[Senate Hearing 113-337]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 113-337
 
      PENSION SAVINGS: ARE WORKERS SAVING ENOUGH FOR RETIREMENT? 

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

EXAMINING PENSION SAVINGS, FOCUSING ON IF WORKERS ARE SAVING ENOUGH FOR 
                               RETIREMENT

                               __________

                            JANUARY 31, 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              LAMAR ALEXANDER, Tennessee
PATTY MURRAY, Washington                   MICHAEL B. ENZI, Wyoming
BERNARD SANDERS (I), Vermont               RICHARD BURR, North Carolina
ROBERT P. CASEY, JR., Pennsylvania         JOHNNY ISAKSON, Georgia
KAY R. HAGAN, North Carolina               RAND PAUL, Kentucky
AL FRANKEN, Minnesota                      ORRIN G. HATCH, Utah
MICHAEL F. BENNET, Colorado                PAT ROBERTS, Kansas
SHELDON WHITEHOUSE, Rhode Island           LISA MURKOWSKI, Alaska
TAMMY BALDWIN, Wisconsin                   MARK KIRK, Illinois
CHRISTOPHER S. MURPHY, Connecticut         TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts
                                       

                    Pamela J. Smith, Staff Director

                 Lauren McFerran, Deputy Staff Director

               David P. Cleary, Republican Staff Director

                                  (ii)



                            C O N T E N T S

                               __________

                               STATEMENTS

                       THURSDAY, JANUARY 31, 2013

                                                                   Page

                           Committee Members

Harkin, Hon. Tom, Chairman, Committee on Health, Education, 
  Labor, and Pensions, opening statement.........................     1
Alexander, Hon. Lamar, a U.S. Senator from the State of 
  Tennessee, opening statement...................................     2
Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming..    45
Warren, Hon. Elizabeth, a U.S. Senator from the State of 
  Massachusetts..................................................    46
Murphy, Hon. Christopher, a U.S. Senator from the State of 
  Connecticut....................................................    50
Isakson, Hon. Johnny, a U.S. Senator from the State of Georgia...    52
Baldwin, Hon. Tammy, a U.S. Senator from the State of Wisconsin..    53
Franken, Hon. Al, a U.S. Senator from the State of Minnesota.....    55

                               Witnesses

Moslander, Edward, Senior Managing Director, TIAA-CREF, New York, 
  NY.............................................................     5
    Prepared statement...........................................     7
McCarthy, Julia, Executive Vice President, Fidelity Investments, 
  Boston, MA.....................................................    10
    Prepared statement...........................................    12
Hounsell, M. Cindy, President, Women's Institute for a Secure 
  Retirement, Washington, DC.....................................    30
    Prepared statement...........................................    32
Madrian, Brigitte C., Aetna Professor of Public Policy and 
  Corporate Management, Harvard Kennedy School, Cambridge, MA....    37
    Prepared statement...........................................    40

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Response by Edward Moslander to questions of:
        Senator Harkin...........................................    58
        Senator Enzi.............................................    58
    Response by Julia McCarthy to questions of:
        Senator Harkin...........................................    61
        Senator Enzi.............................................    62
        Senator Warren...........................................    64
    Response by M. Cindy Hounsell to questions of:
        Senator Harkin...........................................    67
        Senator Enzi.............................................    68

                                 (iii)

  


       PENSION SAVINGS: ARE WORKERS SAVING ENOUGH FOR RETIREMENT?

                              ----------                              


                       THURSDAY, JANUARY 31, 2013

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:03 a.m., in 
room SD-430, Dirksen Senate Office Building, Hon. Tom Harkin, 
chairman of the committee, presiding.
    Present: Senators Harkin, Casey, Franken, Baldwin, Murphy, 
Warren, Alexander, Enzi, Burr and Isakson.

                  Opening Statement of Senator Harkin

    The Chairman. Good morning. The Senate Committee on Health, 
Education, Labor, and Pensions will please come to order.
    I want to welcome everyone to the latest in our ongoing 
series of hearings focusing on retirement security. I'm told 
this is the seventh or the eighth hearing. This is the seventh 
hearing that we've had on this over the last couple of years.
    Today we're going to take a closer look at the question: 
How much do families need to save for retirement? Well, I guess 
maybe I'm about to find that out. It's in my future.
    [Laughter.]
    That was an aside.
    But I already know from my constituents that the dream of a 
secure retirement is growing fainter. Whether it is a young 
family struggling to pay off student loan debt, save for the 
kids' education and put something aside for their own 
retirement, or a 65-year-old nurse finally eligible to stop 
working, Americans are fearful about whether they'll have 
enough money to live on when they retire.
    That's why we're starting this new Congress by focusing on 
how we can help people save for retirement. Today we're going 
to hear testimony about how much people need to save, what's 
holding them back, and how we can help them build a nest egg.
    As a starting point, I think we need to keep in mind the 
bottom line: people simply are not saving enough. I've said 
this before, but the retirement income deficit--that is, the 
difference between what people need for their retirement in the 
future and what they actually have--now has been estimated to 
be as high as $6.6 trillion. Half of all Americans have less 
than $10,000 in savings.
    These are very disturbing and frightening numbers. When 
people run out of money when they get old, they see their 
living standard decline. They lean more and more on the social 
safety net, squeezing government costs again at all levels. So 
it comes back on taxpayers again.
    We need to do more to help American families cope with this 
looming crisis. Hard-working Americans deserve to be able to 
rest and take a vacation, spend more time with their grandkids 
when they get older. But to do so, they need to have better 
opportunities, opportunities to save prior to retirement.
    We've always said there needs to be a three-legged stool of 
Social Security, pensions and savings. Social Security provided 
a base, but it was never meant to be a full retirement system. 
It was meant to be one leg of that stool. And then second, 
people of my generation and before counted on defined-benefit 
pensions. I always say that when I first came to Congress, one 
out of every two Americans had a pension, an annuity that would 
last until the day they died, defined benefit. Today it's one 
out of five, and getting less.
    Third, people would have savings, but again these savings 
are not enough. As I said, half of all Americans have less than 
$10,000. And again, although many employers now offer 
retirement savings plans such as 401(k)'s, again those plans 
were designed to supplement, supplement traditional pensions, 
not replace them.
    Savings rates are just too low, and very few 401(k) plans 
offer people an easy, cost-effective way to convert their 
savings into a steady stream of lifetime retirement income. I 
look forward to hearing about some of the innovative ways that 
companies like TIAA-CREF and Fidelity and others are helping 
people to cope with these challenges.
    I'm a true believer that we need to restore the three-
legged stool that starts with rebuilding the pension system. 
After all these hearings, we released a report last September 
called ``The Retirement Crisis and a Plan to Solve It,'' and we 
put out some ideas and suggestions. I've been working with 
Senator Enzi a lot on this over the past several months, and 
his staff, and again we've heard time and again in this 
committee that employers, especially small business, just can't 
do pensions. They're too complex, they're too risky. They have 
to take it out of their bottom line to hire the people to run 
it. They have a fiduciary responsibility. That's why we need a 
new plan that's simplified, that's privately run, that takes 
the onus off of the employers and makes it easy for people to 
actually put money away for a defined benefit.
    I'd like to say that our plan that we've been working on 
has some aspects of defined benefit and defined contribution.
    As the chairman of this committee, I am making this a top 
priority for this committee to look at and to actually bring 
something to fruition, hopefully in this Congress.
    With that, I'll turn to Senator Alexander.

                 Opening Statement of Senator Alexander

    Senator Alexander. Thanks, Mr. Chairman. I want to applaud 
you and Senator Enzi for your consistent focus on this. Lots of 
times, one of the most useful functions of the U.S. Senate is 
to put a spotlight on the right question and then explore 
toward some good solution. I believe you've clearly put the 
spotlight on the right question, are workers saving enough for 
retirement, and your focus on the retirement income deficit.
    I also appreciate the even-handed way you have approached 
these hearings. You have your own suggested idea, but you have 
opened the hearings to witnesses from all directions, and that 
gives us a chance really to test Senator Harkin's proposals, as 
well as other proposals, and hopefully come to a good 
conclusion.
    I thank the witnesses for being here. I told them earlier I 
look forward to hearing what they have to say.
    Of course, we currently have the mandatory retirement 
plan--Social Security. My preference would be to explore what 
we need to do to beef up and strengthen our voluntary 
retirement plans. We read regularly about troubles that both 
corporate and union defined-benefit plans have. We need to be 
careful in the changing world that we have where businesses 
aren't like businesses were 40 or 50 years ago. We're in a 
global marketplace with rapidly changing companies. Employers 
look different than employers did some time ago. We have to be 
very careful about decisions we make here, because we're 
talking about tens of millions of individuals, and we're 
talking about hundreds of thousands of businesses who might be 
affected by whatever we do.
    I would like for us to be careful as we go through this 
process about placing new mandates on business enterprises in 
America, and I would like to use an example or two to suggest 
why.
    I was visited not long ago by a franchise group that owns 
20 fast food restaurants in DC, Virginia and Maryland, and they 
employ 542 people. They are trying to make a profit, which is 
their goal in business. They start out with a 6.2 percent 
Social Security and Medicare tax. They have a menu labeling 
mandate that costs another $1,000 per restaurant. For each $1 
increase in the minimum wage mandate, that's nearly $25,000 per 
year according to a company study. They also have some paid 
sick leave mandates.
    I'm not re-litigating any of those issues. I'm just saying 
if you're operating a business, those are some of the mandates 
you start out paying, and we have to be careful about thinking 
about adding new ones.
    Then there's the healthcare mandates that are coming, again 
not to re-litigate them, but if I were the owner of those 20 
fast food restaurants, I would be concerned. They tell me that 
they offer health care to their 542 employees, but only 34 take 
it. If nothing changed next year--that is, if the healthcare 
law didn't go into effect--they would still be spending $94,000 
on health care. Under the healthcare law, if they opt to pay 
the penalty, they will be spending $1 million instead of 
$94,000. That exceeds their expected net profit for the year 
2013. If they were to decide themselves to continue to offer 
healthcare, their costs would be estimated to be between 
$400,000 and $1.4 million.
    You could apply the same sort of reasoning and statistics 
to an even smaller company and come out with similar results. 
If we want to create an environment for the largest number of 
new jobs in America so people can have the largest incomes so 
that they can then have more money to spend on saving for 
retirement, we need to be very careful and circumspect about 
any new cost or mandate on existing businesses. Or, in the case 
of the healthcare law mandate, many restaurants are considering 
reducing the number of employees they have, and reducing the 
number of full-time employees--people who work more than 30 
hours--and therefore those workers won't make as much money. 
Therefore, they may not have as much to retire.
    So my point is that, No. 1, I think the Chairman is doing a 
terrific job of moving us toward the right questions. He has 
offered a very thoughtful solution of his own. He has invited 
witnesses all across the board that should educate us. And my 
hope would be that as we look toward a solution, that we are 
very circumspect about imposing any new mandates on business 
enterprises in the country because I think they are likely to 
be self-defeating, reduce the number of full-time jobs, and 
reduce the level of incomes that people have from which they 
can save.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Alexander.
    We have an excellent panel of witnesses today, people that 
have done a lot of work in and thinking about retirement, and 
they have a lot to share with this committee. I thank them all 
for being here. I will introduce a couple, and then I'll turn 
to Senator Warren for other introductions.
    First we'll hear from Ed Moslander, Senior Managing 
Director at TIAA-CREF. Mr. Moslander has been with TIAA-CREF 
for more than 28 years and has extensive experience working 
with plans, sponsors in the academic, research, medical and 
cultural fields.
    We have Cindy Hounsell, president of the Women's Institute 
for a Secure Retirement--``WISER'', I think it's called. I was 
privileged to speak to your group just not too long ago. Ms. 
Hounsell has been working with women for years to equip them 
with the knowledge and tools they need to take charge of their 
finances and prepare for retirement.
    Now I'd recognize Senator Warren for the purpose of 
introduction of two other witnesses that we have.
    Senator Warren.
    Senator Warren. Thank you very much, Mr. Chairman. I want 
to introduce Julia McCarthy. She was born and raised in 
Massachusetts. She now lives in Southborough, MA, with her 
husband and her two sons. She is an executive vice president in 
the Workplace Investing Division of Fidelity Investments. 
Fidelity is a homegrown Massachusetts company that has become a 
worldwide leader, providing investment management, retirement 
planning and other financial services to more than 20 million 
individuals and institutions. Ms. McCarthy has been a leader in 
that company, developing a data base analysis of retirement 
strategies. I'm proud to have Ms. McCarthy here today 
representing Fidelity, and I know she will offer valuable 
insights to this committee.
    I'm also very pleased to be able to introduce Dr. Brigitte 
Madrian, who is the Aetna Professor of Public Policy and 
Corporate Management at the Harvard Kennedy School. She has 
also taught at the University of Pennsylvania Wharton School, 
the University of Chicago Graduate School of Business, and the 
Harvard University economics department.
    Dr. Madrian's research focuses on household savings and 
investment behavior. She received her Ph.D. in economics from 
the Massachusetts Institute of Technology and studied economics 
as an undergraduate at Brigham Young University. She is a 
recipient of the National Academy of Social Insurance 
Dissertation prize, and a two-time recipient of the TIAA-CREF 
Paul A. Samuelson Award for Scholarly Research on Lifelong 
Financial Security.
    She is one of the country's foremost experts on investment 
behavior, and I'm very pleased to have her here. I know that 
she will be very helpful to this committee.
    Welcome.
    The Chairman. Very good. Thank you very much, Senator, and 
thank you all again for being here. Your statements will be 
made a part of the record in their entirety. I read them over 
last evening. They are very good.
    I would ask that we start with Mr. Moslander, and we'll 
just go down the line. If you could do a summary of your 
statement so that we can get into more of an exchange, I would 
appreciate that. If you'd take maybe 5 to 7 minutes to give us 
a summary of your statement, I would appreciate it.
    Mr. Moslander.

