[Senate Hearing 113-805]
[From the U.S. Government Publishing Office]






                                                        S. Hrg. 113-805

                 POOLED RETIREMENT PLANS: CLOSING THE 
           RETIREMENT PLAN COVERAGE GAP FOR SMALL BUSINESSES

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

                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

EXAMINING POOLED RETIREMENT PLANS, FOCUSING ON CHALLENGES AND PROSPECTS 
                   FOR EMPLOYEES OF SMALL BUSINESSES

                               __________

                             JULY 16, 2013

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions


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          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                       TOM HARKIN, Iowa, Chairman

BARBARA A. MIKULSKI, Maryland
PATTY MURRAY, Washington
BERNARD SANDERS (I), Vermont
ROBERT P. CASEY, JR., Pennsylvania
KAY R. HAGAN, North Carolina
AL FRANKEN, Minnesota
MICHAEL F. BENNET, Colorado
SHELDON WHITEHOUSE, Rhode Island
TAMMY BALDWIN, Wisconsin
CHRISTOPHER S. MURPHY, Connecticut
ELIZABETH WARREN, Massachusetts

                                     LAMAR ALEXANDER, Tennessee
                                     MICHAEL B. ENZI, Wyoming
                                     RICHARD BURR, North Carolina
                                     JOHNNY ISAKSON, Georgia
                                     RAND PAUL, Kentucky
                                     ORRIN G. HATCH, Utah
                                     PAT ROBERTS, Kansas
                                     LISA MURKOWSKI, Alaska
                                     MARK KIRK, Illinois
                                     TIM SCOTT, South Carolina
                                       

                    Pamela J. Smith, Staff Director

        Lauren McFerran, Deputy Staff Director and Chief Counsel

               David P. Cleary, Republican Staff Director

                                  (ii)

  
















                                CONTENTS

                               __________

                               STATEMENTS

                         TUESDAY, JULY 16, 2013

                                                                   Page

                           Committee Members

Harkin, Hon. Tom, Chairman, Committee on Health, Education, 
  Labor, and Pensions, opening statement.........................     1
    Prepared statement...........................................     2
Alexander, Hon. Lamar, a U.S. Senator from the State of 
  Tennessee, opening statement...................................     4
Franken, Hon. Al, a U.S. Senator from the State of Minnesota.....    34
Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming..    36
Murphy, Hon. Christopher S., a U.S. Senator from the State of 
  Connecticut....................................................    38

                               Witnesses

Jeszeck, Charles A., Ph.D., Director, Education, Workforce, and 
  Income Security, U.S. Government Accountability Office, 
  Washington, DC.................................................     5
    Prepared statement...........................................     7
Koetje, David J., President and CEO, Christian Schools 
  International, Grand Rapids, MI................................    19
    Prepared statement...........................................    21
Kais, Jim, Senior Vice President and National Practice Leader, 
  Special Markets, Transamerica Retirement Solutions, Ringoes, NJ    25
    Prepared statement...........................................    27

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Letter of Support............................................    43
    Response to questions of Senator Enzi by:
        Charles A. Jeszeck, Ph.D.................................    44
        David J. Koetje..........................................    45

                                 (iii)


 
 POOLED RETIREMENT PLANS: CLOSING THE RETIREMENT PLAN COVERAGE GAP FOR 
                            SMALL BUSINESSES

                              ----------                              


                         TUESDAY, JULY 16, 2013

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:32 p.m. in room 
SD-430, Dirksen Senate Office Building, Hon. Tom Harkin, 
chairman of the committee, presiding.
    Present: Senators Harkin, Alexander, Franken, Murphy, and 
Enzi.

                  Opening Statement of Senator Harkin

    The Chairman. The Senate committee on Health, Education, 
Labor, and Pensions will come to order.
    I would like to thank all of you for coming to the latest 
in our ongoing series of hearings on the retirement system.
    Today, we are going to focus on the fact that most people 
employed by small businesses simply are not being offered good 
retirement benefits. We are going to look at whether we can 
address this problem by allowing groups of small employers to 
reduce costs, complexity, and risk to pooled retirement plans.
    The retirement income deficit, that is the difference 
between what people have saved for retirement and what they 
should have saved, I have seen estimates now to be at least 
$6.6 trillion, and half of Americans have less than $10,000 in 
savings.
    To make matters worse, only half of the workforce 
participates in an employer-provided retirement plan, and 
defined benefit pension plans are disappearing. When I first 
came to Congress, one in every two Americans had a pension. 
Now, it is only one in every five, and going down.
    If you ask small business owners, they understand how big a 
problem the retirement crisis really is. A recent survey by the 
Main Street Alliance and the American Sustainable Business 
Council found that a super majority of small business owners 
believe that a lack of retirement security hurts the economy by 
both making older Americans less willing to spend and by 
forcing the current generation to devote time and money to the 
financial support of their aging parents.
    As we will hear today, the 42 million people working for 
small businesses are not getting the retirement plans they 
need. Most small employers do not even offer a 401(k), let 
alone a pension. When they do offer a plan, studies 
consistently show that participants pay higher fees, which can 
profoundly reduce retirement savings over the course of a 
career.
    The plans also are not typically designed to produce 
retirement income. They are basically savings plans that help 
people buildup a nest egg during their working years, but they 
really do not do anything to help convert those savings into a 
secure source of retirement income that they will have until 
they die.
    So if we are ever going to solve the retirement crisis, we 
need to make sure that everyone, including those who work for 
small businesses, has the opportunity to participate in a 
quality retirement plan. That means we have to address the 
issues that are keeping small business owners from starting 
retirement plans. So we have to make the plans less costly, 
less complex, and less risky for business owners.
    That is the heart of my proposal to create the USA 
Retirement Funds, a 21st century retirement plan that is easier 
for employers to offer and get participants a secure source of 
retirement income for life.
    USA Retirement Funds would provide employers, especially 
small employers, the chance to pool their resources so they can 
have all of the advantages that large employers have, and will 
let them delegate their fiduciary responsibilities to 
professional boards of trustees. Employers just have to 
automatically enroll their employees and make minimal 
contributions, and that is all they would have to do.
    The market is moving in that direction already. Providers 
are finding ways to help employers limit their liability and to 
incorporate lifetime income into plans. But there are a lot of 
roadblocks under current law. So what I would like to do is to 
clear a path and make it easier for the industry to innovate, 
and to make sure the law is sufficiently protective of 
participants.
    I am actively working on legislation to implement the USA 
Retirement Funds and hope to introduce a comprehensive, 
bipartisan reform bill soon. But I am also committed to making 
the system work better for employers that are already offering 
good pension benefits to their employees, and we will hear 
about that today.
    That is why I am introducing a bipartisan bill today called 
the Cooperative and Small Employer Charity Pension Flexibility 
Act of 2013. This bill--which is co-sponsored by Senator 
Roberts, Senator Murray, Senator Murkowski, and Senator 
Franken--will make it easier for charities and cooperative 
associations to provide cost-effective, defined benefit pension 
benefits through pooled plans.
    I am confident that if we work together, we can solve this 
retirement crisis, and I look forward to working with my 
colleagues on both sides of the aisle to help make this happen.
    I thank all of you for being here today. I look forward to 
hearing from our excellent panel of witnesses.

                  Prepared Statement of Senator Harkin

    I want to supplement my opening remarks with more 
information about S. 1302, the Cooperative and Small Employer 
Charity Pension Flexibility Act of 2013, which I introduced 
today with Senator Roberts.
    Currently, many charities and cooperative associations 
provide their employees with retirement benefits through 
defined benefit multiple employer pension plans. In the bill, 
we call them Cooperative and Small Employer Charity Pension 
Plans or CSEC plans. The plans allow small, community-focused 
employers to pool their resources to achieve economies of scale 
otherwise only available to large employers. Although CSEC 
plans have operated successfully for decades, they are poised 
to become subject to the Pension Protection Act of 2006, which 
would threaten the ability of many non-profit employers to 
continue to offer pension benefits.
    PPA fundamentally changed the way most pension plans are 
funded in order to protect participants and the Pension Benefit 
Guaranty Corporation. However, Congress recognized that the new 
rules were not appropriate for rural cooperative multiple 
employer defined benefit plans because, by design, the plans 
pose little risk that they will be unable to pay benefits. 
Consequently, Congress granted the plans a temporary exemption 
from PPA in order to assess whether the rules would be 
appropriate. The exemption was later broadened to include 
eligible charities by the Pension Relief Act of 2010. Without 
congressional action, the temporary exemption will expire.
    Since 2006, it has become increasingly apparent that the 
PPA funding rules remain inappropriate for the unique structure 
of CSEC plans. The rules create too much funding volatility, 
and they would force community-focused organizations to 
unnecessarily divert funds from critical services just when 
those services are needed most. Without changes, CSEC plans 
will be forced to comply with PPA funding rules, and many 
small, non-profit employers will be unable to continue to 
provide pension benefits.
    S. 1302 ensures charities and cooperative associations will 
continue to be able to provide quality pension benefits to 
their employees by implementing pension funding rules that 
reflect the unique design of their CSEC plans. The rules are 
substantially similar to those that CSEC plans are currently 
subject to with modifications to make them work better and 
result in far less volatility. CSEC plans would have the 
flexibility to opt into PPA in 2014 if they want, and 
importantly, S. 1302 imposes additional transparency 
requirements on CSEC plans so that participants have access to 
accurate information.
    S. 1302 also provides for a ``time out'' from scheduled 
increases to PBGC premiums. Last year, CSEC plans were 
indiscriminately subjected to significant premium increases 
without regard to the unique structure of the plans. S. 1302 
would freeze premiums at current levels while the agency 
reevaluates how much CSEC plans should be paying for pension 
insurance.
    S. 1302 is a good bill that will help thousands of people 
in Iowa and around the country. I would like to thank my friend 
from Kansas, Senator Roberts, for working on it with me and the 
other original cosponsors of the bill--Senators Patty Murray, 
Lisa Murkowski, and Al Franken. I would also like to submit for 
the record a letter of support for the bill signed by nine non-
profit organizations.
    [The information referred to may be found in additional 
material.]

    Now, I recognize our Ranking Member, Senator Alexander.

                 Opening Statement of Senator Alexander

    Senator Alexander. Thanks, Mr. Chairman.
    I want to welcome the witnesses. Thank you for taking time 
to come today. We know you have busy schedules.
    I want to thank Senator Enzi and Senator Harkin for the 
work they have been doing for several years, really, as 
chairman and ranking member of this committee, on the issue 
about which we are talking today. I especially thank them for 
their work on pooled retirement plans where there seems to be 
some real promise of progress.
    As the chairman says, small business employs about half our 
country's private sector workforce, but according to the 
Government Accountability Office, 50 percent of the workers who 
work for those small businesses with fewer than 100 workers, do 
not have access to any kind of work-based retirement plan. We 
are looking for ways not to require everybody to do something, 
but to make it easier for them to do something; to create an 
environment in which employers can find ways to offer more 
options for their employees.
    We have our mandatory retirement plan--Social Security--but 
that was meant to subsidize retirement. We need to encourage 
individuals and businesses to save more. Many small businesses 
cannot afford the traditional defined benefit retirement plans. 
The 401(k) system has significant regulatory burdensome costs. 
Can Congress improve the situation? We would like to try.
    The use of pooling is promising, allowing multiple 
businesses to put assets into a common fund to help small 
businesses by spreading out costs. We could take a hypothetical 
small business with 51 employees with varying salaries.
    Our staff tried to put together a picture of that--salaries 
in the lower to mid-range. There are the FICA taxes; they would 
be about $130,000. There would be the unemployment taxes; that 
is another $2,800. Healthcare mandates, if they opt out and 
take the penalty; that is $42,000. If they do provide coverage 
and any employees receive premium credits in the exchanges, 
these businesses face a $3,000 per employee penalty. So we have 
to, in my view, be cautious about new mandates.
    But we do not need to be cautious about fostering an 
environment to create more good paying jobs and to create more 
options for small businesses to provide more choices of 
retirement plans for their employees.
    I thank the witnesses for being here. I thank Senators 
Harkin and Enzi for their work. I look forward to learning more 
today.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Alexander.
    I want to acknowledge, again, the work that Senator Enzi 
has done over this for many years, and we have been working 
together on this over the last couple of years on looking at 
retirement plans and what is happening around America.
    He is certainly one of our resident experts, I should say, 
on retirements and retirement plans. We have all benefited from 
his wisdom and his knowledge in this area. As I said, we are 
working with others on this to try to get something put 
together here in a bill form.
    With that, I will introduce our witnesses. We have a great 
panel today. First, we have Dr. Charles Jeszeck, Director of 
Education, Workforce, and Income Security Issues at the 
Government Accountability Office. Dr. Jeszeck has been with the 
GAO for over 27 years, an expert on retirement security and 
related issues. He holds a Ph.D. in economics from U.C. 
Berkeley, and has taught economics at Barnard College and 
Amherst.
    Next, we have Mr. David Koetje, president and CEO of 
Christian Schools International. Mr. Koetje has been involved 
in education administration for over 40 years serving as a 
teacher, principle, professor, and superintendent. Currently, 
he oversees Christian Schools International's pension plan, 
which covers thousands of teachers and other employees at 
schools all over the country.
    Finally, we will hear from Jim Kais, senior vice president 
for Transamerica Retirement Solutions. Mr. Kais has nearly 20 
years of experience with retirement services and has worked to 
help small and mid-sized businesses offer retirement plans.
    I welcome you all here.
    Without objection, each of your statements will be made a 
part of the record in their entirety.
    The Chairman. We will start with Dr. Jeszeck and work over. 
If you could sum up your testimony in 5 or 7 minutes, then we 
will get into a nice colloquy.
    Welcome. Please proceed.

 STATEMENT OF CHARLES A. JESZECK, Ph.D., DIRECTOR, EDUCATION, 
WORKFORCE, AND INCOME SECURITY, U.S. GOVERNMENT ACCOUNTABILITY 
                     OFFICE, WASHINGTON, DC

    Mr. Jeszeck. Thank you. Chairman Harkin and Ranking Member 
Alexander, thank you for inviting me here today to discuss the 
state of retirement security for the millions of workers 
employed by our Nation's small businesses.
    Small businesses are a critical sector of our economy 
providing employment for over 42 million workers, about one-
third of the private sector workforce.
    While a secure retirement is increasingly at-risk for all 
workers, this risk is often greater for employees of small 
businesses. Further, the challenges facing small businesses in 
helping their employees save for retirement appear particularly 
daunting.
    My comments today are based on the findings of several 
recent GAO reports. In summary, many of us will find the 
results disturbing. Pension sponsorship among small employers, 
those with fewer than 100 employees, is low and the challenges 
they face in sponsoring plans can be formidable. Few workers 
employed by small businesses are covered by traditional pension 
plans.
    For those small business employees fortunate enough to 
participate in a 401(k) type plan, average account balances are 
low and they often pay higher fees that can lower their 
returns.
    Small business plan sponsorship rates are low. In our 2012 
report, we found an overall sponsorship rate of about 14 
percent. Only 5 percent of small businesses offered a 
traditional defined benefit pension. Low sponsorship rates lead 
to low retirement plan coverage. For example, experts have 
estimated that less than 30 percent of small business employees 
are covered by any retirement plan.
    We also found that the larger the firm, the more likely it 
was to offer a plan. Among the smallest firms, those with one 
to four employees, the rate was 5 percent. Sponsorship rates 
for firms with 26 to 100 employees were higher, at 31 percent.
    Similarly, small firms with low-paid workforces were less 
likely to offer a pension plan. At the lowest level, only 3 
percent of small employers who paid an average annual wage of 
$10,000 or less sponsored a plan. This low sponsorship rate is 
a consequence of the challenges small businesses report in 
sponsoring a plan.
    In focus groups with small employers around the country, we 
heard about many of these challenges. Having insufficient 
financial resources, time, and personnel; being overwhelmed by 
the choice of plan design and investment options; frustrated by 
onerous administrative requirements; and fearful that they were 
not fully knowledgeable about the legal responsibilities 
associated with sponsoring a plan.
    Of course, increased sponsorship alone is not enough. 
Employees must contribute faithfully and invest prudently. 
Again, the evidence suggests cause for some concern. The 
average account balance for workers in small plans is about 
$59,000 only somewhat above the Nation's median household 
income for 1 year.
    Participants in small plans also face the challenge of high 
fees. In April 2012, we reported that participants in smaller 
plans typically pay more in fees than participants in larger 
plans. According to industry experts, plans with fewer 
participants generally have lower plan assets and therefore pay 
higher fees than plans with more assets.
    For example, our nationally representative survey of plan 
sponsors found that participants in plans with fewer than 50 
participants paid an average of 0.43 percent of plan assets 
annually for recordkeeping and administrative services. 
Meanwhile, participants in plans with more than 500 
participants paid 0.22 percent.
    In addition, participants often pay investment, trading, 
and a variety of other fees, some of which can be substantial. 
In our report, we found many instances where small employers 
were unaware of the amount of the fees paid, the types of fees 
being paid, and who was paying them. We note that our work was 
conducted before Labor's issuance of its fee disclosure 
regulations, which hopefully are having a positive effect.
    However, our work also demonstrates the need for sponsors 
to understand plan fees to help participants secure adequate 
retirement savings. Any excessive fee paid by participants can 
significantly reduce retirement savings over time. For example, 
over a 20-year period, a 1 percent fee increase can reduce 
account growth by double-digits.
    Small employers and experts we spoke with suggested a 
variety of solutions to address these challenges. These ranged 
from enhancing guidance from labor, expanding financial 
incentive for plan sponsorship, to introducing broader more 
universal solutions.
    Each option poses tradeoffs, but it is time for all of us 
to explore these options carefully and initiate appropriate 
action.
    That concludes my statement, Mr. Chairman. I would be happy 
to answer any questions you, or other members, may have.
    [The prepared statement of Mr. Jeszeck follows:]

            Prepared Statement of Charles A. Jeszeck, Ph.D.

