual rate of return, changes in 
actual investments do not present issues under the  411(d)(6) anti-
cutback rules.
    XI. Final regulations should clarify that the annuity conversion 
rates for a terminated plan applicable at normal retirement also apply 
at a participants early retirement date.
    XII. Final regulations should provide additional  411(d)(6) relief 
and guidance for changes to interest crediting rates.
    XIII. Final regulations should provide additional guidance on how 
the accrual rules apply to a floor offset arrangement that includes a 
cash balance plan.
    XIV. Final regulations should provide guidance on the application 
of nondiscrimination, coverage, participation, accrual and maximum 
benefit rules when a plan uses a variable rate.
    XV. If participant choice is permitted, regulations should provide 
new safeguards to participants in exchange for workable rules for plan 
sponsors.
                          discussion of issues
    I. Early retirement benefit conversion options. Based on prior IRS 
requirements that the accrued benefit be stated solely as the monthly 
annuity payable at normal retirement age, and the  411(a) requirement 
that all optional forms be at least actuarially equivalent to the 
normal retirement benefit (on the basis of reasonable actuarial 
assumptions), many plans contain provisions requiring that the benefit 
payable in an optional form be at least actuarially equivalent to the 
accrued benefit payable at normal retirement. Section 1.411(a)(13)-
1(b)(3) of the proposed regulations removes this ``annuity whipsaw'', 
but without  411(d)(6) relief, these plans are unable to take 
advantage of it.
    ASPPA COPA recommends that  411(d)(6) relief be provided for plan 
amendments that change the amount payable under an optional form of 
payment from the actuarial equivalent of the projected annuity payable 
at normal retirement date to the actuarial equivalent of the current 
hypothetical account balance.
    II. Reasonable assumptions. In the proposed regulations,  
1.411(a)(13)-1(b)(3) frequently uses the expression ``reasonable 
assumptions.'' However, this expression is not defined. Given the broad 
range of plan designs and employee groups, it is difficult to 
contemplate a regulation adequately defining this term. For the benefit 
of plan sponsors, particularly small plan sponsors, it would be 
extremely helpful to have certain assumptions identified as ``deemed 
reasonable''.
    ASPPA COPA recommends that certain assumptions should be deemed 
reasonable, but the term should not be defined. For example, interest 
rates that satisfy the definition of market-rate of return should be 
deemed reasonable interest rates. Additionally, ASPPA COPA recommends 
that the  417(e) mortality, and no pre-
retirement mortality, be deemed reasonable mortality.
    III. Decreases in benefits. Section 411(a)(9) provides that the 
normal retirement benefit cannot be less than the early retirement 
benefit. Section 411(b)(1)(G) provides that a participant's benefit may 
not be decreased on account of increasing age or service. In a hybrid 
plan that provides market rate interest credits, it is easy to 
construct examples where the participant's monthly annuity benefit 
payable at age 63 is greater than the monthly annuity benefit payable 
at normal retirement age. Practitioners are confused about how to apply 
these rules and plan sponsors and participants would be best served by 
having clear guidance.
    ASPPA COPA recommends that final regulations clarify:

     That decreases in benefits due to interest crediting rates 
decreasing or being negative are not a decrease in benefit due to 
increasing age or service.
     That decreases in benefits due to variable assumptions 
(such as  417(e) assumptions) used to convert lump sum balances to 
annuities changing as described in the plan are not a decrease in 
benefit due to increasing age or service.
     That for purposes of  411(a)(9) an early retirement 
benefit is any immediate annuity payable prior to normal retirement age 
whether or not a plan labels it an early retirement benefit. Guidance 
should explain when early retirement benefits need to be determined 
(for example, annually based on plan or birth date, at the end of each 
interest crediting period, etc.).
     How lump sums should be calculated in the case of an 
account-based plan where due to decreases in the hypothetical account 
balance the early retirement benefit exceeds the otherwise calculated 
normal retirement benefit. Should the plan pay the account balance or 
as described in proposed regulation  1.411(a)(13)-1(b)(4)(ii) the sum 
of the account balance and the  417(e) lump sum based upon the 
difference in the early retirement benefit and the otherwise calculated 
normal retirement benefit?
    IV. ``Set and forget'' conversion rule. The alternative method for 
establishing an opening account balance in the proposed regulation 
requires ongoing testing and adjustments that are not workable 
administratively.
    ASPPA COPA recommends that the Service reconsider this alternative. 
As suggested in our original comments submitted March 27, 2008, final 
regulations should allow plans without early retirement subsidies that 
establish opening hypothetical account balances no less than the single 
sum value of the accrued benefit using  417(e) mortality and interest 
to avoid future comparisons. This methodology would generally be cost 
effective for the small employer-sponsored plans with little or no 
possibility of discrimination in favor of HCEs.
    V. Noncompliant interest crediting rates. Section 411(b)(5)(B)(i) 
and (ii) state that an applicable defined benefit plan ``shall be 
treated as failing'' to comply with the requirements of  411 (b)(1)(H) 
unless the market rate of return and preservation of capital 
requirements are met. The fact that these are requirements, not safe 
harbors, is not clearly stated in the proposed regulations, however, 
and the lack of a clear statement has led to some confusion.
    ASPPA COPA recommends that final regulations make it clear that 
interest credits that do not conform with the market rate of return or 
the preservation of capital rules under  411(b)(5)(B)(i) may not use 
the general testing rule for age discrimination in  411(b)(l)(H) to 
show compliance with  411.
    VI. Lookback period. Some plans have been drafted to base interest 
credits applied to hypothetical accounts using a lookback month during 
the current plan year while others have been drafted to use a rate 
determinable at the beginning of the plan year based on a lookback 
month during the prior plan year. For example, the 2010 interest credit 
under some plans is based on the November 2010 30-year rate while 
others define the rate for 2010 using the November 2009 rate. Both 
options apparently were acceptable under Notice 96-8.
    Under  1.411(b)(5)-1(d)(1)(iv)(B) a plan would seem to be limited 
to using an interest crediting rate based on one of the lookback months 
from the prior year: ``. . . a plan that is using one of the interest 
crediting rates described in paragraph (d)(3) or (d)(4) of this section 
can determine interest credits for a stability period based on the 
interest crediting rate for a specified lookback month with respect to 
that stability period. For purposes of the preceding sentence, the 
stability period and lookback month must satisfy the rules for 
selecting the stability period and lookback month under  1.417(e)-
1(d)(4), although the interest crediting rate can be any one of the 
rates in paragraph (d)(3) or (d)(4) of this section and the stability 
period and lookback month need not be the same as those used under the 
plan for purposes of section 417(e)(3).''
    We believe it should not be an imperative that the interest 
crediting rate under a cash balance rate be tightly tied to the period 
for which a credit is provided. It is necessary that the rate be 
definitely determinable and that the rate not be in excess of a market 
rate of return. But the use of a rate tied to the beginning of the 
period is no more ``accurate'' than a rate tied to the end of the 
period.
    ASPPA COPA recommends that the final rule be clarified to 
accommodate both choices as long as the plan document describes the 
interest rate credit in a definitely determinable manner.
    VII. Crediting interest on distributions during the year. Final 
regulation  1.411(b)(5)-1(d)(1)(iv)(C) provides that ``Interest 
credits under a plan must be provided on an annual or more frequent 
periodic basis and interest credit must be credited as of the end of 
the period.'' Proposed regulation  1.411(b)(5)-1(d)(1)(iv)(D) provides 
that ``A plan is not treated as failing to meet the requirements of 
this paragraph (d) merely because the plan does not provide for 
interest credits on amounts distributed prior to the end of the 
interest crediting period.'' The proposed regulation does not provide 
guidance that would be helpful for those plan sponsors who choose to 
credit interest on balances paid before the end of the period.
    ASPPA COPA recommends that the final regulations clarify that it is 
permissible to prorate interest credit for the year of the 
participant's distribution for situations where payment is made prior 
to the next interest crediting date. Guidance should provide that if 
the actual crediting rate is not known, the rate used to project the 
hypothetical account balance to normal retirement age, a lesser rate, 
or a fixed rate could be used for this purpose. Guidance should also 
make it clear that the date through which interest is credited can be a 
date as of which the distribution is intended to be paid, and need not 
be the date the distribution actually is paid from the trust.
    VIII. Use of an index. The proposed regulations do not endorse the 
use of an interest crediting rate that is based on an index, and 
generally requires that a Registered Investment Company (RIC) would 
have to be used for equity-based options. The apparent explanation for 
this requirement is that the use of the index itself will provide a 
return greater than a market rate of return because it does not reflect 
the underlying expenses inherent in actually investing funds. Also, a 
RIC that is based on an index will not exactly replicate the results of 
the index because when the makeup of an index changes, there is a lag 
before the RIC can adjust its holdings to match the index. The Service 
notes that a RIC can cease to exist or change its investment strategy 
and has asked for comments on how additional guidance should deal with 
these possibilities.
    We agree that changes in RICs used as the basis to determine 
interest crediting rates can be problematic because the RIC may cease 
to exist or may be modified over time. We believe that this is much 
less likely to be a concern with broadly used indexes. To adjust for 
the concern that the index itself does not reflect a true market rate 
of return because of transaction costs and timing differences, a set 
reduction could be required. To reflect the reduced cost of investing 
in an index fund as contrasted with managed funds, the adjustment 
should be relatively small.
    ASPPA COPA recommends that final guidance allow for the use of an 
interest crediting rate based on a widely acknowledged index. If indeed 
there is concern that such a rate would be greater than a market rate 
of return, final guidance could require a reduction in the rate by a 
minimum number of basis points (e.g., 20 bp).
    IX. Required changes in RICs. The Service has asked for comments on 
how  411(d)(6) would apply if a selected RIC ceases to exist or if the 
RIC substantially changes its investment strategy.
    When an interest crediting rate is based on a RIC, or several RICs, 
the plan sponsor and plan participants anticipate that each RIC will 
continue to be in existence and that the investment strategy in 
existence as of the date the RIC was selected will continue. However, 
this is not always the case and the discontinuance of a RIC or a change 
in the investment strategy of the RIC will upset those expectations. 
Under these circumstances the plan sponsor should be allowed to replace 
such RIC with another RIC that provides the same (or similar) 
investment strategy and underlying expenses as the original RIC. Such a 
change should not be viewed as an amendment to the plan that is subject 
to anti-cutback requirements. If the RIC no longer exists, the actual 
investment income is zero. If there is a change in investment strategy, 
the replacement RIC that brings the choice back to the originally 
selected strategy has the effect of protecting the original 
expectations. Neither circumstance represents a settlor-type decision 
to change the underlying promise of the benefit defined by the plan--
which would be the type of change the anti-cutback rule addresses. Plan 
document language could specify the conditions under which the 
substitution would be made so as to restrict the plan sponsor's 
discretion about the time of the change or the selection of the new 
RIC.
    ASPPA COPA recommends that plan sponsors should be allowed to 
replace an existing RIC with a similar RIC without considering the 
change to an amendment that is subject to  411(d)(6) restrictions. 
Final regulations could specify the type of documentation needed to 
implement the change in the RIC, suggest plan language that would be 
suitable to avoid employer discretion about the substitution, and 
provide guidance on what constitutes a similar RIC.
    X. Actual investment return and accrued benefits. Assuming the 
diversification requirements are satisfied, the proposed regulations 
allow a plan to provide an interest crediting rate based on the actual 
rate of return on the aggregate assets of the plan. Fiduciaries need to 
be assured that a change in investment policy, or individual 
investments being selected, would not constitute a violation of anti-
cutback rules under  411(d)(6) or an impermissible forfeiture under  
411(a).
    ASPPA COPA recommends that the final rule should clarify that a 
plan using actual investment results for the interest crediting rate is 
not constrained by anti-cutback or impermissible forfeiture rules, with 
respect to accrued, normal, or early retirement benefits, stemming from 
changes in investment decisions made by the plan fiduciary.
    XI. Annuity conversion rates for terminated plans. Proposed 
regulation  1.411(b)(5)-1(e)(2)(i)(B) provides guidance regarding the 
interest rate and mortality table used to calculate any benefit under 
the plan payable in the form of an annuity commencing at or after 
normal retirement age. Guidance is not provided on the conversion rates 
at earlier ages. Guidance is also not provided on how the 5-year 
average is to be determined if the plan is terminated mid-year.
    ASPPA COPA recommends that the final regulations clarify that the 
annuity conversion rates required by this section also apply prior to 
normal retirement date. Guidance should also be provided on acceptable 
methods for determining the 5-year average interest credit for mid-year 
terminations such as dropping the rate applicable to the year of 
termination or annualizing the rate for the short period up to the plan 
termination date.
    XII. Anti-cutback relief. In the final regulations,  1.411(b)(5)-
1(e)(3)(ii) provides prospective  411(d)(6) protection for plans with 
an interest crediting rate that exceeds a market rate of return to 
modify the rate to the extent necessary to satisfy the market rate of 
return rules. However, plan administrators need additional relief and 
guidance for several situations such as the following:

     In an effort to comply with the Pension Protection Act 
(PPA), a plan administrator whose plan document specified an interest 
crediting rate in excess of a market rate of return operationally 
applied a lower interest crediting rate than specified in the plan 
document. The lower interest crediting rate was chosen by the plan 
administrator to be consistent with the plan administrator's 
interpretation of the requirements of PPA. Plan participants were 
provided an ERISA  204(h) notice that explained the change in the 
interest crediting rate. A retroactive plan amendment is needed to 
conform the document to operations as contemplated by  1107 of PPA.
     A plan document has an interest crediting rate in excess 
of market rate of return and plan operations reflected the documented 
rate. The final regulations provide that  411(d)(6) relief is 
available allowing the plan sponsor to prospectively change the 
interest crediting rate, but additional guidance is needed to address 
whether the interest crediting rate can be amended retroactively with  
411(d)(6) protection to conform to the final regulations.
     A plan is using an interest crediting rate that satisfies 
the requirements of  1.411(b)(5)-1(d)(3) or 1.411(b)(5)-1(d)(4). 
However, the plan's method of applying this rule is not consistent with 
the requirements of  1.411(b)(5)-1(d)(1)(iv)(B) which are effective 
for plan years after 2010. For example, instead of using a look-back 
month, the plan chooses the rate based upon the rate in effect on a 
single day.
    ASPPA COPA recommends that  1.411(b)(5)-1(e)(3) be amended to:

     Provide that a plan may be amended to conform its 
operational interest crediting rate for the first plan year beginning 
after the passage of PPA through the last day of the plan year ending 
after the final regulations are issued without a requirement to also 
provide the rate stated in the plan document, if greater, if the 
following conditions are met:

          The plan operationally used the interest crediting 
        rate.
          The plan had a good faith belief that the plan as 
        written did not conform to the requirements of PPA.
          The plan had a good faith belief that the lower 
        interest crediting rate satisfied the statutory requirements of 
        the PPA.

     Provide guidance on retroactive amendments to interest 
crediting rates to conform to the requirements of PPA.
     Provide  411(d)(6) relief for plans with an acceptable 
interest crediting rate under  1.411(b)(5)-1(d)(3) or  1.411(b)(5)-
1(d)(4) to amend the method of applying their interest credit rate to 
conform with  1.411(b)(5)-1(d)(1)(iv)(B). In amending to conform with 
 1.411(b)(5)-1(d)(1)(iv)(B) plan sponsors should be able to choose any 
acceptable options under  417(e) for look back month, averaging, and 
stability period without regard to their current methodology and should 
be permitted to modify those methods without a requirement to provide 
the greater of two rates for the period prior to actual amendment of 
the plan.
    XIII. Floor offset arrangements. Floor offset arrangements are 
specifically permitted in assessing age discrimination under  
411(b)(5)(C) to the extent otherwise permitted under  401(a). Existing 
guidance on floor offset arrangements (principally Rev. Rul. 76-259) 
explains how an offset arrangement would apply where traditional plan 
benefits are offset by benefits provided from a true defined 
contribution account. Example 3 in the new final hybrid regulation at  
1.411(a)(13)-1 illustrates the 3-year vesting rule in a situation where 
a traditional plan benefit is offset by the cash balance account in a 
separate plan, thus confirming that floor-offset arrangements can be 
constructed with defined benefit as well as defined contribution 
offsets.
    Guidance is needed on how the accrual rules are applied to the 
plans where a cash balance account is used in a floor offset 
arrangement. As in the case of a defined contribution offset, the net 
benefit from the richer plan should not be required to independently 
show that it satisfies an accrual rule. As in the case of a defined 
contribution offset, the floor offset should be limited to the amount 
provided from the vested portion of the hypothetical account.
    Guidance is also needed for floor offset arrangements that consist 
of a cash balance plan offset by allocations under a defined 
contribution plan. Arguably, rules for such plans are already in place 
in Rev. Rul. 76-259. However, some interpret current requirements to 
permit a plan design that offsets allocations against cash balance 
credits on an annual basis. We have concerns about the impact of such a 
design on the accrual rule that must be satisfied by the cash balance 
plan.
    ASPPA COPA recommends that final regulations clarify that floor 
offset arrangements comprised of two defined benefit plans are tested 
under the accrual rules in aggregate and that the offset is limited to 
the vested portion of the offset benefit. This treatment would be 
comparable to the rule for defined contribution plans in Rev. Rul. 76-
259.
    In addition, ASPPA COPA recommends that regulations clarify that 
cash balance principal credits cannot be offset by defined 
contributions on an annual basis.
    XIV. Testing methodology with variable rates. The cash balance safe 
harbor testing method in  1.401(a)(4)-8(c)(3)(v)(B) provides that, if 
a cash balance plan uses a variable interest crediting rate, the rate 
specified in the plan that is used to project the account balance must 
be either the interest crediting rate for the current period, or an 
average of the rate for one or more prior periods not to exceed 5 
years. Based on this regulation, which has not been updated for PPA, 
practitioners believe it is reasonable to use a rate that meets this 
safe harbor to project benefits for purposes of  401(a)(4),  
401(a)(26),  411,  415 and  416. Although the use of current, or 
recent, investment results to predict future returns has been the safe 
harbor, it does not reflect the fact that long-term returns are 
unlikely to be the same as recent returns--especially in times of 
irrational exuberance or bear markets. (In fact, the preamble to the 
proposed regulations notes that a 5-year average of equity rates is not 
a good predictor of future equity rates of return. Presumably a current 
year rate would also not be predictive.) The proposed regulations 
acknowledge the difficulty inherent in projecting negative returns for 
purposes of  411, and permit an assumption of zero return when return 
is negative. The proposed regulation does not extend this approach to 
other code sections.
    Placing a cap and floor on interest crediting rates used for 
projection would result in more realistic projections of hypothetical 
account balances than the current methodology based on a current rate 
or recent average. A concern about permitting a floor in excess of zero 
is that existing hypothetical balances may reflect unusually high 
returns, a negative return may just be part of returns reverting to the 
long term norm, and using a minimum crediting rate when returns are 
negative will overstate projected balances. However, if there were also 
a cap on the crediting rate, the cap would have prevented the (probably 
more significant) overstatement of likely projected balances that 
resulted from projecting the prior hypothetical account at an 
irrationally high long term rate.
    ASPPA COPA recommends that final regulations provide guidance on 
the application of nondiscrimination, coverage, participation, accrual 
and maximum benefit rules when a plan uses a variable interest 
crediting rate. Specifically guidance should:

     Permit cash balance plans to project hypothetical balances 
for testing purposes, including  401(a)(4),  401(a)(26),  411, and  
415, using the crediting rate for the most recent period or an average 
of prior periods, subject to minimum and maximum interest crediting 
rates. The floor could be, for example, the average rate of return on 
1-year Treasury constant maturities and the cap the average of the S&P 
500 over a 40-year period (a typical working lifetime).
     Provide safe harbor principle credit amounts that will be 
deemed to satisfy the meaningful benefit requirement of  401(a)(26). 
Because determination of an appropriate credit should consider the 
methodology adopted for projecting benefits, ASPPA COPA requests that 
there be an opportunity to comment further on this issue when further 
guidance is provided on applying variable interest crediting rates for 
testing purposes.
     Clarify that the present value of accrued benefits for 
purposes of determining top heavy status is the hypothetical account 
balance as of the determination date.