 STATEMENT OF EDWARD MOSLANDER, SENIOR MANAGING DIRECTOR, TIAA-
                       CREF, NEW YORK, NY

    Mr. Moslander. Thank you, Chairman Harkin and Ranking 
Member Alexander and members of the committee. Thanks for the 
opportunity to appear today to discuss ways Americans can 
achieve a financially secure retirement. I am Ed Moslander. I'm 
senior managing director of TIAA-CREF's Institutional Client 
Services Organization.
    TIAA-CREF was founded nearly a century ago to assist 
college professors with achieving financial security in 
retirement. Today, we manage over $500 billion in assets for 
3.7 million individuals that we serve in the educational, 
research, medical and cultural communities.
    We do believe the Nation is facing a retirement insecurity 
crisis. The traditional three-legged stool consisting of a 
pension, Social Security and personal savings has become 
increasingly unsteady. Retirement has become more of a do-it-
yourself proposition, where a large part of an individual's 
retirement security depends on defined contribution retirement 
plans. As a result, achieving a comfortable retirement has 
become a source of increasing concern for Americans, eroding 
confidence in their ability to do so.
    TIAA-CREF's experience has provided us with a unique 
perspective on the retirement challenges America faces. The 
higher education community, our core market, has never depended 
on defined benefit plans; and instead, since 1918, it has 
relied only on defined contribution plans to provide retirement 
security. Employers have funded those plans to ensure that 
participants have adequate retirement savings. As a result, we 
found that our clients generally are more confident about 
retirement prospects when compared to the rest of the U.S. 
population.
    A survey conducted by our institute found that 75 percent 
of higher education employees are either very confident or 
somewhat confident in their retirement income prospects, 
compared with only 49 percent of U.S. workers in general. The 
same survey found that 88 percent of higher education employees 
are currently saving for retirement, and of these, 60 percent 
have tried to figure out just how much they need to save for a 
secure retirement.
    I'd like to highlight a few things, practices that we 
encourage that we believe contributed to these results. First, 
the proliferation of the defined contribution plan model means 
that saving for retirement has become more of an individual 
responsibility. But for the model to be successful, it has to 
be, in our experience, a shared responsibility. While defined 
contribution plans enable workers to save for retirement, many 
eligible employees still don't participate, and those who do 
have a difficult time saving 10 to 15 percent of their annual 
income that most financial experts agree is necessary for a 
secure retirement.
    For this reason, it is extremely important that employers 
recognize that attaining retirement savings goals is a shared 
responsibility between employers and employees, and 
accordingly, employer contributions should be a foundation of 
any retirement plan.
    That said, employers cannot be expected fully to fund a 
retirement plan, and should also ensure that matching programs 
are in place to further incentivize individual participation in 
the plan.
    Part of the success of our program is that there has always 
been an employer contribution, which is part of that shared 
responsibility. It's not uncommon for our plan sponsors to 
contribute a flat percentage to an individual's retirement plan 
over and above any match that they might offer. Employer 
contributions demonstrate to employees that the employer values 
saving for retirement and that they care about the employees' 
future, and it can also be a competitive advantage in the quest 
for workers and talent.
    The next point I'd like to make is that while getting 
employees to contribute is an important step, we also have to 
recognize that workers have to make complex decisions about how 
much they should save and how to invest those savings. However, 
the pervasive lack of financial literacy across our Nation 
often means that a lot of people are not equipped for that 
task.
    We believe it's important to offer clients tools that can 
assist them in making these decisions. Such tools include user-
friendly online programs, advice, access to advisors and 
comprehensive, objective third-party advice programs. It's 
important that each of these tools ensure that the guidance 
they provide is holistic, taking into account all sources of a 
worker's savings; and second, is affordable and accessible to 
all employees, not only those with high balances; considers 
savings rates, retirement age, asset allocation, fund 
selection, and the probability of reaching goals; includes 
information on how to structure and invest retirement income; 
and is delivered by firms and advisors who take fiduciary 
responsibility for the advice that they provide.
    Finally, while there has been a lot of attention paid to 
the savings, the accumulation phase, there has been less of a 
focus on the drawdown phase, when people are spending the money 
they have saved during retirement. Due to our increasing 
lifespans, as well as concerns surrounding Social Security and 
the movement away from traditional defined benefit plans, the 
drawdown phase will and should become a greater focus of the 
retirement security discussion. TIAA-CREF sees the issue of 
ensuring that people do not outlive their retirement savings as 
among the most pressing issues in retirement income security 
today.
    A 2011 report by the Government Accountability Office 
encouraged annuitization as an important means of addressing 
the issue. It is crucial that those who are saving for 
retirement receive information not just about how much they 
have in savings, but also about how that accumulation 
translates into income at retirement. TIAA-CREF includes a 
retirement income projection on all of our clients' quarterly 
statements that provides an estimate of what their monthly 
income would be at retirement, while also providing information 
about how they could improve the prospects of this income 
projection by saving more. We believe that providing this key 
piece of additional information assists in reframing the 
conversation about retirement savings by putting the focus on 
income as opposed to strictly on accumulating assets.
    Based on this experience, TIAA-CREF supported the Lifetime 
Income Disclosure Act, which was introduced in the last 
Congress. This proposal would have required all retirement plan 
participants to receive at least annually an illustration of 
how their current accumulation would translate into income at 
retirement.
    To conclude, as the committee considers the issue of 
retirement security and improving retirement savings among 
Americans, we urge you to look at ways of strengthening the 
means by which Americans can achieve a secure retirement, some 
of which I have outlined here. We are confident that 
policymakers and the private sector can work together to 
address these challenges and find solutions that guarantee that 
all Americans can attain a financially secure retirement. TIAA-
CREF is ready to assist in any way that we can as we work 
toward this shared goal.
    Thank you again for providing the opportunity to testify. I 
look forward to your questions.
    [The prepared statement of Mr. Moslander follows:]
                 Prepared Statement of Edward Moslander
                                summary
    TIAA-CREF is a financial services organization committed to helping 
our 3.7 million clients in the research, medical, and cultural 
communities achieve a secure retirement. We believe the Nation is 
facing a retirement security crisis and that the traditional ``three-
legged stool'' of retirement has become increasingly unsteady.
    Achieving a secure retirement has become much more of a ``do-it-
yourself '' proposition, where a large part of an individual's 
retirement security depends on his or her participation in defined 
contribution plans. Employers, therefore, need to encourage employee 
participation in such plans by taking steps that will incent employees 
to contribute, such as providing matching contributions.
    While getting employees to contribute is an important step, we also 
need to recognize that workers often have to make complex decisions 
about how much they should be saving and how to invest these savings. 
We believe it is important to offer clients tools that can assist them 
with making these decisions while also ensuring such tools are 
objective, comprehensive, and affordable and accessible to all 
employees.
    While there has been much attention paid to the accumulation phase 
of retirement, there has been less of a focus on the draw-down phase, 
when people are spending their retirement savings. The draw-down phase 
will and should become a greater focus of the retirement security 
discussion. TIAA-CREF sees the issue of ensuring one does not outlive 
their retirement savings as the most pressing issue in retirement 
security today and therefore believes it is crucial that those who are 
saving for retirement receive information not just about their 
accumulations, but also about how that accumulation translates into 
income at retirement. TIAA-CREF provides such information of our 
clients on their quarterly statements and supported the Lifetime Income 
Disclosure Act, a proposal introduced in the last Congress that would 
require all retirement plan participants receive, at least annually, 
information on the projected monthly income they could expect at 
retirement.
    As the committee considers the issue of retirement security and 
improving retirement savings among Americans, we urge you to look at 
ways of strengthening the means by which Americans can achieve a secure 
retirement. TIAA-CREF stands ready to assist in any way we can as you 
work toward this goal.
                                 ______
                                 
                            i. introduction
    Chairman Harkin, Ranking Member Alexander, members of the 
committee, thank you for the opportunity to appear today to discuss 
ways Americans can achieve a financially secure retirement. My name is 
Ed Moslander and I am senior managing director for TIAA-CREF's 
Institutional Client Services organization. In this capacity, I am 
responsible for managing relationships with plan sponsors, the 
consultant community that supports them, and the national associations 
of which not-for-profit plan sponsors are members.
    TIAA-CREF was founded nearly a century ago to assist college 
professors with achieving financial security in retirement. Today, we 
manage over $502 billion \1\ in assets for the 3.7 million individuals 
we serve in the research, medical, and cultural communities. Our 
primary mission is to serve those who serve others by helping them 
achieve lifelong financial security.
---------------------------------------------------------------------------
    \1\ As of December 31, 2012.
---------------------------------------------------------------------------
    We believe it is clear the Nation is facing a retirement security 
crisis due to a number of factors, including changes in the way 
retirement is funded. The traditional ``three-legged stool,'' which 
consists of ``defined benefit'' pension plans, Social Security, and 
personal savings acquired through ``defined contribution'' 401(k)-type 
accounts, has become increasingly unsteady.
    Retirement has become much more of a ``do-it-yourself '' 
proposition, where a large part of an individual's retirement security 
depends on defined contribution plans. As a result, achieving a 
comfortable retirement has become a source of increasing concern for 
Americans, eroding confidence in their ability to do so. Consider that:

     Only 14 percent of Americans say they are ``very 
confident'' they will have enough money for a comfortable retirement; 
\2\
---------------------------------------------------------------------------
    \2\ The 2011 Retirement Confidence Survey: Confidence Drops to 
Record Lows, Reflecting ``the New Normal,'' Ruth Helman, Mathew 
Greenwald & Associates, and Craig Copeland and Jack VanDerhei, Employee 
Benefit Research Institute. March 2011.
---------------------------------------------------------------------------
     Sixty percent of workers say they have less than $25,000 
in retirement savings; \3\ and
---------------------------------------------------------------------------
    \3\ Ibid.
---------------------------------------------------------------------------
     Sixty-six percent of respondents in a 2011 Gallup poll 
said their top financial concern is not having enough money for 
retirement.

    TIAA-CREF's experience has provided us with a unique perspective on 
the retirement challenges Americans face, helping us better meet the 
financial needs of the individuals and institutions we serve. In fact, 
we have found that, in contrast to the above statistics, our clients 
generally are more confident about their retirement prospects. For 
example:

     A survey conducted by the TIAA-CREF Institute found that 
75 percent of higher education employees are either ``very confident'' 
or ``somewhat confident'' in their retirement income prospects, 
compared with 49 percent of U.S. workers in general.\4\
---------------------------------------------------------------------------
    \4\ Retirement Confidence on Campus: The 2011 Higher Education 
Retirement Confidence Survey, Paul J. Yakaboski, TIAA-CREF Institute. 
June 2011.
---------------------------------------------------------------------------
     This same survey also found 88 percent of higher education 
employees are currently saving for retirement and of these, 60 percent 
have tried to determine how much they need to save by the time they 
retire.\5\
---------------------------------------------------------------------------
    \5\ Ibid.

    I would like to highlight some of the practices we encourage that 
we believe have resulted in these higher levels of confidence and 
savings rates among our clients.
                       ii. shared responsibility
    The proliferation of the defined contribution plan model means that 
saving for retirement has become much more of an individual 
responsibility. While defined contribution plans enable workers to save 
for retirement, many eligible workers still do not participate and 
those that do often have a difficult time saving the 10-15 percent of 
their annual income that most financial experts agree is necessary to 
achieve a secure retirement. For this reason, it is extremely important 
that employers recognize that attaining retirement savings goals is a 
shared responsibility between employers and employees, and accordingly 
should offer matching contributions that encourage employees to 
contribute.
    For example, an employer may provide a dollar-for-dollar match when 
an employee saves up to a certain percentage of his or her salary. In 
addition to providing a tangible incentive to contribute, matching 
contributions demonstrate to employees that their employer values 
saving for retirement and cares about their employees' financial 
future. At TIAA-CREF, we have found that it is not uncommon for our 
plan sponsors to offer their employees a matching contribution, while 
also contributing a flat percentage over and above the match to further 
incent individual participation in the retirement plan.
                     iii. advice and planning tools
    While getting employees to contribute is an important step, we also 
need to recognize that workers often have to make complex decisions 
about how much they should be saving and how to invest these savings. 
However, the pervasive lack of financial literacy across our Nation 
often means that most are not equipped for these tasks.
    Therefore, we believe it is important to offer clients tools that 
can assist them with making these decisions. Such tools include user-
friendly online programs, access to advisors either in-person or over 
the phone, and comprehensive objective third-party advice programs.
    With respect to each of these tools, it is important to ensure that 
the guidance they provide:

    1. Is holistic, taking into account all sources of a worker's 
savings;
    2. Is affordable and accessible to all employees regardless of 
account size;
    3. Takes into consideration asset allocation, fund selection, 
savings rates, retirement age, and probability of reaching goals; and
    4. Includes information on how to structure and invest retirement 
income.
                   iv. importance of lifetime income
    While there has been much attention paid to the accumulation phase, 
there has been less of a focus on the draw-down phase, when people are 
spending the money they have saved for retirement. Due to our 
increasing lifespans, as well as the aforementioned concerns 
surrounding Social Security and the movement away from traditional 
pension plans, the draw-down phase will and should become a greater 
focus of the retirement security discussion. TIAA-CREF sees the issue 
of ensuring one does not outlive their retirement savings as the most 
pressing issue in retirement security today.
    A 2011 report by the Government Accountability Office encouraged 
annuitization as an important means of addressing the issue.\6\ The 
report noted, however, that just 6 percent of those in a defined 
contribution plan chose or purchased an annuity at retirement. It is 
crucial that those who are saving for retirement receive information 
not just about their accumulations, but also about how that 
accumulation translates into income at retirement. TIAA-CREF includes a 
retirement income projection on all of our clients' quarterly 
statements that provides a projection of what their monthly income 
would be at retirement, while also providing information about how they 
could improve the prospects of this income projection by saving more. 
We believe providing this additional piece of information assists in 
reframing the conversation about retirement savings by putting some 
focus on income as opposed to strictly accumulated assets.
---------------------------------------------------------------------------
    \6\ Report to the Chairman, Senate Special Committee on Aging: 
Retirement Income--Ensuring Income throughout Retirement Requires 
Difficult Choices, U.S. Government Accountability Office. June 2011.
---------------------------------------------------------------------------
    TIAA-CREF supported the Lifetime Income Disclosure Act, which was 
introduced in the last Congress. This proposal would have required all 
retirement plan participants receive, at least annually, an 
illustration of how their current accumulation would translate into 
income at retirement. However, we believe that retirement plan 
providers should take action now to institute this feature and not wait 
for policymakers to enact mandates.
                             v. conclusion
    As the committee considers the issue of retirement security and 
improving retirement savings among Americans, we urge you to look at 
ways of strengthening the means by which Americans can achieve a secure 
retirement. A number of steps can be taken to accomplish this, some of 
which I have outlined today. We are confident that policymakers and the 
private sector can work together to address these challenges and find 
solutions that guarantee all Americans can attain a financially secure 
retirement. TIAA-CREF is ready to assist in any way we can as we work 
toward this goal.
    Thank you again for providing me with the opportunity to testify. I 
look forward to taking your questions.

    The Chairman. Thank you, Mr. Moslander. It was very good 
testimony.
    Ms. McCarthy.