                         why gao did this study
    About 42 million workers, or about one-third of all private-sector 
employees, work for employers with fewer than 100 employees, and recent 
Federal data suggest many of these workers lack access to a work-based 
retirement benefits. Despite efforts by the Federal Government to 
develop new plan designs and to increase tax incentives, plan 
sponsorship remains low among small employers. MEPs, a type of 
arrangement involving more than one employer, have been suggested as a 
potential way to increase coverage.
    This testimony describes (1) the challenges small employers face in 
helping ensure that their workers secure retirement income, and (2) 
types of MEPs and their potential to address these challenges. GAO drew 
from its previous reports related to small employer challenges in 
establishing and maintaining a retirement plan and recent work on MEPs 
issued from March 2012 through September 2012.
                          what gao recommends
    GAO is not making any new recommendations. GAO made several 
recommendations in prior reports to Labor and the Internal Revenue 
Service (IRS) to address challenges facing small employers and to 
improve oversight and coordination for MEPs. The agencies generally 
agreed with GAO's recommendations. However, Labor disagreed with a 
recommendation to create a single webportal for Federal guidance. GAO 
believes consolidating information could benefit small employers, 
mainly because resources are scattered.
                             what gao found
    About 14 percent of small employers sponsor some type of plan for 
their employees to save for retirement and these employers in general 
can face numerous challenges establishing and maintaining a plan. GAO's 
March 2012 report found that many of the small employers who were 
contacted said they felt overwhelmed by the number of plan options, 
plan administration requirements, and fiduciary responsibilities. For 
example, some small employers found it challenging to select investment 
funds for their plans. Small employers also cited other challenges in 
sponsoring a plan, including a lack of financial resources, time, and 
personnel. GAO's April 2012 review of select 401(k) plans--the most 
common type of plan sponsored by small employers--found that some 
smaller plan sponsors did not know about or fully understand fees they 
and their participants were charged, such as fees associated with group 
annuity contracts. In addition to these fees, participants in small 
plans often pay higher recordkeeping and investment management fees 
than participants in larger plans. GAO's work demonstrates the need for 
plan sponsors, particularly small sponsors, to understand fees in order 
to help participants secure adequate retirement savings. Any fees paid 
by participants, even a seemingly small amount can significantly reduce 
retirement savings over time.



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Source: GAO analysis of Labor and IRS data.

    Little is known about the types of employers that participate in 
multiple employer plans (MEP), particularly because, since 2004, no 
publically available information has been collected on such employers. 
MEP representatives have suggested MEPs as a viable way for small 
employers to reduce the administrative and fiduciary responsibilities 
that come with sponsoring a pension plan, and for reducing costs, in 
part through asset pooling. However, GAO found that these advantages 
are not always unique to MEPs. There was also no consensus on the 
potential for MEPs to increase plan coverage. During GAO's September 
2012 study the Department of Labor (Labor) ruled that some MEPs made up 
of otherwise unrelated employers did not constitute a single pension 
plan but an arrangement under which each employer sponsored a separate 
plan for its own employees. Because this raises significant policy and 
compliance questions and data are limited, it is important that Labor 
gather information on participating employers to inform policy and 
oversight activities on retirement security for employees of small 
businesses.
                                 ______
                                 
    Chairman Harkin, Ranking Member Alexander, and members of the 
committee, I am pleased to be here today to discuss retirement security 
for employees of small businesses. One-third of all private-sector 
employees, about 42 million, work for small businesses with fewer than 
100 employees and many of these employees lack access to a work-based 
plan to save for retirement. In fact, an estimated 51 to 71 percent of 
employees of small businesses lack access to such plans.\1\ Over the 
years, the Federal Government has taken steps to encourage small 
employers to sponsor some type of plan, and legislation has been 
enacted that has established incentives such as plan types with fewer 
Federal reporting requirements, higher plan contribution limits, and a 
tax credit for plan startup costs. Despite such efforts, plan 
sponsorship remains low among small employers. One proposed option to 
address this challenge is the use of pooled arrangements, such as 
multiple employer plan (MEP), a type of arrangement comprised of more 
than one employer. GAO recently examined the characteristics of MEPs 
and the ongoing challenges that small employers face in establishing 
and maintaining a plan for their employees. My statement today 
describes: (1) the challenges small employers face in helping ensure 
that their workers secure retirement income; and (2) the types of MEPs 
and their potential to address small employers' challenges. This 
statement is drawn from prior reports we issued from March 2012 through 
September 2012 regarding small employer plans and MEPs.\2\ Those 
reports contain detailed explanations of the methods used to conduct 
our work. We conducted all of our work in accordance with generally 
accepted government auditing standards.
---------------------------------------------------------------------------
    \1\ The lower percentages in these ranges are Bureau of Labor 
Statistics' estimates based on 2011 data from the National Compensation 
Survey. The higher percentages are the Employee Benefit Research 
Institute's estimates based on 2011 data from the Census Bureau's 
Current Population Survey.
    \2\ GAO, Private Sector Pensions: Federal Agencies Should Collect 
Data and Coordinate Oversight of Multiple Employer Plans, GAO-12-665 
(Washington, DC: Sept. 13, 2012); 401(k) Plans: Increased Educational 
Outreach and Broader Oversight May Help Reduce Plan Fees, GAO-12-325 
(Washington, DC: April 24, 2012); and Private Pensions: Better Agency 
Coordination Could Help Small Employers Address Challenges to Plan 
Sponsorship, GAO-12-326 (Washington, DC: Mar. 5, 2012).
---------------------------------------------------------------------------

                               Background

    To encourage employers to provide retirement benefits for their 
employees, the Federal Government provides preferential tax treatment 
under the Internal Revenue Code (IRC) for pension plans that meet 
certain requirements. In addition, the Employee Retirement Income 
Security Act of 1974 (ERISA),\3\ sets forth certain protections for 
participants in private-sector pension plans \4\ and establishes 
standards of conduct for those who manage such plans and their assets, 
generally called fiduciaries.\5\ To the extent they qualify as 
fiduciaries under the law, plan sponsors assume certain 
responsibilities and potential liability under ERISA. For example, a 
fiduciary must act prudently and in the sole interest of the plan's 
participants and beneficiaries.\6\ Responsibilities of plan sponsors 
and other fiduciaries may include reporting plan information to the 
Federal Government and to participants, selecting and monitoring 
investment options the plan will offer, and ensuring that the services 
provided to their plans are necessary and that the cost of those 
services is reasonable.
---------------------------------------------------------------------------
    \3\ Pub. L. No. 93-406, 88 Stat. 829 (codified in part at 29 U.S.C. 
 1002-1461).
    \4\  In this statement, consistent with ERISA, we use the term 
``pension'' to refer generally to all types of private retirement 
plans, not just defined benefit plans.
    \5\ Under ERISA, a fiduciary is anyone who exercises any 
discretionary authority or discretionary control respecting management 
of such plan or exercises any authority or control respecting 
management or disposition of its assets or renders investment advice 
for a fee or compensation, direct or indirect, with respect to any 
moneys or other property of such plan, or has authority to do so, or 
has any discretionary authority or discretionary responsibility in the 
administration of the plan. 29 U.S.C.  1002(21)(A).
    \6\ 29 U.S.C.  1104.
---------------------------------------------------------------------------
    Employers may choose to sponsor a plan for their employees from one 
of three categories: employer-sponsored individual retirement 
arrangement (IRA) plans; defined contribution (DC) plans; and defined 
benefit (DB) plans.\7\ Small employers may also choose to sponsor a 
Savings Incentive Match Plans for Employees (SIMPLE) IRA. Employer-
sponsored IRAs and DC plans, generally allow employers, employees, or 
both to make contributions to individual employee accounts within the 
plan. DC plans tend to have higher contribution limits for employees 
than employer-sponsored IRA plans. However, DC plans are also subject 
to more reporting and other requirements.\8\
---------------------------------------------------------------------------
    \7\ Defined benefit plans are plans in which employers generally 
maintain a fund to provide a fixed level of monthly retirement income 
based on a formula specified in the plan. Defined contribution plans 
are plans in which retirement income is based on employer and employee 
contributions and the performance of investments in individual employee 
accounts.
    \8\ For additional information about the rules and reporting 
requirements plans are subject to, see GAO-12-326.
---------------------------------------------------------------------------
    A MEP is a type of arrangement involving more than one employer, 
and can be structured as either a DB or a DC plan. A MEP is distinct 
from a single employer plan that is established and maintained by one 
employer for its employees.\9\ MEPs are also distinct from 
multiemployer plans that are also maintained by more than one employer, 
in that MEPs need not be established by one or more employee 
organizations pursuant to a collective bargaining agreement.\10\ When 
employers decide to participate in a MEP, they legally adopt the plan 
as their own as participating employers. A participating employer may 
sign an agreement that serves to identify the plan terms that will 
apply to its employees.
---------------------------------------------------------------------------
    \9\ 29 U.S.C.  1002(41) and (42).
    \10\ For more information on multiemployer plans, see GAO, Private 
Pensions: Timely Action Needed to Address Impending Multiemployer Plan 
Insolvencies, GAO-13-240 (Washington, DC: Mar 28, 2013). Another plan-
type that can involve multiple employers are master or prototype plans, 
which are largely based on uniform plan document sponsored by an 
organization for adoption by employers who are either its customers or 
members.
---------------------------------------------------------------------------
    Some MEPs were formed long before the enactment of ERISA in 1974. 
Our September 2012 report identified four types of MEPs: association, 
corporate, professional employer organization (PEO), and open MEPs.\11\ 
MEPs maintained by most associations we interviewed included over 100 
participating employers and were often organized around a common trade 
or industry that served smaller employers. However, the majority of the 
largest 25 MEPs are corporate. These sponsors tend to be large Fortune 
500 or Global 500 corporations with few participating employers.\12\ Of 
the association and corporate MEPs we interviewed, all sponsored a 
traditional DB plan, while the other types generally sponsored DC plans 
only.
---------------------------------------------------------------------------
    \11\ GAO-12-665.
    \12\ Those we interviewed maintained MEPs to cover subsidiaries not 
under common control. For most purposes, all employees of employers in 
the same controlled group are treated as employed by a single employer. 
26 U.S.C.  414(b). The status of these large, corporate plans as MEPs 
may be temporary if the transactions that resulted in them becoming 
MEPs are undone. For example, one plan sponsor representative we 
interviewed said that the sponsor's DB and DC plans became MEPs in the 
early to mid-2000s as a result of a merger within a business segment. 
Not long after, however, that particular segment was spun-off from the 
company and, by sometime in 2012, both the DB and DC plans will no 
longer be MEPs, but may be single-employer plans. The extent to which 
two or more corporations are considered in the same controlled group 
has to do chiefly with the percentage of ownership one has in the 
other. 26 U.S.C.  1563.
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    Other types of MEPS appear to have become popular more recently and 
are often structured as DC plans. These include MEPs sponsored by PEOs, 
which are firms that provide payroll and other human resources services 
to clients, and so-called ``open'' MEPs sponsored by firms that do not 
purport to employ plan participants. Employers in these ``open'' MEPs 
are related solely by their participation in the plan. \13\
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    \13\ On May 25, 2012, the Department of Labor (Labor) issued an 
advisory opinion on an open MEP arrangement and found that it was not a 
single employee benefit plan under Title I of ERISA. The Internal 
Revenue Service (IRS) has found at least one open MEP qualified for 
preferential tax treatment. IRS does not take into consideration a 
MEP's status under Title I of ERISA when considering whether it 
qualifies for preferential tax treatment. IRS focuses solely on 
compliance with IRC provisions. Labor's advisory opinion means, in 
effect, that an open MEP may be simultaneously considered both a single 
plan by IRS, for purposes of certain tax laws, and a series of plans by 
Labor. Dept. of Labor Advisory Op. 2012-04A.
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    To operate an employer-sponsored plan, employers may hire companies 
to provide services, such as legal, accounting, trustee/custodial, 
recordkeeping, investment management, investment education, or advice. 
These companies, typically referred to as plan service providers, can 
assist with administrative functions associated with establishing and 
maintaining a plan, including, for example, any required testing, plan 
audits, or filing of government reports, chiefly the Form 5500.\14\ 
Service providers are compensated for their services generally in the 
form of fees charged to the plan, which may be passed on to plan 
participants. \15\ Plan fees, even seemingly small ones, can 
significantly reduce a participant's retirement savings over the course 
of a career. Service providers charge an array of fees depending on the 
type of product and arrangement the provider may have with other 
entities that provide plan services. Some investment fees may be paid 
by third parties in connection with investment-related services, also 
known as revenue sharing, \16\ which are ultimately indirectly paid for 
by the plan or its participants.
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    \14\ Most tax-qualified plans are required to annually file a Form 
5500, developed jointly by the Department of Labor, the Internal 
Revenue Service, and Pension Benefit Guaranty Corporation (PBGC) to 
satisfy certain annual reporting requirements under ERISA and the 
Internal Revenue Code. ERISA established a reporting and disclosure 
framework, in part, to protect the interests of participants and 
beneficiaries by requiring that certain financial and other information 
be provided to participants and beneficiaries, as well as to the 
Federal Government. Some small plans may be eligible to use a 
simplified version of Form 5500. SIMPLE IRA and Simplified Employee 
Pension (SEP) IRA plans that comply with certain alternative methods of 
compliance are not required to file Form 5500.
    \15\ For details about how service provider charge plan fees and 
the types of fees that can be charged, see GAO-12-325.
    \16\ Revenue sharing, in the 401(k) plan industry, generally refers 
to indirect payments made from one service provider, such as the 
investment fund provider, to another service provider in connection 
with services provided to the plan, rather than payments made directly 
by the plan sponsor for plan services. For example, a plan's record 
keeper and investment fund manager may have an arrangement where the 
investment fund company collects sub-TA fees from plan assets invested 
in a particular fund that may then be used as a credit to offset the 
record keeper's fees.
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    To respond to concerns about the lack of access to employer-
sponsored plans for employees of small businesses, legislation has been 
enacted to lower costs, simplify requirements, and ease administrative 
burden. For example, the Revenue Act of 1978 \17\ and the Small 
Business Job Protection Act of 1996 \18\ established the SEP 
(Simplified Employee Pension) IRA plan and the SIMPLE IRA plan, 
respectively, featuring fewer compliance requirements than other plan 
types. The Economic Growth and Tax Relief Reconciliation Act of 2001 
(EGTRRA) \19\ also included a number of provisions that affected small 
businesses. For example, EGTRRA eliminated top-heavy testing 
requirements \20\ for safe harbor 401(k) plans,\21\ increased 
contribution limits for employer-sponsored IRA plans and 401(k) plans, 
and created a tax credit for small employers to offset startup costs, 
including the cost of educating employees about a new plan.\22\ EGTRRA 
also created a tax credit for individuals within certain income limits 
who make eligible contributions to retirement plans. The Pension 
Protection Act of 2006,\23\ among other changes, made these EGTRRA 
provisions permanent and established additional provisions that support 
plan participation by rank-and-file employees, such as automatic 
enrollment. Despite these incentives and legislative efforts, the 
percentage of the U.S. workforce that participates in a pension plan 
remains around 50 percent.\24\
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    \17\ Pub. L. No. 95-600,  152, 92 Stat. 2763, 2791.
    \18\ Pub. L. No. 104-188,  1421, 110 Stat. 1755, 1792.
    \19\ Pub. L. No. 107-16, 115 Stat. 38.
    \20\ Some plans may be subject to top-heavy requirements and be 
required to conduct further testing to ensure a minimum level of 
benefits are provided to rank-and-file workers in plans that are 
sponsored by owner-dominated firms, where the majority of benefits 
accrue to ``key'' employees, such as owners and top executives.
    \21\ 26 U.S.C.  401(k)(12). Safe harbor 401(k) plans require 
employers to either make a specified matching contribution to each 
participating employee's account or contribute at least 3 percent of 
compensation to all nonhighly compensated eligible employees.
    \22\ The credit for small employer pension plan startup costs 
applies to certain startup costs in connection with the establishment 
of a new qualified DB plan, DC plan (including 401(k) plans), SIMPLE 
IRA plan, or SEP IRA plan. To be eligible, an employer must have no 
more than 100 employees who received at least $5,000 of compensation in 
the preceding year. The credit equals 50 percent of qualified startup 
costs, which include administration costs and employee education, up to 
a maximum of $500 per year (for the first 3 years of the plan). 26 
U.S.C.  45E.
    \23\ Pub. L. No. 109-280, 120 Stat. 780. EGTRRA was set to expire 
on December 31, 2010, but the Pension Protection Act of 2006 made 
permanent EGTRRA's provisions relating to pensions and IRAs.
    \24\ John J. Topoleski, U.S. Household Savings for Retirement in 
2010 (Washington, DC: Congressional Research Service, April. 30, 2013).
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    To help encourage plan sponsorship, Federal agencies conduct 
education and outreach activities, and provide information about 
retirement plans for small employers. The Department of Labor (Labor), 
the Internal Revenue Service (IRS), and the Small Business 
Administration (SBA)--which maintains an extensive network of field 
offices--have collaborated with each other and with national and local 
organizations to develop information on small employers retirement 
plans and conduct outreach with small employers. For example, Labor, 
IRS, SBA and the U.S. Chamber of Commerce partnered to create the 
Choosing a Retirement Solution Campaign, which targets small employers 
and their employees.
    Labor's Employee Benefits Security Administration (EBSA) is the 
primary agency responsible for protecting private-sector pension plan 
participants from the misuse or theft of their pension assets, among 
other things, and carries out its responsibilities through such 
activities as issuing regulations and conducting investigations of plan 
fiduciaries and service providers. EBSA also issues advisory opinions 
in which it facilitates compliance with ERISA through interpretative 
guidance.
    small employers face challenges helping their workers save for 
                               retirement
Complex Rules, Resource Constraints, and Financial Instability 
        Contribute to Low Rates of Plan Sponsorship by Small Employers
    As we reported in March 2012,\25\ retirement plan sponsorship is 
low among small employers, which may reflect the challenges employers 
face in establishing and maintaining a plan.\26\ Our analysis of 
available Labor and IRS data found that about 14 percent of small 
employers sponsored some type of plan in 2009.\27\ As shown in figure 
1, the smallest employers--those with 1 to 4 employees--had the lowest 
sponsorship rate at 5 percent but even employers with 26 to 100 
employees had a sponsorship rate of 31 percent.\28\ To put this in 
context, about 50 percent of the private sector workforce at any one 
time participates in an employer-sponsored pension plan. Also, small 
employers paying average annual wages of $50,000 to $99,999 had the 
highest rate of plan sponsorship at 34 percent while small employers 
paying average wages of under $10,000 had the lowest sponsorship rate 
at 3 percent.
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    \25\ GAO-12-326.
    \26\  For the purposes of this statement, we defined a small 
employer as a for-profit firm with at least 1 employee and no more than 
100 employees. Because not all employees may participate or be eligible 
to participate in the plan, we define a ``small plan'' as those with 
fewer than 50 participants.
    \27\ This sponsorship rate does not include small employers that 
sponsor SEP IRAs because the IRS currently does not have a means to 
collect data on employers that sponsor this plan type. The sponsorship 
rate also does not include small employers that participated only in 
MEPs or multiemployer retirement plans. In addition, for the purposes 
of this study, we chose to use a ``firm'' as our unit of analysis, 
which may differ from other studies. For example, the BLS's 2010 
National Compensation Survey used ``establishment'' as a unit of 
analysis. An establishment differs from a firm in that an establishment 
can be a business at a single physical location or a branch of a larger 
companying operating multiple branches, where we defined a firm as a 
complete, for-profit, independent business. For additional information 
on the scope and methodology of this analysis, see GAO-12-326.
    \28\ Given the traditional dynamism of business formation in the 
United States, one would expect the ``churn'' rate of new business 
formations and dissolutions to result in a low sponsorship rate for the 
smallest employers.