    XV. Participant choice. The preamble to the proposed regulations 
asks for comments on whether or not a statutory hybrid plan should be 
allowed to offer participants a menu of hypothetical investment 
options, including a life-cycle investment option under which 
participants are automatically moved into a less aggressive investment 
mix as they near retirement. ASPPA COPA has serious concerns about 
permitting participant choice of interest crediting rates. The defined 
benefit system has historically offered participants and spouses 
additional protections over the defined contribution system. However, 
the introduction of an alternative to 401(k) plans that provides a 
defined contribution allocation rather than elective deferral (pay 
credit), minimum guarantee, and automatic, though waivable, qualified 
joint and survivor benefits may be an option that many plan sponsors 
and plan participants value. If participant choice is offered in the 
defined benefit system, the additional protections need to be 
preserved, and a number of other issues will need to be addressed to 
assure these plans are workable administratively and not fraught with 
hidden liabilities for employers and fiduciaries.
    A. Choice of benefit structures. The choice of interest crediting 
rates in a cash balance plan represents a participant being offered a 
choice between two different benefit structures. If participants are 
offered a menu of potential interest crediting rates, participants need 
to be provided with adequate information about how their choices will 
impact their potential monthly annuity benefit including how their 
choices will impact the assumptions used to convert their account 
balance to an annuity.
    If participant choice of interest crediting rates is permitted, 
ASPPA COPA recommends that participants and their spouses should be 
provided information about the impact of their choices on their monthly 
annuity in advance of participants making interest credit choices.
    B. Disclosure. Participant accounts in defined contribution plans 
either have the protection of the prudent expert rule or are subject to 
the rules of ERISA  404(c). Thus, unless the participants are given 
the disclosures and information required under ERISA  404(c) (and 
other protections, including the right to change investment elections 
at least quarterly), the trustees remain responsible for the investment 
performance of the participants' accounts. Similar protections for 
participants would not exist in a participant-directed cash balance 
plan under current law. PPA's addition of the preservation of capital 
rule for cash balance plans does not adequately make up for the loss of 
protection.
    Thus, while the selection of an investment menu offered to 
participants is clearly a fiduciary duty in a defined contribution 
plan, in a defined benefit plan it would be settlor function; simply a 
plan design choice. Absent requirements in the regulations to provide 
basic disclosure about the hypothetical investment menu and other ERISA 
 404(c)-type protections, the defined benefit plan that is supposed to 
provide greater security to the participant would have none of the 
protections extended to participants in the (supposedly less secure) 
defined contribution plans.
    If participant choice of interest crediting rates is permitted, 
ASPPA COPA recommends that disclosure requirements similar to those for 
ERISA  404(c) be required of cash balance plans offering choice. 
However, unlike ERISA  404(c), cash balance plans should not be 
required to permit election changes more frequently than annually. 
Also, a cash balance plan should be able to limit options to a range of 
life-cycle funds, or funds representing conservative and moderate 
investment mixes so as to limit volatility for individual participants.
    C. Moral hazard. With participant directed cash balance plans there 
are additional moral hazards for trustees and plan sponsors. The duty 
of a defined benefit plan trustee to invest so as to manage volatility 
would seem to be at odds with the ability of participants to elect an 
aggressive interest crediting option. If participants make aggressive 
elections, either assets would have to be invested aggressively, 
leading to volatile returns, or the plan sponsor could expect 
additional volatility in contributions. It can be argued that it is 
always prudent to invest the assets in a defined benefit plan in such a 
way that the assets exactly track the increases and decreases in plan 
liabilities. This would effectively lead to permitting defined benefit 
plan assets to be invested to track participant elections (thus 
shifting all investment risks from the plan sponsor to the plan 
participant), but without a structure similar to ERISA 404(c) to 
protect the electing participants and the fiduciaries. In the 
alternative, if the plan's investments are invested according to a 
traditional defined benefit investment strategy which does not 
correlate to participants' aggressive elections, there is a possibility 
that a well-funded plan could become underfunded very quickly in a 
period when aggressive investments perform well. This could lead to 
additional exposure for the PBGC and put participants at risk for 
shortfalls in anticipated benefits.
    Because the interest crediting rate is part of the accrued benefit, 
and all related future interest credits are accrued at the time a 
participant accrues a pay credit, some would argue that a change in the 
crediting rate would appropriately be treated as a plan amendment for  
411(d)(6) purposes. A similar result arises from the notion that 
participants in a qualified retirement plan are not permitted to waive 
all or any part of their accrued benefit. An election of a different 
interest crediting rate would effectively be a waiver of any part of 
the benefit that would have been payable had the change not been made. 
In either view, the effect would be that the benefit resulting from the 
changed participant choice cannot be less than would have been provided 
applying the previously chosen interest crediting rate. If plans had to 
operate under this paradigm, participants would be encouraged to select 
one rate and subsequently change to another rate with different 
characteristics to achieve the greater of the two results. This moral 
hazard could be limited by placing restrictions on the ability to 
change investments. However, limiting the ability to change when an 
initial election is no longer (or never was) appropriate would 
eliminate a right available under a self-directed defined contribution 
plan (with quarterly or more frequent changes permitted), placing 
participants in a defined benefit plan at a relative disadvantage.
    If participant choice of interest crediting rates is permitted, 
ASPPA COPA recommends that:
     Plans permitting participant choice be required to provide 
the 3 percent aggregate minimum allowed for equity based interest 
credit rates for all hypothetical accounts under the plan.
     A change of election relating to an existing hypothetical 
account not be treated as a plan amendment or impermissible waiver of 
accrued benefit under  411.
    While PPA set capital preservation as the appropriate minimum in 
cash balance plans, if participant choice of interest crediting rates 
is permitted, a higher minimum is necessary to combine protection of 
accrued benefits with workable rules and to mitigate moral hazard. 
Since plan sponsors are not required to employ the prudent expert rule 
in determining the proper menu of funds for participant direction in 
cash balance plans, this minimum will also help to insure that sponsors 
choose funds of appropriate quality and risk characteristics. This 
combination of a higher cumulative minimum and  411 relief would 
provide participants with greater protection than a defined 
contribution plan, while permitting flexibility in cash balance plan 
design.
    D. Other guidance required. If choice of investment crediting rates 
is permitted, guidance would need to address the following concerns:

      401(a)(4). Current regulations would already require 
that interest crediting rate options be available on a 
nondiscriminatory basis. Guidance should provide that changes in 
elections can only be prospective, and  401(a)(4) testing is based on 
the interest crediting rate in effect on the testing date.
      401(a)(26). Guidance should provide that benefit 
projections are based on the interest crediting rate in effect on the 
determination date.
      411(a). Guidance should provide that no forfeiture 
occurs as a result of a change in an interest crediting rate election.
      411(b). As with other plan amendments, the application 
of the accrual rules would be based on the prospective interest 
crediting rate.
      411(b)(5). The  411(b)(5) safe harbor regulations would 
have to be modified to provide that the similarly situated test is 
applied assuming a history of identical elections of investment choice 
for older and younger workers.
     Alternative option. Assuming the 3 percent cumulative 
minimum is required, and choices are available on a nondiscriminatory 
basis, plans should be permitted to use the cumulative 3 percent 
account to apply the general nondiscrimination test of  401(a)(4), and 
to demonstrate compliance with  401(a)(26) and  411.
    If the interest crediting rate in effect on the current testing 
date is a variable rate, the recommendations on testing methodology 
with variable rates in section IX above, including any averaging of 
returns for prior periods, would be applied based on the interest 
crediting rate in effect on that date.

    XVI. Ministerial Issues.

    A. Given that governmental plans are not subject to  411, 
references to the special PPA delayed effective date rule should not be 
included in final  411 regulatory effective date descriptions.
    B. Regulation  1.411(b)(5)-1(d)(5)(ii) relating to the use of the 
actual rate of return on plan assets should be added to the list of 
sections in Prop.  1.411(b)(5)-1(f)(2)(i)(B) (dealing with the 2012 
effective date).

    These comments were prepared by a task force of ASPPA's Defined 
Benefit Subcommittee of the Government Affairs Committee and the ASPPA 
College of Pension Actuaries. The task force was chaired by Kevin 
Donovan, MSPA, and the comments were primarily authored by Marjorie 
Martin, MSPA, Judy Miller, MSPA, Mark Dunbar, MSPA, Karen Smith, MSPA 
and Thomas Finnegan, MSPA. Please contact us if you have any comments 
or questions on the matters discussed above.
    Thank you for your consideration of these comments.

            Sincerely,

    Brian H. Graff, Esq., APM, Executive Director/CEO; Craig P. 
Hoffman, Esq., APM, General Counsel/Director of Regulatory Affairs; 
Ilene Ferenczy, Esq., APM, Co-chair, Government Affairs Committee; 
Karen Smith, MSPA, Co-chair, Defined Benefit Subcommittee; Judy A. 
Miller, MSPA, Chief of Actuarial Issues; Mark Dunbar, MSPA, Co-chair, 
Government Affairs Committee; James Paul, Esq., APM, Co-chair, 
Government Affairs Committee.
           Prepared Statement of the U.S. Chamber of Commerce
    The U.S. Chamber of Commerce would like to thank Chairman Harkin, 
Ranking Member Enzi, and members of the committee for the opportunity 
to provide a statement for the record of the hearing entitled ``The 
Power of Pensions: Building a Strong Middle Class and Strong Economy'' 
which was held on July 12, 2011.
    Even with the many challenges facing plan sponsors, the voluntary 
employer-
provided retirement system has been overwhelmingly successful in 
providing retirement income. Private employers spent over $200 billion 
on retirement income benefits in 2008 and paid out over $449 billion in 
retirement benefits. According to the Bureau of Labor Statistics, in 
March 2009, 67 percent of all private sector workers had access to a 
retirement plan at work, and 51 percent participated. For full time 
workers, the numbers are 76 percent and 61 percent, respectively.
    The Chamber and its membership promote all parts of the employer-
provided retirement plan system. While we agree that efforts should be 
made to encourage the defined benefit plan system, we believe that it 
is equally important to recognize the success of the defined 
contribution system and to continue to encourage employers to 
participate and expand that system as well. In our statement, we 
highlight the successes of the defined contribution system and also 
point out challenges in the defined benefit system that have led to the 
declining numbers of defined benefit plans.
          the success of the defined contribution plan system
    While there has been a shift away from defined benefit plans, the 
number of defined contribution plans has increased exponentially. Since 
1975, the number of defined contribution plans has almost quadrupled 
from 207,748 to 658,805 in 2007.\1\ In 1992-93, 32 percent of workers 
in private industry participated in a defined benefit plan, while 35 
percent participated in a defined contribution plan.\2\ According to 
the 2008 National Compensation Survey, the participation for private 
industry workers in defined benefit plans has decreased to 21 percent, 
while participation in defined contribution plans has increased to 56 
percent.\3\
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    \1\ Private Pension Plan Bulletin Historical Tables: U.S. 
Department of Labor, Employee Benefits Security Administration, June 
2010, http://www.dol.gov/ebsa/pdf/1975-2007historical
tables.pdf (accessed August 11, 2010).
    \2\ Beckman, Allan. ``Access, Participation, and Take-up Rates in 
Defined Contribution Retirement Plans Among Workers in Private 
Industry, 2006''. Bureau of Labor Statistics. December 27, 2006. http:/
/www.bls.gov/opub/cwc/cm20061213ar01p1.htm (accessed August 11, 2010).
    \3\ ``Percent of Workers in Private Industry With Access to 
Retirement and Health Care Benefits by Selected Characteristics: 
2008'', Bureau of Labor Statistics, http://www.census.gov/compendia/
statab/2010/tables/10s0639.pdf (Accessed August 11, 2010).
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    In addition, the amount of assets held in these plans has 
significantly increased. The total assets of all employer-sponsored 
retirement plans, IRAs, and annuities equaled $17.5 trillion at year-
end 2010. The largest components of retirement assets were IRAs and 
employer-sponsored defined contribution plans, holding $4.7 trillion 
and $4.5 trillion, respectively, at year-end 2010. Comparably, private-
sector defined benefit pension funds held $2.2 trillion at year-end 
2010.\4\ Consequently, the investment capital from defined contribution 
plan savings has a significant impact on our economy.
---------------------------------------------------------------------------
    \4\ 2011 Investment Company Fact Book: A Review of Trends and 
Activity in the Investment Company Industry, pp. 100-102. 
WWW.ICIFACTBOOK.ORG.
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    Although there has been critique of the adequacy of account 
balances in defined contribution plans, we believe that this criticism 
paints an unfair picture. Since personal account plans did not become 
popular until the 1980s, there has not yet been a generation that has 
relied completely upon personal account plans for retirement. Moreover, 
studies show that account balances tend to be higher the longer 401(k) 
plan participants had been working for their current employers and the 
older the participants. Workers in their sixties with at least 30 years 
of tenure at their current employers had an average 401(k) account 
balance of $198,993.\5\
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    \5\ 2011 Investment Company Fact Book: A Review of Trends and 
Activity in the Investment Company Industry, WWW.ICIFACTBOOK.ORG, p. 
108.
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    Through the passage of the Pension Protection Act of 2006, Congress 
encouraged even greater participation in defined contribution plans by 
implementing automatic enrollment and automatic escalation rules. EBRI 
has stated that automatic enrollment can nearly double participation in 
some defined contribution plans.\6\ Moreover, a study by Vanguard found 
that automatic enrollment appears to raise plan participation rates 
most dramatically among certain demographic groups, particularly young 
and low-income workers, for whom plan participation rates are 
traditionally very low. For example, employees earning less than 
$30,000 and hired under automatic enrollment have a participation rate 
of 77 percent versus a participation rate of 25 percent for employees 
at the same income level hired under voluntary enrollment. Similarly, 
81 percent of employees younger than 25 are plan participants under 
automatic enrollment, versus 30 percent under voluntary enrollment.\7\ 
Consequently, automatic enrollment has been most successful with the 
groups that are most at risk for not being adequately prepared for 
retirement.
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    \6\ [EBRI CITE].
    \7\ [VANGUARD CITE].
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              challenges facing the defined benefit system
    The number of defined benefit plans has been declining.\8\ This 
decline is due to the number of challenges facing plan sponsors--of 
which the greatest are the need for predictability of the rules and 
flexibility to adapt to changing situations. Since 2002, Congress has 
passed five laws that address defined benefit funding.\9\ For over a 
decade, the legality of hybrid plans was unresolved and those plan 
sponsors were unable to get determination letters.\10\ In the recent 
financial crisis, plan sponsors faced unexpected financial burdens due 
to inflexible funding rules. All of these scenarios have had a negative 
impact on the employer-provided retirement system. Therefore, we urge 
Congress to keep in mind the need for predictability and flexibility to 
ensure that employers can continue to maintain plans that contribute to 
their workers' retirement security.
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    \8\ In 2007, 54 of the 100 largest employers offered a traditional 
pension plan to new workers, down from 58 in 2006, according to Watson 
Wyatt Worldwide. That 7 percent decline compares with a 14 percent drop 
as recently as 2005. Levitz, Jennifer. ``When 401 (k) Investing Goes 
Bad''. The Wall Street Journal Online 4 Aug. 2008. http://
online.wsj.com/article/SB121744530
152197819.html (accessed August 21, 2009) Also see Private Pension Plan 
Bulletin Historical Tables: U.S. Department of Labor, Employee Benefits 
Security Administration, June 2010, http://www.dol.gov/ebsa/pdf/1975-
2007historicaltables.pdf (accessed August 11, 2010).
    \9\ Job Creation and Worker Assistance Act of 2002 (P.L. 107-147 
increasing the range of permissible interest rates for determining 
pension liabilities, lump sum distributions, and PBGC premiums for 
under-funded pension plans to 120 percent of the current 30-year 
Treasury bond interest rate; Pension Funding Equity Act of 2004 
replacing the interest rate assumption for 2 years; Pension Protection 
Act of 2006 fundamentally changing the funding rules for both single-
employer and multiemployer defined benefit plans; The Worker, Retiree, 
and Employer Recovery Act of 2008 (``WRERA'') providing limited funding 
relief; The Preservation of Access to Care for Medicare Beneficiaries 
and Pension Relief Act of 2010, providing defined benefit plan funding 
relief for both single-employer and multiemployer plans.
    \10\ In 1999, the Service's Director of Employee Plans issued a 
Field Directive that effectively halted the determination letter 
applications of hybrid plans from being processed. In 2002, the 
Treasury Department, with input from the Equal Employment Opportunity 
Commission and the Department of Labor, issued proposed regulations 
addressing the issue of age discrimination in hybrid plans but withdrew 
the proposed regulations in 2004 in order to clear a path for Congress 
to act. The uncertainty surrounding hybrid plans has been even more 
considerable in the litigation arena with contradictory decisions among 
various circuit courts.
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Funding Issues
    The current economic environment has created challenges for 
employers that want to maintain retirement plans. In addition to 
complying with the normal set of rules and regulations, plan sponsors 
must make tough decisions about their retirement plans and other 
competing needs. Therefore, the more certainty that plan sponsors have 
about the rules, the better they will be able to make these important 
decisions.
    On August 17, 2006, the Pension Protection Act of 2006 (``PPA'') 
was signed into law. The act fundamentally changed the funding rules 
for defined benefit plans. A major impetus behind the PPA was to 
increase the funding level of pension plans. Consequently, most plan 
sponsors entered 2008 fully ready to comply with the new funding rules. 
The severe market downturn at the end of 2008 drastically changed the 
situation.\11\ Because of the accelerated funding scenarios spelled out 
in the PPA, and notwithstanding the efforts of Congress to provide some 
temporary funding relief, many plan sponsors were faced with the 
reality of having to contribute two and three times the amount of the 
expected contribution.
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    \11\ At the beginning of 2008, the average funded level of plans 
was 100 percent. Data from a study published by the Center for 
Retirement Research at Boston College indicates the following as of 
October 9, 2008:

     In the 12-month period ending October 9, 2008, equities 
held by private defined benefit plans lost almost a trillion dollars 
($.9 trillion).
     For funding purposes, the aggregate funded status of 
defined benefit plans unpredictably fell from 100 percent at the end of 
2007 to 75 percent at the end of 2008. (See footnote 5 of the study).
     Aggregate contributions that employers will be required to 
make to such plans for 2009 could almost triple, from just over $50 
billion to almost $150 billion.
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    A matter of recent concern is the consideration of increases to 
PBGC premiums. Increasing PBGC premiums without the opportunity for 
discussion of details, careful consideration of the potential impact, 
or buy-in from all interested parties would present another challenge 
to the private sector defined benefit pension system.
    Raising the PBGC premiums, without making contextual reforms to the 
agency or the defined benefit system, amounts to a tax on employers 
that have voluntarily decided to maintain defined benefit plans. An 
increase in PBGC premiums, when added to the multi-billion dollar 
impact of accelerated funding enacted in 2006 could divert critical 
resources from additional business investment and subsequent job 
creation.
Regulatory Issues
    In general, greater regulation often leads to greater 
administrative complexities and burdens. Such regulatory burdens can 
often discourage plan sponsors from establishing and maintaining 
retirement plans. The following are just a few examples of where the 
regulatory burden is overwhelming, particularly with respect to defined 
contribution plans.
    Notice and Disclosure: Plan sponsors are faced with two 
increasingly conflicting goals--providing information required under 
ERISA and providing clear and streamlined information. In addition to 
required notices, plan sponsors want to provide information that is 
pertinent to the individual plan and provides greater transparency. 
However, this is difficult with the amount of required disclosures that 
currently exist. Although there is a reason, even a good reason, for 
every notice or disclosure requirement, excessive notice requirements 
are counterproductive in that they overwhelm participants with 
information, which many of them ignore because they find it difficult 
to distinguish the routine, e.g., summary annual reports, from the 
important. Excessive notice requirements also drive up plan 
administrative costs without providing any material benefit. It is 
critical that Congress coordinate with the agencies and the plan 
sponsor community to determine the best way to streamline the notice 
and disclosure requirements.
    PBGC Rule on Cessation of Operations: In August 2010, the PBGC 
published a proposed rule under ERISA section 4062(e) which provides 
for reporting the liabilities for certain substantial cessations of 
operations from employers that maintain single employer plans. If an 
employer ceases operations at a facility in any location that causes 
job losses affecting more than 20 percent of participants in the 
employer's qualified retirement plan, the PBGC can require an employer 
to put a certain amount in escrow or secure a bond to ensure against 
financial failure of the plan. These amounts can be quite substantial.
    We believe that the PBGC proposed rule goes beyond the intent of 
the statute and would create greater financial instability for plan 
sponsors. Furthermore, we are concerned that the proposed rules do not 
take into account the entirety of all circumstances but, rather, focus 
on particular incidents in isolation. As such, the proposed rule would 
have the effect of creating greater financial instability for plan 
sponsors.
    The PBGC recently announced that it is reconsidering the proposed 
rule. However, we continue to hear from members that the proposed rule 
continues to be enforced. This type of uncertainty is an unnecessary 
burden on plan sponsors and discourages continued participation in the 
defined benefit plan system.
    Alternative Premium Funding Target Election: The PBGC's regulations 
allow a plan to calculate its variable-rate premium (VRP) for plan 
years beginning after 2007, using a method that is simpler and less 
burdensome than the ``standard'' method currently prescribed by 
statute. Use of this alternative premium funding target (APFT) was 
particularly advantageous in 2009 because related pension funding 
relief provided by the Internal Revenue Service served for many plans 
to eliminate or significantly reduce VRP liability under the APFT 
method. However, in both 2008 and 2009 PBGC determined that hundreds of 
plan administrators failed to correctly and timely elect the APFT in 
their comprehensive premium filing to the PBGC, with the failures due 
primarily to clerical errors in filling out the form or administrative 
delays in meeting the deadline. In June 2010, the PBGC responded to the 
concerns of plan sponsors by issuing Technical Update 10-2 which 
provides relief to certain plan sponsors who incorrectly filed. We 
appreciate the PBGC's attention to this matter and its flexibility in 
responding to this situation. However, we are concerned that the relief 
provided does not capture all clerical errors or administrative errors 
that may have occurred and, therefore, some plan sponsors remain 
unfairly subject to what are substantial and entirely inappropriate 
penalties. As such, we believe that the rules established under the 
current regulation and the Technical Update should be considered a safe 
harbor. The regulation should be revised to state that if the safe 
harbor is not met, the PBGC will still allow use of the APFT if the 
filer can demonstrate, through appropriate documentation to the 
satisfaction of the PBGC, that a decision to use the APFT had been made 
on or before the VRP filing deadline. Proof of such a decision could be 
established, for example, by correspondence between the filer and the 
plan's enrolled actuary making it clear that, on or before the VRP 
filing deadline, the filer had opted for the APFT. It is important that 
this regulatory change be made on a retroactive basis, so as to provide 
needed relief to filers for all post-PPA plan years.
    Cash Balance Plan Regulations: On October 18, 2010, the Internal 
Revenue Service issued long-awaited regulations affecting cash balance 
benefit plans under the Pension Protection Act of 2006. In addition to 
the delay in receiving this regulatory guidance, plan sponsors were 
disappointed that the regulations deviated from clear congressional 
intent. The Chamber is engaged in on-going conversations with the 
Treasury Department and is asking Treasury and the IRS to set forth a 
clear and rational approach to PPA compliance for Pension Equity Plans. 
Moreover, because of the complexity of hybrid plans and their 
regulation, we are requesting additional guidance to ensure that plan 
sponsors have sufficient clarity and flexibility to adopt and maintain 
hybrid pension plans with legal certainty.
    Top-Heavy Rules: The top-heavy rules under ERISA are an example of 
extremely complex and burdensome regulations that do not offer a 
corresponding benefit. We recommend that this statute be eliminated 
altogether.
                           accounting issues
    In 2006, the Financial Accounting Standards Board (``FASB'') 
undertook a project to reconsider the method by which pensions and 
other benefits are reported in financial statements. They completed 
Phase I of the project but left Phase II, which would have removed 
smoothing periods from the measure of liabilities, until a later date. 
After significant negative feedback from the plan sponsor community, 
FASB indefinitely postponed the implementation of Phase II.
    In 2010, FASB issued two proposals concerning accounting 
requirements for businesses that participate in multiemployer plans. 
Each proposal would have required the participating employer to include 
estimated withdrawal liabilities on their statement regardless of the 
likelihood of withdrawal. As you are aware, the information included on 
financial statements is used to determine the credit-worthiness of a 
company. Therefore, disclosing an estimated withdrawal liability could 
be misleading and negatively impact an employer's ability to get 
appropriate financing either from banks or bonding agencies. In 
addition, even if an individual employer is not directly impacted, that 
employer may be indirectly impacted if other employers who participate 
in the plan suffer financial trouble due to the disclosure of this 
information. FASB recently revised this proposal at the urging of the 
business community.
    The threat of accounting changes from FASB is a constant worry of 
plan sponsors. These changes can have significant ramifications for 
their businesses--impacting credit determinations and loan agreements--
without having any impact on the actual funding of the plans. This 
persistent threat discourages participation in the employer-provided 
retirement system.
                               conclusion
    The best way to encourage plan sponsors to maintain retirement 
plans is to create a predictable and flexible benefit system. Moreover, 
we believe that all types of benefit plans should be equally 
encouraged, as there is not one type of plan that is suitable for every 
employer. We look forward to working with this committee and Congress 
to enact legislation that will encourage further participation in all 
parts of the employer provided retirement system.
    Thank you for your consideration of this statement.
       Report of Tower Watson's (Insider, July 2011) newsletter 

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         Response to Questions of Senator Enzi by Diane Oakley
    Question 1. We all agree that well-run defined benefit plans offer 
very good benefits for employees and are an attractive retention tool 
for employers. However, many businesses may struggle with the 
burdensome regulations or convoluted laws associated with setting up 
and maintaining a defined benefit plan. In your opinion, which is 
easier for large companies to set up a defined contribution or a 
defined benefit plan? Does a defined contribution plan offer more of a 
``turn-key'' operation for many businesses? What about for small- and 
medium-sized business to set up? Why is this?
    Answer 1. DB pension plans offer employers a cost-efficient, useful 
workforce management tool for employee recruitment and retention. In 
today's economy, most companies do not start out as large firms, rather 
over time they grow in size from start-up organizations or they become 
larger in size as a result of a merger. Also, private-sector industry 
shifts have occurred as the number of domestic manufacturing jobs with 
long-tenured employees has declined, while there has been a growth in 
information technology companies that typically have employees with 
shorter average tenures. As a result fewer companies offer new 
employees pensions today than even just 10 years ago.
    Among the Fortune 1000 companies, we have seen an upward trend in 
the number of corporations covering employees under defined 
contribution (DC) plans rather than defined benefit (DB) plans due in 
large part to the growing level of regulations that you refer to in the 
next questions. This has occurred in spite of the reality that DB plans 
due to their embedded economic efficiencies can provide the same level 
of retirement income for nearly half the amount that an individual 
would need to accumulate in a 401(k) account. DB plans require 
employers to continue to fund the promised benefits and that commitment 
means that in tough economic patches employers do not have the 
flexibility that we saw many larger employers with 401(k) plans 
exercise when they suspended employer matching contributions in 2009 
and 2010 and which they are now starting to resume.
    While it might be easier to set up a DC plan because the financial 
services industry has developed the capacity to deliver turn-key 
programs, the ongoing operating cost of a DB plan once established for 
larger employers is more cost effective. DC plans have higher 
administrative costs of maintaining individual accounts and annual 
testing, although with bundled service approaches the cost is often 
borne by employees through the fees charged to their accounts.
    DB plans are often tailored to the companies' human resource needs, 
and while DB plans may require additional actuarial work we have seen 
very efficient models develop in the public sector under which state-
wide municipal retirement plans can scale up services and deliver cost-
effective DB plans to public employees in small local communities.
    When the DB(k) plan was created as part of the Pension Protection 
Act of 2006 (PPA), I believe that there was some of that intent but the 
delay in issuing regulations on such plans has stalled possible 
implementations of DB(k) plans. NIRS has offered several policy options 
that could help employers consider covering workers under DB plans 
which include changing the law to make plan funding less volatile, 
allowing employees to contribute to DB plans on a pre-tax basis and 
creating a way that third parties could sponsor a pension plan.

    Question 2. When ERISA was first enacted in 1974, our retirement 
system was a lot simpler and 401(k) plans didn't really take off until 
much later. In today's environment, does it make sense to have three 
regulatory entities overseeing the retirement benefit system? In this 
case, we have the Department of Labor's Employee Benefit Security 
Administration, the Pension Benefit Guaranty Corporation and the 
Internal Revenue Service.
    Answer 2. See response to question 3.

    Question 3. At the hearing, I introduced into the record a six page 
list of required employee disclosures pursuant to Federal retirement 
and health laws. In addition, those laws and regulations require many 
additional filings and reports to regulators. Recently, the President 
issued Executive Order 13563 requiring agencies to look at the 
regulatory burden and to come up with plans to reduce redundant, 
overlapping or burdensome regulations. Should the Administration place 
special attention on reducing regulatory burdens in the retirement 
area? What suggestions would you have for DOL in implementing e-
disclosure policies?
    Answer 2 and 3. Let me combine my response to these two questions. 
I agree that the operations of pension plans have become more complex 
since ERISA was enacted. I started working with pension plans just as 
ERISA passed and it was thought to be a complex law even in its 
original form and it has changed significantly over time.
    Of course, in 1974 the change in the law that enabled the creation 
of 401(k) plan was still to come. I believe that the history of 401(k) 
plans illustrate how the unintended consequence of a small change in 
the pension and tax law can lead to major policy shifts, in that 401(k) 
plans, which were created as supplements to what was then the mainstay 
of retirement--defined benefit plans, have become the only retirement 
savings plan offered to the majority of workers covered by employer-
sponsored plans.
    The first area for the Administration to look at in reducing 
regulatory burden is regulations being interpreted by the IRS and other 
agencies in ways that do not reflect the intent of Congress.
    Let me illustrate this with another unintended consequence example 
that is coming out of the rulemaking process with regard to established 
practices on normal retirement age, especially for public pensions. In 
language designed to allow for phased retirement, Pension Protection 
Act of 2006 (PPA) set forth a definition of ``normal retirement age.'' 
At the time, there was no discussion of normal retirement age practices 
in the public sector nor was there any intent to broadly change State 
pension laws at the time. Still, the IRS chose to use a PPA provision 
dealing with in-service distributions under phased retirement as the 
basis for questioning whether or not a retirement age that is 
conditioned (directly or indirectly) on the completion of a stated 
number of years of service is permissible in public sector plans.
    Under the IRS regulations--scheduled to apply to public sector 
pension plans beginning in 2013--all governmental pension plans would 
be required to specifically define a normal retirement age as an actual 
age. However, many governmental plans define normal retirement age or 
normal retirement date as the time or times when participants qualify 
for unreduced retirement benefits under the plan, which is set forth in 
State and/or local statutes and may not state a specific age.
    Furthermore, under many governmental pension plans, a participant 
can reach normal retirement age by satisfying one of several age and 
service combinations. Sponsors of such plans would find it very 
difficult to select a single age to be the plan's normal retirement 
age. Selecting an age that is higher than the lowest age would likely 
impair the constitutionally protected rights of the participants to any 
benefit conditioned on normal retirement. Selecting an age that is 
lower than the highest age could impact the actuarial cost of the plan. 
While meetings have occurred between governmental plan representatives 
and the Treasury Department, the issue remains unresolved.

    Question 4. Studies show that many new employees like having a 
defined contribution plan because they can see their money grow from 
year to year. Also, many new employees do not envision that they will 
be with the same company for 30 years. Should Congress expand the 
opportunities under the defined contribution system to adjust to this 
new workforce philosophy?
    Answer 4. For many years while 401(k) plans were gaining 
popularity, employees were able to look at their quarterly statements 
and see the money in their DC plan account grow. The last decade has 
been an eye-opener for many families about the investment risk in 
401(k) plans.
    During the last decade's first recession, many participants tried 
not to look at the shrinking 401(k) account balances when their 
quarterly statement arrived and many had recovered from investment 
losses just as the great recession hit in 2008. Over recent years they 
have seen account balances fall significantly once again and equity 
investments have continued to swing down and up.
    The economic shocks we have lived through since the start of this 
century have shown workers how risky our new retirement system can be. 
In a recent NIRS Opinion Survey, we asked if it was easier to prepare 
for retirement today than it was in comparison to earlier generations. 
Nearly 6 out of 10 women and nearly half of the men told us that it was 
much harder. Also, more than 8 out of 10 women told us that the average 
worker cannot save enough on their own to guarantee a secure retirement 
and 3 out of 4 men felt the same way.
    Most working Americans have seen their earnings slip in real terms 
over these years and few cannot afford to make added retirement 
contributions to make up the losses. I indicated in an earlier response 
that employers have a difficult time dealing with volatility but they 
have more wherewithal than most employees do to rebound from the 
beating their accounts took in the recent financial storms. This has 
created a growing appreciation for traditional defined benefit plans.
    In the public sector where a number of States allow new employees 
to choose between participating in a DB or DC plans, the large majority 
speak with their money and choose the traditional DB plan. Congress has 
helped retirement savings plans take advantage of defaults to encourage 
participation in retirement plans, so you have seen the power that a 
default can have. In the State of Washington where employees have a 
choice between a traditional DB plan and hybrid arrangement that 
includes a DC plan and the default is to the hybrid arrangement. This 
provides an interesting example, 6 out of 10 employees actively choose 
the traditional DB plan over the default option with its DC plan. NIRS 
will be releasing a report on the choice selections between DB and DC 
plans in the coming weeks and we would be happy to share all of the 
details with you.
    Over the last several decade Congress has done a lot of heavy 
lifting to make pension plans more portable by expanding rollover 
flexibility among plans. This has been extremely helpful to workers 
when they change jobs. Of course, the other side of portability is that 
lump sum distributions often lead to leakage when employees leave one 
job for another and fail to make a roll over. Even modest lump sums, 
especially from employment early in a career would compound 
significantly with interest and improve long-term retirement security 
for many Americans if we could discourage early withdrawals.
    Last, Boston College did a ``chicken or the egg'' type of analysis 
of job changing and the decline of pensions. In 2006, they found 
evidence that the move from DB plans into DC plans beginning in the 
1990s caused employees to turn over at higher rates--as opposed to the 
other way around, as is sometimes assumed. They further found that DB 
pension coverage increases tenure with an employer by 4 years, as 
compared to having no retirement system in place. DB coverage increases 
tenure with an employer by 1.3 years as compared with DC coverage. 
Having a DB and DC plan showed the greatest retention effects, as the 
two plans together increase tenure by a full 3.1 years, as compared 
with a DC-only plan.

    Question 5. At the hearing, we heard that one of the big issues for 
companies in sponsoring defined benefits is the change in accounting 
standards and rules requiring fair market value of pension liabilities 
which are reported on companies' balance sheets. Many companies believe 
that this has led to increased volatility for companies' balance 
sheets. Even if we revise the pension funding rules pursuant to ERISA 
for counter-cyclical events, would the current accounting rules still 
be an issue?
    Answer 5. I agreed with the witness who spoke to the accounting 
change that the change in the accounting standards requiring fair 
market value of pension liabilities has led to increased volatility on 
corporate balance sheets. NIRS has found that it also contributed to 
the trend toward freezing DB plans in the private sector. As Congress 
considered the PPA, many private plan sponsors suggested that the 
funding rules that moved in a similar direction would force sponsors to 
consider freezing pensions and that appears to be the case. In the wake 
of the financial crisis, Congress provided modest pension funding 
relief for private pension plans and a further consideration of 
restoring greater time horizons to the funding requirements, which 
would have an important bottom line effect in generating cash flow, 
could help companies have the resources to hire new employees.
    The FASB accounting rules would still pose challenges in private 
sector and similar concerns now face public employers, with the release 
of the recent exposure draft on pension accounting by GASB. The balance 
sheet numbers will impact stock prices and credit ratings but the 
pension funding rules go straight to the cash flow bottom line today 
even though the pension plan liabilities are far in the distant future.