STATEMENT OF JULIA McCARTHY, EXECUTIVE VICE PRESIDENT, FIDELITY 
                    INVESTMENTS, BOSTON, MA

    Ms. McCarthy. Chairman Harkin, Ranking Member Alexander, 
and members of the committee, thank you for the opportunity to 
be here today. My name is Julia McCarthy, and I am an executive 
vice president at Fidelity Investments within the Workplace 
Investing business. We have the privilege of serving more than 
18 million American workers for more than 22,000 employers. 
Fidelity takes very seriously the responsibility to ensure that 
workers know how to save, how much to save, and how to invest 
for retirement.
    I would like to thank you for bringing attention to the 
issue of retirement security and, more importantly, the issue 
of ensuring that American workers are saving enough for 
retirement. We share your concern that many Americans are not 
prepared for retirement. Yet we know from our data what savings 
behaviors work for a majority of workers.
    The steps are straightforward: enroll in your workplace 
plan, the earlier the better; save at the highest levels 
possible; increase your contribution rate as your salary grows; 
invest in a diversified asset mix; and own your plan, stick 
with it, stay engaged, and avoid taking out loans or cashing 
out when you change jobs.
    That said, we know that savings is not always simple. I 
would like to focus on three areas which help people increase 
their savings but can be improved to help Americans reap the 
full power of their benefits.
    The first one is inertia. While the results of the Pension 
Protection Act have been impressive, more needs to be done to 
harness the power of automatic plan features and defaults. The 
default rate for many plans is too low. The current Safe Harbor 
Rules for 401(k) plans start at a 3 percent default rate. 
Starting at a 6 percent rate would give workers a significant 
leg up on savings. Our data show that 61 percent of workers who 
auto enroll do not change their default rate. Opt out rates are 
virtually identical regardless of the 3 percent or the 6 
percent starting point. Let's give people the advantage of 
saving more and put the power of inertia to work for them.
    No. 2 is maximizing savings through automated programs. 
Recognizing inertia and the need to save, there are programs to 
leverage the additional feature of the Pension Protection Act 
that automatically increase contribution levels. Annual 
increase programs are the primary way workers are increasing 
their contributions. Our data show that close to one-third of 
all contribution increases last year in the plans we administer 
were attributed to an annual increase program. Unfortunately, 
these programs are under-utilized. Only 11 percent of employers 
are offering them.
    It may feel a bit onerous, but when aligned with an annual 
salary increase, these programs can increase savings while 
minimizing the impact to take-home pay.
    No. 3 and critically important is education and guidance. 
More than ever, workers are responsible for saving and planning 
for their retirement. They need help understanding a range of 
financial topics, from the most basic information about how to 
enroll and how much they should save to the more complex topics 
such as proper asset allocation and retirement income planning. 
Workers who receive guidance take action and have better 
outcomes.
    Our data show that workers who engage in a retirement 
planning session, as an example, either online or on the phone, 
increase their deferral rates on average by 5 to 6 percentage 
points. One theme that is a constant in all of our research is 
that the majority of workers want and need help.
    Workers also need a simple way to gauge their savings 
process. Last fall, Fidelity released new research on age-based 
savings guidelines. These guidelines serve as a framework for 
establishing retirement savings goals. As workers progress 
through their careers, their salary times a factor of X can be 
one of the measures used to assess their retirement savings 
progress. We found that a simple to understand savings target 
is a framework that resonates with both workers and employers, 
and we believe this approach will be helpful for people who 
switch jobs frequently and who may have a number of retirement 
accounts, thus making it even more difficult to evaluate one's 
savings strategy.
    In closing, there is a path to retirement security for most 
Americans, but the road is not always an easy one. Many key 
constituencies have a role in ensuring success.
    First, workers need to take an active role in saving and 
managing for their financial future. Employers need more 
flexibility in the rules and regulations to design benefit 
plans which meet the diverse needs of their workforce without 
risk of fiduciary liability and increased coverage costs. 
Third, service providers like Fidelity need to continue to 
innovate around how to help plan sponsors optimize their 
benefit programs and service participants based on their needs.
    And last, we ask policymakers to consider a variety of 
ideas to improve retirement savings outcomes. Some examples 
include increasing the default deferral rate, incentivizing 
more plans to adopt auto features, protecting and promoting the 
availability of education and guidance, modernizing and 
simplifying the current regulatory framework to allow for more 
innovation, exploring new ways to help incentivize younger 
workers to save for their retirement, and partnering with 
schools and other organizations to help ensure all students 
have access to quality financial literacy.
    Fidelity is committed to partnering with you, Mr. Chairman, 
and Ranking Member Alexander, and members of your committee, to 
work toward solving these critically important issues. I 
sincerely thank you for the opportunity to be here today and 
share our perspective and experience in helping Americans save 
for retirement. I look forward to your questions.
    [The prepared statement of Ms. McCarthy follows:]
                  Prepared Statement of Julia McCarthy
                                overview
    While Fidelity shares the concerns that many Americans are not 
adequately prepared for retirement, we know from analysis which savings 
behaviors work for a majority of 401(k) plan participants. The steps 
are straightforward, enroll in your workplace plan--the earlier, the 
better, save at the highest levels possible, increase your deferral 
rate periodically as your salary grows, invest in a diversified asset 
mix, and, finally, own your plan, stick with it, stay engaged, and 
avoid taking out loans or cashing out when you change jobs.
    Yet, Fidelity also knows from its direct interactions with 
retirement plan participants that saving is not always simple. The 
testimony focuses on three specific areas which Fidelity knows works in 
helping people increase their savings outcomes--but which need 
additional improvements in order for more Americans to reap the full 
power of their benefits.
                        three key areas of focus
    1. Increase the default deferral rate to 6 percent: Auto-enrollment 
has helped enroll many more participants in retirement savings plans 
but the default deferral rate for many plans is too low. Currently the 
safe harbor rules for 401(k) plans start at a 3 percent default 
deferral rate. Our experience is that participants who are auto-
enrolled, regardless of the rate--3 percent, 6 percent or higher--are 
likely to take no additional action with regard to saving more for 
retirement. With opt-out rates virtually identical at each 3 percent 
and 6 percent respectively, steps should be taken to increase the 
default deferral rate to 6 percent.
    2. Auto Annual Increase Programs simplify savings increases: Annual 
Increase Programs are the single most effective driver of deferral 
increases at Fidelity. Our data show that close to one-third of all 
deferral increases last year were attributed to an annual increase 
program. Unfortunately they are underutilized; only 11 percent of plans 
offer automatic annual increase programs--the rest requiring 
participants to pro-actively enroll in an annual step increase. More 
can be done to incent plans to adopt these important auto-features.
    3. Financial education and guidance lead to better savings 
outcomes: More than ever, workers are expected to bear the burden of 
saving and planning for retirement income needs on their own. They need 
help understanding a range of financial topics--from the most basic 
information about how to enroll in their plan, and how much they should 
save to more complex topics such as proper asset allocation and 
retirement income planning. Our data shows participants who receive 
guidance take action and have better outcomes--increased participation, 
increased savings and improved asset allocation. Policymakers should 
look to protect and promote the availability of education and guidance 
by service providers and recordkeepers.
                                 ______
                                 
    Chairman Harkin, Ranking Member Alexander, and members of the 
committee, good morning, and thank you for this opportunity today.
    My name is Julia McCarthy, and I am an executive vice president at 
Fidelity Investments, within our workplace investing business. We have 
the privilege of delivering Defined Contribution, Defined Benefit, 
Health & Welfare, Non Qualified and Health Savings plans to nearly 16 
million plan participants from our more than 22,000 plan sponsor 
clients.
    My area of responsibility is to understand participant needs and 
behaviors, and build solutions and engagement models to ensure that the 
participants we service receive the best experience in the industry, 
and that they are ready for retirement. Fidelity takes very seriously 
the responsibility to ensure that plan participants know how to save, 
how much to save and how to invest for retirement.
                            the need to save
    I would like to thank you, Mr. Chairman and Ranking Member 
Alexander, for bringing attention to the issue of retirement security 
and--more specifically--the importance of ensuring American workers are 
saving sufficiently for retirement. We share your concern that many 
Americans are not adequately prepared for retirement, and that reliance 
on Social Security alone, is not enough. Yet we know from analysis of 
our participant data what savings behaviors work for a majority of 
401(k) plan participants. The steps are straightforward, enroll in your 
workplace plan--the earlier, the better, save at the highest levels 
possible, increase your deferral rate periodically as your salary 
grows, invest in a diversified asset mix, and, finally, own your plan, 
stick with it, stay engaged, and avoid taking out loans or cashing out 
when you change jobs.
    We know that saving is not always simple. I'd like to focus on 
three areas which we know work in helping people increase their savings 
outcomes--but which need additional improvements in order for more 
Americans to reap the full power of their benefits.
            1. Participant Inertia: A Simple Remedy
    It has been more than 6 years since the Pension Protection Act of 
2006 was enacted. While the results under this law have been 
impressive, more needs to be done to harness the power of automatic 
plan features and defaults. The default deferral rate for many plans is 
too low. Currently the safe harbor rules for 401(k) plans start at a 3 
percent default deferral rate. Our experience is that participants who 
are auto-enrolled, regardless of the rate--3 percent, 6 percent or 
higher--are likely to take no additional action with regard to saving 
more for retirement. Our data show that 61 percent of participants who 
are auto-enrolled make no change from the default deferral amount, and 
opt-out rates are virtually identical at each 3 percent and 6 percent 
respectively.
            2. Simplifying Savings Through Auto Annual Increase 
                    Programs
    Annual Increase Programs are the single most effective driver of 
deferral increases at Fidelity. Our data show that close to one third 
of all deferral increases last year were attributed to an annual 
increase program. Unfortunately they are underutilized, only 11 percent 
of plans offer automatic annual increase programs--the rest requiring 
participants to pro-actively enroll in an annual step increase. 
Automatic annual increase programs that are linked to coincide with 
annual salary increases to minimize the impact to an employee's net 
take-home pay are most effective.
            3. Participant Education and Guidance
    More than ever, workers are expected to bear the burden of saving 
and planning for retirement income needs on their own. They need help 
understanding a range of financial topics--from the most basic 
information about how to enroll in their plan, and how much they should 
save to more complex topics such as proper asset allocation and 
retirement income planning. Participants who receive guidance take 
action and have better outcomes--increased participation, increased 
savings and improved asset allocation.
    For example:

     Participants who engage in an online retirement planning 
session increase their deferrals by an average of 5 percentage points, 
raising them from 8 percent to 13 percent.
     After using an on-line retirement planning tool, 55 
percent of participants who make under $30,000 increased their deferral 
rate by 4.3 percentage points.
     Participants who go through a retirement planning session 
with a telephone representative increase their deferral rate by an 
average of 6 percent percentage points. (3 percent to 9 percent)

    One theme that is consistent in all of our research is that the 
majority of participants want and need help.
    Participants are also in need of simple ways to gauge their savings 
progress. Last fall, Fidelity released new research on age-based 
savings guidelines. These guidelines serve as a framework for 
establishing retirement savings goals. As participants progress through 
their careers, their ``salary times a factor of X'' can be one of the 
measures used to assess their retirement savings progress. While 
Fidelity provides retirement guidance that allows participants to 
develop and evaluate their retirement plans using a variety of 
different measures, we have found that a simple way to understand 
savings target is a framework that resonates with both participants and 
plan sponsors. We believe this approach will be helpful to workers who 
switch jobs frequently, and who may have a number of retirement 
accounts thus making it even more difficult to evaluate one's savings 
strategy.
                           closing statement
    There is a path to retirement security for most Americans, but the 
road is not always an easy one. Many key constituencies have a role in 
ensuring success.

     First, plan participants need to take an active role in 
saving and managing their financial future;
     Second, plan sponsors need more flexibility in the rules 
and regulations to design benefit plans which meet the diverse needs of 
their workforce without risk of fiduciary liability and increased 
coverage cost;
     Third, service providers, like Fidelity, need to continue 
to innovate around how to help plan sponsors optimize their benefit 
programs and service participants based on their needs;
     And last, we ask policymakers to consider key areas to 
improve retirement savings outcomes:

       increase the default deferral rate to 6 percent,
       incent more plans to adopt auto-features currently 
available, such as automatic annual increase programs,
       protect and promote the availability of education and 
guidance by service providers and recordkeepers,
       modernize and simplify the current regulatory framework 
to allow innovation in plan design and participant communications,
       explore new ways to help incent younger workers to build 
solid savings habits by enrolling earlier in their working careers, and
       partner with school administrators, businesses and 
nonprofit organizations to help ensure all students have access to 
quality financial literacy.

    As the leader in providing 401(k) recordkeeping services to the 
workplace, Fidelity is in a unique position to analyze savings and 
investment trends, recommend new products and services, and help 
millions of American workers save more in their retirement accounts. 
Fidelity is committed to partnering with you, Mr. Chairman, and Ranking 
Member Alexander, and members of your committee as you work toward 
solving these issues.
    Again, I thank you for the opportunity to appear today and share 
our perspective and experience in helping Americans save for 
retirement. I am pleased to take your questions.
                                 ______
                                 
                               Appendix*
                 Fidelity Perspectives--September 2012
           do your participants have what it takes to retire?
    When helping employees plan for retirement, it's fair to say that 
the more money saved, the better. But how much savings is really 
enough? The truth is, a host of economic, demographic, and lifestyle 
variables make this seemingly straightforward question particularly 
difficult to answer.
---------------------------------------------------------------------------
    * Before investing in any mutual fund, please carefully consider 
the investment objectives, risks, charges, and expenses. For this and 
other information, call or write Fidelity for a free prospectus or, if 
available, a summary prospectus. Read it carefully before you invest.
---------------------------------------------------------------------------
    Today's younger workers, for example, are likely to switch jobs 
more frequently than generations past. According to a recent survey, 
more than 90 percent of so-called Millennials (those born between 1977 
and 1997, also known as Gen Y) expect to remain in any single job 3 or 
fewer years.\1\ As a result, members of this generation could hold 15 
to 20 separate jobs during their working lives. Multiple jobs lead to 
the accumulation of multiple retirement accounts and a fragmented, 
clouded picture of progress toward retirement readiness. Moreover, job 
switching presents workers with a number of unwelcomed opportunities to 
cash out, causing potentially significant setbacks in the pursuit of 
financial security after work.
---------------------------------------------------------------------------
    \1\ Future Workplace ``Multiple Generations @ Work'' survey of 
1,189 employees and 150 managers, June 2012.
---------------------------------------------------------------------------
    This transient dynamic in the workplace, along with increasing life 
expectancy, escalating health care costs, and uncertainty about the 
future of Social Security all portend a looming retirement savings 
crisis for many. Indeed, an estimated 20 percent of retirees will 
exhaust their savings within 10 years of their retirement.\2\
---------------------------------------------------------------------------
    \2\ The EBRI Retirement Readiness Rating:TM 
Retirement Income Preparation and Future Prospects, July 2010.
---------------------------------------------------------------------------
    Despite this sobering outlook, Fidelity believes it's critical to 
help participants determine if they are on track toward their 
retirement savings goals throughout the course of their careers.
                   getting on track and staying there
    Employees attempting to set a course toward a financially secure 
retirement are looking for help and asking for it explicitly.
    Setting up stepwise savings goals for employees and linking it to 
salary simplifies the process of determining if they are on track. 
Fidelity advocates that as participants progress through their careers 
their target multiples, or X's, of their salaries can be used as the 
goal for retirement savings. For example, at age 35, this Fidelity 
guideline suggests a participant should have saved 1X their current 
salary. Using these multiples makes the concept of saving for 
retirement a bit easier to comprehend, and therefore, potentially more 
achievable.
    While every individual's situation will differ greatly based on 
desired lifestyle in retirement, the average worker can expect to 
replace 85 percent of his pre-retirement income \3\ by saving at least 
8 times, or 8X, his ending salary.\4\ In order to reach the 8X level by 
age 67,\5\ Fidelity suggests workers should aim to save about 1X their 
salary by age 35, 3X by age 45, and 5X by age 55. The target amounts 
include all retirement savings vehicles.
---------------------------------------------------------------------------
    \3\ Eighty-five percent replacement rate is for a hypothetical 
average employee and may not factor in all anticipated future living 
expenses or needs, such as long-term care costs.
    \4\ All dollars are today's dollars, not future value.
    \5\ The age when workers born 1960 or later are eligible for full 
Social Security benefits.
---------------------------------------------------------------------------
    What is important to note is the savings multiple in comparison to 
salary. Fidelity analysis suggests that for most individuals the best 
way of achieving the recom-mended 8X goal at retirement is to ensure 
that the multiple target goals are met along the way. These 
hypothetical guidelines can help employees to meet the suggested income 
replacement rate of 85 percent in retirement. Since the 85 percent or 
8X may seem daunting as an end goal, Fidelity believes that breaking 
the retirement planning process down to an age-based goal--especially 
for younger workers--will help make the savings process seem more 
attainable.
    This example of targeted savings could be positively or negatively 
impacted by any number of variables including breaks in employment, 
working past age 67, changes to the Social Security model, or 
individual asset allocation decisions. There is no one-size-fits-all 
number; however, using this method as a guide should generate the 
necessary questions and conversations to get employees thinking and 
ultimately prompt them to take action.
    To help employees assess their situation, education programs that 
explain the importance of debt reduction and the need to establish an 
emergency fund to avoid the negative impact of loans and hardship 
withdrawals as well as helping employees avoid interruptions in their 
savings history are critical to long-term success. Guidance and 
education via online tools, in-person sessions, or telephone 
consultations--can also play a critical role in engaging participants 
and bolstering their retirement readiness.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Source: Fidelity Investments.--This hypothetical chart is for 
illustrative purposes only. It is not intended to predict or project 
investment results. Your rate of return may be higher or lower than 
that shown in the hypothetical illustration above. Fidelity Brokerage 
Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 
02917.
                            leading the way
    While the responsibility for preparing for retirement is clearly a 
shared one, plan sponsors can lead the way with innovative, automated, 
plan design features that get participants saving early, saving more, 
and--with the help of strategic goal-setting and ongoing guidance--
saving enough. The three steps outlined below can help move 
participants in the right direction.
    Step 1--Encourage employees to begin saving as early in their 
careers as possible. Early participation in a retirement savings plan 
can have an enormous impact on long-term wealth accumulation. This is 
especially critical as the DC savings plan will likely be the primary 
retirement funding vehicle for generations to come.
    Step 2--Implement auto-enrollment (AE) with an automatic Annual 
Increase feature. Not only does AE support the goal of early savings 
for the youngest workers, it also boosts plan participation rates 
overall. According to Fidelity's latest data, the average participation 
rate in plans with AE is approximately 90 percent, far higher than the 
67 percent rate in plans without it. Fidelity data also shows a marked 
increase in savings rates by employees when employers marry a higher 
default deferral rate with an automatic escalation provision such as an 
Automatic Increase Program (AIP). Only 6 percent of participants 
offered an AIP elect to enroll on their own.\6\ Requiring employees to 
opt out of an AIP rather than opting in exposes a much larger number of 
participants to the benefits of higher deferral rates.
---------------------------------------------------------------------------
    \6\ Fidelity Investments record-kept data of corporate-defined 
contribution (DC) plans of nearly 20,000 plans and 11.8 million 
participants as of June 30, 2012.
---------------------------------------------------------------------------
    Step 3--Promote the use of guidance and planning tools. Fidelity's 
MyPlan Snapshot online savings tool allows participants to anticipate 
how much they need to save for retirement which can help set savings 
goals. From there, our Income Simulator tool can help them translate 
their savings into an estimated monthly income stream during 
retirement.
    As we've noted, retirement planning is not an easy matter to tackle 
but plan sponsors can help move their participants in the right 
direction by following this simplified guideline of target multiples, 
optimizing plan design and encouraging their employees to seek 
guidance. For more information on helping participants reach retirement 
savings sufficiency, contact your Fidelity representative.
                                 ______
                                 