    Figure 1: Small Employer Plan Sponsorship by Number of Employees in 
2009


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Source: GAO analysis of Labor and IRS data.

    When we met with small employers and other stakeholders, they 
identified a variety of factors as challenges to sponsoring retirement 
plans or as reasons for terminating existing plans.\29\ One commonly 
cited concern focused on the multiplicity of plan types and the burden 
of paperwork and administration. For example, some small employers and 
retirement experts said that the broad range of plan types and features 
made it difficult for small employers to compare and choose plans. 
Another small employer who previously sponsored a 401(k) plan with a 
company match said the amount of required plan paperwork, including 
generating annual reports, was a key reason he terminated it.
---------------------------------------------------------------------------
    \29\ For our March 2012 report, we conducted structured interviews 
with groups of small employers that did and did not sponsor plans. Our 
interview protocols also sought to identify and interview small 
employers of varying sizes and from various industries. While the 
findings from these interviews are not generalizable to the overall 
population of small employers, these discussions were extensive and 
included separate interviews with both sponsors and nonsponsors of 
pension plans to discuss the overall challenges of pension plan 
sponsorship. For additional details about our small group interviews, 
see GAO-12-326.
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    Other areas of concern for small employers centered on a sponsor's 
fiduciary responsibilities with respect to managing or controlling plan 
assets. Specifically, some small employer sponsors found the fiduciary 
responsibility of selecting investment fund choices for their plans 
particularly challenging. A small employer with a 401(k) plan described 
the difficulties of selecting investment options with an appropriate 
balance of risk, for a workforce that includes both younger and older 
workers. Moreover, a number of stakeholders said some small employers 
may not have an adequate understanding of their fiduciary duties and 
are not always aware of all their legal responsibilities. One service 
provider explained that some small employers mistakenly believe that 
all fiduciary responsibilities and liabilities are transferred to a 
service provider when they are hired. Another expert noted that some 
small employers have an exaggerated sense of the possible liabilities 
that being a fiduciary carries, and may avoid sponsoring a plan out of 
fear of being sued by their employees.
    In addition to these challenges, smaller or newer firms may be 
unwilling or unable to sponsor plans because they lack sufficient 
financial resources, time, and personnel. For instance, smaller 
employers noted that startup and ongoing costs involved with 
maintaining a plan, costs associated with reporting and testing 
requirements, administrative fees paid to an outside party, and any 
employer requirements to match employee contributions were barriers to 
plan sponsorship. Small employers also expressed the need to reach a 
certain level of profitability before they would consider sponsoring a 
plan and that general economic uncertainty makes them reluctant to 
commit to such long-term expenses.
    Low employee demand for an employer-sponsored plan may also be a 
challenge for small employers. For example, a number of small employers 
stated that employees prioritized health care benefits over retirement 
benefits. One small employer thought that, given the limited funds 
available to contribute toward benefits, his employees would prefer 
those resources be applied toward lowering the employees' share of 
health insurance premiums. Small employers emphasized that offering 
health care benefits was necessary to attract quality employees.
    Additionally, some small employers, such as those who described 
having a younger workforce, stated that their employees were less 
concerned about saving for retirement and, as a result, were not 
demanding retirement benefits. Other small employers told us that 
employees, particularly those with low pay, do not have any interest in 
retirement benefits because they live paycheck to paycheck and are less 
likely to have funds left over to contribute to a plan. For example, 
one small employer discontinued his plan when too few of his 
employees--most of whom he described as low-wage--participated in the 
plan. Another small employer noted that even senior-level managers in 
his business did not participate in the plan. However, a retirement 
expert stated that while some employees might not be interested in 
participating in a retirement plan, he believed the perceived lack of 
demand to be exaggerated. He added that he believed some businesses may 
use lack of employee demand as an excuse when the small employer was 
not interested in sponsoring a plan.
    In March 2012, we made a recommendation to Labor to convene an 
interagency task force with the Department of Treasury, IRS, SBA, and 
other appropriate agencies to review, analyze, and address the 
challenges small employers face in helping ensure retirement 
security.\30\ The agencies generally agreed with this recommendation, 
however, Labor disagreed with one aspect of our recommendation, which 
was for the task force to create a single webportal for Federal 
guidance. We believe consolidating plan information onto one webportal 
could benefit small employers, mainly because Federal resources are 
scattered across different sites. We also made a recommendation to the 
Department of the Treasury to collect additional information on IRA 
plans.
---------------------------------------------------------------------------
    \30\ GAO-12-326.
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Participants of Small Employer 401(k) Plans are Likely to Pay Higher 
        Fees
    Small employers are more likely to sponsor 401(k) plans and 
participants of these plans tend to pay higher fees than larger plans. 
According to our analysis of Labor and IRS data, out of slightly more 
than 712,000 small employers that sponsored a single type of plan in 
2009, about 46 percent sponsored a 401(k) plan, 40 percent a SIMPLE 
IRA, and the remaining employers sponsored other types of plans, 
including DB and non-401(k) profit sharing plans. \31\ Experts have 
identified low contribution rates as a key problem facing workers 
seeking to a secure an adequate retirement income. In 2011, the average 
account balances of 401(k) plans with 100 or fewer participants was 
about $59,000. This may reflect the challenges facing participants in 
small plans of not only contributing faithfully, but also investing 
prudently and avoiding high fees.
---------------------------------------------------------------------------
    \31\ For additional information about the number and types of other 
plans sponsored, see GAO-12-326.
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    Regarding fees, plans with fewer than 100 participants account for 
the majority of 401(k) plans, but these plans usually pay higher fees. 
According to industry experts and research, plans with fewer 
participants generally have lower plan assets, and therefore pay higher 
fees as a percentage of assets than plans with more assets or older 
plans that have grown their assets over time. Service providers and an 
industry expert we met with noted that administrative fees to start a 
401(k) plan can be significant for small plans. Additionally, 
representatives of a retirement industry organization said that it may 
be difficult for sponsors of small plans to negotiate for lower fees 
because assets in these plans are modest.
    In April 2012, we reported that participants in smaller plans 
typically pay higher fees than participants in larger plans.\32\ 
Specifically, our nationally representative survey of plan sponsors 
found that participants in plans with fewer than 50 participants paid 
an average of 0.43 percent of their plan assets annually, while 
participants in larger plans--those with more than 500 participants--
paid 0.22 percent for recordkeeping and administrative services.\33\ On 
top of these fees, participants likely paid other plan fees. For 
example, according to survey results, in about 69 percent of small 
plans, participants paid all of the investment fees (see fig. 2 for 
additional details), which ranged from less than 0.01 percent to 3.24 
percent of assets.\34\
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    \32\ GAO-12-325. This work was conducted before Labor finalized the 
regulations regarding disclosure of service providers' direct and 
indirect compensation and before regulations to disclosure certain plan 
and investment-related information, such as fees, to participants and 
their beneficiaries in participant-directed individual accounts were in 
effect. 29 CFR  2550.408b-2 and 2550.404a-5 (2012).
    \33\ For further details on the design of our 401(k) plan sponsor 
survey on fees, see GAO-12-325.
    \34\ Our estimates of investment management fees are not 
generalizable to the population of 401(k) plans.

    Figure 2: Among Survey Respondents Who Provided Amounts, the 
Percentage of Investment Management Fees Paid by Participants, 
Sponsors, or Both, 2010


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Source: GAO analysis of Survey of 401(k) Plan Sponsors.

    Note: Percentages may not total to 100 because of rounding. 
Estimates in this figure have margins of error that are less than plus 
or minus 24 percentage points.

    Investment management fees account for the majority of 410(k) plan 
fees, but sponsors of about 50 percent of plans we surveyed did not 
know if they or their participants paid investment management fees or 
believed these fees were waived. This was especially prevalent among 
smaller plans. For example, respondents of 57 percent of small plans 
either did not know about fees or claimed fees were waived, compared 
with 31 percent of large plans. Some of these sponsors may not know 
about investment management fees, because these fees are usually borne 
by participants and are typically charged against participants' assets, 
as opposed to being invoiced to the plan sponsor.

Some Common Investment-Related Fees

     Management fees: These fees are typically paid out of fund 
assets to the fund's investment adviser for investment portfolio 
management, other management fees payable to the fund's investment 
adviser or its affiliates, and administrative fees payable to the 
investment adviser that may not be included in some of the fees 
identified below.
     Marketing and distribution fees, also known as 12b-1 fees: 
These fees may be used to pay commissions to brokers and other 
salespersons, to pay for advertising and other costs of promoting the 
fund to investors, and to pay various service providers of a 401(k) 
plan pursuant to a bundled services arrangement. They are usually 
between 0.25 percent and 1.00 percent of assets annually.
     Sub-transfer agent (sub-TA) fees: These fees are typically 
used to reimburse a plan's record keeper for shareholder services that 
the fund would have otherwise provided, such as maintaining 
participant-level accounts and distributing the fund's prospectus.
     Trading or transaction costs: These fees are associated 
with an investment manager's buying and selling of securities within a 
particular investment vehicle, such as a mutual fund, which can include 
commissions. These also include costs associated with portfolio 
turnover.
     Wrap fees: These fees are usually associated with 
insurance products, such as group variable annuities. They are 
aggregate fees that encompass multiple components, such as investment 
management fees, mortality risk and administrative expense charges, and 
surrender and transfer charges.

    We also found instances in which participants paid for consulting 
and advisory services to help the employer with their plan 
responsibilities, such as monitoring investments and selecting plan 
vendors. These fees were also higher for participants in smaller plans. 
For example, while participants in small plans paid approximately 0.29 
percent annually, the median amount participants in large plans (500 or 
more participants) paid was 0.07 percent of assets.
    A lack of understanding on the part of plan sponsors about how fees 
are charged can also have adverse effects on participants' retirement 
savings by unknowingly passing those fees along to participants. As 
noted earlier, understanding these fee arrangements may be even more 
challenging for small employers, who lack the time and resources to 
fully identify and understand them. Our review of selected plans 
indicates that some smaller plan sponsors did not know about or fully 
understand revenue sharing arrangements, in which fees for plan 
services are indirectly charged to the plan through an outside entity. 
For example, in comparing survey responses to annual plan investment 
reports, we found that a plan with about $6 million in assets 
unknowingly paid about $5,000 in 12b-1 fees and other revenue sharing 
fees--a type of revenue sharing fee used to pay commissions to brokers, 
advertising and other costs of promoting a fund to investors, and 
various other marketing and distribution services. Moreover, plan 
sponsors that were aware of revenue sharing arrangements may not have 
fully understood the impact of these arrangements on plan services and 
plan fees, and therefore likely paid higher fees than they reported on 
our survey. For example, a plan with 65 participants and about $5.8 
million in plan assets reported that the company did not pay anything 
for recordkeeping and administrative fees, though the fee report the 
sponsor provided indicated that these fees in total were about 
$10,700--about $5,900 was invoiced to the company and roughly $4,800 
was paid to the provider from revenue sharing fees collected from 
participants' asset accounts. Failing to understand these arrangements 
can have adverse effects on the plan sponsor and participants.\35\
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    \35\ A short video illustrating a hypothetical example of how 
revenue sharing arrangements can work and how the fees for services 
change over time under such an arrangement is available at http://
www.gao.gov/products/GAO-12-325.
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    Small plan sponsors may also not be aware of others fees that 
participants are paying, such as wrap fees associated with group 
annuity contracts. These contracts are products that place a 
``wrapper'' of benefits, namely a guaranteed lifetime annuity income or 
a minimum death benefit, around a bundle of investments that are 
similar to mutual funds--called separate accounts or subaccounts. Some 
service providers we met with said that plan sponsors often do not know 
that they are invested in group variable annuities and are unaware of 
the associated fees. These wrap fees include administrative fees and a 
mortality and expense risk charge, which is typically in the range of 
1.25 percent of assets per year.\36\
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    \36\ These fees can be significant and plan sponsors are likely 
contracting with providers that charge higher fee rates without knowing 
the benefits for which they and their participants are paying. 
Moreover, without knowing if their plan is a group annuity contract, 
plan sponsors cannot adequately assess whether the benefits tied to 
that product are worth the associated fees.
---------------------------------------------------------------------------
    Finally, small plan sponsors may not be aware that their 
participants are paying potentially significant transaction costs (also 
known as trading costs). These costs are commonly paid for indirectly 
by plan participants and typically include commissions incurred when an 
investment manager buys and sells securities within a particular 
investment vehicle.\37\ While transaction costs are common among mutual 
funds, and more than 80 percent of 401(k) plans in our survey offer 
mutual funds, sponsors of an estimated 48 percent of plans did not know 
if their plans incurred transaction costs through the deduction from 
participants' returns on investments. We previously reported that the 
transaction cost for an investment option was as high as 2.72 
percent.\38\
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    \37\ There are also ``transaction costs'' associated with plan 
participant actions, such as withdrawals and taking a loan from their 
401(k) plan accounts; however, this definition of transaction costs 
differs from the types of transactions referred to in this testimony.
    \38\ Our analysis of transaction costs was limited to 83 plans; see 
GAO-12-325 for additional details about this analysis.
---------------------------------------------------------------------------
    Our work demonstrates the need for plan sponsors, particularly 
small sponsors, to understand plan fees in order to help participants 
secure adequate retirement savings. Any fees paid by participants, even 
a seemingly small amount, such as a 1 percent annual fee, can 
significantly reduce retirement savings over time, as shown in Figure 
3.

    Figure 3: Effect of 1-Percentage Point in Higher Annual Fees on a 
$20,000 DC Plan Balance Invested over 20 Years


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Source: GAO analysis.