    Question 6. In your research, you found that defined benefit plans 
get ``more bang for the buck'' than defined contribution plans, 
however, your research comes from public pension plans. What about the 
volatility and accounting issues associated with private sector defined 
benefit plans? Do the longer period for amortization and ``smoothing'' 
allowed by public pension plans create stability for public pension 
plans or do they create more funding problems for State and local 
governments' pension obligations?
    Answer 6. NIRS ``Better Bang for the Buck'' compares the cost of 
providing a certain level of lifetime income under both a DC plan and a 
DB plan. It finds that the DB plan generally provides a 46 percent cost 
advantage to provide the same benefit. The analysis looks at a generic 
DB plan that would occur in either the private or public sectors. The 
analysis did not look at funding volatility in and of itself.
    The paper calculates how much money would be needed in a DC plan to 
provide a certain level of income in retirement to last for almost all 
of a person's life. It then compares that amount with the amount of 
money that would need to be accumulated in a DB plan with the same 
benefit level. The pooling of longevity risk, maintaining portfolio 
diversity and higher investment returns from DB plans due to 
professional asset management add up to a 46 percent cost advantage. 
Investment risk occurs in DB and DC plans but it generally resides with 
employers in DB plans and with employees in DC plans.
    Because the States that sponsor the large public pensions, which 
cover 85 percent of the public workforce, are sovereign governments 
there is no Federal agency insuring the benefits promised to public 
employees.
    Without Federal restrictions on the actuarial tools (smoothing and 
amortization) that plan sponsors can use to create a more stable and 
predictable flow of dollars into pension plans, public pension trusts 
gradually reached aggregate funding levels in excess of 100 percent by 
2000. The vast majority of individual public pensions attained funding 
levels that GOA has cited as appropriate for public pensions by that 
same time, but some plans fell short when it came to prefunding their 
liabilities for various reasons, including budgetary pressures.
    The predictable cost of providing a DB plan in the public sector as 
well as the contributions made to DB plans by public employees have 
allowed these plans to continue to provide retirement security to 
millions of American workers. The first chart shows the historical 
employer and employee contributions made into public pensions from 1982 
through 2009. The shared forced saving of public employees has been a 
steady component of public pension funding while employer contributions 
were adjusted back when plans in many States reach full funding levels. 
The second chart compares the percentage increase in plan contributions 
for both public and private employers and illustrates how the longer 
period for amortization and ``smoothing'' offer sponsors of public 
pensions a more predictable cost for their pensions which enabled most 
plans to reach adequate funding levels over time without creating 
extreme burdens on taxpayers in any 1 year. Over the last several years 
nearly all States have adjusted their pension plans in various ways to 
put them on a path back on a sounder financial basis over time.
      Public Pensions Typically Are Shared Funding Responsibility
       employee and employer pension contributions, 1982 to 2009

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 change from prior year in corporate and public pension contributions, 
                               1989-2009

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 Response to Questions of Senator Enzi by Christopher T. Stephen, Esq.
    Question 1. We all agree that well-run defined benefit plans offer 
very good benefits for employees and are an attractive retention tool 
for employers. However, many businesses may struggle with the 
burdensome regulations or convoluted laws associated with setting up 
and maintaining a defined benefit plan. In your opinion, which is 
easier for large companies to set up a defined contribution or a 
defined benefit plan? Does a defined contribution plan offer more of a 
``turn-key'' operation for many businesses? What about for small- and 
medium-sized business to set up? Why is this?
    Answer 1. DC plans were originally created to be supplemental 
retirement income to traditional DB Plans and Social Security benefits. 
We all know that over the last 25 years, DC plans have largely become 
the primary retirement savings vehicle for workers, as many companies 
have reduced, frozen or terminated their DB plans. As I testified 
during the hearing, there are many reasons for this transition, but the 
``tipping point'' was when Congress (1) amended the Full Funding Limit 
rules (effective in 1988), and (2) introduced pro-cyclical funding 
requirements that dramatically increased funding obligations during 
difficult economic times. Up until that time, the tax code allowed 
employers to contribute more to their retirement plans in good times, 
and less in bad times, recognizing the need for more capital in bad 
times.
    Policies that increased volatility in contribution rates and 
required more funding by companies during down financial markets has 
created a trend over the last two decades for employers to freeze or 
completely eliminate DB plans. The current funding rules are pro-
cyclical, making operation and maintenance of a DB a one-way-wrench 
that requires substantial increases in funding when companies are least 
able to afford it. We cannot have a vibrant defined-benefit system as 
long as the funding rules require exorbitant contributions at exactly 
the wrong time.
    No business of any size--whether it is a small electric co-op in 
Iowa or Wyoming or J.P. Morgan which Forbes cites as the largest 
company in the world--can survive or thrive if it does not have 
predictable, manageable, and budgetable costs on an annual basis, let 
alone a 5- to 10-year horizon. That is exactly what has become of the 
DB system--substantially increased volatility and unpredictability in 
the funding rules has made sponsoring a DB plan an unpredictable, 
unmanageable, and unbudgetable cost that companies will be liable for 
over decades.
    Companies need certainty. In late September 2011, The New York 
Times and The Wall Street Journal both reported that health-insurance 
premiums paid by employers rose by 9 percent in 2011, with the average 
annual cost of family coverage topping $15,000 according to a study 
from Kaiser Family Foundation, and that unemployment insurance premiums 
are rising for employers as States struggle to repay $38 billion in 
Federal loans for unemployment benefits. And, at the same time, the 
Administration continues to pursue its goal to increase PBGC premiums 
by $16--$17 billion on the very companies struggling to keep their DB 
Plan in place. This unfair tax increase on DB plan sponsors is just 
another example of government injecting unpredictability and pro-
cyclical, anti-growth policies into a system it allegedly wants to 
preserve and enhance. In that context, it is wrong for the government 
to even consider taxing plan sponsors.

    Question 2. When ERISA was first enacted in 1974, our retirement 
system was a lot simpler and 401(k)s didn't really take off until much 
later. In today's environment, does it make sense to have three 
regulatory entities overseeing the retirement benefit system? In this 
case, we have the Department of Labor's Employee Benefit Security 
Administration, the Pension Benefit Guaranty Corporation and the 
Internal Revenue Service.
    Answer 2. If the three agencies are going to continue to oversee 
the retirement benefit system, much better coordination is needed among 
them. For example, each agency discusses the need to slow the decline 
of the DB Plan system, but there is no concerted effort to do so. 
Instead, the PBGC spearheads an extremely counterproductive proposal to 
impose a large tax only on defined benefit plan sponsors. In our public 
policy discussions with the Hill and the Administration, Treasury and 
Labor are not involved, leaving us more convinced than ever of the need 
for more coordination among the agencies. That coordination could 
potentially head off misguided proposals like the PBGC's.

    Question 3. At the hearing, I introduced into the record a 6-page 
list of required employee disclosures pursuant to Federal retirement 
and health laws. In addition, those laws and regulations require many 
additional filings and reports to regulators. Recently,the President 
issued Executive Order 13563 requiring agencies to look at the 
regulatory burden and to come up with plans to reduce redundant, 
overlapping or burdensome regulations. Should the Administration place 
special attention on reducing regulatory burdens in the retirement 
area? What suggestions would you have for DOL in implementing e-
disclosure policies?
    Answer 3. The retirement plan system is slowly being overrun by 
overlapping, unnecessary, and burdensome requirements. First, the 
volume and complexity of employee communications have reached such an 
extreme point that many employees simply do not read anything anymore, 
yet longer and more complicated disclosures are constantly being added. 
Second, the cost of preparing, printing, and mailing these notices is 
growing. Despite the fact that the world, including much of the Federal 
Government, is moving toward electronic communication, DOL is moving 
toward more paper, more cost, and less effective communication. 
Finally, all the new rules are spawning a wave of baseless litigation 
as class actions in search of a settlement have hit the retirement plan 
system. These issues must be addressed if we are to have a vibrant, 
growing private retirement system.

    Question 4. Studies show that many new employees like having a 
defined contribution plan because they can see their money grow from 
year to year. Also, many new employees do not envision that they will 
be with the same company for 30 years. Should Congress expand the 
opportunities under the defined contribution system to adjust to this 
new workforce philosophy?
    Answer 4. Congress should expand opportunities throughout the 
retirement security arena, to enable workers to save more for a secure 
retirement, and, encourage employers to invest more in their greatest 
asset--employees. That is, Congress should not pick ``winners and 
losers'' in the retirement savings arena. Rather, it should enact 
policies that encourage employers to provide and contribute to plans, 
and that incentivize employees to save for their own retirement.
    As I said in my testimony, NRECA is proud that the vast majority of 
its members offer comprehensive retirement benefits to their committed 
employees through a traditional DB plan (the NRECA Retirement Security 
Plan) and a DC Plan (the NRECA 401(k) Plan). These ``multiple-
employer'' retirement benefit plans (under  413(c) of the Internal 
Revenue Code) are operated to maximize retirement savings for 
employees, retirees and their families and provide each co-op employee 
the financial means to enjoy a comfortable and secure retirement.
    The strongest recruitment and retention tool for electric 
cooperatives continues to be their employee-benefits program--
particularly their DB Plans. As a consumer-owned business, each 
electric cooperative is focused on serving its community through its 
workforce. While many publicly traded, international companies see 20 
to 30 percent or more annual employee turnover, electric cooperatives 
see less than a 5 percent annual employee turnover, with more than \2/
3\ of cooperative employees spending their entire working careers 
within the cooperative family. Our members understand the very real 
recruiting, training, and development costs for new hires are 1.0 to 
2.0 times annual pay. As such, our DB Plan rewards long service 
employees, and allows our members to invest in these key employees 
without having to face these substantial replacement costs. This 
``works'' for our businesses.
    For other business and industries, however, a traditional DB Plan 
may not ``work'' for its employees or business model. For employers, DC 
Plans have predictable, manageable, and budgetable costs, which make 
them an important part of total compensation. Also, as your question 
states, many employees have transitioned away from career employment at 
one company. At the same time, while the DC Plan system has achieved 
many successes, with approximately 670,000 private-sector DC Plans 
covering 67 million Americans, it still presents challenges to provide 
the necessary level of retirement benefits to many Americans.
    Eliminating or diminishing the current tax treatment of employer-
sponsored retirement plans like the NRECA Retirement Security Plan or 
401(k) Plan will jeopardize the retirement security of tens of millions 
of American workers, impact the role of retirement assets in the 
capital markets, and create challenges in maintaining the quality of 
life for future generations of retirees. While we work to enhance the 
current retirement system and reduce the deficit, policymakers must not 
eliminate one of the central foundations--the tax treatment of 
retirement savings--upon which today's successful system is built. As 
Congress and the Administration consider comprehensive tax reform and 
deficit reduction, we urge you to preserve these provisions that both 
encourage employers to offer and workers to contribute to retirement 
plans.

    Question 5. At the hearing, we heard that one of the big issues for 
companies in sponsoring defined benefits is the change in accounting 
standards and rules requiring fair market value of pension liabilities 
which are reported on companies' balance sheets. Many companies believe 
that this has led to increased volatility for companies' balance 
sheets. Even if we revise the pension funding rules pursuant to ERISA 
for counter-cyclical events, would the current accounting rules still 
be an issue?
    Answer 5. Not available.

    Question 6.  Your cooperative members operate a ``multiple 
employer'' defined benefit plan that allows multiple defined benefits 
plans to be rolled into a larger plan. Multiple employer plans seem to 
allow small businesses some of the benefits large companies have with 
their big participant pools. What can be done to allow other entities 
to have access to the multiple employer structure? Are there major 
regulatory burdens or roadblocks to implementing and running a 
successful multiple employer plan?
    Answer 6. Our ``multiple-employer'' DB Plan provides cooperatives 
with a convenient and affordable mechanism to pool resources, maximize 
group purchasing power and leverage economies of scale that would 
otherwise be unavailable to small businesses like cooperatives. In 
fact, that is why NRECA created the Plan in 1948--our members could not 
afford all of the administrative expenses to set up and operate a plan 
on their own, and financial institutions were not interested in 
employers of our size.
    There are, however, several statutory and regulatory burdens and 
roadblocks hindering the formation of association-based multiple-
employer plans (MEPs) like ours, that are dedicated to doing the right 
thing for their members and their employees.

     If Congress pursues a policy to expand MEPs, Federal laws 
and regulations should recognize the difference between bona fide 
``employer association-based MEPs,'' and ``open MEPs'' for fiduciary 
responsibility and liability purposes. For true bona fide association-
based multiple employer plans (like NRECA), participating employers 
share a relationship and common business goal unrelated to employee 
benefits and typically have voting authority with respect to the 
association. Employer-association MEPs assume enormous liabilities for 
other employers when sponsoring the MEP; in exchange for assuming the 
risk, complexity and cost, the central MEP sponsor must have control 
over policies, provider selection, plan management, and investments. 
If, for example, 1,000 participating employers in an employer-
association-based MEP were obligated to assume responsibility for 
management and monitoring of the MEP, the advantages of the MEP design 
(centralization of cost and complexity), would be eviscerated, leading 
to increased costs and confusion. In that model, individual employers 
would need to hire sub-administrators to provide monitoring 
administration services, defeating the purpose of the MEP. To the 
extent Congress looks to expand opportunities for companies to join 
and/or establish MEPs, Congress should recognize bona fide association-
sponsored MEPs' centralized responsibility and accountability and 
eliminate burdens at the participating employer level. Further, 
Congress should be very leery of opportunistic for-profit companies who 
seek to establish ``open MEPs,'' where employers share no ``common-
bond'' relationship or voting authority with respect to the sponsoring 
entity, so there is no separate entity to assume those obligations. 
With an open MEP, since there is no bona fide employer association 
sponsor, it makes sense to require participating employers to maintain 
these obligations. If any clarifications are made to current law on MEP 
structure or fiduciary responsibility and liability, Congress should 
carefully assess the structure, operation, oversight and participant 
protections in ``open MEPs.''
     Expand eligibility to participate in employer association-
based MEPs. Under ERISA  3(5), an employer includes an association of 
employers. Under various DOL advisory opinions specific to health and 
welfare plans, the DOL advised that employers who lack certain 
characteristics, such as the requisite degree of control, may not be 
eligible to participate in an employer association-sponsored plan. 
These opinions were primarily issued to address entities attempting to 
circumvent State health insurance requirements. Recent comments by the 
DOL suggested that the interpretation of 3(5) would be the same as to 
retirement plans. This interpretation generally does not impact 
existing association-sponsored MEPs or employers already participating 
in them, particularly ``closed'' association-sponsored MEPs like 
NRECAs. However, a narrow interpretation of the definition of employer 
would discourage the expansion of association-sponsored MEPs, or the 
formation of ``open MEPs.'' Obviously, concerns about eligibility would 
further diminish the likelihood that an employer would establish or 
participate in a DB MEP. Congress could facilitate ``open MEPs'' or the 
expansion of existing association-sponsored MEPs, with appropriate 
safeguards.
     Congress should change rules that disqualify and penalize 
an entire MEP for the compliance failure of one participating employer. 
Code section 413(c) and in particular Treas. Reg.  1.413-2(a)(4) 
provides in essence that to the extent a single participating employer 
fails to comply with tax qualification requirements, all participating 
employers in the MEP and the MEP itself will be disqualified. Further, 
under revenue procedures, if a single participating employer fails to 
comply, the tax penalty is based not on the assets attributable to that 
employer, but on the assets of the entire plan. This rule is 
impractical and counter to a policy that encourages MEPs. Instead, 
Congress should implement a reasonable rule that imposes obligations 
only on the party that fails to comply. For example, the employer 
responsible for the breach could be (a) compelled to take corrective 
measures pursuant to IRS correction programs; and, (b) statutorily 
required to fund the liabilities affiliated with its own failure.
     Enhance DB Plan Portability. One primary advantage of an 
MEP like NRECA's is portability. In a true association-sponsored MEP 
like ours, employees of one co-op may transfer to another participating 
co-op without losing eligibility, service, or vesting credit. This 
portability should be preserved for existing MEPs and possibly made 
more widely available.
     Reporting and disclosure requirements for DB MEP 
Administration must be streamlined and simplified. One of the most 
challenging aspects of MEP administration involves the reporting and 
disclosure requirements of Title I, Part I of ERISA. Unlike a single 
employer plan where the employer knows the employment status, address, 
compensation, marital and disability status of employees, in the MEP 
design, the participating employer, not the MEP administrator, has the 
data related to employee status. Similarly, unlike a union-based multi-
employer plan where the benefit design is often the same or similar for 
collectively bargained employees, or a single employer plan where the 
plan design is largely the same for all employees, in the MEP design, 
each participating employer's benefit design is often different, 
including eligibility, benefit accrual, normal retirement date, 
vesting, etc. This creates necessary flexibility for employers 
operating in different markets with different compensation rates and is 
one of the most attractive features of an MEP for employers. However, 
it is also one of the most expensive and challenging to administer. For 
example, MEP administrators (like NRECA) may have thousands of 
different Summary Plan Descriptions (SPDs) and correspondingly complex 
disclosure requirements. Managing these difficulties requires extensive 
resources and increased expenses. Congress should examine ways to make 
electronic compliance as feasible as possible and provide flexible 
deadlines that recognize the difficulties of data collection and 
disclosure obstacles applicable to many different employers with unique 
benefit designs.
         Response to Questions of Senator Hagan by Diane Oakley
    Question 1. Ms. Oakley, in your work at the National Institute on 
Retirement Security, have you seen a need for financial literacy 
programs not just in young people, but also in adults who are making 
important decisions about their retirement?
    Answer 1. Senator Hagan, a wide body of research indicates that 
indeed, there is a need for increased financial literacy for Americans 
in all areas of personal finance.
    According to Council for Economic Education (CEE), your State, 
North Carolina, is a leader on financial literacy for young people 
having already put in place standards for economic and personal finance 
education and requiring school districts to implement those standards 
and offer classes. Thanks to CEE and other programs like JumpStart we 
are reaching children and helping them understand about money, the 
economy and the importance of savings.
    Financial Literacy for adults is also critical, especially today, 
as financial matters have become more complex and more of the risks for 
reaching important lifetime goals, like a secure retirement, are 
falling squarely on the shoulders of working Americans. We have often 
heard that adults take more time to plan a 2-week vacation than they 
take to plan their retirement. Research also tells us that Americans 
with a higher level of financial literacy are in a better position to 
manage their income during their working and retirement years. 
Economist Annamaria Lusardi found that retirement planning is a 
powerful predictor of wealth accumulation; those who plan have more 
than double the wealth of those who have done no retirement planning.
    However, financial literacy can only do so much when it comes to 
helping Americans achieve retirement security. Even if an individual 
understands how to save for retirement, the bigger challenge is to 
convert that knowledge into action. Retirement plans that make it easy 
for Americans to save are far more valuable than financial literacy 
programs. For example, providing employees with access to a traditional 
pension eases the burden on Americans. The plan does the work--
collecting regular savings, investing with professional asset 
management, and paying a stable monthly income in retirement that lasts 
until death. With a pension, the average employee does NOT have to be a 
financial planner, an investment advisor and an actuary in addition to 
their regular day job. This is particularly important as millions of 
Americans near retirement are struggling with how to contend with the 
ongoing volatility of the financial markets.
    Ultimately, financial literacy is important, but not a silver 
bullet for what ails the Nation's retirement crisis. Twenty-five years 
ago more than 80 percent of large and mid-sized firms offered workers a 
defined benefit plan 25 years ago, but today less than a third do and 
that share continues to decline. If we have any hope of putting America 
back on track to reach the ``retirement security'' component of the 
American Dream, we need to restore the board pooling of ``retirement 
risks'' that is at the foundation of traditional pensions.
        Response to Questions of Senator Enzi and Senator Hagan 
                           by David Marchick
                              senator enzi
    Question 1. In your research, you found that defined benefit plans 
get ``more bang for the buck'' than defined contribution plans, 
however, your research comes from public pension plans. What about the 
volatility and accounting issues associated with private sector defined 
benefit plans? Do the longer period for amortization and ``smoothing'' 
allowed by public pension plans create stability for public pension 
plans or do they create more funding problems for State and local 
governments' pension obligations?
    Answer 1. Unavailable.
                             senator hagan
    Question 1. Mr. Marchick, in your testimony you highlighted the 
liquidity that pension funds provide to U.S. financial markets. I agree 
that this is an important function, but it would seem to me that 
retirement assets, broadly speaking, provide that function. Regardless 
of whether assets reside in defined benefit or defined contribution 
plans, they are typically longer-term and more patient capital.
    Can you help me understand the liquidity impact that we would see 
if pension assets were held elsewhere, for example in defined 
contribution plans? Would this pension fund liquidity disappear?
    I also noted that in your testimony you cited return differentials 
between pension funds and other retirement assets. It is my 
understanding that pension funds are typically permitted to engage in 
certain activities not permitted by most defined contribution plans, 
such as investing in private equity funds or hedge funds.
    What impact does the broader investment mandate enjoyed by some 
pension funds have on the return differentials you see between defined 
benefit and defined contribution plans?
    Answer 1. Unavailable.
                                 ______
                                 
                         American Benefits Council,
                                      Washington, DC 20005,
                                                  February 3, 2011.
Office of Regulations and Interpretations,
Employee Benefits Security Administration,
Attn: Definition of Fiduciary Proposed Rule,
Room N-5655,
U.S. Department of Labor,
200 Constitution Avenue, NW,
Washington, DC 20210.
Re: RIN 1210-AB32, Definition of Fiduciary Proposed Rule

    Dear Sir or Madam: On behalf of the American Benefits Council (the 
``Council''), I am writing today with respect to the proposed 
regulations addressing the definition of a fiduciary.
    The Council is a public policy organization representing 
principally Fortune 500 companies and other organizations that assist 
employers of all sizes in providing benefits to employees. 
Collectively, the Council's members either sponsor directly or provide 
services to retirement and health plans that cover more than 100 
million Americans.
    The Council has requested to testify at the hearing scheduled for 
March 1, 2011 and, if necessary, March 2, 2011. We thank the Department 
of Labor (the ``Department'') for scheduling the hearing and for 
extending the comment period. We believe that those were important 
steps in ensuring a full public policy dialogue with respect to this 
critical proposed regulation.
    We understand the desire of the Department to update and improve 
the regulatory definition of a fiduciary. We agree that the retirement 
community would benefit from rules that establish clear lines between 
fiduciary advice, on the one hand, and non-fiduciary education, 
marketing, and selling on the other hand. However, we believe that the 
proposed regulations create too broad a definition of fiduciary. As 
discussed in more detail below, we are very concerned that an overly 
broad definition would actually have a very adverse effect on 
retirement savings by raising costs, inhibiting investment education 
and guidance for plans and participants, and significantly shrinking 
the pool of service providers willing to provide such investment 
education and guidance.
    We know that the Department does not have any intent to create an 
overly broad definition that would adversely affect retirement savings 
or trigger burdensome and unnecessary costs that will be borne in whole 
or in part by participants. Accordingly, we look forward to a very 
constructive dialogue on the critical issues raised by the proposed 
regulations.
    Defined contribution plan participants and individual retirement 
account or annuity (``IRA'') owners have generally been given the 
opportunity and responsibility to make their own investment decisions 
and to design their own path toward retirement security. This is an 
enormous challenge for individuals who are not investment professionals 
and may not be familiar with the investment markets. The public policy 
challenge is how to facilitate participant education and engagement 
with respect to effective investment strategies, while at the same time 
protecting participants from misleading self-interested advice. Finding 
a balance between these two goals should, in our view, be the core 
objective of the new definition of a fiduciary.
    Moreover, as discussed further below, it is essential that the 
Department's proposed regulations be coordinated with guidance issued 
by the Securities and Exchange Commission (``SEC'') and the Financial 
Industry Regulatory Authority regarding the standard of conduct 
applicable to brokers and dealers. Without coordination, brokers and 
dealers would be subject to different and conflicting standards with 
respect to the same advice, reducing their ability to provide clear 
sound advice to participants.
    The proposed regulations would also pose great challenges for 
defined benefit plan sponsors seeking investment information and 
valuation services. In particular, it is critical that the proposed 
regulations be coordinated with specificity with the Commodity Futures 
Trading Commission's ``business conduct'' regulations regarding swaps; 
without clear coordination, the Department's regulations could render 
swaps unavailable to plans, with devastating results.
    The importance of coordinating among Federal agencies has recently 
been strongly emphasized by the President in a January 18, 2011 
Executive order:

          Some sectors and industries face a significant number of 
        regulatory requirements, some of which may be redundant, 
        inconsistent or, overlapping. Greater coordination across 
        agencies could reduce these requirements, thus reducing costs 
        and simplifying and harmonizing rules. In developing regulatory 
        actions and identifying appropriate approaches, each agency 
        shall attempt to promote such coordination, simplification, and 
        harmonization.