                   Fidelity Perspectives--Summer 2011
                     reducing regret in retirement
    New Fidelity survey provides insight on participant sentiment and 
decisions relative to enrollment, savings and early withdrawals.
    In this post-recession economy, many Americans are more focused on 
saving and are increasingly more prudent in their spending. As 
individuals consider their options, a recent Fidelity survey reveals 
that Defined Contribution (DC) plans such as 401(k)'s and IRAs play 
more prominently in their ability to save. A key finding is that more 
than half (55 percent) of current DC participants agree that they would 
not be saving for retirement if it weren't for their DC plan. In 
addition, employees of all ages view their DC plans as an effective way 
to save money for retirement. In fact, just under half of working 
participants indicated that the DC plan is critical to meeting their 
financial goals and is the only way they are saving for retirement.
    With the DC plan becoming the foundation for so many as a means to 
retirement income, employers may be wondering why employees aren't 
doing more to grow and preserve their account for its intended purpose. 
Interestingly, one-third of retired and about half of working 
participants said they wished they had contributed more to their 
retirement savings. Many expressed regret at borrowing from their 
account.
    The survey of 1,000 working and retired DC plan participants 
conducted in February 2011, underscores the role that DC plans have 
come to play in employees' retirement savings efforts. Among retirees, 
it also reiterated and reinforced how having some form of a financial 
plan can boost confidence and help reduce negative behaviors such as 
taking loans or cashing out.
    Consider these highlights from the survey results:

     More than 95 percent of those surveyed cited DC plans are 
a good way to save money for retirement.
     Eighty-five percent of those currently working as well as 
86 percent of retirees indicated they wouldn't have saved as much for 
retirement without a DC plan.
     Ninety percent of current workers surveyed said DC plans 
influence their choice of an employer.
     Thirty-nine percent of retirees and 29 percent of working 
participants who have taken a loan cited they would not take a loan if 
faced with the same decision again.
     IRAs are the most commonly held non-DC plan savings 
vehicle (37 percent) for current workers.

    This paper delves into the results to better understand what drives 
employee retirement savings decisions. The study examines employees' 
rationale for participating, why they save as much as they do, and 
whether they regret any of their retirement savings decisions.
Company Match Drives Enrollment Decisions
    Perhaps the most critical retirement savings decision an employee 
can make is their first decision--enrolling in their employer's DC 
plan. With that realization in mind, we surveyed DC plan participants 
about what factors helped to overcome any inertia or indecision and 
drove them to enroll in the first place.
    The most common reason given by current workers across all age 
groups was the desire to take advantage of company matching 
contributions. The majority of working participants (92 percent) 
surveyed indicated this was an important factor. Employers seem to be 
cognizant of this preference, as 83 percent of working employees 
indicated they receive some type of employer contribution. In addition, 
only 13 percent of working employees said their employers reduced or 
suspended matching contributions during the past 3 years, an indication 
that many employers are hesitant to take this important benefit away 
from employees, even during a recession.
    Tax benefits were another common driver of plan participation, with 
9 out of 10 indicating they believe their DC plan offers a good way to 
save for retirement on a tax-deferred basis. This sentiment was even 
more pronounced among pre-retirees, who generally earn more and may be 
subject to higher tax rates.
    There also seems to be widespread support for auto-enrollment, 
although this attitude is more prevalent among retired DC participants 
(perhaps due to their own experiences trying to save for retirement). 
Among retirees, nearly three quarters agree that all employees should 
be automatically enrolled in a workplace retirement savings plan.
Raise in Pay Leads to Increases in Deferral Rates
    The majority of current DC plan participants (54 percent) feel that 
saving more will improve their financial outlook for retirement. This 
attitude is particularly prevalent among the youngest employees (those 
age 25 to 34). Of course, one way to contribute more is to spend less. 
Yet, only 14 percent of working DC plan participants indicated that 
spending less was the one thing they could do to improve their 
financial outlook for retirement.
    Despite the challenging economic environment of the past 2 years, 
17 percent of employees indicated they increased their deferral rates 
within the past year and an additional 12 percent did so within the 
past 12 to 24 months. Fidelity record-kept data echoes these findings--
by the end of the first quarter of this year, nearly 10 percent of 
active plan participants increased their deferral rate--the largest 
portion to do so since Fidelity began tracking this figure in 2006.\7\ 
Receiving a raise or having extra money available were the most common 
reasons given for increasing deferral rates. This seems to be an 
encouraging sign that some employees understand the importance of 
increasing deferral rates whenever possible.
---------------------------------------------------------------------------
    \7\ Based on our analysis of nearly 16,500 corporate DC plans and 
11 million participants as of March 31, 2011.
---------------------------------------------------------------------------
    As employees close in on retirement, their efforts to save through 
their DC plan take on additional urgency. Approximately one out of four 
pre-retirees ages 55+ indicated the need to save more to meet 
retirement goals was their reason for upping their contributions.

     While many employees made every effort to defer as much as 
possible over the past 5 years, 23 percent of those still working 
reported they had decreased their salary deferral rates. Of those that 
have ever decreased deferrals, 34 percent cited that the money was 
needed to cope with a spouse/partner's layoff, they needed the extra 
money for an emergency fund, or their employer suspended the company 
match.
Many Older Workers Save the Maximum Allowed; Younger Workers Saving 
        What They Can Afford
    Among retirees surveyed, one-third indicated they deferred the 
maximum allowable by law in the period prior to retirement. Another 29 
percent of retirees deferred the amount necessary to receive a full 
company match and 27 percent deferred the most they could afford. 
Conversely, among employees who are still working, only 15 percent are 
deferring the maximum amount, 31 percent are deferring enough to earn 
the company match, and 43 percent are deferring all they can afford.
    The youngest employees surveyed were least likely to defer the 
maximum amount allowed (12 percent). It's possible that this population 
is grappling with college loans, saving for a down payment on a home, 
or may simply not earn enough to defer more salary. Nevertheless, 
convincing younger employees to defer the maximum allowable amount 
could produce tremendous long-term benefits for them.
Regrets, they've had a few
    Many DC participants indicated they made decisions that they later 
regretted. For example, among retirees, one-in-three said they wished 
they had contributed more to their retirement savings. Among those who 
decreased salary deferrals, 26 percent of current employees lamented 
that decision.
    Taking a loan, hardship withdrawal, or full payout when changing 
jobs was another source of regret for retirees and current employees 
alike.
     Among retirees who had taken a loan, nearly 4 in 10 cited 
they would not make the same decision again, whereas roughly 30 percent 
of working participants felt the same way--many may not regret the 
decision until they're actually in retirement.
     Roughly 40 percent of both working and retired 
participants regretted their decision to withdraw money for an 
emergency.
     More than half of working participants cited that they 
regretted the decision to take a full payout when leaving a job. Many 
retirees may take full payouts to consolidate accounts and/or to 
purchase annuities.
Having A Financial Plan Leads To Better Decision Making
    The existence of a complete financial retirement plan--or lack 
thereof--is another important factor impacting one's decision on how 
much to contribute to their DC plan. Three out of four working 
employees with a financial plan increased their salary deferral rate at 
some point in their careers, while only 59 percent of those without a 
plan reported doing so. Those without a plan were also somewhat more 
likely to increase salary deferrals out of a necessity to catch up 
later in life than those with a plan.
    A consistent theme: having a plan can help--and the earlier the 
better.
    The existence of a complete financial retirement plan appears to 
play an important role in the level of regret experienced by 
participants. For example, those with a financial plan--and therefore 
more likely to have a better understanding of their financial 
situation--were more likely to regret their decision to decrease salary 
deferrals (34 percent versus 25 percent) than those participants 
without a complete plan and potentially in the dark on the ultimate 
impact of their decision.
    The existence of a complete financial retirement plan also appears 
to produce better savings habits. Among retirees, those with a plan 
were significantly less likely to have:

     Taken a loan (18 percent vs. 30 percent)
     Taken a hardship withdrawal (16 percent vs. 34 percent)
     Taken a full payout (25 percent vs. 37 percent)

    Current employees with a plan were also less likely to withdraw 
assets early than those without a plan (26 percent vs. 35 percent). 
Among working participants, the level of regret over decisions to take 
early withdrawals was for the most part similar, whether or not the 
employee had a financial plan. Only time will tell if these employees 
come to regret these decisions later in life.

    Three steps employers can take to help employees minimize regret or 
leave employees with no regret.

    These results demonstrate that better educated and prepared 
employees make better retirement savings decisions. They are less 
likely to withdraw assets prior to retirement and even if they do need 
to do so, they are less apt to regret their decisions if they have 
prepared a comprehensive retirement financial plan.
    Of course, employees are unlikely to make any meaningful progress 
toward a financially secure retirement if they do not start 
participating in their DC plans as soon as possible. To motivate 
employees to get started and help increase their chances of success, 
employers must:

    1. Communicate the benefits of contributing to a DC plan in simple 
terms to all employees--and the importance of maximizing every 
opportunity to save more.
    2. Automatic enrollment for all eligible non-participating 
employees--not simply the newly hired--provides another, even more 
efficient way to overcome the dual challenges of employee enrollment 
and savings rates. Combining automatic enrollment with an Annual 
Increase Program (AIP) can help employees save more and put them on a 
path toward a secure retirement.
    3. Most importantly, while automatic plan features can get 
employees started, they will need guidance along the way to avoid 
making decisions they may come to regret later. Promoting the benefits 
of having a plan and offering guidance through planning tools, 
workshops, and one-on-one consultations may produce better results for 
employees and employers alike.
                                 ______
                                 
                      Building Futures--Fall 2012
 What Can Saving More Really Get You? (More Than You Might Think.)--A 
                    Building Futures Report: Q2 2012
            average account balances reach an all-time high
    At the close of Q3, average defined contribution (DC) account 
balances had reached $75,900 \8\--an all-time high--while the average 
account balance among 10-year continuous DC participants totaled 
$198,800.\8\
---------------------------------------------------------------------------
    \8\ Based on Fidelity analysis of 20,222 corporate DC plans 
(including advisor-sold DC) and 12M participants as of 9/30/2012.
---------------------------------------------------------------------------
    While the news is good and the trend is clearly positive, a closer 
examination of participant data reveals that deferral rates are a key 
driver in accumulating savings. According to Fidelity's latest data, 
covering more than 20,000 DC plans and 12 million participants, total 
savings rates average 12 percent, composed of 8 percent from employee 
contributions and 4 percent from employers. This total rate falls 
within Fidelity's recommended range of 10 percent-15 percent and 
Fidelity analysis reveals that increases in employee deferral rates can 
have dramatic effects on participant account balances over time.

    Fidelity recommends a 10 percent-15 percent total savings rate.

    In this first in a series of studies of participant behavior and 
associated outcomes, Fidelity analysis quantifies the substantial 
benefits participants can reap from deferring more and identifies steps 
plan sponsors can take to help employees realize the advantages.
       a leading lever in driving better outcomes: deferral rates
    It's intuitive that if you save more you should end up with more. 
But it begs the question: how much more? To quantify the difference 
between savings rates Fidelity profiled two DC plan participants--
``Trisha'' and ``Thomas'', \9\ who have been proactive about saving for 
retirement. Trisha and Thomas are remarkably similar. Both are in their 
mid-forties, earn roughly $45,000 \9\ annually, and had exactly the 
same balanced asset allocation over the past 12 years; they each 
currently are invested approximately 70 percent in equities. Both had 
less than $6,000 for plan DC account balances 12 years ago, and both 
make pre-tax contributions to their plan and receive company 
contributions each year. Neither has ever taken a loan or a hardship 
withdrawal.
---------------------------------------------------------------------------
    \9\ While the information provided herein is based on actual 
Fidelity workplace savings plan participant behavior, ``Thomas'' and 
``Trisha'' are fictitious names and the examples provided are for 
illustrative purposes. Trisha started with a beginning balance in 2001 
of $1,869 while Thomas's beginning balance in 2001 was $5,544. 
Approximately 20 percent of the end account balance growth is 
contributed to market return/conditions. Both participants were 
allocated 70 percent to equities. Actual salaries used were $44,944 and 
$45,098. The data is based on Fidelity research from 6/30/2000 through 
6/30/2012.
---------------------------------------------------------------------------
    Similarities aside, Trisha's and Thomas's investor profiles diverge 
in one critical area--their deferral rates. And that has made a big 
difference.
Trisha's Account Balance Grows
    Trisha contributes 4 percent of her salary annually and receives a 
1 percent core contribution from her employer. As shown in our 
illustration, Trisha's account balance has increased over the past 12 
years to its current total of $27,000.
    In reviewing Trisha's account, we can see that her DC account 
balance has grown, and she still has approximately 20 years in the 
workforce during which she can continue to save. But how does Trisha's 
situation compare with Thomas'?
    Figure 1: Deferrals Drive Outcomes for ``Thomas'' and ``Trisha'' 
\9\

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Thomas Makes Bigger Strides
    Like Trisha, Thomas benefits from a core employer contribution of 1 
percent. However, Thomas has consistently saved two to three times as 
much as Trisha. He deferred 12 percent of his salary for the past 5 
years and 8 percent annually prior to that. Thomas's current total 
savings rate is 13 percent versus Trisha's total savings rate of 5 
percent. The additional money Thomas saved has produced impressive 
results.
    While Trisha's account balance grew to over $27,000 during the past 
12 years, Thomas's grew to a balance of over $68,000. In this case, the 
additional 8 percent Thomas contributed over Trisha has resulted in a 
retirement savings balance that is 2\1/2\ times larger than Trisha's. 
Clearly, Thomas's higher deferral rate over the last 12 years has left 
him better prepared for retirement. Despite the fact that they had the 
same savings potential, Thomas is more on target demonstrating that 
higher deferral rates are critical to successful retirement planning.
                      how can plan sponsors help?
    As the participant case study of Thomas and Trisha depicts, the 
effects of participant choices relative to their retirement savings are 
magnified over time. Thus, it's critical that plan sponsors work with 
plan providers, their advisors and consultants to not only educate 
employees early and often about the impact their decisions can have 
over time on their outcomes but also structure their plan design to 
promote optimal behaviors.
Accelerating Savings
    For workers facing the economic realities of the here and now, 
retirement planning can be a daunting proposition. As a result, many 
are subject to inertia by either not participating in their DC plan or 
they set it and forget it once enrolled and very infrequently, if at 
all, increase their deferral rate. In fact, according to Fidelity data, 
61 percent of participants who are auto-enrolled make no change from 
the default deferral amount.\8\

    Auto-escalation drives \1/3\ of all deferral increases.\8\

    To combat such participant inertia, sponsors can implement the 
automatic annual increase programs (AIPs) to boost deferral rates. AIP 
can be linked to coincide with annual salary increases to minimize the 
impact to an employee's net take home pay. AIP is the single most 
effective driver of deferral increases, as 33 percent of all deferral 
increases during the past 12 months were due to AIP and for young 
workers (age 20-30) 52 percent of all deferral increases are due to 
AIP.\8\ In addition, Fidelity data reveals that very few employees 
decline to participate; 93 percent of those enrolled by their employer 
remain within the program.\8\
Putting Employees on a Better Path
    Fidelity data shows that the opt-out rates in plans with a 3 
percent automatic enrollment default rate are virtually identical to 
those in plans with a default rate of 6 percent. \8\ Automatically 
enrolling employees at a savings rate that will set them down the right 
path--such as 6 percent combined with an annual increase at 1 percent a 
year up to 10 percent or 12 percent--can help drive better outcomes 
without adversely affecting participation. In addition, 16 percent of 
auto-enrolled employees who received an e-mail and telephone call from 
a Fidelity representative to orient them to their plan increased 
contributions, and on average their deferral rates nearly doubled (3.5 
percent to 6.7 percent).\10\
---------------------------------------------------------------------------
    \10\ Fidelity Investments, CKC Onboarding Results from January-July 
2011; based on 192,000 auto-enrolled participants.
---------------------------------------------------------------------------
Know Where Your Opportunities Lie
    Plan sponsors should look beyond the averages to examine 
participant behaviors. Learn which employees aren't participating and 
why. Identify participants missing out on a full company match and 
those who have never increased their deferral rates. By understanding 
these participants more fully, sponsors are better able to respond with 
timely information, targeted communications, and appropriate guidance.
    Thomas and Trisha are saving, which is the first step on the road 
to retirement readiness; however, there is more that may help them and 
others to be fully prepared for retirement. Identifying where your 
participants stand and targeting populations that may be lagging is 
critical to helping participants prepare for retirement.