    In our April 2012 report, we have made a number of recommendations 
to help small and large plan sponsors better understand and monitor 
fees.\39\ Specifically, we recommended that Labor develop and implement 
outreach and education initiatives that actively engage sponsors and we 
recommended enhancing online access to available plan fee information. 
Labor generally agreed with these recommendations. We will continue to 
monitor Labor's actions to address these recommendations.
---------------------------------------------------------------------------
    \39\ GAO-12-325.
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Little Information Available About Current MEPs and Their Potential to 
        Increase Small Business Sponsorship
    As we reported in September 2012, little is known about the 
employers that participate in MEPs, or even the number of MEPs by type, 
in part because the Federal Government no longer collects these data. 
\40\ As of 2009, the most recent data available for our September 2012 
report, MEPs represented only a small portion of the pension 
universe.\41\ Specifically, DB MEPs represented 0.7 percent of all DB 
plans, about 6.0 percent of all DB assets and 5.0 percent of all DB 
participants. DC MEPs represented about the same percentage of all DC 
plans, assets and participants. In our September 2012 report, we found 
smaller employers in MEPs were mainly participating in association-
sponsored MEPs.\42\ Two associations told us their participating 
employers averaged between 20 and 60 employees. However, one MEP 
sponsored by a PEO \43\ reported that the typical participating 
employer in its plan was small as well. In particular, little data 
exist on the current number of PEO or open MEP plan types,\44\ their 
asset size, the number of participants or the participating employers. 
Relative to other MEP types, PEO and open MEPs are the newest, and may 
be the only types actively marketing their MEPs to participating 
employers.\45\
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    \40\ GAO-12-665.
    \41\ While the Federal Government stopped collecting data on MEP 
participating employers in 2005, the most recent Form 5500 plan-level 
data on MEPs was from 2009.
    \42\ GAO-12-665.
    \43\ A PEO is a firm that provides payroll and other human 
resources services to clients.
    \44\ The key differences between PEO MEPs and open MEPs appear to 
be that open MEPs do not (1) offer payroll management or other 
administrative services PEOs typically offer, or (2) purport to be an 
employer of plan participants. Employers in open MEPs are related 
solely by their participation in the MEP.
    \45\ Key public data on participating employers have not been 
collected since 2004. Additionally participating employer information 
alone does not identify sponsor types or specific employer 
relationships that could indicate whether the MEP is sponsored by, for 
example, a large corporation, PEO, or association. According to 
officials we interviewed, the information that was collected in 2004 
and prior was also not particularly useful because it was not required 
on an annual schedule for all employers--and the information that was 
collected was not particularly direct or timely. For our September 2012 
report, GAO-12-665, we were able to obtain such information by 
interviewing plan representatives.
---------------------------------------------------------------------------
    MEPs have been suggested by PEO and open MEP representatives as a 
viable way for small employers to reduce their administrative 
responsibility for their pension plans. Several MEP representatives 
said MEP administrators can complete the recordkeeping and the annual 
testing, and can submit required filings such as a single Form 5500 for 
the MEP on behalf of all the participating employers. Furthermore, 
employees can more easily move among employers in the plan. For 
example, in a DB MEP sponsored by an association, as long as a 
participant remains an employee of an employer within the association, 
participants can change employers and continue earning vesting service 
credit in the same plan. A small employer sponsoring a single employer 
plan can also contract with a service provider to perform 
administrative functions, but a couple of interviewees said employers 
not already offering plans might find it easier and faster to join a 
MEP than to create their own single employer plan. MEPs have also been 
suggested by some as a possible means to lower the costs of plan 
sponsorship, since participating employers can pool assets to obtain 
lower pricing available to larger plans. One expert we spoke with said 
that certain association plans have been very effective at offering 
efficient, cost-effective retirement options for their members. 
Furthermore, a couple of interviewees said MEPs may also reduce costs 
for employers since they will not need to spend money to create an 
initial plan document, as they would in establishing a new single-
employer plan.
    As we found in September 2012, another possible benefit of MEPs, 
according to some MEP marketing material, is reducing participating 
employers' fiduciary liability since the MEP administrator takes on 
some fiduciary duties.\46\ However, it is not clear how much relief 
from fiduciary liability a MEP can provide to participating employers, 
and it is not clear that such relief is unique to MEPs. For example, 
small employers may also be able to receive a similar degree of reduced 
fiduciary liability by using a service provider to administer the 
employer's own plan. Because small employers may not be familiar with 
how to manage a plan, reduced fiduciary liability may be an attractive 
feature for them, and, in our March 2012 small employer report,\47\ 
small employers identified possible fiduciary responsibility as a 
barrier to sponsoring a pension plan. However, while MEP 
representatives and MEP marketing materials sometimes stated otherwise, 
participating employers retain some fiduciary responsibility, according 
to Labor officials. At a minimum, participating employers must still 
select a MEP to join and monitor a plan's investments and fees, which 
Labor considers a fiduciary function.
---------------------------------------------------------------------------
    \46\ GAO-12-665.
    \47\ GAO-12-326.
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    Overall, no consensus existed among MEP representatives and pension 
experts on the potential for MEPs to substantially expand coverage. 
Large associations can provide the option of joining a MEP to their 
members. That option is unavailable to small employers not part of a 
membership organization looking out for their interests. The extent to 
which small employers can join a MEP may depend on whether a MEP is 
actively marketed and sold, since one pension expert observed that 
small employers do not extensively research pension plans or actively 
seek them out. Additionally, employers who choose to become part of a 
MEP for the first time may already have been providing a plan for their 
employees. While a couple of the MEP representatives we spoke with 
specifically targeted employers without plans, several targeted 
businesses with existing plans.
    From Labor's perspective, their primary regulatory concern centers 
on one type of MEP, the open MEP. During our review for our September 
2012 report, Labor issued an advisory opinion stating that one 
particular open MEP did not constitute a pension plan under ERISA 
because it was not established or maintained by an employer or an 
employee organization.\48\ Labor determined that, in the case of this 
MEP, participating employers did not constitute a bona fide employer 
group or association, sufficient to be considered an employer 
sponsoring the arrangement, because, among other things, they did not 
exercise sufficient control over the plan.\49\ As a consequence of this 
guidance, the participating employers in that open MEP were instead 
determined to each be the sponsors of their own, individual plans. 
Association MEP representatives told us Labor's guidance had no affect 
on their plans.\50\
---------------------------------------------------------------------------
    \48\ An advisory opinion, which is limited to the facts in the 
opinion, can be relied upon, as a legal matter, only by the parties in 
the opinion. However, these opinions serve as guidance to others on 
what arrangements are considered employee benefit plans under ERISA.
    \49\ Dept. of Labor Advisory. Op 2012-04A. On both MEWAs (Multiple 
Employer Welfare Arrangements), arrangements providing welfare benefits 
such as health coverage and MEPs, Labor has held that multiple 
employers may maintain a single plan through a bona fide employer group 
or association of employers. However, Labor has been careful to define 
the nature of such an association in advisory opinions. Labor's 
advisory opinions on MEWAs may have been prompted by abuses by their 
promoters. When State insurance regulators found such practices 
violated their insurance laws, MEWAs claimed to be ERISA-covered plans 
preempted from State regulation. According to a Labor official, the 
MEWAs that failed to maintain adequate funds to pay promised benefits 
were often comprised of otherwise unrelated employers. Labor is still 
confronting challenges stemming from abuses of participants. For 
additional details, see GAO-12-665.
    \50\ The PEO representatives we interviewed said their PEOs 
operated under what they referred to as a ``coemployer'' contract. We 
did not find coemployer defined in Federal statute. Because the term 
PEO is not well-defined either, and the actual services are 
contractually determined, some refer to certain PEO practices as 
``employee leasing'' or ``payrolling,'' which involves providing 
administrative or financial services to employers, rather than serving 
as an employer in the sense of hiring or supervising workers. According 
to Labor officials, a PEO does not represent a bona fide association 
but establishes an employer relationship with the employees of its 
clients through the services it offers them.
---------------------------------------------------------------------------
    As a practical matter, Labor's ruling is being treated by many as 
meaning that individual participating employers in an open MEP have to 
comply with any reporting, auditing and bonding requirements on an 
individual rather than aggregate basis. In our September 2012 report, 
we noted that a number of compliance-related questions were left 
unanswered for open MEPs.\51\ Additionally, we noted that, for purposes 
of preferential tax treatment, IRS might still consider an open MEP to 
be one plan rather than a series of individual plans. In an effort to 
remove confusion for plan sponsors, we recommended Labor and IRS 
coordinate their interpretations and develop compliance-related 
guidance. Labor and IRS generally agreed with our recommendations on 
coordination.\52\
---------------------------------------------------------------------------
    \51\ GAO-12-665.
    \52\ Specifically, Labor and IRS officials said they will amend 
their coordination agreement if compliance issues become more apparent.
---------------------------------------------------------------------------
    Labor's expectation is that the recently issued opinions on open 
MEPs will serve as guidance to the pension industry at large. However, 
despite the ruling on open MEPs from Labor, pension experts and MEP 
representatives told us that broader policy questions remain. The 
opinion did not provide Labor's view on the potential of open MEPs to 
lower plan costs or expand coverage, but we were told by MEP 
representatives and pension experts that open MEPs will continue to 
receive the attention of policymakers for that reason. At this time no 
one knows for certain how many open MEPs there are, who is in them, or 
how they may affect future pension coverage. Pension experts cautioned 
that any legislative change allowing certain open MEPs should ensure 
that there are appropriate safeguards to protect plan participants.
    Labor officials said the potential for inadequate employer 
oversight of a MEP is greater than for other pension arrangements 
because employers pass along so much responsibility to the entity 
controlling the MEP. Labor officials noted that potential abuses might 
include layering fees, misusing assets, or falsifying benefit 
statements.\53\ One pension expert agreed that there is potential for 
MEPs to charge excess fees without the enrolled employer being aware. 
While Labor officials acknowledged that single employer plans could be 
subject to similar abuses, they cautioned that the way a MEP is 
structured and operated could make it particularly susceptible to 
abuses.\54\ For this reason, the structure of a particular MEP can be 
important. Representatives of MEPs maintained by associations we 
interviewed said they had an appointed board made up of association 
members who served as the named fiduciaries of the plan. Most of these 
associations required board members to also participate in the MEP. 
However, the extent to which open MEPs have or would have such 
structures in place is unclear. Given the limited knowledge some plan 
sponsors have of the fees they pay and their fiduciary 
responsibilities, it would appear that some such governance structure 
or related safeguards is warranted to protect employer and participant 
interests.
---------------------------------------------------------------------------
    \53\ Under ERISA, an employee pension plan can only be sponsored by 
an employer, an employee organization, or both. A group or association 
can be considered an employer under ERISA if Labor determines the 
association is bona fide. Under its advisory opinions, Labor has long 
looked at certain factors, such as pre-existing relationships among 
employers, to determine if a group of employers constitutes a bona fide 
association of employers that may, therefore, sponsor a single employer 
plan under Title I of ERISA. Pension and Welfare Benefits Admin., U.S. 
Dept. of Labor, Advisory Opinion 83-15A, 1983 ERISA Lexis 43. Because 
by definition an open MEP is open for any employer to join, without 
pre-existing relationships or other factors necessary to establish a 
bona fide association, it is not considered an employer under ERISA and 
cannot maintain an employee pension benefit plan.
    \54\ On April 15, 2013, a former trustee and fiduciary of a number 
of MEPs was convicted of 17 counts of wire fraud by a Federal jury in 
Boise, ID. The jury heard evidence that the individual misappropriated 
plan assets for his personal use. According to Labor officials, 
sentencing is scheduled for July 31, 2013. Labor officials told us that 
last year, they obtained the appointment of an independent fiduciary 
who is currently managing the remaining plan assets and making 
distributions. They stated further that the department is monitoring 
the progress of the criminal case, as well as the efforts of the 
independent fiduciary, who they report is actively attempting to 
recover additional assets.
---------------------------------------------------------------------------
    Labor's lack of data to identify different MEP sponsor types or any 
employers participating in MEPs limits the agency's ability to protect 
MEP employers and participants. To ensure Labor has information needed 
to oversee MEPs, in September 2012, we recommended that Labor gather 
additional information about the employers participating in MEPs, 
potentially through the Form 5500, which is the primary source of 
pension plan information for government oversight activities.\55\ Labor 
officials said the number of participating employers or the names of 
participating employers could be useful oversight information. The 
agencies generally agreed with our recommendation on gathering 
additional MEP-related information and said they will consider MEP-
related changes to the Form 5500 as part of their regular evaluations. 
We consider this an important first step, and await any proposed or 
scheduled changes to data collection.
---------------------------------------------------------------------------
    \55\ GAO-12-665.
---------------------------------------------------------------------------
                        concluding observations
    For workers at small employers, building an adequate level of 
income for retirement is becoming increasingly challenging. 
Particularly for small employers, the low level of plan sponsorship 
means that many of their workers may enter retirement with little or no 
income outside of Social Security. Small employers also face some 
greater challenges to sponsorship than larger employers and they often 
have less time, fewer resources and personnel to handle them. The 
potential advantages of multiple employer plan design are appealing in 
this context, however, current data and information, as well as other 
safeguards, will be necessary to ensure that small employer interests 
are protected and promises to participants are not broken.
    Chairman Harkin, Ranking Member Alexander, and members of the 
committee, this completes my prepared statement. I would be pleased to 
respond to any questions that you may have at this time.
    For further information about this testimony, please contact 
Charles A. Jeszeck at (202) 512-7215 or [email protected].

    The Chairman. Thank you very much, Dr. Jeszeck.
    Mr. Koetje, welcome. I read all of your statements last 
evening and I was quite impressed by the plans that you offer.
    Please proceed.

  STATEMENT OF DAVID J. KOETJE, PRESIDENT AND CEO, CHRISTIAN 
            SCHOOLS INTERNATIONAL, GRAND RAPIDS, MI

    Mr. Koetje. Thank you. Chairman Harkin, Ranking Member 
Alexander, committee members, and staff of committee members.
    I am Dave Koetje, president and CEO of Christian Schools 
International. Christian Schools International was the first 
national organization to serve Christian schools. From eight 
charter members in 1920, we have grown into a 400-school 
membership organization. Today, all of our programs and 
services are designed to reinforce school strength, stimulate 
teacher creativity, and nurture institutional redesign in 
Christian schools across the country.
    Our twin goals of advancing and supporting Christian 
education mean that we are constantly listening to our members, 
discerning their needs, and striving to support the important 
work they do in our schools.
    I am honored to testify today regarding our voluntary 
retirement program, and how this defined benefit multiple-
employer plan remains a critical tool for our members to 
recruit and retain employees.
    We are repeatedly told by plan participants of the value 
they place in the long-term security provided by the Christian 
Schools International plan. I am especially honored to tell how 
the bill Chairman Harkin and Senators Roberts, Murray, 
Murkowski, and Franken introduced today, the Cooperative and 
Small Employer Charity Pension Flexibility Act of 2013, will 
enable our members to retain our plan by permanently 
recognizing the unique nature of our Multiple Employer Plan and 
its lack of risk to the PBGC.
    The CSI plan plays a vital role in ensuring that our 
teachers and administrators have a secure retirement that 
enables them to live with dignity in the communities they have 
served. Our plan is part of our members' core business strategy 
to recruit, retain, and reward long service employees with a 
secure, financial retirement.
    I cannot overemphasize how important this plan is to the 
men and women who work in our schools, nor can I overemphasize 
the opportunity that this committee has to help our employees 
by cosponsoring, and approving, the Harkin-Roberts pension 
bill.
    Rural, suburban, urban, and central city schools are all 
part of the Christian Schools International mix. Economic and 
cultural diversity characterize the student bodies of our 
schools. Our schools service students regardless of their 
cognitive package or developmental complexities.
    Excellence is embedded in the learning culture of our 
schools. Teachers prepare students to connect learning to the 
busy-ness of life and to the messiness of life. They do this 
because it is their passion that their graduates enter this 
world equipped to straighten that which is crooked and to heal 
that which brings pain.
    Excellence for us is Thomas Jahl, a Princeton graduate, who 
teaches at Cono Christian School in Cono, IA. A school designed 
especially for disadvantaged students; students that suffer 
through trauma, and neglect, and family disruption. Thomas 
knows the power a school has when the school is intentional 
about creating a community where healing can take place. He and 
his colleagues make Cono Christian a safe place where in all 
the complexities of life, the heart of a child is given voice. 
A place where spiritual growth takes place. A place where 
children turn into adults. A place where learning and maturity 
flourish.
    Excellence to us is Shaun La Rose, an art teacher, at 
Chattanooga Christian School in Chattanooga, TN where what 
students learn and do needs to connect to the world that is 
real. Mr. La Rose, therefore, had his high school art students 
create a mural in a section of Chattanooga that, by any 
standard, is hungry for revitalization. Mr. La Rose took the 
time to do this because he and his students know that visible, 
quality art on display in decaying neighborhoods provide small, 
but powerful stimulation for constructive neighborhood 
revitalization.
    Whether it is Iowa, Tennessee, or any of the 22 States and 
U.S. territories including here in DC, we have schools that 
tell these stories over and over again. Today, there is not a 
profession that is not dotted with one of our graduates.
    We are proud of our teachers and it is those teachers that 
we refer to today. We are proud that our schools offer a 
comprehensive guaranteed retirement benefit to over 11,000 
employees and retirees through our Multiple Employer defined 
benefit pension plan.
    Our 300 U.S. member schools have as few as 5 employees with 
a median of 25 employees. The CSI plan provides our members 
with a convenient and affordable mechanism to pool resources, 
maximize group purchasing power, and leverage economies of 
scale that would otherwise not be unavailable to small 
organizations like private and parochial schools. That is why 
we created the plan in 1943 that was recognized that no one 
school can do independently what we could do together.
    The plan is funded by contributions that can be made in two 
ways. One way is for the school to contribute a set percent of 
pay for each employee and that same amount is contributed by 
the employee. The second way is for the school to make the 
total contribution. Most importantly, both formulas treat all 
employees at each school the same. Since the benefits are based 
on contribution and the same percent of pay is connected to all 
employees.
    PPA reflecting the core, fundamental principle that a 
promise made is a promise kept. We strongly support these 
principles which are equally reflected in the Harkin-Roberts 
bill. However, in PPA itself, Congress recognized its new 
pension funding rules that are especially designed to protect 
the PBGC in case a single employer maintaining a plan goes 
bankrupt. We are not appropriate for rural cooperative multiple 
employer defined benefit plans since, by design, these plans 
pose virtually no risk of default to PBGC. Accordingly, 
Congress granted these plans a temporary exemption to stay 
under the pre-PPA rules. Congress later extended the treatment 
to eligible charities like Christian Schools International, but 
this treatment ends in 2017.
    The Harkin-Roberts bill would solve the challenges I have 
described by allowing these cooperative and small employer 
charity Multiple Employer Plans that are already temporarily 
excluded from PPA, to choose between either staying excluded 
from PPA permanently, as Christian Schools International wants 
to do, or jumping into PPA in 2014 if, due to unusual 
circumstances, that is helpful.
    In reality, the Harkin-Roberts bill tweaks PPA to fulfill 
its original intent that it should not apply to plans like 
ours.
    We hope to continue our work with the committee to address 
the challenges. And I look forward to responding to your 
questions.
    [The prepared statement of Mr. Koetje follows:]