    Finally, as discussed below, we strongly urge the Department to 
provide broad transition relief to avoid significant disruption of the 
retirement plan world.
    ensuring the continued availability of investment education and 
               guidance and services to retirement plans
    The Department's regulations could have very significant effects on 
the provision of services to plan sponsors, and on the provision of 
investment education and guidance to plans, plan participants, and IRA 
owners. In this regard, the regulations could cause certain established 
means of providing such services, education, and guidance to cease, 
which could leave plans and participants with less access to investment 
education and guidance. That is clearly undesirable.
    We have the following recommendations with respect to avoiding this 
result:

           Substantive modifications. There are certain 
        modifications to the proposed regulations that would be 
        consistent with the Department's objectives but would not 
        unnecessarily disrupt established and successful means of 
        providing investment education and guidance. The remainder of 
        this letter addresses those issues.
           Effective date. The regulations are proposed to be 
        effective within 180 days of finalization. That is not enough 
        time. These regulations could cause portions of the investment 
        advice industry to be restructured or eliminated. For example, 
        in some cases, advisors may need to alter the type of education 
        and guidance they provide or possibly eliminate certain 
        services in order to avoid fiduciary status. These advisors 
        will need significant training. In other cases, advisors will 
        become fiduciaries, and this may require restructuring their 
        compensation packages, as well as the fee structures of their 
        employer. Even if existing agreements are grandfathered (as 
        discussed below), new agreements regarding investment services 
        will need to be developed. And potentially far more entities 
        and persons will need to be insured as fiduciaries. All of this 
        requires a substantial amount of time, especially at a time 
        when administrative frameworks and systems are being strained 
        by adjustments to broad new disclosure regimes. A transition 
        period of at least 12 months following finalization of the 
        regulations (and implementation of any necessary prohibited 
        transaction exemptions) is critical to avoid periods when 
        investment information is materially less available for plans 
        and IRAs.
          In addition, we urge the Department not to disrupt existing 
        agreements. For example, a plan sponsor may have an existing 
        agreement with a consultant to provide non-fiduciary investment 
        information regarding the plan's investment options as well as 
        other investment options that could be offered to plan 
        participants. It would be very disruptive to cause that 
        agreement to be terminated prior to its expiration by reason of 
        the fact that the new rules would transform the arrangement 
        into a fiduciary relationship. It may not be possible to 
        renegotiate a different agreement under the new rules with the 
        same service provider; it may even be the case that for a 
        period of time, no service provider is prepared to provide 
        services under the new rules. In this context, the forced 
        termination of existing arrangements would certainly not be 
        appropriate.
          Other existing arrangements may raise even more difficult 
        problems. For example, swap agreements set out long-term 
        financial and contractual obligations that cannot be modified 
        without extensive and expensive renegotiations. The proposed 
        regulations have great potential to force such renegotiations 
        by, for example, treating certain valuations under typical 
        agreements as fiduciary advice, which would, in turn, trigger 
        prohibited transaction issues and termination provisions in 
        swap agreements.
          We are still gathering information on the extent of the 
        adverse effects on existing arrangements, but what we have 
        uncovered to date convinces us that there is a great need not 
        to disrupt existing arrangements that may be very difficult to 
        modify or replace, especially in the short term.
           Coordination with other guidance. If certain 
        established means of providing investment information cease to 
        be workable, members of the retirement plan community will be 
        looking for alternative means of providing such information. In 
        this regard, it is critical that all available tools be ready 
        and available when investment information delivery systems are 
        being redesigned. This means that the finalization of the 
        proposed regulations should be coordinated with other 
        rulemaking that could affect investment information delivery 
        systems. For example, the proposed regulations implementing the 
        prohibited transaction exemptions under the Pension Protection 
        Act of 2006 (the ``PPA'') should be finalized at least 12 
        months before the effective date of the fiduciary definition 
        regulations, so that during the 12-month period, the plan 
        community can explore whether use of the exemptions can provide 
        a workable way to provide investment information.
          It is important that the Department clarify that all 
        currently applicable prohibited transaction exemptions would 
        remain in effect. In that regard, if the Department is 
        planning, in light of the regulation, to revisit any exemptions 
        affecting the investment advice area, it is critical that this 
        be coordinated with the finalization of the fiduciary 
        definition regulations, so that all available means of 
        providing investment information can be evaluated prior to the 
        effective date of the new rules.
          Coordination with the SEC is very important, as discussed 
        further below. If the Department's regulations are finalized 
        and effective at a time when broker/dealers' obligations under 
        the securities laws are not settled, this will result in 
        broker/dealers being unable to redesign their investment 
        information delivery systems due to ongoing uncertainty. This 
        could have a devastating effect on the availability of 
        investment information from broker/dealers, which traditionally 
        have been a very important source of such information, 
        especially for small businesses and IRA owners.
          Coordination with the CFTC and the SEC regarding swaps is 
        also critical. If the Department's proposed regulations and the 
        CFTC's proposed business standards were finalized in their 
        current state, plans would effectively be forced to cease using 
        swaps, with devastating results, as discussed further below.
         clarification of the basic definition of ``fiduciary''
Individualized Specific Advice Should be Required in All Cases
    In general. We are very concerned that the furnishing of investment 
recommendations may, under the proposed regulations, be treated as a 
fiduciary act even if the recommendations are not specific or 
individualized. For example, assume that an investment adviser (within 
the meaning of section 202(a)(11) of Investment Advisers Act of 1940) 
(``Investment Adviser'') provides a firm newsletter to an IRA owner 
customer. The firm newsletter provides a discussion of the general 
market outlook, including a discussion of which industry sectors may be 
gaining or losing strength in the near future.
    Arguably, the newsletter is providing recommendations regarding the 
``advisability of investing in, purchasing, holding, or selling 
securities.'' If so, the newsletter would appear to be fiduciary advice 
under the proposed regulation since (1) the newsletter is provided to 
an IRA owner, (2) the newsletter is provided by an Investment Adviser, 
(3) the newsletter does not appear to be covered by any of the 
``limitations'' in  2510.3-21(c)(2), and (4) compensation, such as 
brokerage commissions, would be earned in connection with purchases or 
sales of securities. Furthermore, under the proposed regulations, 
affiliates of the Investment Adviser' employer would also appear to be 
fiduciaries with respect to the matters addressed in the newsletter.
    Clearly, the newsletter should not be treated as fiduciary advice. 
The newsletter is simply an effort to educate and engage individuals 
with respect to market trends. Such education should not be inhibited 
and we do not believe that the Department intended this result. (Of 
course, if a newsletter were sold that provides specific investment 
advice on particular investments that participants should buy or sell 
within a specific plan, the newsletter should be treated as fiduciary 
advice.)
    The proposed regulations should be clarified so that in order to 
constitute fiduciary advice, recommendations must in all cases (1) be 
individualized to the needs of the plan, plan fiduciary, or participant 
or beneficiary, and (2) address the purchase, sale, or holding of 
specific securities, rather than market trends or asset allocations. 
This should apply in the case of subclauses (A), (B), and (C) of  
2510.3-21(c)(1)(ii), in addition to applying for purposes of subclause 
(D).
    Interaction with Interpretive Bulletin 96-1. Without the 
clarification described above, the meaning of Interpretive Bulletin 96-
1 (``IB 96-1'') would be cast into doubt. It is true that the proposed 
regulations specifically provide that the provision of investment 
education and materials within the meaning of IB 96-1 does not give 
rise to fiduciary status. But IB 96-1 has generally been read to permit 
education about investments that does not involve individualized advice 
regarding specific securities. The proposed regulations would call that 
interpretation into question by clearly implying that at least some 
non-individualized non-specific market guidance can constitute 
fiduciary advice.
    If finalized in their current form, the proposed regulations would 
thus put a significant chill on investment education. Any non-
individualized investment education that is not precisely addressed in 
IB 96-1 would be called into question and thus may cease to be 
provided. This would have a very adverse effect on critical educational 
tools currently in effect, leaving participants with far less 
information, especially low- and middle-income participants who may not 
be able to afford to acquire investment assistance elsewhere. In 
addition, this structure will clearly stifle any future innovation with 
respect to investment education, such as the application of IB 96-1 to 
plans (in addition to plan participants) as discussed below. We do not 
believe that the Department intended these results, which can be 
avoided by clarifying the regulations in the manner recommended above.
Fiduciary Relationship: ``May Be Considered'' is Too Low a Threshold to 
        Trigger 
        Fiduciary Duties and Liabilities
    As discussed above, recommendations should be fiduciary advice only 
if individualized and specific. However, that alone is not enough. For 
example, assume that a plan participant has done extensive research and 
consulted with an advisor, and has decided tentatively to invest in a 
group of mutual funds available under the plan. As a last-minute check, 
the individual asks a friend in the employer's human resources 
department if the participant's fund selections make sense for an 
individual in his situation. The human resources employee says she is 
not an expert but the choices make sense to her and are consistent with 
what many others are doing. Under the regulation, that reaction may be 
investment advice if the human resources employee is compensated in 
part for dealing with plan-related questions.
    Alternatively, instead of calling the human resources employee, the 
employee calls a friend who is an Investment Adviser of an affiliate of 
the financial institution offering some of the funds under the plan. 
The Investment Adviser has nothing to do with the plan and his 
affiliate operates completely independently of the institution offering 
some of the plan's funds. The Independent Adviser says that he cannot 
give the participant investment advice, but the choices seem generally 
appropriate for someone in the participant's position. That reaction is 
clearly investment advice under the proposed regulations (and would 
thus be a prohibited transaction).
    These examples are not real investment advice. These are situations 
where individuals receive very incidental comfort regarding decisions 
made independently by them. Yet the proposed regulations would turn 
this into investment advice that triggers personal liability and, in 
the case of the Investment Adviser, a prohibited transaction. This is 
not the right result.
    A fiduciary relationship should not be treated as existing unless:

          There is a mutual understanding that the recommendations or 
        advice being provided in connection with a plan or IRA:

                  (1) will play a significant role in the recipient's 
                decisionmaking, and
                  (2) will reflect the considered judgment of the 
                adviser.

    The ``may be considered'' standard is such a low threshold that 
almost any casual discussion of investments will satisfy it. An ERISA 
fiduciary relationship is a very serious relationship with the highest 
fiduciary standard under the law, including (1) application of the 
prudent expert standard, (2) a duty to act solely in the interest of 
the participants and beneficiaries, and (3) very significant potential 
liability. In that context, fiduciary status should not be triggered by 
casual discussions but only by serious communications that reflect a 
mutual understanding that an adviser/advisee relationship exists.
    Thus, we urge the Department to replace the ``may be considered'' 
standard with the standard described above. Moreover, no 
recommendations should be treated as giving rise to fiduciary status 
unless such recommendations meet this standard. Thus, this standard 
should be a part of subclauses (A), (B), and (C) of  2510.3-
21(c)(1)(ii), in addition to being part of subclause (D).
Requiring Individualized Specific Advice and Raising the ``May Be 
        Considered'' Threshold Would Address Other Concerns
    A number of concerns have been identified regarding the proposed 
regulations' ``status'' rules under which an adviser may, for example, 
become a fiduciary by reason of being a fiduciary for another purpose, 
an Investment Adviser, or in some cases an affiliate of an entity that 
meets one of these ``status'' requirements. (If the Investment Adviser 
``status'' rule is retained, it should be clarified that the exclusions 
under section 202(a)(11) of the Investment Advisers Act of 1940 apply 
in determining who is an Investment Adviser for purposes of the 
regulation.) For example, if a financial institution serves as a 
directed trustee, any discussion of the market by an affiliate of the 
financial institution, however benign the discussion, could arguably be 
treated as fiduciary advice under the proposed regulations solely by 
reason of the conceptually irrelevant point that the affiliated 
financial institution serves as a directed trustee. This inappropriate 
result is avoided if the proposed regulations are modified, in 
accordance with the suggestions set forth above, to provide that advice 
is treated as giving rise to fiduciary status if and only if:

          (1) There is a mutual understanding that the recommendations 
        or advice being provided in connection with a plan or IRA:

                  (a) will play a significant role in the recipient's 
                decisionmaking, and
                  (b) will reflect the considered judgment of the 
                adviser, and

          (2) The recommendations or advice is individualized to the 
        needs of the plan, plan fiduciary, or participant or 
        beneficiary.

    Thus, proposed regulation  2510.3-21(c)(1)(ii) should be revised 
so that a person cannot be a fiduciary by reason of providing 
investment advice unless the person's recommendations or advice 
satisfies the above requirements.
``Management of Securities or Other Property'': the Proposed 
        Regulations Would Transform Contract Reviews and Other Non-
        Investment Advice Into Investment Advice
    The proposed regulations would include within the definition of 
``investment advice'' the following: ``advice . . . or recommendations 
as to the management of securities or other property.'' The preamble 
states that:

          This would include, for instance, advice and recommendations 
        as to the exercise of rights appurtenant to shares of stock 
        (e.g., voting proxies), and as to selection of persons to 
        manage plan investments.

    The broad language of the proposed regulations raises many 
questions:

     A plan decides to change trustees, chooses a new trustee, 
and begins negotiating a trust agreement with the new trustee. The plan 
asks for advice with respect to the terms of the trust agreement from 
the plan sponsor's internal and external ERISA and contract attorneys, 
as well as the plan sponsor's compliance personnel, human resources 
department, and tax department. The trustee is involved in the 
``management'' of plan assets, and the terms of the trust agreement 
affect that management. Does that mean that all of the above personnel 
advising the plan with respect to the trust agreement are fiduciaries? 
If it does, the cost of trust agreements and many other routine plan 
actions will increase exponentially with the imposition of new duties 
and large potential liabilities. Also, many of the above persons may 
refuse to work on the project without a full indemnification from the 
plan sponsor. We do not believe that this type of cost increase and 
disruption was intended.
    What about the persons working on the agreement for the new 
trustee? If such persons make any ``recommendations'' to the plan in 
the course of negotiations, they would become fiduciaries because the 
seller exemption, on its face, only appears to apply to sales of 
property and not services. Any such recommendations would thus trigger 
fiduciary status and corresponding prohibited transactions. 
Theoretically, this could chill all meaningful give-and-take during the 
negotiations, and many institutions may be unwilling to act as trustee. 
Again, we do not think that this was intended.
     A plan has decided to enter into a swap and must execute a 
swap agreement. The terms of the swap agreement will have a significant 
effect on the plan's rights with respect to the swap. The plan asks its 
internal and outside securities counsel to work on the swap agreement, 
and to consult with the plan's internal and outside ERISA counsel. The 
plan also asks its investment manager for input on the types of 
provisions that are important for plans to include (or exclude) in swap 
agreements. The plan accountant is also asked to review the agreement. 
Finally, the company's own compliance personnel, contract experts, and 
finance department also review the agreement.
    The terms of the swap agreement affect the ``management'' of the 
swap. So do all of the above personnel become fiduciaries under the 
proposed regulations? If the answer is yes, plans' cost of investments 
will skyrocket, as an enormous new set of individuals and companies 
that have little material role in plan investments become fiduciaries, 
with far greater potential liability and a higher standard to meet. In 
addition, as noted above, many persons would likely refuse to review 
the agreement absent a full indemnification by the plan sponsor.
     A plan negotiates a loan agreement in connection with an 
ESOP. Is everyone who works on the loan agreement a fiduciary? Could 
individuals working on the loan agreement for the lender become 
fiduciaries if they make any ``recommendations'' during negotiations?
     Are Board recommendations regarding proxy voting on 
employer securities a fiduciary act? They could be under the proposed 
regulations.
    To avoid the inappropriate results described above and many other 
similar results, we strongly urge you to provide a precise and 
appropriately narrow definition of ``management'' in the regulations. 
Under the definition, ``management'' would include:

     The selection of persons to manage investments;
     Individualized advice as to the exercise of rights 
appurtenant to shares of stock; and
     Any exercise of discretion to alter the terms of a plan 
investment in a way that affects the rights of the plan, unless such 
exercise of discretion has been specifically reviewed and agreed to by 
a plan fiduciary. In the swap context, for example, swap terms can be 
modified without plan review and consent by, for example, swap data 
repositories. If any such changes are made, anyone making those changes 
is acting for the plan and should be treated as a fiduciary. Moreover, 
such treatment is necessary in order to prevent harm to the plan.

    This would target the actions identified by the Department in the 
preamble and would give the Department the flexibility to identify 
additional forms of ``management''. But it would not have the 
inappropriately broad consequences illustrated above.
Even Without the Management Issue, the Proposed Regulations Would 
        Transform Legal Advice and Other Non-Investment Advice Into 
        Investment Advice
    Assume that the definition of ``management'' is revised in 
accordance with our suggestion. Let us go back to the swap example set 
forth above.

     Assume that ERISA counsel advises the plan that entering 
into a swap with the particular dealer would raise prohibited 
transaction issues and counsels the plan not to enter into the swap for 
that reason. Under the proposed regulations, that would clearly 
constitute investment advice, making the ERISA attorney a fiduciary.
     Assume that the plan sponsor's contract experts determine 
that, separate from any investment issue, the swap agreement gives the 
dealer too much discretion in interpreting critical terms and advises 
the plan not to enter into the swap. That internal contract expert 
would be rendering investment advice under the proposed regulations and 
thus would also clearly be a fiduciary.
     Assume that the plan sponsor's compliance personnel are 
concerned about whether the swap, as structured by the dealer, would 
comply with the law and advise the plan not to enter into the swap for 
that reason. Again these internal compliance personnel would be 
rendering investment advice under the proposed regulations and thus 
would be fiduciaries.