    Guidance can lead to higher deferral rates.\10\
                                 ______
                                 
               A Building Futures Report: Q4 2012 Trends
     fidelity investments: an industry leading retirement provider
    Fidelity's record-kept database is one of the industry's most 
comprehensive proprietary collections of defined contribution plan and 
participant information.

     Based on record-kept data of corporate-defined 
contribution (DC) plans:

       Over 20,000 plans
       11.9 million participants

     Data as of December 31, 2012 unless otherwise noted \11\
---------------------------------------------------------------------------
    \11\ Data in this presentation exclude tax-exempt plans, 
nonqualified plans, and the FMR Co. plan. This analysis includes data 
from the Fidelity Advisor 401(k) Program.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                    important additional information
    Before investing in any mutual fund, please carefully consider the 
investment objectives, risks, charges, and expenses. For this and other 
information, call or write Fidelity for a free prospectus or, if 
available, a summary prospectus. Read it carefully before you invest.
    As with all your investments through Fidelity, you must make your 
own determination whether an investment in any particular security or 
securities is consistent with your investment objectives, risk 
tolerance, financial situation and your evaluation of the security.
    Personal Rate of Return (PRR): A measure of portfolio performance 
that indicates the return earned over a given time period. Personal 
rate of return used in our analyses (unless otherwise noted) is time 
weighted, which means it was calculated by subtracting beginning market 
value from ending market value and dividing by beginning market value 
for each sub-period. A new sub-period began each time there was cash-
flow. The sub-period returns were then geometrically linked together to 
calculate the return for the entire period. All returns shown are 
historical and include change in share value and reinvestment of 
dividends and capital gains, if any. Risk is defined as the volatility 
of historical portfolio returns; it measures the average deviation of a 
series of historical returns from its mean. Large values of risk 
indicate large volatility in the historical return series, and small 
values indicate low volatility.
    Keep in mind investing involves risk. The value of your investment 
will fluctuate over time and you may gain or lose money.

    Past performance is no guarantee of future results.

    Important Additional Information about Charts Showing Participant 
Equity Holding versus Freedom Funds' Equity Rolldown

    For the equity rolldown chart, ``Equities'' are defined as domestic 
equity, international equity, company stock, and the equity portion of 
blended investment options. A random sample of 5,000 participant data 
points are plotted on the related charts. Percentage of assets invested 
in equities is based on data for participants in the defined 
contribution plans record-kept by Fidelity with a balance as of quarter 
end. These plans included both qualified and assetized nonqualified 
plans (i.e., nonqualified plans informally funded with mutual funds and 
other securities), as well as single-fund plans, which include Employee 
Stock Ownership Plans (ESOPs). Plans sponsored by Fidelity Investments 
for the benefit of its own employees are excluded. The Fidelity Freedom 
Funds rolldown schedule on both Exhibits illustrate the Freedom Funds' 
target asset allocations among equities and was created by Strategic 
Advisers, Inc. This rolldown schedule also illustrates how these 
allocations may change over time. The Freedom fund future target asset 
allocations may differ from this approximate illustration.
    Fidelity Freedom Funds are designed for investors expecting to 
retire around the year indicated in each fund's name. Except for the 
Freedom Income Fund the funds' asset allocation strategy becomes 
increasingly conservative as it approaches the target date and beyond. 
Ultimately, they are expected to merge with the Freedom Income Fund. 
The investment risks of each Fidelity Freedom Funds change over time 
as its asset allocation changes. They are subject to the volatility of 
the financial markets, including equity and fixed income investments in 
the United States and abroad and may be subject to risks associated 
with investing in high yield, small cap and, commodity-related, foreign 
securities. Principal invested is not guaranteed at any time, including 
at or after their target dates.

    The Chairman. Thank you very much, Ms. McCarthy.
    And now, Ms. Hounsell.

 STATEMENT OF M. CINDY HOUNSELL, PRESIDENT, WOMEN'S INSTITUTE 
            FOR A SECURE RETIREMENT, WASHINGTON, DC

    Ms. Hounsell. Good morning, Chairman Harkin, Senator 
Alexander, and the other distinguished members of the 
committee. We appreciate the opportunity to be here today to 
discuss retirement saving by American workers and to ensure 
that committee members recognize the significant retirement 
risks that women face, particularly the millions of women who 
are on the cusp of retirement.
    My name is Cindy Hounsell. I am president of the Women's 
Institute for a Secure Retirement. For 17 years, we have been 
trying to help women, educators and policymakers understand the 
important issues surrounding women's retirement income. Our 
primary mission is financial education and capability, 
providing women with the crucial skills and information they 
need to avoid poverty in retirement.
    WISER and the U.S. Administration on Aging also operate the 
National Education and Resource Center on Women and Retirement 
Planning.
    We commend the committee for examining the adequacy of 
retirement savings because this comes at a time when 61 percent 
of Americans age 44 to 75 fear running out of retirement assets 
more than they fear death. Women are among the most worried 
about savings and their financial security in retirement, and 
rightly so. They live longer, they have less retirement income. 
Divorce and widowhood have significant negative consequences 
for their financial well-being. Current discussions about tax 
reform would lead us to expect that policymakers would use the 
process as an opportunity to strengthen the retirement system 
and improve its effectiveness.
    We believe that much can be accomplished by strengthening 
and building on our existing retirement programs such as Social 
Security, employer-sponsored plans, financially innovative 
products, incentives for longer work, and increased financial 
education and planning.
    Every year there is new research and literature showing 
that American workers are not saving enough. The Employee 
Benefit Research Institute's retirement security projection 
model for 2012 shows that 44 percent of Baby Boomers and Gen-
Xers won't have enough retirement income to cover even basic 
retirement expenses and uninsured health costs. When looking 
just at the Gen-Xers, the shortfall, the average savings 
deficit for a single female is a little over $133,000. That's 
the additional amount that a single female would, on average, 
need to save by age 65 to eliminate her shortfall.
    The recent economic crisis has made it even more difficult. 
The low contribution rates and the lack of understanding of the 
need for a comprehensive retirement strategy means inadequate 
income for the rest of your life. These issues are compounded 
for women. In addition to living longer, older women are more 
likely to have costly chronic medical conditions and need long-
term institutional care. Further, older women are more likely 
to be single at some point in their lives, which puts them at a 
higher risk for poverty, and it's a cruel irony at the latest 
stage of life that many women become poor for the first time in 
their lives.
    Today, the rate of poverty for women aged 65 and over is 
close to 11 percent. In my testimony I have a lot more numbers, 
but what I'd like to just point out is that of those numbers, 
once you get to single women, for African-American women, 
almost a third are poor, and for Hispanic women it's 44 
percent, which is just enormous.
    Another twist on this is that women also work fewer years 
because they are the family primary caregivers, and caregiving 
can have serious financial consequences. A recent study shows 
that caregivers lost about $304,000 in wages, Social Security 
and private pension losses. And another problem is older women 
taking in their grown children and their grandchildren. Almost 
20 percent of the grandparents responsible for grandchildren 
who live with them are living in poverty.
    In the workplace there is better news, but it still varies 
by ethnicity and racial groups, and black women were the most 
likely to work for an employer with a plan, while Latinos were 
the least likely. However, the gender gap is a continuing 
factor, and another EBRI report suggests that while women in 
the aggregate have been closing the retirement participation 
rate over the last decade, they slipped a little because of the 
recession.
    The reality of today's retirement landscape, as already 
mentioned, is do it yourself, do it right, or live at or below 
the edge of poverty for the rest of your life. That's the 
reality for a lot of people. And that slice of the pie keeps 
getting bigger and bigger. The nature of today's system of 
individual responsibility demands financial capability. We need 
to help people with these issues, and a lot of the suggestions 
that are made are helpful for people if you work in a large 
company, but for those who are in smaller companies like what 
you are talking about, Senator Alexander, people just don't 
have that level of education and literacy.
    Women, along with their male counterparts, tend to lack 
basic retirement financial knowledge. That is often the reason 
why they make serious financial mistakes. Women need the best 
information and opportunity to access information to ensure 
that they don't make these mistakes. Experience and research 
shows that relevant financial information from trusted 
resources can dramatically increase your total net worth by 
nearly a third for those even with the lowest incomes, and up 
to 18 percent for those with moderate incomes.
    So, what can we do? One of our key initiatives, as I 
mentioned, is the National Resource Center that we operate with 
the U.S. Administration on Aging that provides programs in 
communities, and these interventions leverage strategic 
partnerships not only with other nonprofit aging organizations 
but business, Federal agencies, and financial services groups.
    First of all, before I get into my long list which is in my 
testimony, and I won't read that to you at this point, one of 
the most important things that we think needs to be done to 
support increased economic and financial security for women of 
all ages would be to strengthen the Social Security system, and 
we are happy to see that the white paper that the Chairman has 
issued has a plan to strengthen Social Security.
    Another one of my favorite provisions which has been talked 
about in this city for about 20 years is to help caregivers by 
including a provision in Social Security for caregiving 
credits.
    There are many programs around that help at-risk 
populations. What we need to do is start working with these 
models that we really know work and promote them on a larger 
scale. Many of these programs help people avoid dependence on 
government programs.
    In conclusion, I'd like to say thank you for letting me 
hammer home the risks for women in retirement. I would like to 
just say finally that there is no single solution. I have been 
hearing, ``Everybody wait until we get the perfect plan.'' 
There is no perfect plan. We already know where the problems 
are, what the challenges are. We need to target those segments 
of the population. There are a range of solutions. Most of all, 
we need to continue to build on what is working, make it 
better, and just realize that there are a lot of Americans out 
there who are just trying to achieve basic financial stability. 
Thank you.
    [The prepared statement of Ms. Hounsell follows:]
                Prepared Statement of M. Cindy Hounsell
                                summary
    American workers are not saving enough for retirement. The recent 
economic crisis has made it even more difficult and low contribution 
rates and lack of understanding of the need for a comprehensive 
strategy means inadequate income for the rest of your life. The topic 
of retirement income insecurity, however, is not new. We all know the 
themes: people are not saving enough, they are not investing 
intelligently, and they are not going to have enough money to live 20-
30 years in retirement. When it comes to women, we know that they live 
longer, earn less, take time out of the workforce to provide family 
care, are more likely to work part-time and are likely to live alone at 
some point in retirement. While women are equally likely to have access 
to retirement savings plans through work, they are hampered by a 
significant pay gap and millions are unable to contribute at the levels 
needed. All of these factors make it that much harder for women to 
experience a financially secure retirement.
    The reality of today's retirement landscape is do-it-yourself, and 
do it right, or live at or below the edge of poverty in what are 
supposed to be the golden years. The nature of today's system of 
individual responsibility demands financial capability. This is WISER's 
primary area of focus. Women face unique challenges, and they are in 
the difficult position of making big decisions while being unable to 
afford even a small mistake. Women, along with their male counterparts, 
also tend to lack basic financial knowledge, which is often the reason 
for making serious financial mistakes. Women need the best information 
and opportunity to access information; this information should be 
targeted to women as spouses and caregivers, as well as to women as 
employees.
    WISER's mission is to provide reliable, actionable and culturally 
relevant resources. WISER's interventions leverage strategic 
partnerships to maximize our reach; from highly educated professionals 
to the most vulnerable populations. Through these partnerships, WISER 
educates women and inspires them to take action to improve their 
financial situation and outlook. WISER's approach is to bring financial 
planning back to the basics. Our goal is to help women make the best 
decisions they can with the limited resources they may have available.
    There is no single solution to these issues. We need to start 
understanding what the specific challenges are to certain segments and 
target those segments with a wide range of solutions from financial 
education, to product design, policy changes and other innovations. 
WISER's recommendations include: Protect, preserve and strengthen 
Social Security--a program critical to the financial well-being of 
women; support employer plans, make adjustments in education 
initiatives to recognize the difference in men's and women's employment 
experience and promote individual saving behavior; enable later 
retirement and support better work options at later ages; encourage 
financial product innovation that help older Americans preserve and 
protect their retirement incomes and assets; and educate women of all 
ages about longevity and how financial products, financial planning and 
saving can improve their financial prospects.
                                 ______
                                 