                  Prepared Statement of Dave J. Koetje

                                summary
    Christian Schools International (CSI) was the first national 
organization to serve Christian schools. From eight charter members in 
1920, we have grown into a 400-school organization.
    Who We Serve--Rural, suburban, urban, and central city schools are 
all part of the CSI mix. Economic and cultural diversity characterize 
the student bodies of our schools. Our schools service students 
regardless of their cognitive package or developmental complexities.
    Our Employees--Excellence is imbedded in the learning cultures of 
our schools. Our teachers prepare students to connect learning to the 
messiness of life. Our teachers do this because it is their passion 
that our graduates enter this world equipped to straighten that which 
is crooked and to heal that which brings pain. Our 300 U.S. member 
schools have as few as 5 employees, with a median of 25 employees.
    The CSI Plan--CSI is proud that many of its members offer 
comprehensive, guaranteed retirement benefits to over 11,000 employees 
and retirees through our ``multiple-employer'' defined-benefit pension 
plan (under Sec. 413(c) of the Code). The CSI Plan provides members 
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 organizations like us. That is why 
CSI created the plan in 1943; no one school could do independently what 
we could establish together. It is not administered by a collective 
bargaining agreement--which differentiates us from union multi-employer 
plans, aka Taft/Hartley plans. The CSI Plan is a critical tool for our 
members to recruit and retain employees who can often earn higher wages 
at other institutions, but value the long-term security provided by the 
Plan.
    PPA Rules Don't Fit Our Plan Design--PPA reflected the core, 
fundamental principle that a promise made is a promise kept. We 
strongly support these principles. However, in PPA itself, Congress 
recognized its new pension funding rules--that are specifically 
designed to protect the PBGC in case a single employer maintaining a 
plan goes bankrupt--were not appropriate for rural cooperative 
``multiple-employer'' defined benefit plans, since by design these 
plans pose virtually no risk of default to PBGC. Accordingly, Congress 
granted these plans a temporary exemption to stay under the pre-PPA 
rules. (See PPA Sec. 104). Congress later extended this treatment to 
eligible charities like CSI (See Sec. 202, Preservation of Access to 
Care for Medicare Beneficiaries and Pension Relief Act of 2010; Pub. L. 
No 111-192). But this treatment ends in 2017.
    Harkin/Roberts Recognizes CSI Plan's Unique Plan Design--The bill 
Chairman Harkin and Senator Roberts introduced today, the ``Cooperative 
and Small Employer Charity Pension Flexibility Act of 2013'' solves 
these challenges, enables our members to retain our plan, and 
permanently recognizes the unique nature of our plan and its lack of 
risk to the PBGC. It allows plans that are already temporarily excluded 
from PPA to choose between (1) staying excluded from PPA permanently 
(as CSI wants to do) or (2) jumping into PPA in 2014 if, due to unusual 
circumstances, that is helpful. In reality, the Harkin/Roberts bill 
``tweaks'' PPA to fulfill its original intent--that it should not apply 
to plans like ours.
    DB Plan Works for CSI, But Financial Challenges are Growing--
Congress should continually examine new and innovative policies to 
address the challenges of administering and participating in a defined-
benefit pension plan, particularly ``multiple-employer'' plans like 
CSI's, so they remain a viable vehicle in the future for small 
employers trying to do the right thing: provide meaningful retirement 
benefits to their faithful employees. The best way to achieve this goal 
today is for each of you to co-sponsor and approve the Harkin/Roberts 
CSEC Pension Bill as soon as possible.
                                 ______
                                 
    Chairman Harkin, Ranking Member Alexander, and all committee 
members, I am Dave Koetje, president and CEO of Christian Schools 
International (CSI). CSI was the first national organization to serve 
Christian schools. From eight charter members in 1920, we have grown 
into a 400-school membership organization serving high-quality 
Christian schools, with a primary emphasis on North American Christian 
schools.
    CSI's initial programs were designed to advance the professional 
status of teachers and principals. In 1943 we established what is now 
known as an ERISA defined benefit ``multiple-employer'' pension plan, 
for any of our schools that choose to participate. By the 1950s we were 
publishing textbooks and other instructional materials. Today all of 
our programs and services are designed to reinforce strength, stimulate 
creativity, and nurture institutional redesign in Christian schools 
across the country.
    With a history of steady growth, solid leadership, and exceptional 
service, CSI looks optimistically toward its future and the future of 
Christian schooling. Our twin goals of advancing and supporting 
Christian education mean that we are constantly listening to our 
members, discerning their needs, and striving to support the important 
work they do in their schools.
    I am honored to testify today regarding our voluntary retirement 
program and how this defined-benefit ``multiple-employer'' plan remains 
a critical tool for our members to recruit and retain employees who can 
often earn higher wages at other institutions, but value the long-term 
security provided by the CSI Plan. I am especially honored to tell you 
how the bill Chairman Harkin and Senator Roberts introduced today, the 
``Cooperative and Small Employer Charity Pension Flexibility Act of 
2013'' (CSEC) will enable our members to retain our plan by permanently 
recognizing the unique nature of our multiple-employer plan and its 
lack of risk to the Pension Benefit Guaranty Corporation (PBGC).
    The CSI Plan plays a vital role in ensuring that our teachers and 
administrators have a secure retirement that enables them to live with 
dignity in the communities they served. Today, I will discuss who we 
serve, what we do, and why maintaining our plan is part of our members' 
core business strategy to recruit, retain, and reward long-service 
employees with a secure financial retirement. But first I want to 
emphasize up front that this committee has the opportunity to help our 
employees by co-sponsoring and approving the Harkin/Roberts Pension 
Bill. I urge you to do so as soon as possible.
                              who we serve
    Rural, suburban, urban, and central city schools are all part of 
the CSI mix. Economic and cultural diversity characterize the student 
bodies of our schools. Our schools service students regardless of their 
cognitive package or developmental complexities.
                             our employees
    Excellence is imbedded in the learning cultures of our schools. In 
our schools teachers prepare students to connect learning to the 
messiness of life. Our teachers do this because it is their passion 
that our graduates enter this world equipped to straighten that which 
is crooked and to heal that which brings pain.
    It's Thomas Jahl, a Princeton graduate who teaches at Cono 
Christian School in Cono, IA, working in a school designed especially 
for students who come from hard places--children that suffer through 
trauma, neglect, or family disruption. Mr. Jahl is at this school 
because he knows the power a school has when the school is intentional 
about creating a community where healing can take place. He teaches at 
Cono Christian because this Christian school is a safe place where the 
heart of the child is given voice. A place where spiritual growth takes 
place. A place where learning and maturity flourish.
    It's Shaun La Rose, for example, an art teacher at Chattanooga 
Christian School in Chattanooga, TN, who had his high school art 
students create a mural in a section of Chattanooga that is hungry for 
revitalization because he believes quality art that is visible in 
decaying neighborhoods provides stimulation for neighborhood 
revitalization.
    Whether it's Iowa, Tennessee or any of the 22 States and U.S. 
Territories--including here in DC--where our schools are located, I 
could go on for hours with stories like these.
                      csi role in our communities
    Our role in communities around the country is not insignificant. 
CSI represents $800,000,000 in education costs paid for by the private 
sector. We represent 10,000 wage earners representing a combined 
$450,000,000 in income. Our high school graduation rates exceed 95 
percent--a statistic of significance when one recognizes the wide 
diversity of students that we serve. There is not a profession that is 
not dotted with our graduates--graduates who are motivated by a passion 
to fix and to heal. Graduates who have been shaped by Christian school 
teachers, the teachers we are talking about this morning.
                              the csi plan
    CSI is proud that many of its members offer comprehensive 
retirement benefits to their committed employees through a traditional 
defined-benefit plan, a ``multiple-employer'' retirement plan (under  
413(c) of the Internal Revenue Code) that is operated to maximize 
retirement savings for employees, retirees, and their families and 
provide each employee the financial means to enjoy a comfortable and 
secure retirement.\1\ It is not administered by a collective bargaining 
agreement--which differentiates us from union multi-employer plans, aka 
Taft/Hartley plans.
---------------------------------------------------------------------------
    \1\ This permits CSI members to pool experience and expenses while 
being controlled by a single Plan Document with limited optional plan 
features for each employer. 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 hundreds of 
different approaches.
---------------------------------------------------------------------------
    The CSI Plan (the ``plan'') provides comprehensive, guaranteed 
retirement benefits to over 11,000 employees and retirees throughout 
the United States. Our 300 U.S. member schools have as few as 5 
employees, with a median of 25 employees. Our multiple-employer 
defined-benefit pension plan provides our members 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 employers like private and parochial schools. In 
fact, that is why CSI created the plan in 1943; it was recognized that 
no one school could do independently what we could establish together.
                         how the csi plan works
    The plan is funded by contributions that can be made in two ways. 
One way is for the school to contribute a set percent of pay for each 
employee and that same amount is contributed by each employee. A second 
way is for the school to make the total contribution. The pension 
benefit is based on the contributions made for/by an employee. For 
contributions made before September 1, 2005, the employee receives 30 
cents annually for every dollar contributed. For contributions made on 
and after September 1, 2005, the employee receives 25 cents annually 
for every dollar contributed.
    This formula treats all employees at each school the same since the 
benefits are based on contributions and the same percent of pay is 
contributed for all employees of the school--from principal to 
teacher's assistant to janitor.
                  ppa rules don't fit our plan design
    The Pension Protection Act of 2006 (PPA) reflected 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 depend on 
a secure, financial retirement. We strongly support these principles, 
and believe these principles are equally reflected in the Harkin/
Roberts bill.
    However, PPA's single-employer plan rules are specifically designed 
to protect the PBGC in case a single employer maintaining a plan goes 
bankrupt. In the case of a multiple-employer defined benefit plan 
maintained by charities or rural cooperatives (``CSECs,'' as explained 
below), the plan can continue to be maintained despite the bankruptcy 
of one or more of the participating employers. Thus, the rationale for 
the PPA single-employer plan funding rules does not apply to CSECs, 
since by design these plans pose virtually no risk of default to PBGC.
    In PPA itself, Congress recognized its new pension funding rules 
were not appropriate for rural cooperative multiple-employer defined 
benefit plans, Accordingly Congress granted these plans a temporary 
exemption to stay under the pre-PPA rules (See PPA Sec. 104). Congress 
later extended this treatment to eligible charities like CSI (See Sec. 
202, Preservation of Access to Care for Medicare Beneficiaries and 
Pension Relief Act of 2010; Pub. L. No 111-192).
    There are, however, two serious problems. First, the exemption runs 
out in 2017, at which time CSECs would be subjected to single-employer 
plan rules not designed for CSECs. Second, as soon as next year, 
elements of the pre-PPA funding rules, which currently apply to CSECs, 
could become very problematic, because certain elements of those pre-
PPA funding rules were also designed to protect the PBGC with respect 
to single-employer plans.
    Application of the inappropriate single-employer plan funding rules 
is so onerous for CSECs, like CSI's plan, that they can greatly 
interfere with our ability to fulfill our charitable and non-profit 
missions. The single-employer plan funding rules would cause our 
participating member schools to have to divert assets from serving 
their missions in order to overfund our plan causing unacceptable and 
unmanageable financial strain. This simply makes no sense.
        harkin/roberts recognizes csi plan's unique plan design
    The Harkin/Roberts bill would solve the above challenges by 
allowing these Cooperative and Small Employer Charity (CSEC) 
``multiple-employer'' plans that are already temporarily excluded from 
PPA to choose between (1) staying excluded from PPA permanently (as CSI 
wants to do) or (2) jumping into PPA in 2014 if, due to unusual 
circumstances, that is helpful. In addition, the bill would modify the 
pre-PPA rules so that they fit the unique features of CSECs. In 
reality, the Harkin/Roberts bill ``tweaks'' PPA to fulfill its original 
intent--that it should not apply to CSEC plans.
    Harkin/Roberts also resolves the inequity of plans that, by design, 
pose virtually no risk of default to the PBGC, by making scheduled 
increases in PBGC premiums inapplicable to CSECs. Recent increases to 
PBGC premiums were applied without consideration of the unique 
structure and low-risk profile of CSEC plans and without a thorough 
examination of the impact such increases would have on CSEC 
participants and beneficiaries. Harkin/Roberts would freeze current 
premium rates at 2013 levels--preventing scheduled increases--while the 
PBGC conducts a study to determine what CSEC premium rates should be. 
PBGC would then make recommendations to Congress. If Congress chooses 
not to act, premium rates would remain at 2013 levels.
    According to publicly disclosed data compiled by PBGC, only 33 
multiple-employer plans (covering just over 127,000 active employees) 
are currently exempt from PPA. Harkin/Roberts is narrowly targeted to 
only impact these existing plans.
           economic downturn impact on the plan and employees
    In both good times and in bad times, CSI members have kept their 
promises to their employees and retirees, which has not always been 
easy. Congress specifically recognized the challenges faced by 
charities like CSI by granting a temporary exemption to stay under the 
pre-PPA rules in 2010. We believe providing employees with a secure 
retirement is critical to reward their commitment to providing our 
children with a bright future, and the best way to do that is to pass 
the Harkin/Roberts bill.
      db plans work for csi, but financial challenges are growing
    We are looking toward the future, working with our members to 
maintain our plan going forward. Cost uncertainty is anathema to any 
entity, let alone a charity that sponsors an increasingly complex and 
expensive defined-benefit plan.
    CSI members sometimes ask us: ``If everyone else is cutting their 
defined benefit plans, why aren't we?'' Thankfully for us that has not 
happened, largely due to the unique multiple-employer plan design that 
reduces complexity and maximizes group purchasing power that would 
otherwise be unavailable while allowing schools to tailor benefits to 
meet their needs. 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.
                               conclusion
    CSI 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. 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 CSI's, 
so they remain a viable vehicle in the future for organizations trying 
to do the right thing: provide meaningful retirement benefits to their 
faithful employees. The best way to achieve this goal today is for each 
of you to co-sponsor and approve the Harkin/Roberts Pension bill as 
soon as possible. I look forward to answering your questions.

    The Chairman. Thank you very much, Mr. Koetje.
    Now, we will turn to Mr. Kais.

   STATEMENT OF JIM KAIS, SENIOR VICE PRESIDENT AND NATIONAL 
   PRACTICE LEADER, SPECIAL MARKETS, TRANSAMERICA RETIREMENT 
                     SOLUTIONS, RINGOES, NJ

    Mr. Kais. Thank you, Chairman Harkin, Senator Alexander, 
members of the committee and staff.
    Transamerica Retirement Solutions provides services for 
over 21,000 employer retirement savings plans with over $102 
billion in plan assets. Specifically in the small employer 
market, Transamerica services over 18,500 plans with over 
800,000 participants and $24 billion in assets.
    Our company employs approximately 11,000 individuals in the 
United States. Approximately 3,800 of those work in the State 
of Iowa.
    I will focus this testimony on the particular challenges 
employers face in providing retirement plans to their 
employees. I will also discuss a new Transamerica plan or 
platform, a new approach that we believe can help very much to 
improve small business coverage.
    According to the U.S. Small Business Administration, small 
businesses employ over 49 percent of the U.S. workforce. 
Therefore, expanding retirement plan coverage amongst small 
businesses is critical to enhancing American's retirement 
security.
    Employers play a vital role in helping workers save for 
retirement, and Americans are far more likely to save for 
retirement by participating in a company-sponsored retirement 
plan versus contributing to an individual IRA or other savings 
vehicles.
    According to research from the Transamerica Center of 
Retirement Studies, approximately 77 percent of workers whose 
employers offered a 401(k) plan or similar arrangement 
participated in that plan. By comparison, the Investment 
Company Institute found only 16 percent of U.S. households 
contributed to an IRA in 2011.
    There are several principles that should be followed in 
developing proposals to increase coverage and enhance benefits.
    No. 1, we must acknowledge and preserve employers' central 
role in effectively helping their employees save for their own 
secure retirement. Employer-sponsored plans typically provide 
employees with investment education, the potential for employer 
match, fiduciary oversight, as well as the convenience of 
automatic payroll deduction.
    Employers and plan service providers working together have 
made huge strides forward by constantly seeking improved plans 
and enhanced savings. Innovation such as auto-enrollment and 
target-based funds were products of these efforts. Investment 
education targeted to a particular workforce has vastly 
improved understanding of retirement issues and investment 
principles.
    No. 2, in seeking solutions, we must take care to do no 
harm to the current system. The current employer plan system is 
a voluntary one which employers provide at a considerable cost 
and administrative burden, and with significant concern about 
fiduciary liability. Solutions should address these concerns 
and not add to them.
    Any requirements adding further complexity and costs 
without any significant benefit to the employer plan or 
participant are likely to further tip that balance in favor of 
an employer deciding not to offer a plan.
    No. 3, we need to focus reforms to improve the system and 
the retirement security outcomes of planned participants on the 
primary challenges that employers, especially small employers, 
face in offering retirement plans: cost, complexity, and 
concern about fiduciary liability.
    I will highlight two solutions to address employer concerns 
that can be facilitated through additional reforms. First, 
small employers connected by a common interest are currently 
able to address costs and complexity challenges by joining 
together in a multiple employer plan. A multiple employer plan 
provides the employer the same flexible features and benefits 
of a traditional 401(k) plan, but spreads the cost and 
administrative complexity of administering a plan among all 
participating employers through the pooling of assets in one 
investment trust and retention of one or more providers to 
service the entire Multiple Employer Plan.
    Reforms to protect employers from any fiduciary liability 
for the acts, or failure to act, of other employers 
participating in a Multiple Employer Plan, as well as proposals 
to reduce administrative complexity of Multiple Employer Plans 
should be encouraged.
    Second, employers can help employees manage their 
investment risk and their retirement savings to last their 
lifetime through offering annuities both as a plan investment 
option and as a distribution option. Reforms to require the 
statement of an employee's account balance in the form of an 
annuity will increase the employee's awareness of the savings 
needed to provide for a guaranteed monthly income.
    Similarly, reforms to limit employer's fiduciary liability 
for offering an annuity as a distribution option will 
facilitate the availability of products to help employees 
manage their savings and retirement to last their entire 
lifetime.
    No. 4, we must acknowledge that there is no one solution to 
the coverage problem and room for continued innovation in 
industry should be allowed. The workforce retirement plan 
system complements the other two legs of the retirement 
security stool: Social Security and private savings. But no one 
leg can be fully expected to ensure the retirement security of 
all Americans.
    The Retirement Plan Exchange is a new Transamerica private 
sector solution designed to help more small businesses offer 
workplace retirement plans to more employees, and to help 
employees save for retirement at higher rates. The Retirement 
Plan Exchange includes, within the current employer retirement 
plan system, many of the elements of Senator Harkin's USA 
Retirement Fund proposal including asset pooling, automatic 
enrollment, and escalation features, risk sharing, and enhanced 
coverage for more small businesses.
    The Retirement Plan Exchange is a collection of single 
employer plans that builds on the cost of administrative 
benefits of a Multiple Employer Plan by providing employers the 
ability to enter into a pooled investment arrangement resulting 
in cost savings through economies of scale as the asset pool 
increases.
    The pooled investment arrangement allows participant 
accounts for the various participating employers to be 
collectively invested in and through a Transamerica group 
annuity. These cost savings may be in the form of lower 
investment fees and expenses, as well as lower fees from the 
Exchange's service providers.
    Fiduciary and administrative services such as a selection 
of investment fund lineup for the plan are outsourced to 
independent firms, a benefit that is typically reserved for 
larger corporations or businesses.
    Like a Multiple Employer Plan, the Retirement Plan Exchange 
also allows a small business to save on administrative 
expenses. Most importantly, we believe as the Retirement 
Exchange will auto-enroll eligible workers at a 6 percent 
contribution rate with a 2 percent auto-increase each of the 
next 2 years.
    In conclusion, TRS would like to commend Chairman Harkin 
and Ranking Member Alexander, and other members of the 
committee on their consideration of the important issue of 
employer plan coverage. We appreciate the opportunity to 
present our views today on the particular challenges faced by 
small businesses in offering plans and our suggested approach 
to solutions.
    Thank you very much.
    [The prepared statement of Mr. Kais follows:]