    These inappropriate results can be avoided by adding an additional 
exception to the regulations. Under this exception, advice would not be 
treated as investment advice if it relates to the compliance of the 
investment with applicable law or relates to risks separate from the 
advisability of the underlying investment.
Clarity: Permitting the Parties' Agreement to Clarify Fiduciary Status
    Both plan sponsors and service providers have emphasized to the 
Council the importance of clarity with respect to who is and who is not 
a fiduciary. We know that similarly this is an important issue for the 
Department. In this regard, we remain concerned that, even with our 
suggested changes, it would be difficult in many circumstances to 
determine whether a fiduciary relationship exists.
    Accordingly, we recommend that the regulations provide that a 
service provider, adviser, or appraiser is not a fiduciary if the 
parties agree in writing to that effect. (This rule would apply 
separately from, and in addition to, the seller exemption.) We also 
propose the following safeguards be adopted as part of the rule we are 
suggesting:

     The agreement would have to describe the type of advice 
that the parties agree is not fiduciary advice. For example, assume 
that a plan uses a particular investment manager (``Manager A'') for 
Pacific Rim investments. The agreement could provide that any advice 
not related to Pacific Rim investments is not fiduciary advice.
     The agreement would also have to describe how the 
decisions on which the nonfiduciary advice may be given would be made. 
Under the agreement between Manager A and the plan, for example, 
Manager A agrees to be available to discuss investment opportunities 
outside the Pacific Rim, but the agreement specifies that the plan 
relies on different investment managers with respect to such other 
investments. The plan wants Manager A to be available as a sounding 
board and as a source of questions for the other investment managers, 
but the plan does not make such other investment decisions based on 
Manager A's advice. In these circumstances, Manager A would not be a 
fiduciary with respect to the advice it renders regarding such other 
investments.
     Similarly, if a swap counterparty provides information to 
a pension plan as required by the terms of a financial instrument or if 
requested by a fiduciary to a pension plan prior to entering into a 
financial instrument, the fiduciary to a pension plan and the 
counterparty should be able to agree that the plan is relying on other 
advisors and that counterparty is not a fiduciary to the pension plan.

    On a separate but related point, we urge the Department to clarify 
that an advisor is not treated as having acknowledged fiduciary status 
under Proposed Regulations  2510.3-21(c)(1)(ii)(A) unless such 
acknowledgement is made in writing. Clarity with respect to fiduciary 
status is critical, and the regulations should not make fiduciary 
status turn on oral, informal discussions.
Plan-Level Education: Application of IB 96-1
    We believe that there is no legal or conceptual reason why the 
principles of IB 96-1 regarding investment education should not be 
extended to defined benefit and defined contribution plans. The 
provision of investment education to defined benefit and defined 
contribution plan fiduciaries should not give rise to fiduciary status.
Plan Sponsor and Advisor Employees: Who Should Be a Fiduciary?
    By very significantly lowering the threshold for fiduciary status, 
the proposed regulations raise serious questions regarding which plan 
sponsor and advisor employees may be treated as fiduciaries. For 
example, it is, of course, common for a plan sponsor to form a 
committee of senior executives to oversee plan issues, including plan 
investment issues. It is certainly clear that such committee has 
fiduciary status. But plan sponsors have expressed concern about the 
status of other employees who perform the research and analysis 
necessary to present investment issues for the committee's review and 
resolution.
    Such other employees may provide recommendations for the committee 
to consider. This is simply how companies work. Middle-level employees 
frame issues for senior employees to resolve; issues are best presented 
in the context of a recommendation based on the advantages and 
disadvantages of any decision, so that senior employees can quickly 
appreciate the relevant factors. Many employees may participate in the 
research and the preparation of the recommendations to the committee. 
If all of these employees were fiduciaries, the effects would be 
severely negative.

     The cost of fiduciary insurance would skyrocket, if such 
insurance would be available at all for such employees.
     It would certainly become more difficult to get employees 
to work on these projects in the face of potentially staggering 
liabilities and lawsuits.
     Creative work and recommendations would likely be stifled 
as middle-level employees propose conservative approaches with less 
downside (and correspondingly less upside).

    The bottom line is that the employees preparing the reports for the 
plan committee are not the decisionmakers. They are the researchers who 
prepare recommendations based on objective criteria for the committee 
members to evaluate and resolve. And the proposed regulations could 
potentially sweep in a huge number of employees, since the middle-
managers formulate their recommendations based on the work of employees 
who in turn work for them.
    As noted, this issue applies to third-party advisors as well as to 
plan sponsors. Recommendations by advisors may be formulated by a team 
of employees employed by the advisor. It would not make sense to treat 
the entire team of individuals as fiduciaries.
    Accordingly, we ask that you clarify the regulations to address the 
situation where a company or committee within a company serves as a 
fiduciary with respect to investment decisions or recommendations. In 
that case, the employees who help the company or committee make those 
decisions or recommendations should not be fiduciaries. Otherwise, we 
could have a real problem as potentially hundreds of employees without 
decisionmaking power become fiduciaries. This is not to suggest that 
employees of a fiduciary company cannot be a fiduciary. For example, an 
advisor company's employee may have the advisory relationship with a 
plan or participant and may become a fiduciary by reason of that 
relationship. Or an employee newsletter might be sold to the company 
employees making very specific recommendations regarding the 
investments available under the company's plan in which the employees 
should invest. But these cases are different. In these cases, employees 
involved are making direct investment recommendations that are not 
filtered through supervisors or entities that are fiduciaries.
                       seller/purchaser exemption
Scope of the Exemption
    The deletion of the ``regular basis'' and ``primary basis'' 
requirements from the existing regulation puts enormous pressure on 
establishing a workable distinction between selling and advice. If a 
one-time recommendation can give rise to fiduciary status, it is 
essential to distinguish between fiduciary recommendations and the 
selling of investment products or services. In both cases, the 
participant or plan is provided with in-depth recommendations regarding 
investment decisions. But clearly in the case of selling, there is no 
fiduciary relationship nor would the commercial world be workable if 
such a fiduciary relationship were imposed.
    Thus, we applaud the Department for including an exemption for 
persons acting as, or on behalf of, purchasers or sellers. However, it 
is critical that the scope of this exemption be clarified. Consider, 
for example, the following situations:

     A plan offers 40 mutual funds sponsored by fund families 
X, Y, and Z, as well as target date funds sponsored by fund families X 
and Y. A representative of X meets with a participant to promote her 
firm's target date funds. The representative makes all appropriate 
disclosures regarding her self-interest. The recommendations made by 
the representative seem clearly covered by the proposed seller 
exemption, as they should be.
     Same plan as above. A representative of Z meets with a 
participant and provides the participant with an illustrative portfolio 
consisting of Z funds. This representative also makes all the 
appropriate disclosures and recommends the illustrative portfolio as 
better than X and Y's target date funds. This recommendation should 
clearly be covered by the seller exemption. Otherwise, the law would 
be, without justification, favoring target date funds over a group of 
funds that can perform the same function.
     Same plan. An Investment Adviser with a commercial 
relationship with Y meets with a participant to promote Y's target date 
funds. The Investment Adviser states in writing that she receives 
compensation for selling Y's funds, and makes all other appropriate 
disclosures. Again, the proposed seller exemption should clearly cover 
this arrangement. The Investment Adviser discloses the compensation 
arrangement with Y and makes all other appropriate disclosures 
necessary to alert the participant to the Investment Adviser's self-
interest. There is no reason for such an arrangement not to be covered 
by the seller exemption.
     Pursuant to an RFP, a plan interviews three investment 
consultants to review the plan's mutual fund offerings on an ongoing 
basis. As part of the interview process, the plan asks all three to 
come prepared with a review of the plan's current offerings, together 
with recommendations for any changes. This is a very common part of the 
RFP process and it should be clarified that responses to RFPs (and 
similar marketing initiatives) do not constitute fiduciary advice.
     IRA account. A representative of Z (a financial 
institution) meets with a client who indicates that he would like to 
roll over his section 401(k) account plan balance to an IRA. After 
discussing the client's goals and assets, the representative of Z 
recommends that the client open an IRA custodial account with specific 
investments. The representative not only recommends products 
manufactured by Z but also by firms Y, X and V with whom Z has selling 
agreements. The representative makes all appropriate disclosures 
regarding her self-interest. All of these recommendations should be 
covered by the proposed seller exemption. The fact that Z makes other 
firms' investments available (i.e., an ``open architecture firm'') 
versus solely its own manufactured products should not affect the 
analysis. Both open architecture firms and those that only sell their 
own proprietary products should be able to avail themselves of the 
seller's exemption with the appropriate disclosures.
     A pension plan fiduciary is contacted by an investment 
bank to discuss potential trades with the investment bank as a 
counterparty, the investment bank provides information in advance of 
the trade to the pension plan fiduciary. The parties agree in writing 
either at the establishment of the counterparty relationship, or in the 
terms of the trade, that the plan fiduciary (and not the investment 
bank) is the fiduciary to the pension plan with respect to any dealings 
with such investment bank and that any information provided by the 
investment bank is not provided on a ``fiduciary'' basis to the pension 
plan. The information provided to the plan fiduciary should not be 
viewed as a ``recommendation'' or ``investment advice'' even if 
specific to the pension plan. Instead, the parties should be able to 
rely on the investment expertise of the plan's investment manager, and 
not the investment bank counterparty which clearly has a conflict of 
interest. Otherwise, dealers will either refuse to deal with pension 
plans and plan fiduciaries or provide only ``generic'' information to 
potential pension plan counterparties which will put pension plan 
fiduciaries at an information disadvantage.
     A defined benefit plan asks an asset manager for 
information regarding liability-driven investing. The manager provides 
white papers it has drafted on the topic and shares some general 
approaches on how defined benefit plans can implement liability-driven 
investing. The manager offers its services to the plan fiduciaries, 
which could be in the form of managing a separate account to a 
liability benchmark and/or investing in a liability-driven fund offered 
by the asset manager. It is unclear whether the seller exemption would 
cover this selling of investment services, but it clearly should if the 
manager discloses its potential self-interest in the separate account 
and fund contexts.

    We ask the Department to clarify the purchaser/seller exception in 
accordance with the above discussion. The seller exemption should apply 
in any case where the entity providing a recommendation has a self-
interest in the decision to be made by the plan or participants, and 
that self-interest is clearly and effectively communicated. 
Conceptually, it does not make sense to distinguish among sellers of an 
investment product, providers of an investment-related service, and any 
other entities that have a financial interest in the decision made by 
the plan or participant. The fundamental principle is clear: any person 
with an interest in an investment decision to be made by a plan or 
participant should be entitled to promote products and services as long 
as such person makes his or her self-interest clear. Any other rule 
would effectively prohibit marketing, promotion, and selling, which is 
not ERISA's purpose.
    See also the discussion of the seller exemption in the context of 
distribution advice below.
Disclosure
    Under the proposed regulations, the seller/purchaser exception only 
applies if the recipient of the advice:

        knows or, under the circumstances, reasonably should know, that 
        the person is providing the advice or making the recommendation 
        in its capacity as a purchaser or seller of a security or other 
        property . . . whose interests are adverse to the interests of 
        the plan or its participants or beneficiaries, and that the 
        person is not undertaking to provide impartial investment 
        advice. [emphasis added]

    We have several comments regarding this language. First, the 
reference to ``adverse'' interests should be deleted. The relationship 
between a seller of investment products and an investor is by no means 
``adverse''. The seller's objective is to establish a long-term 
mutually beneficial relationship. If the investor is not happy with the 
product or the service or feels somehow misled or taken advantage of, 
that will result in a short-term relationship and unhelpful word-of-
mouth for the seller. It is certainly true that sellers of investment 
products profit by selling, but that is true of all product and service 
providers, including doctors, lawyers, counselors, etc. In short, the 
term ``adverse'' is inaccurate and unduly negative, and it does not 
provide the recipient of the disclosure with any meaningful 
information.
    Second, the reference to ``not undertaking to provide impartial 
advice'' is not necessarily correct. Sellers may in many circumstances 
be impartial because their objective is not short-term profits, but a 
long-term relationship.
    In lieu of the ``adverse'' and ``not . . . impartial advice'' 
references, the proposed regulations should be modified to be more 
accurate and precise. Regulation  2510.3-21(c)(2)(i) should be amended 
by deleting all the words starting with ``whose interests are'' 
replacing them with the following:

        who has a financial interest in the transaction to which the 
        recommendation or other information provided relates.

    This is an accurate portrayal of the relationship between a seller 
and investor, much more accurate than the description in the proposed 
regulations. It would be a disservice to both the seller and the 
investor to describe their relationship inaccurately.
    Finally, we believe that the regulation should make clear that 
disclosures of the seller/purchaser's relationship to the investor, as 
described above, should satisfy the ``knows or reasonably should know'' 
standard. So if a seller/purchaser were to make the above disclosure in 
writing, and provide a general description of the financial interest, 
that should satisfy the seller/purchaser exception.
                    plan menu of investment options
    The proposed regulations would confirm that the offering of a 
service provider menu of investment options does not constitute 
fiduciary advice. It should be clarified that this treatment does not 
turn on the service provider menu meeting any requirements regarding 
the number or nature of investment options. The critical issue, 
however, is: how does an employer select a plan menu of investment 
options from the broader service provider menu? In that regard, the 
proposed regulations clarify that ``the provision of general financial 
information and data'' to assist the employer in selecting a plan menu 
is not fiduciary advice.
    Today, one of our greatest challenges in the retirement security 
area is broadening the retirement plan coverage among small businesses. 
It is critical that we step back and consider this proposed rule in 
that context. Small businesses will generally adopt a retirement plan 
only if the process is simple and inexpensive. If the process is 
burdensome, complicated, or costly, small businesses simply will not 
adopt retirement plans. In this context, imagine the hardware store 
owner who would like to adopt a plan for his 12 employees. Assume that 
the service provider presents its menu of 300 investment options, 
provides objective data regarding all 300, and tells the hardware store 
owner (1) to decide how many to offer and (2) to pick the right options 
for his employees, subject to fiduciary liability if he picks 
imprudently. Alternatively, the hardware store owner can find some 
independent consultants, interview them, choose one (subject to 
fiduciary liability), and pay that consultant a substantial amount of 
money to pick and monitor the plan menu.
    Needless to say, if that is the message that the hardware store 
owner receives, he will not adopt a plan for his employees. So if the 
rule set forth in the proposed regulations is finalized without further 
clarification, we may well see a marked decline in retirement plan 
coverage.
    Service providers need a way to provide employers with help in 
choosing the plan menu so that the process is simple and inexpensive. 
In this regard, we urge you to treat all of the following as not 
triggering fiduciary status:

     The service provider may provide the plan fiduciary with 
objective factors that others commonly use in selecting plan menus, 
such as fund ratings, past performance (measured against competitive 
funds), risk measurements, fees, and manager tenure.
     The service provider may screen funds based on objective 
criteria that are provided by the plan fiduciary or that are commonly 
used in the industry. For example, if the plan fiduciary establishes 
criteria based on fund ratings, past performance (measured against 
competitive funds), fees, risk, and manager tenure, the service 
provider may screen the available funds based on such criteria and 
provide the plan fiduciary with fund options that meet the plan 
fiduciary's criteria. Within each investment category, there would 
generally be multiple funds for the plan fiduciary to choose from, but 
in some circumstances, there could be a single fund.
     The service provider may present non-individualized model 
plan menus that other similar businesses have chosen or that reflect a 
conservative, moderate, or aggressive investment approach, with an 
explanation of objective differences between the menus.
     In the context of responding to an RFP, it is very common 
for service providers to provide a non-individualized model plan menu 
of investment options. This is necessary for pricing purposes and it is 
made very clear that the model menu is not being recommended. This 
should not give rise to fiduciary status.
     The service provider may provide objective reasons that a 
plan fiduciary might choose one fund over another or might choose one 
model portfolio over another.
     In some cases, a plan fiduciary may have decided to remove 
an investment option and may ask a service provider for a replacement 
fund that is, based on objective criteria, very similar to the fund 
being removed. Responding to this request with objectively similar 
funds--or a single fund if only one is objectively similar--should not 
give rise to fiduciary status.
     In some cases, the service provider encourages a plan to 
have at least one investment option in every specified asset class and 
to have a set of target date funds (or similar investments).
     A service provider might design its arrangements so that 
all ``mapping'' is done to the plan's QDIA.
     The service provider may also use the seller exemption. It 
makes little sense to prohibit a service provider from using the seller 
exemption in situations where the service provider is selling a 
particular plan menu.

    Finally, the disclosures regarding ``not undertaking to provide 
impartial investment advice'' need to be modified to be accurate, as 
discussed above. The disclosure with respect to the service provider 
menu should provide as follows:

          The investment alternatives available were selected based on 
        various criteria, including past performance, fees, quality of 
        management, popularity, reputation, stability, financial 
        relationships with the service provider, and/or compatibility 
        with the service provider's administrative systems.

    The disclosure with respect to assistance in selecting the plan 
menu should be modified as follows:

          The service provider may have a financial interest in the 
        investment alternatives that are offered under the plan.

                               valuation
    We have multiple concerns regarding the proposed position that, 
subject to a narrow exception, asset valuations are fiduciary acts.
Transaction-Based Distinction
    We believe that it is critical that the regulations draw a 
distinction between two very different types of valuations. On the one 
hand, there are valuations that affect the amount of money that a plan 
pays or receives for the asset being valued. For example, if a plan is 
buying or selling real estate or closely held securities, a valuation 
may be relevant in determining how much a plan pays or receives. These 
valuations can materially affect the total amount of plan assets 
available to provide benefits to participants. This letter refers to 
such valuations as ``Transaction-Based Valuations.''
    On the other hand, there are valuations that do not affect the 
total amount of plan assets available to pay benefits to participants. 
For example:

     A plan must value annuity contracts, separate accounts, 
GICs, and other assets without a readily ascertainable value in order 
to determine the required minimum distributions (``RMDs'') that must be 
made under section 401(a)(9) of the Internal Revenue Code (the 
``Code'').
     All defined benefit plan assets must be valued in order to 
determine the plan sponsor's funding obligations, as well as for 
purposes of applying the various benefit restrictions applicable under 
ERISA section 206(g) and Code section 430. These benefit restrictions 
include restrictions on a plan's ability to pay benefits in certain 
forms, such as lump sums.
     In many circumstances, a participant's defined 
contribution plan account may hold an interest in an asset such as a 
separate account, a GIC, an annuity contract, collective investment 
fund, or another asset without a readily ascertainable market value. In 
order to determine the amount payable to a terminating participant, it 
may be necessary to value such assets.