    Good morning, Chairman Harkin, Senator Alexander and distinguished 
members of the committee. I appreciate the opportunity to appear before 
you today to discuss retirement saving by American workers and to 
ensure that committee members recognize the significant retirement 
risks women face--particularly the millions of women who are on the 
cusp of retirement.
                              introduction
    My name is Cindy Hounsell, and I am president of the Women's 
Institute for a Secure Retirement (WISER). WISER is a nonprofit 
organization that works to help women, educators and policymakers 
understand the important issues surrounding women's retirement income. 
Our primary mission is financial education and capability--providing 
women with the crucial skills and information they need to avoid 
poverty in retirement. As the only organization to focus exclusively on 
the unique financial challenges that women face, WISER supports women's 
opportunities to secure adequate retirement income through research, 
training workshops, educational materials and outreach. WISER and the 
U.S. Administration on Aging operate the National Education and 
Resource Center on Women and Retirement Planning.
    WISER commends the committee for examining the adequacy of 
retirement saving by American workers. This focus comes at a time when 
61 percent of Americans age 44 to 75 fear running out of retirement 
assets more than they fear death.\1\ Our testimony will focus primarily 
on women's retirement savings--highlighting the challenges women face. 
We will summarize some of the activities WISER continues to undertake 
to help women deal with these challenges. We will also detail the 
outreach efforts of WISER and its partners to improve financial 
literacy and thereby improve savings. Finally, we believe that there 
needs to be a range of solutions that will help people today, and help 
various segments of the workforce who are facing differing challenges.
---------------------------------------------------------------------------
    \1\ Outliving Your Money Feared More Than Death, Allianz Life 
Insurance Company of North America press release, June 17, 2010.
---------------------------------------------------------------------------
                     inadequate retirement savings
    Women are worried about saving enough and about their financial 
security in retirement, and rightly so. They live longer than men, and 
they have less retirement income. Divorce and widowhood have 
significant negative consequences for their financial well-being. 
Current discussions about tax reform in 2013-14 would lead us to expect 
that policymakers would use the process as an opportunity to strengthen 
the retirement system and improve its effectiveness by including 
policies to improve the financial security of women (and men) and their 
families. We believe that much can be accomplished by strengthening and 
building on our existing retirement programs, such as Social Security, 
employer-sponsored plans, financially innovative products, incentives 
for longer work, and increased financial education and planning to 
improve the financial security of older women.
    Every year there is new research and literature showing that 
American workers are not saving enough for retirement. The Employee 
Benefit Research Institute's Retirement Security Projection Model 2012 
shows that 44 percent of Baby Boomers and Generation Xers won't have 
enough retirement income to cover basic retirement expenses and 
uninsured health costs.\2\ When looking just at Generation Xers that 
will have a shortfall, the average savings deficit for single females 
is $133,349. This is the additional amount that a single female would, 
on average, need to save by age 65, to eliminate her projected 
retirement shortfall.\3\
---------------------------------------------------------------------------
    \2\ Employee Benefit Research Institute. Retirement Income Adequacy 
for Boomers and Gen Xers: Evidence from the EBRI 2012 Retirement 
Security Projection Model. EBRI Notes, May 2012.
    \3\ Ibid.
---------------------------------------------------------------------------
                         challenges women face
    It's clear from the data that, no matter how you slice it, American 
workers are not saving enough for retirement. The recent economic 
crisis has made it even more difficult and low contribution rates and 
lack of understanding of the need for a comprehensive strategy means 
inadequate income for the rest of your life. These issues are 
compounded for women. For one, women live longer, which means women 
need more income and their retirement assets have to last longer. Older 
women are also more likely to have chronic (read: costly) medical 
conditions and need long-term institutional care. Further, older women 
are more likely to be single, which puts them at higher risk for 
poverty. It is at this later stage of life that many women become poor 
or in the near poor category for the first time in their lives.
    Despite needing more retirement assets, women end up having less. 
In the case of single women over 65 today, fully half receive less than 
$750 a year in income from assets.\4\ Factors that play into this 
include pay inequity, uneven work histories due to caregiving 
responsibilities, and a greater likelihood of working part-time where 
retirement benefits are not offered.
---------------------------------------------------------------------------
    \4\ Women's Institute for a Secure Retirement. Fact Sheet: Single 
Older African American Women and Poverty.
---------------------------------------------------------------------------
    The result of these issues are included in a recent report by the 
GAO which identified that women age 65 and over have 25 percent less 
retirement income and twice the poverty rate of men.\5\ When widowhood 
or divorce occurs, the effects are even more harmful. The report found 
that the income of women near or in retirement dropped 37 percent as a 
result of widowhood, while men's fell 22 percent. Divorce or separation 
reduced women's income by 41 percent--almost twice the decline of men's 
income.\6\ Today, the rate of poverty for women age 65 and over is 10.7 
percent, compared to 6.2 per cent for men.\7\ When looking at single 
women over age 65, the poverty rate jumps to 17.4 percent.\8\ In this 
mix is a poverty rate for white single women of 15.3 percent; 32.5 
percent for single African-American women; and 43.7 percent for single 
Hispanic women.\9\
---------------------------------------------------------------------------
    \5\ GAO. Retirement Security: Women Still Face Challenges. GAO-12-
699. July 19, 2012.
    \6\ GAO. Retirement Security: Women Still Face Challenges. GAO-12-
699. July 19, 2012.
    \7\ Current Population Reports. Income, Poverty and Health 
Insurance Coverage in the United States, 2011. September 2012.
    \8\ Women's Institute for a Secure Retirement. Fact Sheet: Single 
Older African American Women and Poverty. 2012.
    \9\ Ibid.
---------------------------------------------------------------------------
             caregiving hurts women's savings opportunities
    As noted above, while women earn less, live longer and are likely 
to live alone in old age, women also work fewer years by taking time 
out of the workforce for caregiving as their families' primary 
caregivers for both children and older parents. As caregivers, women 
are also more likely to work part-time in jobs without benefits. The 
Social Security Administration finds that among new retired-worker 
beneficiaries, women average 12 years of zero earnings. This is 12 
fewer years to put money away through a defined contribution plan or 
IRA. Since caring for the family is not recognized as an economic 
contribution, women lose out by bearing the main share of this 
responsibility and the corresponding economic consequences. Caregiving 
can have serious financial consequences, especially for adults nearing 
retirement. Reduced wages and benefits result in missed opportunities 
for compounded returns on 401(k) matching contributions and less in 
savings and investments. Caregivers' also pay an estimate of $5,531 
annually in out-of-pocket costs for caregiving.\10\ A 2011 study showed 
that caregivers lost $303,880 in wages, Social Security, and private 
pension losses as a result of caregiving responsibilities. \11\
---------------------------------------------------------------------------
    \10\ National Alliance for Caregiving, Caregiving in the U.S., 
2009.
    \11\ The MetLife Study of Caregiving Costs to Working Caregivers, 
June 2011.
---------------------------------------------------------------------------
    Another problem for women in or near retirement is that almost 20 
percent of the 2.5 million grandparents responsible for grandchildren 
who live with them, were living in poverty. Half of the caregivers had 
been in this role more than 5 years. Many lose or quit jobs to care for 
children and incur more expenses that result in spending down 
retirement savings.\12\
---------------------------------------------------------------------------
    \12\ Growth in Grandfamilies Leads to Food Insecurity. May/June 
2012, Aging Today.
---------------------------------------------------------------------------
    Women must plan for a longer retirement with less income--the 
median income for women age 65 and older is only 60 percent of men's 
income in that same age group.\13\ This should not come as a surprise--
since the retirement system is based on what workers earn--so women are 
left with inadequate pensions and savings. The result is that women 
must rely too heavily on Social Security as an income source in 
retirement.
---------------------------------------------------------------------------
    \13\ Women's Institute for a Secure Retirement, Fact Sheet: Women's 
Retirement Income, 2012.
---------------------------------------------------------------------------
    In the workplace, women were more likely to work for employers that 
offered 401(k) plans than were men. This varies by racial groups and 
black women were the most likely to work for an employer with a plan 
while Latinas were the least likely. However, the gender pay gap is the 
major issue preventing women from contributing more to their defined 
contribution plans. A recent EBRI report suggests that while women in 
the aggregate had been closing the retirement participation rate over 
the last decade--down to less than 1 percentage point by 2009--the 
recession caused women to fall slightly behind again in 2010 and 
2011.\14\
---------------------------------------------------------------------------
    \14\ Employee Benefit Research Institute, Employment-Based 
Retirement Plan Participation, November 2012 EBRI Issue Brief.
---------------------------------------------------------------------------
                          financial capability
    The reality of today's retirement landscape is do-it-yourself, and 
do it right, or live at or below the edge of poverty in what are 
supposed to be the golden years. The nature of today's system of 
individual responsibility demands financial capability. This is WISER's 
primary area of focus. We focus on women because of the challenges we 
set forth earlier. Women are in the difficult position of making big 
decisions while being unable to afford even a small mistake.
    Women, along with their male counterparts, tend also to lack basic 
financial knowledge, which is often the reason for making serious 
financial mistakes. Women need the best information and opportunity to 
access information to ensure that they do not make costly decisions; 
this information should be targeted to women as spouses and caregivers, 
as well as to women as employees. Experience and research shows that 
relevant financial information can dramatically increase total net 
worth by nearly one-third for those with the lowest income and 18 
percent for those with moderate income.\15\
---------------------------------------------------------------------------
    \15\ Lusardi, Annamaria, Saving and the Effectiveness of Financial 
Education. Published in ``Pension Design and Structure: New Lessons 
from Behavioral Finance,'' edited by O. Mitchell and S. Utkus. Oxford 
University press, 2005.
---------------------------------------------------------------------------
    One of WISER's key initiatives is a program administered 
cooperatively and funded by the Administration on Aging--the National 
Education and Resource Center on Women and Retirement Planning. The 
AOA/WISER Resource Center's primary goal is to educate the most women 
we can possibly reach with information that can assist them in their 
retirement planning. We seek to provide average and low-income women 
the opportunity to take the first step toward controlling their 
financial futures.
    WISER's approach is to bring financial planning back to the basics. 
Our goal is to help women make the best decisions they can with the 
limited resources they may have. We train trainers who assist women in 
their communities. We explain the hard reality of having to adjust 
living standards to live within their means and to find resources in 
their communities that they may not be aware of.
    The Center has directly reached tens of thousands of women through 
our own and our partners' workshops, and we've reached millions with 
our publications and Web site. The Center's strength is providing women 
with core financial knowledge that encourages them to make financial 
and retirement planning a priority in their lives. We focus on such 
issues as health and retirement benefits at work (or the implication of 
the lack of such benefits), the financial implications of providing 
care for children, parents and spouses, and the risks of inflation and 
longevity.
    The Center's Business Advisory Council helps in disseminating 
education and information through the Community Partnership Program 
with the Financial Services Roundtable, as well as a long-standing 
partnership with the American Council of Life Insurers and several 
individual companies who help us further our education effort. Many 
other partners--employers, business and trade organizations, aging and 
women's organizations and community-based groups help spread the 
message and disseminate the Center's materials.
    We also work with Federal agencies, including the Department of 
Agriculture's Cooperative Extension Service, the Department of Labor, 
the Consumer Financial Protection Bureau and the U.S. Social Security 
Administration. Recently, both Money magazine and ForbesWoman have 
commended WISER, with ForbesWoman naming WISER's Web site, 
www.wiserwomen.org, one of the Top 100 Web sites for Women in 2012.
    Among the population we have reached are highly educated nurses, 
executive women, childcare workers and low-income entrepreneurs. The 
common thread we found among these varying groups of women was that 
there was an additional obstacle for many women. That obstacle is 
putting everyone's needs ahead of their own. Many women were taken 
aback when the trainers encouraged them to fund their own retirement 
before spending money on their children and grandchildren.\16\
---------------------------------------------------------------------------
    \16\ Women's Institute for a Secure Retirement, Changing Investment 
and Savings Behavior of Nurses, 2012.
---------------------------------------------------------------------------
    There is increasing evidence that planning for retirement is 
effective and work place seminars are helpful, but there is a need for 
more basic resources to help people figure out how much they need to 
increase their savings by in order to retire with security. We have 
included below a list of several issues that women are in particular 
need of learning about or better understanding.\17\ For example, we 
find that the following are key areas of retirement illiteracy:
---------------------------------------------------------------------------
    \17\ Retirement Literacy: A Key to Financial Security for Women. 
Mathew Greenwald & Associates, Inc., WISER Symposium, Washington, DC. 
December 7, 2012.

     Asset to income ratio is not understood and how much is 
needed for a secure retirement.
     Longevity risk is poorly understood and not widely planned 
for.
     Value of guaranteed lifetime income or how to draw down 
assets.
     The impact of future inflation and taxes is not included 
in planning for retirement.
     Many women assume they will just keep working beyond 
normal retirement age, but more than 40 percent of Americans end up 
retiring earlier than they planned to, usually due to job loss, family 
needs including health issues, or personal poor health.
Agenda for Near Retirees:

     Educate near retirees on the value of claiming Social 
Security later to attain higher Social Security benefits.\18\
---------------------------------------------------------------------------
    \18\ Innovative Strategies to Help Maximize Social Security. James 
Mahaney, Strategic Initiatives, Prudential Financial. Updated Edition, 
2012.
---------------------------------------------------------------------------
     Obtain a benchmark measure of retirement literacy and 
target the most important area of insufficient literacy.
     Provide benchmarks on determining retirement readiness or 
when retirement can be afforded.

    Finally, we need to strengthen our existing programs wherever 
possible. That means focusing in particular on Social Security, 
employer-sponsored retirement programs, individual saving initiatives, 
financial products that promote increased economic security in old age 
and longer work incentives for women. The following are suggested 
actions for building and supporting increased economic and financial 
security for women of all ages.

     Protect, preserve and strengthen Social Security--a 
program critical to the financial well-being of women:

       Preserve Social Security as an income-based social 
insurance system.
          Improve benefits for low-wage workers--those with 
        very low benefits are primarily low-wage, unmarried and widowed 
        women.
          Study ways to offer retirement protection to women 
        with significant time spent as caregivers, including the 
        provision of Social Security credits.

     Support employer plans, recognize the difference in men's 
and women's employment experience and promote individual saving 
behavior:

          Encourage more employers to offer a retirement 
        program and make it easy for employers to do so.
          Encourage plan sponsors offering 401(k) and similar 
        plans with better default investment options to enable more 
        savers to accumulate more assets for retirement.
          Extend retirement savings opportunities so that part-
        time and temporary workers have a way to save.

     Enable later retirement and support better work options at 
later ages:

          Study the interaction of increasing longevity and 
        retirement ages, and develop a dynamic system to keep 
        retirement ages in step with greater longevity.
          Promote incentives for older workers to continue 
        working and improve employment training and retraining programs 
        to better serve older workers.

     Encourage financial product innovation that help older 
Americans preserve and protect their retirement incomes and assets:

          Support and encourage the continued sponsorship of 
        retirement plans with risk-protection features, such as 
        lifetime income options.
          Support development of more products that include 
        combining income and long term care.
          Support development of longevity insurance.

     Educate women of all ages about financial products, 
financial planning and saving:

          Encourage employers to offer meaningful and 
        appropriate financial education programs and assistance.
          Government and foundations should act together to 
        support community efforts of non-profit aging organizations to 
        offer financial education, particularly those programs that 
        target at-risk populations. WISER works with n4a, the National 
        Association of Area Agencies on Aging as well as the National 
        Council on Aging's Economic Security Initiative model that 
        works well. We need to promote these programs that are 
        successful on a larger scale. \19\
---------------------------------------------------------------------------
    \19\ Economic Security Initiative Fact Sheet 2012, National Council 
on Aging.
---------------------------------------------------------------------------
          We know Americans are not saving enough; now we need 
        to direct more resources to getting them the information, 
        tools, and services we know can help and that can make a real 
        difference in their retirement savings.
                               conclusion
    Mr. Chairman, thank you for including women's retirement issues as 
part of the broader discussion on retirement savings adequacy. As we 
hope our testimony has pointed out, women are at a particularly high 
risk for poverty in retirement, and there are a series of policy 
options that can help greatly avoid this outcome. We need to make it 
easier for people and give them some level of confidence that they can 
do this or they just throw their hands in the air and say I will never 
have $2 million so what is the point. The point is that a little can go 
a long way and we know that women need confidence to build on their 
financial knowledge and make better decisions.
    Finally, there is no single solution to these issues. We need to 
start understanding what the specific challenges are to certain 
segments and target those segments with a wide range of solutions from 
financial education, to guaranteed income product design, policy 
changes and other innovations. There are millions of workers who want 
to save and do not have access to any plan and do not know how to set 
up an IRA on their own--it is a very complicated process when you don't 
speak the financial jargon.
    Most of all, we need to continue to build on what is working and 
make it better. While there are endless discussions in Washington about 
what the correct solution is, millions of Americans are just trying to 
achieve financial stability.

    The Chairman. Thank you very much, Ms. Hounsell.
    Now, Dr. Madrian.