                     Prepared Statement of Jim Kais

    Transamerica Retirement Solutions appreciates the opportunity to 
provide this written testimony in connection with the hearing of the 
U.S. Senate Committee on Health, Education, Labor, and Pensions (HELP) 
entitled ``Pooled Retirement Plans: Closing the Retirement Plans 
Coverage Gap for Small Business.'' This testimony will discuss the role 
of small business in helping employees to save for retirement, 
principles for solutions to coverage, and innovative private sector 
solutions.
    Transamerica Retirement Solutions Corporation (``TRS''), an 
affiliate of Transamerica Life Insurance Company and its affiliates, 
designs customized retirement plan solutions to meet the unique needs 
of small- to mid-sized businesses. TRS provides services for over 
21,000 plans that collectively represent over $102 billion in plan 
assets as of December 31, 2012. Specifically, in the small employer 
market, TRS services over 18,500 plans with over 800,000 participants 
and $24.5 billion in assets. Transamerica Life Insurance Company and 
its affiliates focus on life insurance, pension, annuity, supplemental 
health, savings, and investment products. Transamerica has 
approximately 11,000 employees in the United States; approximately 
3,800 of whom work in Iowa. The primary call center for employer plans 
that TRS administers is also located in Iowa.
    TRS services small- to large-size employer plans but finds the lack 
of coverage of employees in workplace retirement plans to be most 
prevalent in the small employer market. Therefore, this testimony will 
focus on coverage in the small business market.
    We have four main points, which we will discuss in our testimony:

    1. Employers have played a vital role in improving plans and 
enhancing benefits through innovations designed to help their 
employees. We need to preserve a central role for employers in the 
private retirement system.
    2. The private retirement system has made great strides forward, 
and is continuing to improve. We should be careful not to do any harm 
to the wonderful progress that has been made.
    3. We need to continue to improve the voluntary system by making it 
easier for employers to provide plans through reforms that address the 
primary reasons that employers, especially small employers, do not 
offer plans: cost, complexity and concern about fiduciary liability. In 
this regard, we encourage proposals to enhance coverage and benefits, 
such as proposals to expand the safe harbor for auto-enrollment, and 
proposals to limit the liability of participating employers in a 
multiple employer plan from the wrongful acts of another participating 
employer.
    4. Because there is not a single right way to enhance retirement 
security, we need to promote and encourage innovation. We at 
Transamerica can share an exciting story of a new approach that we 
believe can very much help to improve small business coverage.

    Small business facts and employers' role in helping workers save 
for retirement. According to the U.S. Small Business Administration, 
small businesses (less than 500 employees) represent 99.7 percent of 
the total firms and 49.2 percent of the workforce in the United 
States.\1\ Therefore, expanding retirement plan coverage among small 
businesses is critical to enhancing Americans' retirement security.
---------------------------------------------------------------------------
    \1\ U.S. Small Business Administration, Frequently Asked Questions, 
September 2012, http://www.sba.gov/sites/default/files/
FAQ_Sept_2012.pdf.
---------------------------------------------------------------------------
    Employers play a vital role in helping workers save for retirement. 
The workplace retirement savings system has succeeded in serving as the 
preferred method of saving for retirement for millions of workers. With 
the benefits of saving in an employer-sponsored plan (e.g., often 
investment education, the potential for employer contributions, and 
fiduciary oversight), combined with the employer match and the 
convenience of automatic payroll deduction, Americans are far more 
likely to save for retirement through participating in a company-
sponsored retirement plan versus contributing to an individual IRA or 
other alternate savings structures. According to research from the 
Transamerica Center for Retirement Studies (TCRS), a nonprofit private 
foundation, plan participation rates among workers who are offered a 
401(k) or similar plan remained strong and steady at 77 percent between 
2007 and 2012.\2\ By comparison, the Investment Company Institute found 
that only 16 percent of U.S. households contributed to an IRA in 
2011.\3\ The role of employers in providing retirement savings plans to 
their employees has long been supported by public policy and the work 
of this and prior Congresses in providing tax incentives both for 
employers to sponsor retirement plans for their employees and for 
employees to accumulate long-term savings through those plans.
---------------------------------------------------------------------------
    \2\ Transamerica Center for Retirement Studies, Emerging from the 
Economic Storm: Retirement Plans in the United States, 2007-12, 2013. 
The Transamerica Center for Retirement Studies (``TCRS'') is a 
nonprofit, private foundation. TCRS is funded by contributions from 
Transamerica Life Insurance Company and its affiliates and may receive 
funds from unaffiliated third parties. For more information about TCRS, 
please refer to www.transamericacenter.org.
    \3\ Investment Company Institute, The Role of IRAs in U.S. 
Households' Saving for Retirement, 2012.
---------------------------------------------------------------------------
    Despite the many difficult cost-cutting decisions faced by 
employers over the last 5 years, employer-sponsored defined 
contribution retirement plans have remained relatively intact. 
According to government data, between 2007 and 2010, the number of 
firms in the United States declined by 5.6 percent \4\ yet the number 
of private defined contribution plans declined only 0.7 percent.\5\ 
This strength in the defined contribution system can be further 
illustrated by the vast majority of employers (82 percent) who believe 
that these retirement benefits are important for attracting and 
retaining talent.\6\
---------------------------------------------------------------------------
    \4\ United States Census Bureau, Statistics of U.S. Businesses, 
2007, 2010.
    \5\ U.S. Department of Labor, EBSA, Private Pension Plan Bulletin 
Historical Tables and Graphs, 2012.
    \6\ Transamerica Center for Retirement Studies, Emerging from the 
Economic Storm: Retirement Plans in the United States, 2007-12.
---------------------------------------------------------------------------
    Principles for Developing Solutions to Coverage. While coverage of 
workers in employer plans is very broad, the industry remains as 
concerned as policymakers that more can be done and continues to seek 
solutions to drive up coverage of workers in retirement plans. There 
are several principles that should be followed in developing proposals 
to increase coverage and enhance benefits:

    1. Acknowledge the vital role of employers in retirement savings. 
We must acknowledge the vital role employers play in providing the 
structure and opportunity for workers to save for a secure retirement. 
Employers and their service providers, working together, have made huge 
strides forward by constantly seeking to improve plans and enhance 
savings. Innovations such as auto enrollment and auto escalation were 
products of these efforts. Although we have a long way to go, employers 
and their service providers have pioneered investment education 
approaches that have vastly improved understanding of retirement issues 
and investment principles. Target date funds are another product of 
this continual effort to find answers for retirement challenges. In 
addition, without employers, not only would there be far less 
innovation, but we would be reliant on individual savings, which on its 
own has proven to be far less effective in achieving retirement 
security.
    2. Do no harm. In seeking solutions, we must take care to ``do no 
harm'' to the current system. The current employer plan system is a 
voluntary one, and as noted above, is successful in providing workers 
with the ability to save for a secure retirement. Employers establish 
and maintain employer retirement savings plans at a considerable cost 
and administrative burden, and with significant concern over liability. 
Solutions should address these concerns and not add to them.
    Any new legislative or regulatory requirements adding further 
complexity and cost without any significant benefit to the employer 
plan or participant are likely to further tip that balance in favor of 
not offering a plan for many employers.
    Overly burdensome requirements that add to an employer's fiduciary 
liability and are contrary to market demands without any significant 
benefit to either the employer or plan participants would similarly be 
very counterproductive.
    New restrictions on benefits and contributions would also undermine 
the voluntary system by reducing the incentives for company 
decisionmakers to maintain a plan. Without the voluntary maintenance of 
a plan by companies, we are left with far less savings and more 
pressure on the government to enhance social programs to address the 
needs of seniors.
    Even some apparent simplifications can be very disruptive and 
harmful, and ironically can actually cause complexity. For example, 
proposals to consolidate 401(k), 403(b), and 457(b) plans would cause 
very significant complexities.
    Thousands of governments, churches, colleges, schools, and 
charities, and their millions of employees would be forced to adjust to 
new unfamiliar rules and uncertainties, and likely endure burdensome 
transition rules. The end result would be plans that are not suited to 
these unique employers and workforces.
    3. Address obstacles to employers providing retirement plans. 
Industry, employers and policymakers should continue to seek and find 
ways of enhancing the current system. Many excellent legislative and 
regulatory proposals have been introduced to address the primary 
challenges that employers, especially small employers, face in 
establishing plans: cost, complexity and concern about fiduciary 
liability. Such proposals would also serve to facilitate employee 
participation in the employer plans. I would like to express my 
appreciation to members of this committee for their leadership in 
developing many of these proposals, which include:

    a. Facilitating electronic delivery of plan notices to 
participants. The required use of paper raises costs, creates 
inefficiencies, and makes communication with participants far less 
effective.
    b. Permitting consolidation of plan notices. It is critical that 
participants understand their rights and their opportunities. The 
provision of numerous redundant, complex and lengthy notices is 
severely counterproductive and leads to fewer participants reading 
important disclosures.
    c. Preventing plan leakage. We need to enhance opportunities to 
keep plan assets in plans and IRAs, such as through improved rollover 
opportunities with respect to plan loans.
    d. Limiting plan sponsor liability issues. Potential liabilities 
remain a major obstacle to broader plan coverage among small employers.

    Proposals to expand the attractiveness of multiple employer plans 
(MEPs) as a cost-effective alternative to a stand-alone 401(k) plan for 
small employers, as well as proposals to increase participation of 
employees in employer plans and to reduce the employees' investment 
risk and risk of outliving his or her retirement savings deserve 
special mention.
    Multiple Employer Plans. Under a multiple employer plan, many small 
businesses can join together to achieve economies of scale and 
advantages with respect to plan administration, making plans both more 
affordable and effectively managed. Proposals that protect employers 
from any fiduciary liability for the acts or failure to act of other 
employers participating in the MEP, as well as proposals to reduce 
administrative complexity of MEPs should be encouraged. TCRS' research 
found that many small companies that do not offer a 401(k) plan would 
be likely to consider joining a MEP (36 percent).\7\
---------------------------------------------------------------------------
    \7\ Source: Transamerica Center for Retirement Studies, 13th Annual 
Retirement Survey, 2012.
---------------------------------------------------------------------------
    Annuities: Managing retirement savings to last a lifetime. 
Proposals that help increase plan participants' awareness of amounts 
needed to fund their retirement, as well as that help participants both 
manage their investment risk and ensure their retirement savings will 
last their lifetime should also be encouraged. These proposals include 
requiring benefit statements to provide a participant's account balance 
in the form of a lifetime income stream as well as a lump sum, and 
facilitating the offering of in-plan annuities and annuities as a 
distribution option. Investment in an in-plan annuity will enable an 
employee to shift the investment risk and risk of outliving his or her 
retirement savings to the annuity provider.
    Auto-enrollment: higher levels of default contribution rate. 
Proposals to increase auto enrollment will address employee inertia and 
help employees increase their retirement savings. In particular, we 
support proposals that increase the level of default contribution rates 
in the existing safe harbors. The current minimum default contribution 
rates in the safe harbor, ranging from 3 percent to 6 percent, send a 
powerful message that savings at those levels are sufficient to ensure 
a secure retirement. However, we know that this is not the case and we 
should work together on a more robust safe harbor with minimum default 
contribution rates as high as 10 percent without maximum limits on 
default contribution rates.
    4. Acknowledge that there is no silver bullet to the coverage 
problem; allow room for continued innovation in the industry. We must 
acknowledge that there is no one solution to the coverage problem. The 
workforce retirement plans system complements the other two legs of the 
retirement security stool--Social Security and private savings, and no 
one leg can be expected to fully ensure the retirement security of all 
Americans. The employer plan system continues to be adopted by more 
employers and cover more workers. It should be given room to further 
innovate to adapt to changes in the current workforce and the needs of 
the employees.
    The Retirement Exchange. For example, Transamerica Retirement 
Solutions recently introduced The Retirement Exchange SM 
(the ``Retirement Exchange'') a new private sector solution designed to 
help more small businesses offer workplace retirement plans to more 
employees, and to help employees save for retirement at higher rates. 
The Retirement Plan Exchange includes, within the current employer 
retirement plan system, many of the elements of Senator Harkin's USA 
Retirement Fund Proposal, including: (a) asset pooling, (b) automatic 
enrollment and escalation features, (c) risk sharing and (d) coverage.
    The Retirement Plan Exchange is not a multiple employer plan but a 
collection of single employer plans that builds on the cost and 
administration benefits of a MEP by providing employers the ability to 
enter into a pooled retirement arrangement, resulting in cost 
advantages and fee reductions as the asset pool increases. Fiduciary 
and administrator services, such as selection of the investment fund 
lineup for the plan, are outsourced to independent firms--a benefit 
that is typically available only for large retirement plans. Like a 
MEP, the Retirement Plan Exchange also allows a small business to save 
on audit fees, document preparation and filing fees. To help plan 
participants better prepare for retirement, the Retirement Plan 
Exchange will auto-enroll eligible workers at a 6-percent contribution 
rate with a 2-percent auto increase in each of the next 2 years.
    Transamerica is able to provide The Retirement Exchange within the 
current 401(k) rules, and the Retirement Exchange will benefit from any 
legislative or regulatory reforms, such as those discussed in this 
testimony, that will enhance the efficiency of the current employer-
provided retirement plan system. Ultimately, this will facilitate the 
ability of employees to increase their retirement savings and manage 
those savings to last their lifetime.
                               conclusion
    TRS commends Chairman Harkin, Ranking Member Alexander and other 
members of the committee on their consideration of the important issue 
of employer plan coverage. We appreciate the opportunity to present our 
views on the particular challenges faced by small businesses in 
offering plans and our suggested approach to solutions.