    Though these valuations could affect the timing or form of 
distribution and/or the relative benefits paid to different 
participants, the valuations have no effect on the total assets 
available to pay benefits to participants. There is thus no risk that 
total plan assets may be inappropriately reduced by such valuations. On 
the contrary, these are everyday valuations that are necessary to the 
normal operation of a plan.
    Moreover, if these valuations give rise to fiduciary status, 
holding these types of assets in plans will at the very least become 
much more expensive by reason of (1) the significant additional 
liability assumed by the person valuing the asset, and (2) the fact 
that many service providers will cease providing valuations due to the 
potential liability. In fact, it is very possible that the prohibited 
transaction rules would preclude many investment product providers from 
valuing their own products.
    In addition, persons performing routine valuations would be forced 
to engage in new and difficult legal analyses. For example, in valuing 
assets for purposes of the RMD rules, what is a fiduciary's duty? To 
minimize the value to preserve as much as possible in the plan? To 
maximize the value to avoid possible plan disqualification and/or 
participant excise tax problems? In valuing assets for purposes of 
funding determinations, is there a duty to minimize the value to 
increase funding obligations? Or is there a duty to maximize the value 
to permit the continued availability of all forms of distributions? Or 
should the appraiser be concerned that lump sums could drain the plan 
of assets, so that the valuation should be minimized?
    In addition to sharply increased costs, we envision this regulation 
creating extremely difficult new issues for which there are no answers, 
like the issues noted above. Thus, routine plan operations will be 
thrown into question, and many service providers may simply refuse to 
provide such routine valuations, leaving plan sponsors without a means 
to operate their plans. And what purpose would be served by the 
additional cost, legal uncertainty, and operational chaos? None that we 
can think of. No problem has been identified that would justify the 
enormous disruption triggered by imposing fiduciary status by reason of 
performing routine valuations that do not affect total plan assets.
Other ``Non-Transaction-Based'' Issues
    We are very concerned that we have barely scratched the surface of 
all the issues that could arise if the proposed regulations' treatment 
of valuations were finalized. For example, even custodians that simply 
report valuations prepared by others could be swept into fiduciary 
status. Similarly, service providers that value managed or unitized 
investment options (such as a fund of funds) based on third-party 
values could be treated as fiduciaries. Clearly neither of these 
results would be appropriate.
    But it may be particularly helpful to explore the ``non-
transaction-based'' issues in the context of one example: investment in 
uncleared swaps. (Similar issues may exist with respect to cleared 
swaps.) In the case of uncleared swaps (which will still exist in large 
numbers after the Dodd-Frank Act), a swap has to be valued frequently--
often daily--in order to adjust the collateral posted by one or the 
other parties to secure the obligation under the swap agreement. 
Generally, it is the ``dealer'' that performs the valuation, subject to 
review and possible contestation by the plan (or other end user). The 
valuation by the dealer may be a fiduciary act under the proposed 
regulations:

     The valuation is an appraisal of property;
     The valuation is provided to a plan or plan fiduciary;
     The valuation is performed pursuant to a written agreement 
that it may be considered in connection with making decisions regarding 
management of assets (i.e., the posting of collateral), and the 
valuation is individualized to the needs of the plan; and
     Neither the seller exemption nor the valuation technically 
exemption applies. (In our view, the seller exemption should clearly 
apply, as discussed above, but in its current form, the exemption may 
not apply since the valuation is not performed in the context of a 
sale.)

    If the dealer's valuation is a fiduciary act, then the valuation is 
also a prohibited transaction that runs afoul of ERISA section 406(b), 
since the dealer's interest is adverse to the plan's. One might argue 
that the dealer should not perform the valuation due to its self-
interest and that all valuations should be performed by independent 
third parties. But that would cause very significant disruption in the 
swaps market. Moreover, the plan reviews the dealer's valuation and has 
the right to challenge it, so the conflicted nature of the dealer's 
valuation is not of concern. But most importantly, the Dodd-Frank Act 
requires the dealer to make the valuation available to the plan. See 
section 731 of the Dodd-Frank, adding section 4s(h)(3)(B)(iii)(II) of 
the Commodity Exchange Act. So the option of solely using an 
independent third party to value the swap is simply unavailable.
    Even if this problem could be solved, an additional problem exists. 
As noted above, the plan has the right to contest the dealer's 
valuation and rely instead on an independent party's valuation. This 
system would no longer be available under the proposed regulations. By 
reason of performing the valuation, the independent appraiser would 
become a fiduciary with an exclusive duty of loyalty to the plan. 
Accordingly, the appraiser would cease to be independent, leaving the 
dealer and the plan with no way to resolve their valuation dispute.
    Thus, the proposed regulations would create unworkable conflicts in 
the law with respect to swaps. How many more conflicts or problems are 
lurking out there with respect to this valuation issue? We do not know, 
nor does anyone. And that is our point. This valuation issue needs far 
more study and work before it moves forward. This is clearly true with 
respect to Non-Transaction-Based Valuations, since no problems or 
issues have been identified that would justify the disruption and cost 
that would be triggered by finalization of the proposed regulations.
Transaction-Based Valuations
    Transaction-Based Valuations, such as in the context of ESOPs, seem 
to have provided the impetus for including valuations in the proposed 
regulations as fiduciary acts. The preamble to the regulations 
specifically states that ``a common problem identified in the 
Department's recent ESOP national enforcement project involves the 
incorrect valuation of employer securities.''
    We have two concerns with respect to Transaction-Based Valuations. 
First, as in the case of Non-Transaction-Based Valuations, we are very 
uncertain what the fiduciaries' duties would be. In the preamble, the 
Department states that it:

        would expect a fiduciary appraiser's determination of value to 
        be unbiased, fair, and objective, and to be made in good faith 
        and based on a prudent investigation under the prevailing 
        circumstances then known to the appraiser.

    If this is truly the standard, it needs to be reflected in the 
regulations, because that would not be how we read the law. A fiduciary 
is required by law to ``discharge its duties with respect to a plan 
solely in the interest of the participants and beneficiaries.'' A 
fiduciary is required by law not to be unbiased and objective; on the 
contrary, a fiduciary is required to represent the participants. For 
example, in negotiating with a service provider over fees, a fiduciary 
is required to solely represent the plan's interests, not to be an 
unbiased and objective arbiter of what level of fees are ``fair'' for 
both parties.\1\
---------------------------------------------------------------------------
    \1\ See generally Bedrick By & Through Humrickhouse v. Travelers 
Ins. Co., 93 F.3d 149, 154 (4th Cir. 1996) (``[t]here is no balancing 
of interests; ERISA commands undivided loyalty to plan participants'').
---------------------------------------------------------------------------
    Without further regulatory clarification, an appraiser's duty would 
be to minimize a plan's purchase price and maximize a plan's sales 
price. That would mean that the opposing party would be required to 
hire a second appraiser, doubling the cost, and then there could well 
be a further negotiation based on the disparate valuations and, as in 
the case of swaps, possibly the need to hire an independent appraiser. 
Moreover, as discussed, by requiring that appraisers be plan 
fiduciaries, the proposed regulations would prohibit such 
``independent'' party from being truly independent, leaving the plan 
without a mechanism to resolve the dispute. This could possibly also 
leave many ESOPs without a means to satisfy the ``independent 
appraiser'' requirement of Code section 401(a)(28)(C).
    In short, applying a true fiduciary duty to an appraiser would be 
very disruptive, as well as unworkable, with respect to all 
Transaction-Based Valuations. Yet the preamble indicates that that is 
not what the Department intended. In fact, the result intended by the 
Department--a fair and objective valuation--may not be achievable 
through fiduciary status, which imposes wholly different obligations. 
Thus, we urge the Department to revisit this issue, so as to achieve 
the worthy objective described in the preamble.
    Second, appraisals do not fall within the statutory definition of 
fiduciary advice. Appraisals are not ``investment advice'' under ERISA 
section 3(21)(A)(ii). As aptly discussed in Advisory Opinion 76-65, an 
appraiser is not rendering a view as the advisability of an investment 
decision; an appraiser is simply providing an opinion as the value of 
property.
    In short, we urge the Department to pursue its worthy objectives 
with respect to the valuation of employer securities through a 
different approach that is workable and consistent with the statute.
                    coordination with other agencies
    As noted above, on January 18, 2011 the President issued an 
Executive order emphasizing the importance of agency coordination. This 
means far more than agencies letting each other know about regulatory 
projects being developed. In the President's words, coordination means 
``harmonizing rules'' and avoiding ``inconsistent'' or ``overlapping'' 
rules. Such coordination among the Department, the SEC, and the CFTC is 
essential as described below.
Broker/Dealers: Coordination Between the Department and the SEC
    Under the proposed regulations, a very large number of brokers and 
dealers will become fiduciaries, such as a broker or dealer who gives 
individualized advice to a customer regarding IRA investment. This 
could present a major problem in light of the broker/dealer's 
compensation structure. As a fiduciary, the broker/dealer's opportunity 
to receive commissions or other compensation in connection with the 
advice would in many cases, absent an applicable exemption, cause the 
broker/dealer to have committed a prohibited transaction solely by 
reason of the fact that the customers' trading practices could affect 
the broker/dealer's compensation. We recognize that the Department's 
regulations are only proposed, but in their current state, they would 
generally provide broker/dealers with a choice: restructure an entire 
industry's compensation arrangements or cease providing certain 
essential services to customers.\2\ Thus, the Department's proposed 
regulations could have a very adverse effect on the provision of 
investment assistance to participants, which is exactly the opposite of 
what is needed.
---------------------------------------------------------------------------
    \2\ In fact, in order to avoid having to restructure its entire 
compensation structure, a broker/dealer that is not an investment 
adviser may in some cases have to refrain from providing individualized 
advice with respect to plans and IRAs. This would result in far less 
advice being available to investors, especially in the IRA context. In 
addition, other broker/dealers may decline to seek investment adviser 
status just so as to enable them to continue to provide non-
individualized advice with respect to plans and IRAs. Again, this would 
not appear to be a favorable development from a public policy 
perspective. These approaches, however, may not be possible under the 
upcoming guidance from the SEC, as discussed below.
---------------------------------------------------------------------------
    The SEC's Study. The SEC's staff (``Staff'') recently completed the 
study required by section 913 of the Dodd-Frank Act regarding the 
standards of care applicable to broker/dealers and investment advisers 
with respect to the provision of investment advice to retail customers 
(the ``Study''). The Dodd-Frank Act specifically directs the SEC to 
study the effects of subjecting broker/dealers to the rules applicable 
to investment advisers. In addition, the SEC is authorized to issue 
regulations subjecting broker/dealers to such rules.
    The Dodd-Frank Act is, however, clear that, unlike the Department's 
proposed regulations, any possible change in the standard of care 
applicable to broker/dealers is not intended to require ``standard 
compensation'' arrangements to be restructured: the ``receipt of 
compensation based on commission or other standard compensation for the 
sale of securities shall not, in and of itself, be considered a 
violation of such standard applied to a broker or dealer.'' On the 
contrary, the Dodd-Frank Act clearly emphasizes addressing broker/
dealers' compensation structures through disclosures of ``material 
conflicts of interest.''
    In the Study, the Staff recommended:

        the consideration of rulemakings that would apply expressly and 
        uniformly to both broker-dealers and investment advisers, when 
        providing personalized investment advice about securities to 
        retail customers, a fiduciary standard no less stringent than 
        currently applied to investment advisers. . . .

    Study at v-vi.

    The Staff's reasoning for this conclusion included the following:

        a harmonization of regulation--where such harmonization adds 
        meaningful investor protection--would offer several advantages, 
        including that it would provide retail investors the same or 
        substantially similar protections when obtaining the same or 
        substantially similar services from investment advisers and 
        broker-dealers. . . .

        [R]etail customers do not understand and are confused by the 
        roles played by investment advisers and broker-dealers, and 
        more importantly, the standards of care applicable to 
        investment advisers and broker-dealers when providing 
        personalized investment advice and recommendations about 
        securities.

    Study at viii, 101.

    Coordination. The regulatory projects undertaken by the Department 
and the SEC have enormous overlap; i.e., they overlap with respect to 
all retail customers saving for retirement under arrangements subject 
to the Department's regulations. Yet neither the Study nor the 
Department's proposed regulations indicate that there will be any 
coordination with the other project. The Study states that ``the 
requirements of ERISA are beyond the scope of the Study.'' Study at 87. 
The Department's proposed regulations do not mention the upcoming 
Study, despite the fact that it addresses the same issue.
    This lack of coordination is of great concern for many reasons:

     Executive Order. This lack of coordination is directly 
contrary to the Executive order issued by the President on January 18, 
2011, which requires coordination, not simply notifying other agencies 
of pending projects. The order is critical of regulatory requirements 
that are ``inconsistent or overlapping'' and requires agencies to 
attempt to promote ``coordination, simplification, and harmonization.''
     Inconsistent with the Study. The Study concludes that the 
existence of differing standards harms and confuses investors. Yet 
without coordination between the two agencies, we appear to be moving 
toward enshrining a system whereby broker/dealers providing advice to 
the same customer would be subject to two very different standards with 
respect to different parts of the customer's portfolio.
    The Study also emphasizes ``business model neutrality'' by not 
prohibiting any business model and thus preserving ``investor choice 
among . . . services and products and how to pay for these services and 
products (e.g., by preserving commission-based accounts, episodic 
advice, principal trading and the ability to offer only proprietary 
products to customers).'' Study at 113. The Department's proposed 
regulations would directly conflict with the Study's business model 
neutrality.
    The Executive order also stresses that, consistent with the law and 
regulatory objectives, it is important to ``reduce burdens and maintain 
flexibility and freedom of choice for the public.''
    Significance of the Regulations. These two regulatory projects have 
great potential to modify the investment information available to 
millions of Americans and to have enormous effects on the financial 
industry. Projects of this magnitude deserve coordinated, careful 
consideration. In this regard, a Presidential memorandum issued 
concurrently with the Executive order states that, ``[i]n the current 
economic environment, it is especially important for agencies to design 
regulations in a cost-effective manner consistent with the goals of 
promoting economic growth, innovation, competitiveness, and job 
creation.'' President Obama echoed this sentiment in the recent State 
of the Union address.
    Small Businesses. Without coordination, there is a great risk that 
IRA owners and employees of small businesses in particular will be cut 
off from a main source of investment advice, since broker/dealers 
provide substantial assistance in these areas. This is not what anyone 
wants. The President has made clear that his objective is ``to promote 
innovation''--not eliminate business opportunities. Moreover, the 
Presidential memorandum places emphasis on ``ensuring that regulations 
are designed with careful consideration of their effects . . . on small 
businesses.'' The lack of coordination with respect to broker/dealers 
does not reflect consideration of small business interests.
    Recommendation. The Department and the SEC should coordinate and 
articulate a single standard of conduct applicable to brokers and 
dealers in providing investment advice. That single standard should 
apply with respect to (1) the retirement savings of ``retail 
customers'' (as defined for purposes of the Dodd-Frank Act) and (2) any 
other advice related to retirement savings to which the SEC applies the 
retail customer standard. Having a single standard is critical because 
it would not serve investors well to have their advisors subject to 
inconsistent and overlapping rules.
    In developing that single standard, the Department and the SEC will 
need to work within the statutory framework of the Dodd-Frank Act, 
which permits brokers and dealers to receive ``standard compensation''. 
Standard compensation should be interpreted to include, for example, 
commissions, sales incentives, and the benefits of principal trading. 
Under the Dodd-Frank Act, any issue related to such compensation is to 
be addressed through disclosure of ``material conflicts of interests''.
Interaction With the Business Conduct Standards Regarding Swaps 
        Proposed by 
        the CFTC
    On December 22, 2010, the CFTC published proposed business conduct 
regulations regarding swaps. Those proposed regulations have very 
significant interactions with the Department's proposed regulations, 
rendering coordination acutely necessary. If both sets of regulations 
were finalized in their current state, swap dealers and major swap 
participants (``MSPs'') that enter into swaps with plans would become 
plan fiduciaries solely by reason of complying with the business 
conduct regulations. This would create automatic prohibited 
transactions, so that the end result would be that retirement plans 
would cease to be able to use swaps, which would have a devastating 
effect on plans and on the swap market.
    The solution is clear. In addition to the specific changes 
recommended below, the Department's regulations need to state that no 
action required by the CFTC's business conduct standards shall 
transform a plan's counterparty into a plan fiduciary. Otherwise, the 
two sets of regulations would be in irreconcilable conflict.
    Defined benefit plans use swaps to hedge their asset and liability 
risks. Without swaps, plan assets and liabilities would be far more 
volatile, leading to greatly increased funding volatility. Increased 
funding volatility would, in turn, force plan sponsors to set aside 
much greater reserves to address possible future funding obligations. 
Those reserves would directly reduce money available to invest in jobs 
and in the economic recovery. In short, making swaps far less available 
would have far-reaching adverse effects throughout the economy. In 
addition, without swaps, the greatly increased volatility with respect 
to funding adequacy would undermine the security of participants' 
benefits.
    Risk analysis. Under the CFTC's proposed regulations, if a plan 
enters into a swap with a swap dealer or MSP, the swap dealer or MSP 
must provide the plan with ``material information concerning the swap 
in a manner reasonably designed to allow the [plan] to assess . . . 
[t]he material risks of the particular swap, . . . [t]he material 
characteristics of the particular swap, . . . and . . . [t]he material 
incentives and conflicts of interest that the swap dealer or [MSP] may 
have in connection with the particular swap.'' Moreover, in the case of 
a high-risk complex bilateral swap, the swap dealer or MSP must provide 
the plan with:

        a scenario analysis designed in consultation with the [plan] to 
        allow the [plan] to assess its potential exposure in connection 
        with the swap. The scenario analysis shall be done over a range 
        of assumptions, including severe downturn stress scenarios that 
        would result in significant loss.

    Prop. Reg.  23.431(a). The definition of a high-risk complex 
bilateral swap is not entirely clear, but it appears likely broad 
enough to sweep in many swaps commonly entered into by plans. Even if 
the swap is not a high-risk complex bilateral swap, but it is a 
bilateral swap that is not available for trading on a designated 
contract market or swap execution facility, the swap dealer or MSP must 
provide the plan with a scenario analysis upon request.
    Unless the seller exemption applies, it is clear that a swap dealer 
or MSP that complies with the above would be a fiduciary under the 
Department's proposed regulations: (1) the swap dealer or MSP would be 
providing a plan with individualized investment advice regarding 
investment risks, (2) the advice ``may be considered'' by the plan, and 
(3) the swap dealer or MSP would receive compensation under the swap 
agreement. Some have taken the position that the swap dealer or MSP's 
advice is not really advice, but rather the provision of objective data 
and thus would not trigger fiduciary status under the proposed 
regulations. We question this position for two reasons. First, risk 
analyses are not rote exercises based on universally accepted facts; 
they can be highly subjective and will vary greatly, as demonstrated by 
the fact that the CFTC's regulations recognizes that the scenario 
analyses may be based on confidential proprietary information. Prop. 
Reg.  23.431(a)(1)(iv). Second, the Department's proposed regulations 
do not contain any general exception for advice based on factual data. 
On the contrary, the existence of very specific exceptions for factual 
data provided with respect to plan menu issues and for IB 96-1 raises a 
strong inference that no such general exception applies.
    We strongly believe that the right answer in this case is that the 
seller exemption should apply to the swap dealer or MSP in this case. 
The swap dealer or MSP is the opposing party, and the plan knows not to 
rely on anything provided by such an opposing party. It is critical, 
however, that the applicability of the seller exemption be clarified to 
apply to swap counterparties. Without this clarification, swap dealers 
or MSPs would be required to be fiduciaries and, as such, would be 
engaging in a prohibited transaction in the case of swaps with plans. 
Thus, all plan swaps would be required to cease.
    Review of plan's representative. Under the CFTC's proposed 
regulations, if a swap dealer or MSP is simply entering into a swap 
with a plan, the swap dealer or MSP must engage in a swap-by-swap in-
depth analysis of whether the plan's representative is qualified to 
function as an advisor to the plan. Prop. Reg.  23.450. It is clear 
under the CFTC's regulations that the swap dealer may not simply accept 
representations to that effect, but rather must engage in its own 
scrutiny of any representations given.
    Thus, there is a very strong argument that the swap dealer or MSP 
is effectively rendering advice to the plan regarding its choice of an 
advisor. As noted in the preamble to the Department's proposed 
regulations, advice to a plan regarding its choice of an investment 
advisor is a fiduciary act under the proposed regulations. Thus, the 
swap dealer or MSP may be treated as a fiduciary with respect to the 
plan under the proposed regulations, triggering a prohibited 
transaction in the case of swaps with plans. Unless the two sets of 
proposed regulations are modified, this analysis could result in a 
cessation of all plan swaps.
    Recommending a swap. Under the CFTC's proposed regulations, if a 
swap dealer or MSP ``recommends'' a swap or trading strategy to a plan, 
the swap dealer or MSP has (1) a duty to act in the best interests of 
the plan, and (2) a duty to have a reasonable basis to believe that the 
swap is suitable for the plan.
    So the question is: under what circumstances would a swap dealer or 
MSP be treated as ``recommending'' a swap or trading strategy. This is 
very unclear under the CFTC's proposed regulations. The preamble to the 
CFTC's proposed regulations states that a:

        recommendation would include any communication by which a swap 
        dealer or major swap participant provides information to a 
        counterparty about a particular swap or trading strategy that 
        is tailored to the needs or characteristics of the 
        counterparty, but would not include information that is general 
        transaction, financial, or market information, swap terms in 
        response to a competitive bid request from the counterparty.