  STATEMENT OF BRIGITTE C. MADRIAN, AETNA PROFESSOR OF PUBLIC 
   POLICY AND CORPORATE MANAGEMENT, HARVARD KENNEDY SCHOOL, 
                         CAMBRIDGE, MA

    Ms. Madrian. Thank you for the opportunity to speak to you 
today and share my thoughts on how we can strengthen America's 
retirement savings system. I am Brigitte Madrian, the Aetna 
Professor of Public Policy and Corporate Management at the 
Harvard University John F. Kennedy School of Government, and I 
have spent the last 15 years studying employer-sponsored 
savings plans and the types of policy interventions and plan 
design features that can improve savings outcomes.
    There is much concern in both academic and policy circles 
about whether our current private defined contribution 
retirement savings system can adequately meet the retirement 
income needs of individuals. Although the current system has 
several shortcomings, there are several sensible steps that can 
be taken to improve outcomes for individuals without 
substantially increasing the costs or risks to employers.
    My early research on automatic enrollment documented how 
small changes in plan design can have a large impact on savings 
outcomes. This research provided the impetus for the measures 
incorporated in the Pension Protection Act of 2006 that 
encourage employers to adopt automatic enrollment as part of 
their employer-sponsored savings plans. There are many other 
measures that can further strengthen the private defined 
contribution saving system in the United States. In my remarks, 
I will highlight four shortcomings of the current system and 
suggest potential avenues for change.
    The first shortcoming of the current system is 
participation. Less than half of private-sector workers 
participate in an employer-sponsored retirement plan. Low 
participation is a particular problem for employees in small 
firms, many of which do not even offer a savings plan. Policy 
initiatives that encourage and facilitate the automatic savings 
of employees in small firms are a key step to improving 
outcomes in a defined contribution retirement system.
    Two such proposals are the widely endorsed automatic IRA 
and the U.S. Senate HELP Committee's USA Retirement Funds. Both 
would create a simple and low-cost mechanism for small 
employers to make contributions to retirement savings accounts 
for their employees through a payroll deduction.
    The second shortcoming of the current system is that those 
workers who do participate in a defined contribution retirement 
savings plan too often have contribution rates that are too 
low. Savings plans need to be structured to encourage higher 
participant contributions. Let me suggest three easy ways to do 
so.
    No. 1, change the structure of the employer match. A 
typical savings plan employer match is 50 percent, up to 6 
percent of pay. Such a match costs the employer 3 percent of 
pay for employees contributing 6 percent or more to the plan, 
and gives employees an incentive to save 6 percent of pay. 
Consider instead a match of 30 percent, up to 10 percent of 
pay. This would cost the employer 3 percent of pay for every 
employee contributing at or above 10 percent to the plan, but 
this match gives employees a financial incentive to save at 
least 10 percent of pay but at no increased cost to the 
employer.
    No. 2, encourage employers to adopt a higher default 
contribution rate under automatic enrollment. The widespread 
adoption of automatic enrollment following the Pension 
Protection Act of 2006 has been a clear victory for public 
policy. But the typical default contribution rate is 3 percent, 
a rate that falls well short of what most need to save for 
retirement. Yet we know from extensive research that many 
employees will persist at the default. The solution is easy. 
Set a higher default contribution rate.
    One concern is that a higher default contribution rate will 
encourage more employees to opt out of savings plan 
participation altogether. In my own research, I have found that 
few employees object to higher automatic enrollment default 
contribution rates of 5 or 6 percent in companies that match at 
least to that level.
    No. 3, more aggressive automatic contribution escalation. 
Even though the Pension Protection Act automatic contribution 
increase baseline calls for a 1 percent increase in 
contribution rates each year, there is no reason that employers 
could not escalate employee contribution rates more quickly, 
say at 2 percent or even 3 percent a year. Research shows that 
few employees opt out of contribution escalation even with more 
aggressive annual increases.
    Note that these three approaches to increasing employee 
contributions are not mutually exclusive, and indeed a 
combination of these approaches could be particularly powerful.
    A third shortcoming of the current system is leakage. Many 
individuals take money out of their account before retirement 
for other purposes. This is a serious problem and one that has 
been largely under the radar screen. Recent studies by the GAO, 
the employees at the Federal Reserve and the IRS, and by the 
private company Hello Wallet, all estimate that there is a 
sizable amount of leakage from the retirement savings system 
most significantly due to pre-retirement cash distributions 
after employees change jobs. Moreover, survey results from 
Fidelity Investments and the Boston Research Group find that 55 
percent of employees who have taken a pre-retirement cash 
distribution from their defined contribution savings plan later 
regret having done so.
    The reality is that defined contribution savings plans are 
not used solely to fund retirement. For many, they serve as an 
all-purpose savings vehicle. Because of this, the recommended 
contribution rate to these accounts should reflect not only 
what is needed to successfully fund retirement but what will in 
all likelihood be withdrawn from the plan before retirement as 
well. This suggests that policy should either encourage 
contribution rates that are above those needed solely to fund 
retirement, or policy should limit the extent to which 
individuals can take pre-retirement distributions from these 
accounts.
    A final shortcoming of the current system is that most 
employer savings plans do not offer employees an easy way to 
transform their retirement wealth into retirement income 
through an annuitization option. If retirees want an annuitized 
income stream, above and beyond Social Security, they are left 
to contend with the private market on their own, trying to 
evaluate a product with which they have little experience and 
whose purchase will consume a substantial fraction of their 
wealth. The end result is that annuitization rates are very 
low.
    Employers provide several valuable services to their 
employees when it comes to the investment options in their 
savings plans. They evaluate the many available alternatives 
and select a few options that are best suited to their 
employees' needs, and they are able to offer employees lower-
cost investment options than the employees would have access to 
individually through economies of scale. Having employers 
perform the same function for retirement income options would 
be a valuable service to many current and former employees, but 
employers currently have little incentive to do so.
    Our defined contribution retirement system is not perfect, 
but there are several things we can do to make it substantively 
better. In conclusion, first we can increase coverage by 
creating an easy and low-cost mechanism for small employers to 
use so that employees at these firms can benefit from the ease 
of payroll deductions to fund their retirement savings account. 
Second, we can encourage employers to structure their savings 
plans in ways that promote higher employee contribution rates. 
Third, we can limit leakage from retirement savings plans. And 
fourth, we can encourage the adoption of in-plan annuity 
options. Thank you.
    [The prepared statement of Ms. Madrian follows:]
               Prepared Statement of Brigitte C. Madrian
      Improving Individual Retirement Savings Outcomes in Defined 
                       Contribution Savings Plans
                                summary
    There is much concern in both academic and policy circles about 
whether our current private defined contribution retirement savings 
system can adequately meet the retirement income needs of individuals. 
Although the current system has several shortcomings, there are 
sensible steps that can be taken to improve outcomes for individuals 
without increasing the costs or risks to employers.

    1. Increase the Coverage of Employer-Sponsored Retirement Savings 
Plans. Policy initiatives that encourage and facilitate the automatic 
savings of employees in small firms are a key step to increasing 
participation and improving outcomes in a defined contribution 
retirement savings system. Two such proposals are the widely endorsed 
Automatic IRA and the U.S. Senate HELP committee's USA Retirement 
Funds. Both would create a simple and low-cost mechanism for small 
employers to make contributions to retirement savings accounts for 
their employees through payroll deduction.
    2. Increase Employee Retirement Savings Contributions. There are 
three easy ways to increase employee retirement savings contributions. 
First, encourage employers to structure their match to reward higher 
employee contribution rates, e.g., with a match of 30 percent up to 10 
percent of pay rather than 50 percent up to 6 percent of pay. The cost 
to the employer is the same for employees who contribute at or above 
the match threshold, but the former gives employees an incentive to 
save 10 percent, while the latter only gives them an incentive to save 
6 percent. Second, encourage employers with automatic enrollment to 
adopt a higher automatic enrollment default contribution rate (e.g., a 
6 percent default rather than a 3 percent default). Third, encourage 
employers to be more aggressive in using automatic contribution 
increases. These are not mutually exclusive options, and in fact are 
likely to be quite effective when used together.
    3. Reduce the Impact of Leakage from the Retirement Savings System. 
Defined contribution savings plans are not used solely to fund 
retirement; for many, they serve as an all-purpose savings vehicle that 
is frequently tapped before retirement for other reasons. Policy should 
either encourage contribution rates that are above those needed solely 
to fund retirement, or policy should limit the extent to which 
individuals can take pre-retirement distributions from these accounts.
    4. Turning Retirement Wealth into Retirement Income. A defined 
contribution retirement savings system should include mechanisms that 
make it easy for employees to convert at least some of their retirement 
wealth into a secure lifetime income stream.
                                 ______
                                 
    There is much concern in both academic and policy circles about 
whether our current private defined contribution retirement savings 
system can adequately meet the retirement income needs of individuals. 
Although the current system has several shortcomings, there are 
sensible steps that can be taken to improve outcomes for individuals 
without increasing the costs or risks to employers.
 increasing the coverage of employer-sponsored retirement savings plans
    The first shortcoming of the current system is participation: less 
than half of private sector workers participate in an employer-
sponsored retirement plan.\1\ This is not such a big problem in medium 
and large firms. Most such firms offer a retirement savings plan and 
have been quick to adopt automatic enrollment so that participation 
rates are relatively high. It is a much bigger problem in small firms 
which are less likely to offer a retirement savings plan and, if they 
do, are much less likely to use automatic enrollment.
---------------------------------------------------------------------------
    \1\ Alica Munnell (2012). ``401(k) Plans in 2010: An Update from 
the SCF.'' Center for Retirement Research Working Paper Number 12-13 
(July 2012). http://crr.bc.edu/wp-content/uploads/2012/07/IB_12-13.pdf, 
accessed January 29, 2013.
---------------------------------------------------------------------------
    Policy initiatives that encourage and facilitate the automatic 
savings of employees in small firms are a key step to increasing 
participation and improving outcomes in a defined contribution 
retirement savings system. Two such proposals are the widely endorsed 
Automatic IRA and the U.S. Senate HELP committee's USA Retirement 
Funds.\2\ Both would create a simple and low-cost mechanism for small 
employers to make contributions to retirement savings accounts for 
their employees through payroll deduction.
---------------------------------------------------------------------------
    \2\ See J. Mark Iwry and David John (2009), ``Pursuing Universal 
Retirement Security through Automatic IRAs.'' Retirement Security 
Project Working Paper 2009-3, http://www.brookings
.edu//media/research/files/papers/2009/7/automatic%20ira%20iwry/
07_automatic_ira_
iwry.pdf, accessed January 29 2013, and U.S. Senate Committee on 
Health, Education, Labor, and Pensions (2012), ``The Retirement Crisis 
and a Plan to Solve It,'' http://www.harkin.senate.
gov/documents/pdf/5011b69191eb4.pdf, accessed January 29, 2013.
---------------------------------------------------------------------------
          increasing employee retirement savings contributions
    The second shortcoming of the current system is that those workers 
who do participate in a defined contribution retirement savings plan 
too often have contribution rates that are too low. Savings plans need 
to be structured to encourage higher participant contributions. Let me 
suggest three easy ways to do so.

    (1) In most defined contribution savings plans, employees designate 
their contributions as a percent of pay. In these plans, the 
contribution rates that employees choose tend to be either multiples of 
5 (e.g., 5 percent, 10 percent or 15 percent), the rate that maxes out 
the employer match, or the maximum rate allowed by the plan. In most 
plans, the most popular contribution rate is the match threshold, the 
rate that maxes out the employer match. This makes the match threshold 
an important lever in determining how much employees save.
    A typical savings plan employer match is 50 percent up to 6 percent 
of pay. Such a match costs the employer 3 percent of pay for every 
employee contributing at or above the 6 percent match threshold and 
gives employees a financial incentive to save at least 6 percent of 
pay.
    Consider now a match of 30 percent up to 10 percent of pay. Such a 
match would cost the employer 3 percent of pay for every employee 
contributing at or above the 10 percent match threshold. This match 
gives employees a financial incentive to save at least 10 percent of 
pay but at no increased cost to the employer.
    Encouraging employers to change the structure of their employer 
match to provide a financial incentive for employees to save more is an 
easy way to increase employee retirement savings plan contributions.
    (2) Encourage employers to adopt a higher default contribution rate 
under automatic enrollment. The typical automatic enrollment default 
contribution rate is 3 percent. For most people, this falls well short 
of what they need to save to fund their retirement, yet we know from 
extensive research that many employees will persist at the default. The 
solution is easy--set a higher default contribution rate. One concern 
that employers voice about doing so is that a higher default 
contribution rate will encourage more employees to opt-out of savings 
plan participation altogether which would circumvent the primary goal 
of automatic enrollment which is high participation. In my own 
research, I have found that few employees object to higher automatic 
enrollment default contributions rates of 5 percent or 6 percent in 
companies that match at least to that level.
    (3) More aggressive automatic contribution escalation. The Pension 
Protection Act of 2006 provides a non-discrimination testing safe 
harbor for plans that adopt automatic enrollment with a 3 percent 
default contribution rate in conjunction with automatic contribution 
escalation of 1 percent a year until employees are saving at least 6 
percent of pay. A more aggressive approach would be an initial default 
of 5 percent or 6 percent of pay coupled with automatic contribution 
escalation of 1 percent a year until employees are saving 10 percent. 
If employees don't opt out of these defaults, the latter approach would 
generate 67 percent more in retirement wealth accumulation than the 
Pension Protection Act baseline. Even though the Pension Protection Act 
automatic contribution increase baseline calls for a 1 percent increase 
each year, there is no reason that employers could not escalate 
employee contributions more quickly, say, at 2 percent or even 3 
percent a year, always allowing employees to opt out to a slower rate 
of escalation or none at all if a 2 percent of 3 percent increase seems 
beyond their reach. Research shows that few employees opt out of 
contribution escalation even with more aggressive annual increases, and 
this can be a very effective way to quickly move employees to a 
contribution rate that could reasonably be expected to meet their 
retirement income needs.

    Note that the combination of these approaches could be particularly 
powerful. Suppose that a company adopted a match of 30 percent of 
contributions up to 10 percent of pay in combination with automatic 
enrollment with a default contribution rate of 6 percent along with 
automatic contribution increases of 2 percent a year up to 10 percent 
of pay. In their first 2 years on the job, new employees who persist at 
the default would move from saving 6 percent to 8 percent to 10 percent 
of their own pay; moreover, they would have a financial incentive 
through the employer match to want to reach a savings rate of at least 
10 percent of pay; if you layer the employer match on top of this, 
their total savings, including the employer match, would increase from 
7.8 percent to 10.4 percent to 13 percent of pay in their first 2 
years. In contrast, an employee at a firm with a typical match of 50 
percent up to 6 percent of pay and with automatic enrollment and 
automatic contribution increases that comply with the Pension 
Protection Act minimum standards would only reach a much lower maximum 
combined employee/employer contribution rate of 9 percent of pay after 
3 years on the job.
   reducing the impact of leakage from the retirement savings system
    A third shortcoming of the current system is leakage: many 
individuals take money out of their account before retirement for other 
purposes, and that money is subsequently not available to fund 
retirement. This is a serious problem and one that has largely been 
under the radar screen. Recent studies by the GAO, by employees at the 
Federal Reserve and the IRS, and by the private company Hello Wallet, 
all estimate that there is a sizable amount of leakage from the 
retirement savings system, most significantly due to pre-retirement 
cash distributions after employees change jobs. Moreover, survey 
results from Fidelity Investments and the Boston Research Group find 
that 55 percent of employees who have taken a pre-retirement cash 
distribution from their defined contribution savings plan later regret 
having done so.
    The reality is that defined contribution savings plans are not used 
solely to fund retirement; for many, they serve as an all-purpose 
savings vehicle that is frequently tapped before retirement for other 
reasons. Because of this, the ``recommended'' contribution rate to 
these accounts should reflect not only what is needed to successfully 
fund retirement, but what will in all likelihood be withdrawn from the 
plan before retirement as well. Retirement savings calculators designed 
to help individuals determine how much they need to save for retirement 
will understate how much actually needs to be saved if the calculators 
don't account for the fact that some portion of the money that is 
contributed will in fact be withdrawn and unavailable at the time of 
retirement.
    This suggests that policy should either encourage contribution 
rates that are above those needed solely to fund retirement, or policy 
should limit the extent to which individuals can take pre-retirement 
distributions from these accounts.
            turning retirement wealth into retirement income
    A final shortcoming of the current system is that most employer 
savings plans do not offer employees an easy way to transform their 
retirement wealth into retirement income through an annuitization 
option. If retirees want an annuitized income stream, they are left to 
contend with the private market on their own, trying to evaluate a 
product with which they have little experience and whose purchase will 
consume a substantial fraction of their wealth. The end result is that 
annuitization rates are very low. Employers provide several valuable 
services to their employees which it comes to the investment options in 
their savings plans: they evaluate the many available alternatives and 
select the few options that are best suited to their employees' needs, 
and they are able to offer employees lower cost investment options than 
the employees would have access to individually through economies of 
scale. Having employers perform the same function for retirement income 
options would be a valuable service to many current and former 
employees, but employers currently have little incentive to do so.
                               conclusion
    Our defined contribution retirement savings system is not perfect, 
but there are several things we can do to make it substantively better. 
First, we can increase coverage by creating an easy and low-cost 
mechanism for small employers to use so that employees at these firms 
can benefit from payroll deductions that go straight into a retirement 
savings account. Second, we can encourage employers to structure their 
savings plans in ways that promote higher employee contribution rates. 
Third, we can limit leakage from retirement savings plans. And fourth, 
we can encourage the adoption of in plan annuitization options.