    The Chairman. Thank you very much, Mr. Kais. Thank you all 
for your excellent testimonies. We will now start a round of 5 
minute questions.
    Dr. Jeszeck, I will start with you. GAO did an extensive 
study for this committee on Multiple Employer Plans, and in 
particular, efforts to expand the use of those plans to include 
employers that are not related. I know you heard some concerns 
from the regulators and others about that approach.
    Can you explain to us what those concerns were, so that we 
need to know what to do to address them?
    Mr. Jeszeck. Yes, Senator. In our discussions with DOL, I 
think the first thing to keep in mind is that in our work, we 
were able to identify four different types of Multiple Employer 
Plans.
    The Labor Department really does not have any problem with 
three of those types. That includes the corporate MEP's where 
they are related by--they are either subsidiaries of a main 
company or part--just outside of the controlled group. 
Association MEP's like the Christian Schools International 
here.
    And then the so-called Professional Employer Organization, 
that is PEO's, where these are essentially companies that come 
in and serve--to engage in these co-employer relationships 
where they come in and not only do--where they may provide a 
pension plan, but they will provide a health plan. They will 
take over your workers' compensation program, unemployment 
insurance, essentially take over a lot of the administrative 
functions. So for those three groups, the Labor Department 
pretty much does not have any concerns.
    The main concern was with the fourth group, which is 
something that has become more popular in recent years, the so-
called open MEP's. And from the Labor Department's concern, 
they told us there are two major concerns here.
    One is just at a legal level, I am in a little deepwater 
here since I am an economist, not an attorney, but the question 
is the definition of ERISA for an employer plan--is an open MEP 
an employer for purposes of providing a plan. Is there 
sufficient connection between the employers in a MEP besides 
them just being part of in the MEP? So there is a legal concern 
there that under ERISA they do not consider an open MEP to be a 
single plan but, in fact, a collection of individual plans. And 
that means that for the individual employers, they have to file 
their own 5500's. They have to do a number of things which sort 
of negate the benefits of being in the full MEP.
    The more substantive concern is in terms of enforcement and 
protecting the benefits of workers. The Labor Department has 
had a long history of regulating Multiple Employer Welfare 
Plans, which are essentially in the health area. There have 
been a lot of abuses there.
    They also, given our past work on fees, we know that a lot 
of small employers are very afraid of fiduciary liability. To 
the extent that some of these--the market expanse and you have 
some bad apples coming in and going to small employers and 
saying, ``We will take over all of your fiduciary liability,'' 
where labor says that that could not happen. An employer could 
think that they are doing the right thing and they could be, 
basically, vulnerable to fraud and loss of money and so on. So 
there is that.
    I think there is just a lot of misinformation out there. 
Employers, we found very often, are just not knowledgeable 
enough about even running a plan, of any kind of plan, and they 
would be very vulnerable to marketing techniques that may not 
be particularly legal.
    So those are the two major concerns that the Labor 
Department has.
    The Chairman. Thank you very much, Dr. Jeszeck.
    Mr. Koetje, I have always thought that one of the key 
advantages of a pension like yours is that small employers do 
not have to do everything themselves. They can participate. 
Offer a quality benefit to their employees. They can have 
someone else's professionals actually manage the plan.
    Can you give us some idea of how your plan is managed? How 
did you do that?
    Mr. Koetje. Sure, sure. I also apologize for finally 
reading this clock here. I thought the time remaining, the 
number was going up on me, so I thought I had even more time 
than my colleagues here, so. I have this thing figured out now.
    As the plan sponsor, Christian Schools International board 
appoints a fiduciary board to oversee our pension plan. That 
fiduciary board then appoints financial managers and 
consultants to oversee the workings of that plan. We have a 
small office in Grand Rapids, MI that does the nuts and bolts 
administering of that plan.
    So, what we can do with a small office of, say, 15 
individuals in our office, no one of our schools would be able 
to do on its own.
    The Chairman. By the way, I was reading your testimony last 
night. I think I know my State pretty well.
    Mr. Koetje. Yes.
    The Chairman. I saw this town Cono, IA.
    Mr. Koetje. Yes.
    The Chairman. And I said, ``Boy, that must be a really 
small town because I do not think I have been there.'' So I 
seriously, started thinking, ``Where is Cono, IA?'' And I 
looked it up on my map, and I could not find it. So I got 
bedeviled by this. I thought, ``Maybe he means Colo, IA.'' So I 
checked with Colo. No, there are no Christian Schools 
International in Colo, IA.
    Mr. Koetje. No.
    The Chairman. Well, what I found out is it is Cono Township 
in rural Buchannan County.
    Mr. Koetje. There you go.
    The Chairman. And I have got to tell you, the address of 
your school is Walker, IA.
    Mr. Koetje. Oh, I stand corrected.
    [Laughter.]
    The Chairman. It caused me to do a lot of looking last 
night. I did not know where this was.
    Mr. Koetje. I am impressed with the level of your research.
    The Chairman. Anyway, thank you very much.
    Mr. Koetje. Thank you.
    The Chairman. Senator Alexander.
    Senator Alexander. Thanks, Mr. Chairman. There are lots of 
little towns in Iowa, and I have been to most of them.
    [Laughter.]
    The Chairman. So have I. More than once.
    Senator Alexander. Yes, more than once.
    [Laughter.]
    With varying results, but I enjoyed it.
    Mr. Kais, you mentioned Transamerica's new retirement 
exchange, and that follows up to some comments that were made 
earlier. The Retirement Exchange has outsourced the fiduciary 
liability to an independent firm.
    How are you able to insulate small businesses from 
fiduciary liability? And what about this suggestion that some 
small businesses get buffaloed by that, and are getting 
services that do not really do everything that they think those 
services might be doing?
    Mr. Kais. It is a great question and my response to that is 
usually you can delegate, but you cannot abdicate.
    And what I mean by that is that there are agreements in 
place where the small business owner can delegate certain 
authorities under the fiduciary regulations and fiduciary laws 
to independent third parties. However, our belief is that there 
is still a duty for that small business to monitor those 
particular service providers.
    Senator Alexander. Now, give me an example of those. What 
can be delegated and what has to be monitored? What are we 
talking about?
    Mr. Kais. Sure. You could have a registered investment 
advisor or an investment manager, somebody that acts in 
concert, or on behalf, of the small business owner to select--
--
    Senator Alexander. So turn the money over to that person, 
yes.
    Mr. Kais. Effectively select or replace funds based on 
preset criteria. So the employer there is delegating the vast 
majority of the responsibility to perform those tasks.
    For instance, maintaining an investment policy statement, 
that is the roadmap for how they are going to review and select 
their funds, keeping meeting minutes. A lot of that work is 
outsourced to this third party.
    Senator Alexander. But say the economy tanks and the fund 
goes south, and an employee is aggrieved. Who do they complain 
to? Do they complain to their employer who delegated the 
responsibility, or do they complain to you, the person to whom 
they delegated it?
    Mr. Kais. They could complain to a multitude of parties, 
but I think----
    Senator Alexander. Well, what is the use of delegating it 
if you are going to get sued anyway?
    Mr. Kais. Because the process, effectively the process 
trumps the performance. If you have a logical way to get to the 
selection of the investment lineup through normal, proven 
techniques, the process will always trump.
    Senator Alexander. So the employer will be able to say, ``I 
took normal, prudent steps to pick a qualified investment 
advisor,'' and that will limit the employer's liability from a 
lawsuit, from a disappointed employee?
    Mr. Kais. Again, like my colleague here, I am not a lawyer 
either, but yes. I effectively believe that is the case where 
process will trump performance. Most defined contribution plans 
are also participant-directed.
    Senator Alexander. Yes, but if you are going to sell me on 
this and I am an employer--that I am going to delegate to you--
you've got to do better than that. You have got to tell me why 
it is to my advantage to do that.
    Mr. Kais. To delegate? Because logically or in most cases, 
in the small business community, the registered investment 
advisor or the third party is better able and better equipped 
to come to more prudent decisions as opposed to the small 
business owner. They have the requisite knowledge to be able to 
get them to the best place possible, rather than going it 
alone.
    The business owner knows how to run their business, they 
know how to run their P&L and make revenue----
    Senator Alexander. But I am still liable, am I not, as the 
employer if you mess up? Is that right?
    Mr. Kais. Not entirely. So that is one of the----
    Senator Alexander. You cannot tell me that you will limit 
or reduce my liability if I delegate to you?
    Mr. Kais. We can never say we can eliminate your total 
liability. However, the vast majority of the work that goes 
into coming to the conclusion is outsourced and delegated, and 
that responsibility lies with the third party. And they are 
bonded and the plan is protected.
    Senator Alexander. Dr. Jeszeck, would you have any further 
comment on that?
    Mr. Jeszeck. Yes, my understanding would be similar to Mr. 
Kais'. There still would be some liability for the employer. 
The employer is still the person who was choosing the firm to 
outsource, and so, they would, to the extent that they picked a 
reputable firm, they would likely be liable.
    If they did it in 2007, picked a reputable firm and did 
everything by the book, sort of what's considered to be 
prudent, and people lost money during the financial crisis, 
they likely would not be liable.
    Senator Alexander. Yes.
    Mr. Jeszeck. On the other hand, if they went out and got 
Joe's MEP and simply put all the money in racehorses or 
something, the fact that they did not have any procedure and 
just picked a disreputable firm----
    Senator Alexander. But based on your looking at all of 
this, is it your judgment that a small business who is prudent 
and careful about picking an investment advisor can limit its 
liability to the question of whether it was prudent and 
competent about picking a good advisor and not to the question 
of whether it picked this stock or that stock?
    Mr. Jeszeck. I think in any instance, it would always be 
the facts and circumstances of the case, but I would think that 
in general, if a small employer went out and did the right 
thing. Went out and had a very structured, methodical way, was 
prudent in every stage that they would likely not face--they 
would not have a lot of liability.
    Senator Alexander. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Alexander. I just, I have 
to add before I recognize Senator Franken and then Senator 
Enzi, that one of the things we are trying to do in our bill 
that we have been working on is to specifically insulate the 
employer from that liability. To make it very absolutely clear 
that they have no fiduciary responsibility, so it clears up 
this kind of murky little thing that is out there.
    Senator Franken.

                      Statement of Senator Franken

    Senator Franken. Thank you, Mr. Chairman.
    I want to thank all of you for your testimony today. Mr. 
Koetje, thank you for sharing the importance of Multiple 
Employer Plans for the employees in your organization. This is 
a great example of how small employers can work together and 
improve benefits for employees. We have a similar story in 
Minnesota where many workers at our rural electric co-ops save 
for retirement through Multiple Employer Plans.
    Can you talk about the differences between single employer 
and multiple employer plans in terms of cost and risk?
    Mr. Koetje. If the question is the difference between a 
single employer plan and a Multiple Employer Plan, and could 
I--I am trying to hide behind--I am not an economist. I am not 
a lawyer. I am the president of an organization that happens to 
have a Multiple Employer Plan and knowing the benefits of that.
    For me, the difference would lie in if we were a single 
employer plan and Christian Schools International were to go 
under financial stress, the entire plan would go down with 
Christian Schools International's financial stress.
    Because we are a Multiple Employer Plan, we could have 15 
of our schools close, and it would not have a negative adverse 
effect on the plan. We could have 30 of our schools close, and 
it would not have a negative adverse effect on our plan.
    Senator Franken. How many schools do you have, again?
    Mr. Koetje. We have 300 U.S. schools.
    Senator Franken. OK.
    Mr. Koetje. Of those 300, 159 schools are part of the plan.
    Senator Franken. If some of the schools go under, employees 
at these schools are protected.
    Mr. Koetje. The employee at that school is protected. That 
is correct.
    Senator Franken. And your Multiple Employer Plan is covered 
under the exemption.
    Mr. Koetje. That is correct.
    Senator Franken. That applies to certain groups, right?
    Mr. Koetje. Like the electrical co-op, that is correct.
    Senator Franken. What will happen if that expires?
    Mr. Koetje. If that expires and we do not get a legislative 
relief, there are two factors that put our plan into 
difficulty.
    One is the way our schools plan their budgets, our schools 
like predictability. We like the fact that we can use historic 
averages for a rate of return. Our schools do not function well 
with spikes to get a surprise from us. So they like to know 
that they can predict right now what their pension liability is 
going to be in 2 years or in 3 years.
    If that goes away, if we lose our exemption, we lose two 
important factors. One, we lose a credit balance that we build 
up over the years. If we received any criticism from our plan 
participants, it was the level of conservatism that we had. We 
had been funded anywhere from 147 percent of liabilities down 
to our current status of about 105 percent.
    We fulfill our promise to our employees. You can imagine a 
retiree, though, noticing that we are funded at 130 percent 
wanting to know why we are not increasing the benefit to them.
    We build up a credit balance. We are not able to use that 
credit balance after 2017 if we do not get a legislative 
relief. And most importantly, it is the elimination of a 
predictable interest rate that would be the most detrimental to 
our plan.
    Senator Franken. And did you say you have 15 employees?
    Mr. Koetje. We have 15 employees in our employee benefit 
plan, and of those 15----
    Senator Franken. Who administer it.
    Mr. Koetje. Who administer it. That is correct.
    Senator Franken. OK.
    Mr. Koetje. Yes.
    Senator Franken. And what is your personal role?
    Mr. Koetje. My personal role is as president and CEO of 
Christian Schools International, we have a vice president of 
Employee Benefits who is with me here today. That vice 
president of Employee Benefits is directly responsible for 
administering the plan.
    Senator Franken. This can go to anyone, maybe Dr. Jeszeck.
    For many workers, Social Security is their main, sometimes 
the only, source of retirement savings. This fact underscores 
the importance of maintaining a strong Social Security system. 
But Social Security payments alone will not sustain a worker's 
standard of living in their retirement.
    In your testimony, you said that small employers paying 
average wages under $10,000 had a plan sponsorship rate of only 
3 percent.
    What can we do to improve retirement security specifically 
for those low-wage workers?
    Mr. Jeszeck. Well, there are a lot of options out there 
that the people are talking about that are on the table. There 
is, in the past in the Portman-Cardin bill, there was the 
saver's credit that was targeted to low-income workers.
    One limitation that some experts have mentioned is that it 
is not refundable, and so there are a lot of lower earning 
workers who really cannot take advantage of the saver's credit. 
And basically, the way the saver's credit would work is that if 
you contribute a certain amount to a 401(k) plan, you would get 
money back on your taxes. If it was refundable, even if you 
paid no taxes, you would get a check equal to $500 to $1,000 
depending on how much you contributed. So that is something 
that some people have suggested in the past.
    Of course, the issue with that is it would cost money, and 
that is something that--a priority that is something that would 
have to be balanced against other needs. But that is certainly 
one option.
    There are a lot of other things that have been suggested, 
auto-IRA's. Senator Harkin has a comprehensive proposal which 
we have not analyzed, but that is also something that is on the 
table.
    So there are a lot of different ideas out there. It is just 
something that we have to look at and balance the tradeoffs.
    Senator Franken. Thank you. Thank you, Mr. Chairman, for 
this hearing.
    The Chairman. Thank you.
    Senator Enzi.

                       Statement of Senator Enzi

    Senator Enzi. Thank you, Mr. Chairman. And I want to thank 
you for working so diligently on your goal to get retirement 
security for more workers. I do note that there is some 
confusion over Multiple Employer Plans. The wording itself, and 
that confuses ``big'' with ``small,'' and so I am hoping that 
we can separate that out as we go along.
    Mr. Koetje, you mentioned that these plans that have 
already been temporarily excluded from the PPA should have the 
choice to choose between one staying excluded from the PPA 
permanently, or two, jumping into the PPA.
    What are some of the ways that some of these rural 
cooperatives and small charities would benefit from jumping 
into the PPA, and who should be responsible for making that 
decision?
    Mr. Koetje. I am not aware. I am aware only of the benefits 
to us to remove ourselves from PPA regulations. I am not aware 
of the specifics of an organization that would need to do that. 
So I wish I could give you some more specificity as to the 
reason behind that. I have some colleagues with me who could 
probably answer that question, if you would prefer.
    Senator Enzi. I will submit questions in writing for all 
three of you because I am not going to have time to ask all 
that I would like to. So I appreciate that.
    Dr. Jeszeck, you mentioned in your testimony that in order 
to ensure that the Department of Labor has information needed 
to oversee these MEP's, the Department of Labor should gather 
additional information about the employers participating.
    Can you talk more about this, and describe the information 
you believe would be most useful in obtaining, and why?
    Mr. Jeszeck. Yes, Senator. Back in 2004, the Department of 
Labor on a Form 5500, collected some limited information on 
MEP's, and this was primarily for the IRS for use in 
discrimination testing.
    When the Department of Labor moved Form 5500 to EFAST2, 
which was an electronic system, they no longer collected that 
information because there is a statutory prohibition for the 
IRS to collect information electronically. So that was sort of 
thrown out.
    Collecting information on the individual employers would 
allow a lot of things. One, we could check to see whether there 
are any problems in terms of the employer being in a particular 
plan, whether there was any fiduciary irresponsibility or some 
other enforcement problems there. People's deposits not being 
made and so on.
    Another issue that the employer--we could look to see 
whether, in fact, the multiple employer model was actually 
creating additional coverage because we would know whether 
there are new plans or whether they are simply chasing old 
plans, and forcing them into an MEP.
    But by and large, the main information would be on the 
number of employers so that they could make sure to provide 
targeting information to them to make sure while they still--
they would be giving up most of their fiduciary liability, they 
still would have some awareness of the fees that were being 
charged to their participants, to the investment options that 
were being offered, that they could be better stewards.
    So both for an enforcement and also to make the pension 
system work better, we think that labor--that getting 
information not only whether a plan is a MEP or not, but 
whether they are the participating employers would be very 
helpful.
    Senator Enzi. Most of what you are describing is 
information that should be given to the employer for----
    Mr. Jeszeck. That would be one thing that could come out of 
this.
    Right now, the Department of Labor really does not even 
know who a MEP is or not. And certainly, these new forms of 
MEP's, open MEP's, they have no idea at all. Basically, they 
have to go on the Internet and look for them, essentially. Sad 
as that might be.
    At the very least, if we think that this is a type of 
coverage that has merit, it is something that information 
should be collected upon so not only to help those employers, 
but also maybe to even foster greater expansion in this area.
    Senator Enzi. OK. Thank you.
    Quickly, Mr. Kais, could you give us some more details on 
the asset pooling and risk-sharing features of a retirement 
exchange?
    Mr. Kais. Sure. The retirement exchange was meant to build 
off the efficiencies in the Multiple Employer Plan arena. It is 
kind of an interesting segue from the last question.
    In the retirement exchange, each employer has a 5500 filed 
on their own behalf. What is also interesting is that one rogue 
employer or one bad actor will not taint the assets of the 
entire pool or the plan of a fellow employer that adopts into 
the exchange. We thought that was critical in terms of 
addressing those two particular issues.
    The asset pooling and the centralized administration allows 
for fixed costs to reduce especially over time. As the pool 
grows, the efficiencies increase, and those savings can be 
passed down to each of the employers that adopt into the 
exchange.
    Senator Enzi. So your company does that Form 5500 filing 
for each of the companies, then?
    Mr. Kais. On a go-forward basis, that is correct. This is 
in direct response to the open multiple employer plan advisory 
back from last May that Dr. Charles mentioned.
    Senator Enzi. And that the top-heavy measurement applies to 
that too, then?
    Mr. Kais. Testing is done for each employer and they do 
maintain their own plan, top-heavy and all. Compliance testing 
is done employer by employer similar to a Multiple Employer 
Plan.
    Senator Enzi. Senator Harkin, I will see if we can simplify 
that a little bit. Thank you.
    The Chairman. Senator Murphy.