    In our view, if the swap dealer or MSP clearly informs the plan in 
writing that the swap dealer or MSP is functioning as a counterparty 
and not as an advisor, everything communicated to the plan by the swap 
dealer or MSP should be treated as ``selling'' not recommendations. But 
the CFTC's proposed regulations contain no such seller exemption. On 
the contrary, under the CFTC's proposed regulations, it is very 
possible that the CFTC's proposed regulations could be interpreted 
differently to turn common-place selling--e.g., ``this is appropriate 
for you because it addresses your need to hedge your interest rate 
risk''---into a ``recommendation'', triggering a duty of the swap 
dealer or MSP to act in the best interests of the plan. If that is so, 
problems arise.
    If a swap dealer or MSP must act in the best interests of the plan, 
that would seem to imply a duty to advise the plan regarding the swap. 
Unless the seller exemption applies, that would clearly make the swap 
dealer or MSP a fiduciary under the Department's proposed regulations, 
creating a prohibited transaction in the case of swaps with plans. 
Thus, again it is critical that the seller exemption be clarified to 
apply to the swap dealer or MSP.
                          distribution advice
    The preamble to the proposed regulations invites comments regarding 
``whether and to what extent the final regulations should define the 
provision of investment advice to encompass recommendations related to 
taking a plan distribution.'' This issue needs to be divided into two 
analytically separate parts: (1) advice regarding whether to take a 
distribution, and (2) advice regarding how to invest any distribution 
that may be made. As discussed below, from a statutory and conceptual 
perspective, these questions need to be addressed separately.
Distribution Advice is Not Fiduciary Advice Under the Statute
    ERISA section 3(21)(A)(ii), on which the proposed regulations are 
based, specifically refers to ``investment advice.'' A decision whether 
to invest in an S&P 500 index fund inside a plan or to take a 
distribution from the plan and invest in the same fund outside the plan 
is simply not an investment decision. Thus, advice regarding that 
decision is not investment advice under the statute, and the Department 
lacks the statutory authority to treat such advice as giving rise to 
fiduciary status.
Distribution Advice Cannot Be Fiduciary Advice Conceptually
    The lack of a statutory basis to treat distribution advice as 
fiduciary advice makes conceptual sense. A fiduciary has a duty to the 
participants as participants. A distribution decision is a decision in 
which an individual must weigh his or her needs as a participant versus 
his or her needs as a non-participant. By definition, a fiduciary 
cannot help in that regard, since a fiduciary is required by law to act 
on behalf of a participant as a participant and not consider the 
participant's needs as a nonparticipant. So, advice regarding 
distributions is, by definition, made in a non-fiduciary capacity.
Advice Regarding Investment of Distributed Assets in an IRA or Another 
        Plan Can Be Investment Advice, Subject to the Seller Exemption
    We appreciate the Department's concern with respect to advice 
provided to participants regarding how to invest distributed assets in 
an IRA or another plan. Such advice could be investment advice with 
respect to the IRA or other plan. However, this issue is an excellent 
reminder of how critical the seller exemption is, and how important it 
is that the scope of that exemption be clarified in accordance with our 
recommendations so that entities are able to promote and sell 
investment products for IRAs, subject to the clear disclosures 
discussed above with respect to the seller exemption.
Coordinating With Other Guidance
    If the Department decides to issue guidance that goes beyond the 
framework discussed above, it is critical that the Department do so in 
a coordinated manner. Issuance of any guidance treating distributions 
as fiduciary advice should be coordinated with expansion of IB 96-1 to 
apply to distributions so that the retirement plan community 
understands how to stop short of fiduciary advice but still provide 
valuable education. For example, guidance regarding the allocation 
between annuity distributions and non-annuity distributions should be 
treated as education to the extent that no specific options (such as a 
particular provider's annuity) are recommended. In addition, the 
investment advice area contains many prohibited transaction exemptions 
that permit advice to be given under appropriate circumstances not 
contemplated expressly by the statute. We would certainly need similar 
prohibited transaction exemptions to make the distribution area 
function appropriately if distribution recommendations become fiduciary 
advice. So any regulatory guidance treating distribution advice as 
fiduciary advice should be combined with appropriate prohibited 
transaction exemptions. Providing the regulatory guidance without 
prohibited transaction exemptions would almost certainly create the 
same type of havoc that withdrawing all investment advice prohibited 
transaction exemptions would create.
    However, as noted above, we strongly believe that there is no 
statutory basis to treat distribution recommendations as fiduciary 
advice.
Advisory Opinion 2005-23A
    Finally, we urge the Department to revisit Advisory Opinion 2005-
23A. In the Advisory Opinion, recommendations regarding the investment 
of distributed assets made by any plan fiduciary are automatically 
fiduciary advice. This is inconsistent with the clear longstanding rule 
of law that an entity is only an ERISA fiduciary with respect to those 
functions for which it has fiduciary powers and duties. So, for 
example, if an affiliate of a directed trustee that has no 
responsibility regarding the investment of plan assets were to make 
recommendations regarding the investment of distributed assets, such 
affiliate is clearly not a plan fiduciary with respect to those 
recommendations and there is no reason to treat it as such. We urge the 
Department to revise Advisory Opinion 2005-23A accordingly.
    Our position here is not inconsistent with Varity Corporation v. 
Howe, 516 U.S. 489(1996). In Varity, the plan administrator, acting as 
the plan administrator, provided misleading information regarding the 
plan. This case stands for the proposition that a fiduciary, when 
acting as a fiduciary, is subject to ERISA's fiduciary standards. It 
does not apply to a plan fiduciary who is acting as a wholly separate 
capacity, i.e., as a seller of services unrelated to its status as a 
plan fiduciary.
     ira and non-erisa plan issues: application of ib 96-1 and the 
                              investment 
                            menu exceptions
    The proposed regulations apply to IRAs. We are concerned that the 
regulations were developed in the plan context and do not reflect 
consideration of the many unique factors affecting IRAs. This letter 
does not address in a substantive way the issue of whether IEAs should 
be covered by these regulations. This is an issue that can be more 
directly addressed by other organizations, but we believe that the 
Department should consider separating the proposed regulations into two 
parts, one addressing plan issues and one addressing IRA issues.
    At a minimum, however, we note that the proposed regulation can be 
read not to apply the IB 96-1 and investment menu exceptions to IRAs 
and non-ERISA plans subject to the Code. This should be corrected. IRA 
owners and non-ERISA plan participants need investment education, just 
as ERISA plan participants do, so there is no reason not to make the IB 
96-1 exception applicable to IRAs and non-ERISA plans subject to the 
Code. In addition, IRA sponsors and non-ERISA plans subject to the Code 
can provide a menu of investment options and can provide objective 
assistance with respect to choosing among such options, just as service 
providers in the ERISA plan area would do. The investment menu 
exceptions should thus apply to IRAs and non-ERISA plans subject to the 
Code.
    In short, we believe that the proposed regulations address a wide 
range of critical issues. An extended and robust public policy dialogue 
on all of these issues is needed to avoid (1) a material reduction in 
the services, investment education, and guidance available to plans, 
plan participants, IRA owners, and plan sponsors and (2) a substantial 
increase in costs.
    We very much appreciate the opportunity to comment on these 
important proposed regulations.
            Sincerely,
                                              Jan Jacobson,
                                 Senior Counsel, Retirement Policy.

                      The ERISA Industry Committee,
                                      Washington, DC 20005,
                                                 November 12, 2010.
rin 1212-ab20
Legislative and Regulatory Department,
Pension Benefit Guaranty Corporation,
1200 K Street, NW,
Washington, DC 20005-4026.

Re: Comments on Proposed Rule Regarding Liability for Termination of 
        Single-Employer Plans; Treatment of Substantial Cessation or 
        Operations (RIN1212-AB20)

    Ladies and Gentlemen: The ERISA Industry Committee (``ERIC'') is 
pleased to submit these comments on the proposed regulation under ERISA 
 4062(e), regarding the consequences of a substantial cessation of 
operations at a facility in any location. The proposed regulation was 
published in the Federal Register on August 10, 2010.
    ERIC is a nonprofit association committed to the advancement of the 
employee retirement benefit plans of America's largest employers. 
ERIC's members provide comprehensive retirement benefits to tens of 
millions of active and retired workers and their families. ERIC has a 
strong interest in proposals that would affect its members' ability to 
provide secure pension benefits in a cost-effective manner.
    ERIC is deeply concerned that the proposed regulation is 
inconsistent with the text and purpose of  4062(e). The proposed 
regulation would expand the application of  4062(e) to routine events 
that are far less significant than ``ceas[ing] operations at a facility 
in any location.'' For example, the proposed regulation would reach 
operational changes within an ongoing facility, and the relocation or 
sale of an ongoing operation.
    Such an expansion would have the effect of overriding the reporting 
waivers for many events covered by  4043. In addition, because the  
4062(e) liability is calculated using the PBGC's termination 
assumptions (rather than ERISA's funding assumptions), expanding the 
application of  4062(e) would require many employers to make 
contributions far in excess of what ERISA generally requires; this 
undermines ERISA's detailed and highly reticulated funding rules.
    The PBGC should withdraw the proposed regulation and issue a new 
proposed regulation that corrects the following deficiencies in the 
current proposal:

    1. The proposed definitions of ``operations,'' ``facility,'' and 
``cessation'' are inconsistent with the statute. They should be revised 
to follow the statutory mandate that  4062(e) does not apply unless a 
facility closes.
    2. By stating that the relocation or sale of an ongoing operation 
triggers the application of  4062(e), the proposed regulation departs 
from 34 years of consistent administrative practice.
    3. The proposed regulation fails to keep within reasonable bounds 
the circumstances in which an employee's separation from employment 
would be deemed to occur ``as a result'' of a cessation of operations 
at a facility. It allows all employee separations that can be connected 
by a virtually limitless daisy chain of events to be deemed to result 
from a cessation of operations at a facility at the beginning of the 
chain.
    4. The proposed regulation fails to address the special but 
commonplace circumstances of frozen plans.
    5. The proposed regulation fails to include a reasonable exemption 
for well-funded plans.
    ERIC reserves the right to supplement these comments.
                               discussion

1. Definitions of ``Operations,'' ``Facility,'' and ``Cessation''

    Section 4062(e) was first introduced as a provision related to 
``termination of a substantial facility.'' \1\ In the last 36 years, 
the language of  4062(e) has not changed:  4062(e) applies only if 
``an employer ceases operations at a facility in any location.'' This 
simple phrase has been understood to mean that  4062(e) applies only 
if operations cease--i.e., the facility is closed.
---------------------------------------------------------------------------
    \1\ See H.R. 2, 93d Cong.  462(g) (as passed by the Senate, Mar. 
4, 1974); Staff of S. Comm. on Labor and Public Welfare, 93d Cong., 
Summary of Differences Between the Senate Version and the House Version 
of H.R. 2 to Provide for Pension Reform 18 (Comm. Print 1974). Although 
the heading was changed from ``Termination of Substantial Facility'' to 
``Treatment of Substantial Cessation of Operations,'' the language of 
the provision has not changed since it was first introduced. Moreover, 
the heading still indicates that a cessation of operations at a 
facility refers to something ``substantial.''
---------------------------------------------------------------------------
    Rather than define the statute's phrase as a whole, the proposed 
regulation breaks it down into separate definitions of ``operation,'' 
``facility,'' and ``cessation.'' By doing so, the proposed regulation 
expands the application of  4062(e) to routine events that do not rise 
to the level of a ``cessation of operations at a facility in any 
location.'' ERIC has the following concerns with each proposed 
definition:

     ``Operation.'' The statute does not authorize the proposal 
to replace the term ``operations'' with ``an operation.'' This change 
could result in  4062(e) being triggered by routine events that are 
anything but cessations of operations--e.g., changing the way a space 
is used or outsourcing an operation within an ongoing facility.
     ``Facility.'' The term ``facility'' should be defined 
based on its location, rather than an operation. By stating that a 
single facility may be comprised of more than one building, without any 
geographic restrictions, the proposed regulation leaves open the 
possibility that a single facility can be spread across the country. 
This possibility ignores the statute's phrase ``in any location.''
     ``Cessation.'' A stoppage of operations should not 
constitute a cessation unless the facts and circumstances indicate that 
the stoppage is permanent. The proposed 1 week resumption rule (for a 
voluntary cessation) and 30-day discontinuance rule (for an involuntary 
cessation) are arbitrary and would sweep in common events that are not 
intended to be cessations. For example, a disaster like Hurricane 
Katrina would have been treated like a cessation of operations for many 
businesses in New Orleans that never intended to close and eventually 
resumed operations.
    In accordance with the statute, ``facility'' should be defined by 
reference to its location: a ``facility at any location'' means a 
building (or buildings on a campus) at a particular location. 
``Operations'' should be defined as the work performed at the facility; 
and a cessation of operations at the facility should not be deemed to 
occur unless all of the facility's operations have ceased--i.e., the 
facility has closed. Any concern that an employer might try to avoid  
4062(e) liability by continuing only an operation related to basic 
maintenance of a building (as distinct from changing the operations 
performed at the facility) should be addressed through an anti-abuse 
rule.
    In addition, stopping operations should not result in a 
``cessation'' unless the facts and circumstances indicate that the 
stoppage is permanent. The determination of whether a stoppage is 
permanent should not be based on a fixed time period. If the PBGC 
nevertheless determines that a time period is necessary, (a) the time 
period should be no less than 90 days; (b) the time period should not 
apply in the case of a labor disruption; and (c) the standard should be 
rebuttable.

2. Relocation and Sale of Ongoing Operations

    PBGC Opinion Letters from the last 34 years have consistently 
indicated that relocating or selling an ongoing business generally does 
not trigger a  4062(e) inquiry. Absent a change to the statute, the 
new regulation should preserve this history. Accordingly:

     When ongoing operations are relocated,  4062(e) should 
not apply if the operations are continued--regardless of how many 
employees make the move. See, e.g., Op. Ltr. 77-134.
     When ongoing are sold (whether in an asset sale or a stock 
sale),  4062(e) should not apply if the operations are continued. At 
the very least,  4062(e) should not apply if (a) the facility's 
employee population does not shrink by more than 20 percent and (b) the 
buyer continues the plan or a similar plan without substantial changes. 
See, e.g., Op. Ltrs. 86-13, 82-29, 78-29, 76-52.
    The proposed regulation appropriately allows an employee's 
separation to be ignored if a replacement is hired before the cessation 
is complete. This rule should be expanded to apply when replacement 
employees are hired within a reasonable period after the cessation. For 
example, if ongoing operations are relocated from City A to City B and 
the employer intends to replace the employees who do not make the move, 
the employer should not be penalized merely because some positions are 
not filled for a reasonable period after the move. Also, replacement 
employees should be taken into account from their date of hire, without 
regard to whether they are eligible to participate in the plan.
    ERIC appreciates that the PBGC may waive the  4062(e) liability in 
appropriate circumstances. However, in order to ensure reasonably 
consistent results and to ease the burden on employers and the PBGC in 
cases involving insignificant events, the regulation should include 
safe harbor standards under which waiver or reduced liability is 
automatic. At a minimum, the regulation should provide for an automatic 
waiver of the  4062(e) liability (including the reporting requirement) 
in the circumstances described above.

3. ``As a Result''

    The proposed rule that a separation from employment at one facility 
can be ``as a result'' of a cessation of operations at another facility 
is overly broad and vague. It allows all employee separations that can 
be connected by a virtually limitless daisy chain of events to be 
deemed to result from a cessation of operations at a facility at the 
beginning of the chain.
    Although there might be cases where a cessation of operations at 
one facility affects employment at other facilities, linking causation 
across facilities should be the exception rather than the rule. The 
regulation should include a rebuttable presumption that separations at 
one facility do not result from a cessation of operations at another 
facility. In other words, the proposed standard for a plan 
administrator to decide whether a  4062(e) event has occurred, when to 
file a notice of an event, and how many affected participants to report 
should end the inquiry unless there are unusual circumstances.
    To the extent that linking causation across facilities is 
permitted, the regulation should limit the time period over which a 
chain reaction may occur to 30 days or less. No separation occurring 
after this period should be linked to a cessation of operations that 
occurred before the period started.

4. Plans Frozen to New Entrants

    When a plan is frozen to new entrants, the percentage of active 
employees who participate in the Plan declines steadily over time--
especially if the plan sponsor's business is successful. By ignoring 
this fact, the proposed regulation would sweep in many insignificant 
events.
    For example, suppose a plan was frozen to new entrants in the 
1990's. At the time of the freeze, the plan sponsor had 20,000 
employees in the United States and all of them participated in the 
plan. Since the freeze, attrition has resulted in the number of active 
employees participating in the plan falling to 1,000, but the size of 
the business has remained steady or grown. Under the proposed 
regulation, a cessation that results in only 200 participating 
employees losing their jobs--1 percent or less of the total U.S.-based 
employee population--would be a  4062(e) event.
    As another example, suppose that when a plan was frozen, the 
employer had 5,000 employees and they all participated in the plan. 
Since that time, the employer's business has grown and it now employs 
20,000 employees. Under the proposed regulation, a cessation that 
results in 1,000 participating employees losing their jobs--only 5 
percent of the total employee population--would be a  4062(e) event.
    In order to avoid these absurd results, the regulation should 
include an exemption for frozen plans that meet minimum funding 
requirements. Alternatively, the regulation should allow the active 
participant base to include employees who would have been active 
participants if not for the freeze.

5. Exemption for Well-Funded Plans

    ERIC appreciates that the PBGC intends to continue its practice of 
negotiating with affected employers in appropriate cases. However, in 
order to ensure reasonably consistent results and to alleviate the 
burden of a reporting requirement in cases where the risk to the PBGC 
is not significant, the regulation should specify criteria under which 
no action will be required.
    Many plans that are not fully funded on a termination basis 
nevertheless do not pose a significant risk to the PBGC. For example, a 
plan with an Adjusted Funding Target Attainment Percentage (``AFTAP'') 
of 90 percent or more does not pose a significant risk to the PBGC. The 
regulation should relieve the sponsors of plans in this category from 
worrying about  4062(e).
    Adding a reasonable exemption for plans that do not pose a 
significant risk to the PBGC would not only ease the burden on plan 
sponsors, allowing them to deliver benefits more efficiently: it would 
enable the PBGC to allocate its limited resources to the cases that 
warrant attention.
    ERIC appreciates the opportunity to submit these comments. We look 
forward to working with you to create workable rules that enable the 
PBGC to protect itself against the cost of terminating underfunded 
plans without imposing unnecessary burdens on employers. If we can be 
of further assistance, please let us know.

            Sincerely,
                                           Mark J. Ugoretz,
                                                   President & CEO.

    [Whereupon, at 4:03 p.m., the hearing was adjourned.]

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