                      Statement of Senator Murphy

    Senator Murphy. Thank you, Senator Harkin. Thank you very 
much for this hearing. And your focus as well, Senator 
Alexander and Senator Enzi, on this issue.
    I wanted to talk for just a few minutes about the issue of 
employee demand. That is something that you raised, Dr. 
Jeszeck, in your report. Senator Isakson and I have a piece of 
legislation called the Lifetime Income Disclosure Act, and that 
would require that benefit statements for retirement plans 
include the annual annuity of the employee's benefits. Such 
that the participant could actually see what they are 
eventually going to get as a means, perhaps, of increasing 
demand for a contribution. Of course, that presupposes that 
there is a plan in place to begin with.
    But Dr. Jeszeck, you talk about this issue of employee 
demand as a contributing factor to why a lot of small employers 
do not have plans in the first place, and why they may be even 
hesitant to enter into pooled retirement plans.
    Can you just talk a little bit about how big a factor you 
feel that employee demand is? How big a barrier as compared to 
some of the others that you talk about in your report to small 
employers adopting retirement plans?
    Mr. Jeszeck. Yes, Senator. I think there are two aspects to 
this.
    One is that a lot of small employer plans, you often have 
younger workers who really do not focus a lot on the future. 
They may value other benefits, more importantly healthcare or 
more days off, higher wages than a pension plan.
    But I think the larger aspect about the demand here is 
really low wages. Is that a lot of people simply, a lot of 
workers particularly, I think low-wage workers in companies of 
any size, have to make decisions between saving for retirement, 
paying the rent, saving for school. They have a lot of 
competing demands on their income. So, I think those are sort 
of two big issues.
    I think the issue about getting your benefit expressed in 
an annuity would be particularly helpful, actually, for workers 
as they approach retirement because in this instance workers--
we talked today a lot that the focus has been on accumulation. 
How you get into a plan, how do you save? How do you have money 
for retirement?
    But an equally big problem, particularly now with the Baby 
Boomers, is as you go into retirement, what do you do with your 
lump sums? What do you do with your account balances? I think a 
lot of times people think that they have more money in their 
account than what it really is. It is like $59,000 to some 
people, that is a lot of money, but if you had to annuitize 
that, particularly at today's interest rates, that would be, 
what, a couple hundred dollars a month?
    So I think telling workers what their balance, the 
equivalent of in terms of an annuity would be particularly 
helpful. Again, also, in regards to Social Security, they could 
see how much in addition they would have from their pension.
    Senator Murphy. Sometimes bad news is very useful----
    Mr. Jeszeck. Right.
    Senator Murphy [continuing]. In the long run.
    Mr. Kais, just in terms of your interaction with employers, 
to put that same initial question to you. One of the things 
mentioned in the GAO report is that maybe there is a little bit 
of exaggeration as to how much employee demand contributes to 
the willingness of an employer to step up and offer a plan.
    What do you find as the degree to which employee demand, or 
employee wages, is a contributing factor?
    Mr. Kais. I think inertia can actually work in our favor 
vis-a-vis auto-enroll and auto-escalate. We see the opt-out 
rates are extremely low.
    We also started publishing the expected amounts in the form 
of an annuity payment on the statements already. And that could 
be sobering, as you mentioned earlier.
    Help me with the second part of the question, again.
    Senator Murphy. I think you are answering it. The question 
was really about when you have reluctant employers, how much 
are they putting on the backs of employees who do not want the 
plan versus the other reasons that they might have.
    Mr. Kais. That is almost never an issue, Senator.
    Mr. Murphy. Yes.
    Mr. Kais. It is always about complexity, cost, and when 
they start to look at the alphabet soup of what they have to do 
to comply with the current law and the disclosure they need to 
make, they freeze up and are risk-averse. They see the cost. 
They are generally pumping a lot of their money back into their 
business to grow it. So I think it is more employer-related 
issues than employee demand.
    Senator Murphy. And you said you do provide an annuity 
equivalent on your statements?
    Mr. Kais. That is correct, sir.
    Senator Murphy. All right, thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Murphy.
    I just have a couple of other things. I wanted to ask Mr. 
Kais about the proposal that we have been working on, USA 
Retirement Funds, which I hope you have taken a look at. We are 
asking for people to look at it and give us input.
    One of the things is to focus on this idea of lifetime 
income: annuitization. Can you just talk a little bit about 
that? I know you mentioned once in your statement here about 
plan leakage. Senator Enzi has been focused a lot on that, but 
what is happening is that there is just a lot of leakage so 
they are not getting a lifetime income.
    Again, if we are going to have savings plans, which quite 
frankly, I think basically 401(k)'s really are a savings plan. 
OK, fine. But that somehow making it better or making sure that 
people can convert them into a lifetime stream more easily or 
with some benefits.
    I am just asking if you can elaborate a little bit on that. 
How we get people to focus more on converting those to a 
lifetime stream rather than a lump sum or borrowing against it, 
that type of thing.
    Mr. Kais. We have read your USA Retirement Fund Act on more 
than one occasion. A lot of that was--part of that was the 
inspiration for our Retirement Plan Exchange as well, at least 
we thought there were fantastic ideas there.
    As far as annuitization is concerned, people are living 
longer. They stand to outlive their retirement more now than 
ever. So we are proponents and we believe pretty strongly that 
annuities need to be a part of that part of your lifecycle at 
retirement.
    That really starts with education. However, there is a lot 
of confusion on what is the right annuity? Do I get a fixed 
annuity? Do we have an annuity with a guarantee? Is it 
appropriate to annuitize the entire amount? Or do I want to 
keep part of it in a lump sum to manage?
    So there is probably not one perfect silver bullet or 
perfect answer for an employee, but we believe that 
annuitization is extremely important, at least in part. And 
that starts with education and helping people understand what 
it means at retirement.
    The Chairman. I think part of that education is what 
Senator Murphy just said, and that is making sure people know 
what their savings would convert to as they go along through 
their lifetime.
    Mr. Kais. Precisely.
    The Chairman. And giving them more of an idea of what that 
would mean to them as a monthly income as they go along.
    Mr. Jeszeck. Excuse me, Senator. I wanted to say one thing.
    The Chairman. OK.
    Mr. Jeszeck. We are currently conducting some work for 
Congressman Miller where we have been looking at other 
countries' approaches to annuitization and the different 
strategies available to employees when they retire in terms of 
making sure that their income lasts for the duration of their 
lives. And it should be available in a few months. We looked at 
a number of other different nations that have largely defined, 
very robust, defined contribution systems, and looked at what 
their policies are. How did they help their participants ensure 
that they had money throughout their lifetimes?
    The Chairman. I would like to see that. You think in, what, 
a couple, 3 months?
    Mr. Jeszeck. It should be out in September, I think.
    The Chairman. That would be good to know. You know a lot 
about that. You have told me about some of these other 
countries that have done this.
    I do not have any more questions. Do you have more 
questions?
    Senator Alexander. No.
    The Chairman. Senator Enzi.
    Senator Enzi. I have something else, but they are fairly 
technical.
    The Chairman. OK. He knows a lot of the technical stuff 
here. Do any of you have anything else you would like to offer 
for our benefit here at all? Nothing else?
    Mr. Koetje.
    Mr. Koetje. Yes, I just want to summarize how incredibly 
important Christian Schools International's defined benefit 
pension plan is to its participants. And how just unworkable 
PPA is for us and how committed we are to continuing some way 
to provide a defined benefit plan for our constituents.
    So, any tweaking of PPA that could move us toward pre-PPA 
regulations would be incredibly welcomed and incredibly helpful 
for us. Thank you.
    The Chairman. I appreciate that and I cannot speak for 
everybody on the committee, but I think you will find a general 
consensus here that we do want to address that issue.
    Mr. Koetje. Thank you.
    The Chairman. Maybe in a broader bill.
    Mr. Koetje. Sure.
    The Chairman. Which we tried to do with this USA Retirement 
Fund, but nonetheless, I think you will find a consensus here 
that we want to do that.
    Mr. Koetje. Thanks.
    The Chairman. Yes, Mr. Kais.
    Mr. Kais. In closing, we are obviously big proponents of 
asset pooling and making it easier for small businesses to 
offer a retirement plan. Anything that could be done to limit 
administrative burden through reporting requirements or 
disclosures being consolidated, reducing fiduciary risk is very 
much appreciated.
    We have a body of work to operate off of now. Internally, 
we are covering nearly 10,000 small businesses through these 
pooled arrangements, and we think the sky is the limit just 
based on our limited body of work.
    The Chairman. I tell you one thing, just getting rid of all 
that paperwork.
    Mr. Kais. Absolutely.
    The Chairman. That has to come out. Obviously, we are 
investors, my wife and I. We get all of this paperwork on 
retirement systems. I think I am fairly smart. My political 
opponents may not think so, but nonetheless, I cannot even 
understand that stuff. And so you get it, and you open it, and 
you just throw it away.
    I have to think, how much money is that costing them, and 
in turn costing me and everybody else? Put it out 
electronically. It seems to me that would be the best solution, 
just put it out electronically.
    With that, thank you all very much. I think there was very 
good input provided to this committee, and we are going to keep 
moving ahead as aggressively as we can to address the 
retirement issue in this country.
    Thank you all very, very much. And it is Cono Township, 
Buchanan County. All right. Thanks.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

                           Letter of Support

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



                                             July 16, 2013.

   Co-Sponsor the ``Harkin/Roberts'' Cooperative and Small Employer 
           Charity Pension Flexibility Act of 2013 (S. 1302)

    Defined-benefit ``multiple-employer'' pension plans established by 
not-for-profit cooperatives and charities should not be subject to 
rules designed for other types of plans.

    As not-for-profit cooperatives and charities, we urge Congress to 
promptly pass the bipartisan ``Cooperative and Small Employer Charity 
Pension Flexibility Act of 2013'' (S. 1302), introduced today by 
Senators Tom Harkin (D-IA), Pat Roberts (R-KS), Patty Murray (D-WA), 
Lisa Murkowski (R-AK) and Al Franken (D-MN). The core mission of these 
organizations is to provide food, electricity, communications, and 
other necessities of life, educate and empower children, and for the 
sustainable development of the communities in which their millions of 
members, volunteers and beneficiaries live. However, current pension 
funding laws designed for other types of plans require them to divert 
scarce resources to overfund their pension plans that--by their 
nature--pose virtually no risk of default to the Pension Benefit 
Guaranty Corporation (PBGC).
    In the Pension Protection Act of 2006 (Pub L. No. 109-280) 
(``PPA''), Congress recognized its new pension funding rules were not 
appropriate for rural cooperative ``multiple-employer'' defined benefit 
plans, since by design, these plans pose virtually no risk of default 
to PBGC. As such, Congress granted these plans a temporary exemption to 
stay under the pre-PPA rules (See PPA Sec. 104). Congress later 
extended this treatment to eligible charities (See Sec. 202, 
Preservation of Access to Care for Medicare Beneficiaries and Pension 
Relief Act of 2010; Pub. L. No 111-192).
    S. 1302 is narrowly targeted to permit Cooperative and Small 
Employer Charity (CSEC) ``multiple-employer'' plans that are already 
temporarily excluded from PPA to choose between (1) staying excluded 
from PPA permanently without one element (the ``DRC'') that was added 
in 1987 to address single-employer/non-CSEC problems; or (2) jumping 
into PPA in 2014 if they wish to do so. According to data provided by 
the PBGC, only 33 rural cooperative and charitable ``multiple-
employer'' plans (covering just over 127,000 active employees) filed 
their annual required reports with this PPA Sec. 104 designation.
    Taken together, these entities are today making multi-billion 
dollar decisions on this urgent issue that must be resolved this year 
to prevent not-for-profit cooperative and charity CSECs from diverting 
scarce resources from their core missions.
    In short, because CSECs are by far the least common type of pension 
plan, CSECs are often not separately considered when new rules are 
added. The result is the application of some ``single-employer'' plan 
rules that should not apply. S. 1302 resolves this inequity 
permanently.
    We urge Congress to pass S. 1302 today.

    Christian Schools International (csionline.org); UJA-Federation of 
New York, Inc. (ujafedny.org); United Way Worldwide (unitedway.org); 
The Jewish Federations of North America (www.jewishfederations.org); 
National Rural Electric Cooperative Association (nreca.org); Hawkeye 
Insurance Association (iowarec.org); Girl Scouts of America 
(girlscouts.org); NTCA-The Rural Broadband Association (ntca.org); 
United Benefits Group (ubgretire.com).
Response to Questions of Senator Enzi by Charles A. Jeszeck, Ph.D. and 
                            David J. Koetje
                                 ______
                                 
                       charles a. jeszeck, ph.d.
       U.S. Government Accountability Office (GAO),
                                      Washington, DC 20548,
                                                   August 21, 2013.
Hon. Tom Harkin, Chairman,
Hon. Lamar Alexander, Ranking Member,
Committee on Health, Education, Labor, and Pensions,
U.S. Senate,
Washington, DC 20510.

    Enclosed is our response to the question submitted for the record 
by you and other committee members following the hearing ``Pooled 
Retirement Plans: Closing the Retirement Plan Coverage Gap for Small 
Businesses'' on July 16, 2013. If you have questions, please contact me 
at 202-512-7215 or [email protected] or my Assistant Director, Tamara 
Cross, (202) 512-4890 or [email protected].

                                        Charles A. Jeszeck,
                                    Director, Education, Workforce,
                                        and Income Security Issues.
                                 ______
                                 
    Question. You mentioned that a MEP can be structured as either a DB 
or a DC plan. 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 businesses?
    Answer. We have not assessed the extent to which it may be easier 
for companies of any size to form and administer a defined contribution 
(DC) compared to a defined benefit (DB) plan. However, there is an 
overall trend of new plan formation toward DC plans and away from DB 
plans. When we examined new plan formation in 2011, we found that over 
90 percent of all plans formed between 2003 and 2007 were DC in design.
    Of the less than 9 percent that were newly created DB plans, very 
few were sponsored by large companies. In fact, less than 1 percent of 
all newly formed plans by private employers between 2003 and 2007 were 
DB plans with more than 100 participants. In addition, many of these 
employers of newly formed DB plans during this period were also 
sponsoring a DC plan.
    For large companies, there is evidence suggesting that existing 
regulation can be a deterrent to new plan formation. When we surveyed 
the sponsors of some of the largest private sector DB plans in 2008, 
about a quarter of the respondents said they would consider starting a 
new DB plan and, of those, 55 percent responded that reduced regulatory 
and administrative requirements would increase the chance they might 
consider a new DB plan. As for smaller companies, they are also 
generally not starting DB plans--about 8 percent of all new plans 
formed by companies with fewer than 100 employees between 2003 and 2007 
were DB plans. We also found that in 2009 among small businesses that 
sponsored a plan, only about 1 percent sponsored a DB plan.
    Although we have not used the term ``turn-key'' operation to 
describe the design and structure of DC plans, our work indicates that 
many plan sponsors hire a third-party for key administrative duties. 
Our nationally representative survey of 401(k) plan sponsors found that 
more than half of all plans use some sort of ``bundled'' service 
arrangement, in which one company provides most of the plans services. 
Regardless of a bundled or unbundled arrangement, the majority of 
sponsors hired at least one outside service provider to help them 
manage their plan and about 60 percent of those sponsors used the 
provider to handle most of the plan administrative functions, instead 
of having in-house staff for recordkeeping and reporting.
    Nevertheless, operating and managing such plans can be challenging 
for employers, who always retain some fiduciary responsibilities 
regardless of how they choose to operate the plan. As I mentioned 
during the hearing, many small employers we have spoken with say that 
they are overwhelmed by the administrative and fiduciary 
responsibilities associated with retirement savings plans. Some small 
and large 401(k) plan sponsors also face challenges understanding plan 
fees. Additionally, most 401(k) plan sponsors tend to rely on service 
providers to help them manage their plans. Our work suggests that 
service providers are marketing their products and services to 
employers in a way that appears to relieve them of many of the 
responsibilities that come with starting and maintaining a plan. 
However, even with the assistance of a service provider, employers of 
all plan sizes often continue to have significant plan 
responsibilities, such as managing plan enrollments and separations, 
and carrying out other fiduciary duties.
                            david j. koetje
    Question. In your written testimony, you stated that the funding 
rules in the Pension Protection Act were not appropriate for rural 
cooperative or small employer charity multiple employer defined benefit 
plans and how Congress granted these plans a temporary exemption to 
stay under the pre-PPA rules. You mentioned that the Christian School 
plan that has already been temporarily excluded from the PPA should 
have the choice between (1) staying excluded from PPA permanently or 
(2) jumping into PPA.
    What are some of the ways that the rural cooperatives and small 
charities would benefit by jumping into PPA? Who should be responsible 
for making the decision on whether plans should have the PPA rules 
apply to them?
    Answer. As I said during the hearing, I can only speak for 
Christian Schools International, our member schools, and the 11,000 
employees and retirees throughout the United States that participate in 
the CSI Plan. For CSI, PPA places us in an unworkable situation. If the 
CSI Plan is ever subject to PPA, costs and complexity could increase 
dramatically, required minimum contributions will be more volatile and 
unpredictable, and current benefits options and accruals could be 
restricted or eliminated completely.
    We need your help and support.
    PPA's single-employer plan rules are specifically designed to 
protect the PBGC in case that one, single employer maintaining a plan 
goes bankrupt. In the case of the CSI Plan--a ``multiple-employer'' 
defined benefit plan maintained by over 150 independent, 501(c)(3) 
schools--the plan can continue to be maintained despite the bankruptcy 
of one or more of the participating employers. We have a completely 
different risk profile.
    As you know much better than I do, there are three types of plans: 
single employer plans, multiemployer plans, and ``multiple-employer'' 
plans.

     Rules for singles are carefully designed for plans 
maintained by a single company.
     Rules for multies are carefully designed to fit the 
collectively bargained context.
     Rules are almost never tailored to ``multiple-employer'' 
plans like ours, which are subject to the singles' rules. That is why 
PPA ``kicked the can down the road'' to provide a 10-year delayed 
effective date for its new single-employer rules to apply to rural 
cooperative ``multiple-employer'' plans, that was thankfully extended 
to eligible charities like CSI back in 2010.

    For CSI, we hope to make our temporary exemption permanent. S. 1302 
makes this possible.
    Without a change in the law, the CSI Plan and all other charity and 
rural cooperative ``multiple-employer'' plans will be subject to PPA in 
2017. We hope that, with your help, S. 1302 will be enacted, so the CSI 
Plan can stay permanently excluded from PPA. Once enacted, each plan 
sponsor can choose whether PPA provides the appropriate rules for its 
plan. As noted above, in our case, the PPA would hurt our plan, the 
150-plus plan sponsors, and the 11,000-plus participants, so our 
decision would be very simple: we would choose to stay permanently 
excluded from PPA.

    [Whereupon, at 3:37 p.m., the hearing was adjourned.]

                                   [all]