    The Chairman. Thank you, Dr. Madrian.
    I'll start a round of 5-minute questions.
    Dr. Madrian, I just want you to know that we are looking at 
the whole leakage problem, and this is something that I have 
become more and more aware of, and hopefully this committee 
will be looking at this shortly.
    Let me just ask you, though, in this plan that we rolled 
out last year, this USA Retirement plan, a key open issue is 
what the contribution rate should be. Those who have been 
working and developing this plan thought about it not like a 
Social Security, where it's an even match between employer and 
employee. This is mostly on employees to put in a contribution 
with some very low threshold employer match, and then allowing 
an employer to raise that match if they want to as an 
employment incentive.
    One employer might provide 1.5 percent, and another 
employer might say, ``Well, if you come to work for me, we will 
do 2.5 percent.'' You could use that as an employment incentive 
for employers.
    But have you ever thought about what, if we move ahead in 
this area, what should the contribution rate be when we default 
people into the plan?
    Ms. Madrian. That's an excellent question, and I would 
encourage the committee to think not in terms of a single 
default contribution rate but perhaps differentiated 
alternatives. When Senator Alexander was talking about the 
small restaurant chain, my guess is that a lot of the employees 
working at companies like that are younger. They are teenagers. 
It's their first job. And for them a lower contribution rate 
might make sense, 3 percent of pay, 5 percent of pay. Whereas 
if you are looking at someone who is a bit older and this is 
their full-time job and they are going to be working there for 
a while, the appropriate default contribution rate for them 
might be substantially higher.
    We know from investor psychology that individuals, when 
they think about saving, think in terms of round numbers, 
multiples of five, 5 percent of pay, 10 percent of pay, 15 
percent of pay. I think those are benchmarks that individuals 
can easily get their hands around. It might be worth thinking 
about something lower, 5 percent for younger workers; something 
higher, maybe 10 percent, for older workers.
    The Chairman. I understand, but keep in mind we are trying 
to make this as simple as possible.
    [Laughter.]
    Ms. Madrian. And I am a big fan of simplicity.
    The Chairman. OK. I hear you. I understand that.
    A question for you, and I will just ask everyone else here, 
we sometimes hear the argument that automatic enrollment 
doesn't really boost savings because people make up for the 
lost disposable income by reducing other forms of savings. Have 
any of you looked at whether or not automatic enrollment crowds 
out other forms of savings?
    Ms. Madrian. I have been trying to do a study that would 
answer this question for years, and it's really hard to get the 
data to do that well. The little evidence that we have suggests 
that to the extent there is crowd out, it probably isn't that 
big. I have a former graduate student who has done some 
research on savings behavior by members of the military and the 
Thrift Savings Plan, and he finds that financial education 
programs that have substantially increased savings in the TSP 
have had no adverse impact, for example, on the amount of 
credit that military members have outstanding. He is finding no 
crowd out there.
    There is a study by my colleagues John Friedman and Raj 
Chetty at Harvard looking at Denmark, where you can get much 
better data. The Scandinavians aren't so concerned about 
privacy. When they look at automatic savings programs, they 
find very little crowd out on other parts of the balance sheet 
either.
    I think it is a legitimate concern, but I think most of the 
evidence out there suggests that certainly it's not a one-for-
one offset.
    The Chairman. Any other thoughts on the crowd out at all, 
Ms. McCarthy?
    Ms. McCarthy. Yes. We don't have research to support it 
because I think the complexity of getting at that, what's 
happening outside the plan, is difficult. But I think what is 
really important on the automatic enrollment is recognition of 
the significant impact it has in getting participants actually 
into the plan.
    Our enrollment rate, participation rate across our 
customers is 67 percent. With automatic enrollment, it is 88 
percent. It is a very, very powerful distinction that in and of 
itself is so dramatic that it's hard for me to think it is 
creating a big distraction with other savings vehicles.
    The Chairman. Ms. Hounsell, before my time is up, quickly, 
a lot of people who don't have traditional 40-hour-per-week 
jobs, part-time workers, temporary workers, caregivers, what do 
we need to do to make sure that people with non-traditional 
employment arrangements have access, easy access to a 
retirement plan?
    Ms. Hounsell. I think we need options and opportunities for 
people to save at work. A lot of part-time workers are just not 
eligible for benefits, and it has been true--I don't know that 
that is ever going to change. I don't think requiring employers 
to do that--tax lawyers tell me all the ways you can fudge 
those rules. I just think we need ways for people wherever they 
work to save, and we don't have that for half the workforce.
    The Chairman. OK. Again, that is something we are looking 
at in developing this USA Retirement Fund, make it simple, make 
it easy so that there is not a burden on employers for part-
time employees or employees that come in and out of the system 
all the time, where the employer would not have a fiduciary 
responsibility, would not have to operate a plan or anything 
like that. Any other advice you have on that, please let us 
know.
    Ms. Hounsell. We look forward to seeing the plan.
    The Chairman. Senator Alexander.
    Senator Alexander. Mr. Chairman, since Senator Enzi has 
been working on this with you for a while, I would like for him 
to have the first questions.
    The Chairman. Sure.

                       Statement of Senator Enzi

    Senator Enzi. Thank you, Mr. Chairman, and thank you for 
working on this. It really is important. I want to thank the 
panel for their tremendous suggestions. Your testimony is just 
packed with ideas, and that has led to a lot of questions which 
are of a more technical nature than I will attempt while doing 
my questions.
    I appreciate the emphasis on auto enrollment versus perhaps 
a mandate, and I appreciate the comments too about the schools 
needing to do financial literacy. I have looked at a number of 
schools to see what they are doing, and I am very disturbed 
that when they provide them with the money that they are going 
to learn to budget, they leave out the fact that their Social 
Security and Medicare are taken out and the possibility of any 
kind of savings that they might add to that. So I am hopeful 
that that will change.
    For Dr. Madrian and Ms. McCarthy, have you done anything on 
the plans whether it would make a difference if the deferred 
amount was a 401(k) versus a Roth? Would that make a difference 
in this auto enrollment and contribution?
    Ms. Madrian. The limited research that I have done on 
regular versus Roth savings accounts suggests that people 
behave very similarly in both types of savings plans, which 
suggests that the Roth option might actually lead to higher 
levels of long-run wealth accumulation because the taxes have 
been taken out on the front end.
    But truthfully, we need much more research into that 
question.
    Senator Enzi. Ms. McCarthy.
    Ms. McCarthy. I would agree with that, Senator Enzi. It is 
a very good question. We haven't done extensive research. We 
are seeing powerful results with both the Roth IRA, the Roth 
plan and the ability that that provides for incremental savings 
coupled with auto, but I don't have distinctive research at 
this point.
    Senator Enzi. OK. Well, I am hoping both stay in effect as 
possibilities.
    One of the things I really am concerned about is the amount 
of regulation that we have and the possibility for liability 
when they are doing that. Those are the two things that small 
businessmen tell me are the things that keep them from going 
into this.
    I am an accountant. I used to do the accounting for 
primarily 401(k), and then do the fairness testing, and that 
gets into whether the top executives are getting paid more and 
saving more versus the other people.
    Do you have any suggestions for ways that the regulations 
could be made simpler perhaps for particularly small business? 
Mr. Moslander, I think you were relating to some of that.
    Mr. Moslander. Certainly, regulation is a difficult thing 
for employers to deal with, especially around fiduciary 
responsibility. I think one of the more creative and perhaps--
it could have unintended positive consequences, lifting the 
fiduciary burden from the employer and putting it elsewhere. I 
think it might lead to portability possibilities that are 
difficult today for people to manage who change jobs. But the 
fiduciary responsibility, if we could somehow ease that, 
simplify it, even lift it from the employer, that would go a 
long way toward simplifying the ability of employers to provide 
for the plans, and also simplifying portability by 
participants. They might not cash out those benefits the way 
they do today when they terminate employment if it were easier 
for those benefits to be portable.
    Senator Enzi. I really appreciate the portability.
    Does anybody else want to comment on the regulations?
    Ms. McCarthy. If I could just add, simplification is key in 
every aspect of this conversation from a regulatory 
perspective. Our experience shows that in smaller plans, as you 
are pointing out, their adoption is very often avoided as a 
result of the regulatory requirements. So I think look at safe 
harbors and how to simplify those, and look at the fiduciary 
responsibilities. The disclosures are often very onerous, and 
it all drives costs for the employer, which will cause them to 
step back and not offer the benefit.
    Simplicity, there is a very real opportunity there, I 
think, without walking away from the importance of the goals 
looking to be achieved with the regulations.
    Senator Enzi. Anyone else?
    [No response.]
    I also have a bill that would allow pooling of small 
businesses so they can have one administrator for a number of 
them. I mean, it is still individual accounts, and that's what 
allows the portability if they move to a different job, which 
improves the enhancement of this. Senator Kohl and I also have 
a bill that deals with some of the leakage problems so that 
people have an opportunity to put it back in, particularly if 
they leave one business.
    My time has expired. I thank the Chair.
    The Chairman. Thank you very much, Senator Enzi.
    I'm sure I needn't tell you all this but Senator Enzi was 
chair of this committee and shepherded through the Pension 
Protection Act. He is one of our resident experts on this whole 
issue. I'm delighted to have him as a partner in this effort.
    As you know, we recognize people in order of appearance 
here. So it will be Senator Warren, and then back to Senator 
Alexander, Senator Murphy, Senator Isakson, Senator Baldwin, 
Senator Burr, Senator Franken, and then Senator Casey, in that 
order.
    I recognize Senator Warren.

                      Statement of Senator Warren

    Senator Warren. Thank you very much, Mr. Chairman. I want 
to offer my thanks to the panel. Thank you very much, Ms. 
Hounsell, for the work you are doing in education, for all of 
you, the commitment that the companies have made in trying to 
educate clients, and the work you have done in research.
    I read your testimony. I agree with Senator Enzi. It is 
full of good ideas, good thoughts, primarily based around how 
we might do better with employer-sponsored plans and pulling 
people in. I went through all of them, the notion of changing 
opt out, increasing the default amount, the pre-commitments to 
growth, and your very creative plan, Dr. Madrian, of changing 
how the employer calculates the incentive to get people to stay 
in.
    But I also notice in your testimony that you all, to one 
extent or another, talk about incentivizing the employers or 
encouraging the employers. I notice the different verbs we use. 
I am mindful of Senator Alexander's point that, on the one 
hand, we could require the employers to participate. Senator 
Alexander says that this creates complications for small 
businesses.
    So the question I really have is can you fill in that part 
of what you are talking about in your testimony? We don't have 
employees who will participate in these plans if we don't have 
employers who are offering these plans. How do we get more 
employers to offer these plans? What are the options available 
to us, and how effective will they be?
    Ms. McCarthy, would you like to start?
    Ms. McCarthy. Yes, thank you. I think it comes down to the 
discussion we had around simplification, because for smaller 
employers, one of the biggest inhibitors is the cost of 
administration and the fiduciary responsibility and complexity 
that goes along with administering the plans. If we can 
streamline some of the requirements and accountability of them, 
I think we would naturally have better adoption. Then when you 
get into the actual experience, there are ways to offer very 
simple plans that reduce the administrative costs as well.
    Senator Warren. Dr. Madrian.
    Ms. Madrian. Yes, let me completely agree with that. I 
think there needs to be a very simple option for employers that 
needs to have no regulatory requirements, very minimal 
regulatory requirements, limited fiduciary responsibility, 
something simple and straightforward. Then to the extent that 
you can piggyback that with something else that employers are 
already doing so it doesn't add an administrative burden, that 
would also help.
    For example, if small employers are filing their tax 
payments on behalf of their employees quarterly, couple the 
contributions to the savings plan with what they are already 
doing to pay their quarterly taxes instead of instituting 
another regulatory requirement that they need to do these 
contributions in some other way, shape, or form at some other 
point in time. Anything to minimize the administrative burden 
and the regulatory burden will be extremely helpful.
    You could also think about providing a modest tax incentive 
to companies if they offer savings plans, or if you offer the 
savings plan, we will give you a break on your employer taxes.
    Senator Warren. Very valuable.
    Mr. Moslander.
    Mr. Moslander. I would agree with everything that Julia and 
Brigitte said. The art of regulation, if you would, I think is 
important. Out of the Pension Protection Act, I just saw the 
auditing and reporting requirements, which are probably very 
good things. But we also added fee disclosure which, at the 
plan sponsor level, was malleable, at the participant level was 
the opposite of that. We all spent a lot of money and a lot of 
time and a lot of energy to mail out and send out fee 
disclosure information to participants who, in the first place, 
are minimally engaged in the plan. They are not going to be 
interested in the expense ratio of every fund that is offered 
under that plan.
    That was the kind of regulation well intended, but in the 
end it really didn't have the impact that it was designed to 
have. Trying to manage necessary regulation, regulation that is 
really not going to have a big impact, just echoing what Julia 
and Brigitte said, is an important part.
    Senator Warren. Ms. Hounsell, is this going to get us 
there, by making the plans simpler?
    Ms. Hounsell. I think so. I think it will make a big 
difference for people.
    Senator Warren. Very valuable. Thank you very much. I 
appreciate it.
    The Chairman. Senator Alexander.
    Senator Alexander. I would like to continue with Senator 
Warren's line of questioning because I think it is very, very 
helpful. I remember, when I ran for office to be the Governor 
of Tennessee, I walked across the State many years ago. When I 
was out there with nobody to talk to but cows that were along 
the road, I was thinking that if I got elected, what if I could 
make a tax form or some sort of list that I could hand to 
somebody who wanted to start a business and say, from the 
State's point of view, this is everything we care about. These 
are all the taxes, all the regulations, all the rules, a 
complete list of them. If you do all these things, you don't 
have to worry about the State anymore. Of course, when I got 
into office, I never was able to do that.
    Simplicity I think is pretty big here. We have seen that a 
law that was passed a few years ago taught us some things about 
the value of a default position--about auto enrollment, about 
automatic escalations, and we know that financial literacy is 
not at a high level among a lot of us. These things can get 
very confusing. We don't want to take anyone's freedom away to 
make his or her own decision about this, but the automatic 
enrollment or automatic changes or default positions that 
better reflect the reality of what an individual needs to be 
saving seems to me to be one very promising further step we 
could take. We could use your advice about what that one step 
should be.
    I am very intrigued by this simple form, because that is 
exactly what I am thinking is needed, and I wonder what would 
happen if I invited you to write it for us and submit it to us. 
I mean, let's say you are about to go into business and you are 
looking at what you need to do. Dr. Madrian, this is what you 
do. You study all this stuff. You have done it for 20 years. 
You know what's going on better than we do. Why don't you write 
for us a simple plan that we could put into law? So if I'm 
starting a business or I have a small business, I am already 
paying my FICA taxes, paying the minimum wage, I'm worried 
about the healthcare law, and somebody says to me, ``Why don't 
you do something about retirement?'' I'm going to say, I might 
not make any money this year.
    But if it's so simple that I could do it and it was good 
for my employees and good to do, maybe we could make it a pilot 
program. We don't have to do it for everybody in the whole 
country at once. We could take a simple plan and start a pilot 
program.
    So I would invite each of you, if you would like to, to 
submit to me, or to us, your idea of a simple plan. Submit 
anything you can think of to get free of burdensome regulation 
and still make it responsible and that would encourage an 
enterprise to offer a voluntary plan that would promote the 
savings levels that you think are appropriate.
    Now, I would like to ask one question about that. If you 
were to create a simple plan, would you do it for any business, 
or would you do it for a small business? And if so, how would 
you define the enterprise that you would do such a thing for? 
Does anyone have a response?
    Ms. Madrian. I'll start out by saying I'm going to go back 
to my class next Monday and I'm going to give them your 
challenge, and we'll see what they can come up with.
    Senator Alexander. I'm quite serious. They are likely to 
come up----
    Ms. Madrian. They are likely to come up with some excellent 
ideas.
    Senator Alexander. Give them the idea of, say, look, you're 
going into business and you've got a lot of other things to do. 
How would you do this? That would be very helpful to us.
    Ms. Madrian. Last year the CFPB held some sort of a 
competition--Senator Warren would know better about this--to 
redesign the mortgage disclosure forms, enlist the great 
thinkers in society interested in----
    Senator Alexander. If the Consumer Financial Protection 
Bureau would actually do that, it would double my--it would 
increase my appreciation of the agency.
    [Laughter.]
    Which is not very high right now.
    [Laughter.]
    But the mortgage disclosure form is a good example of what 
we are talking about. All of these regulations are well-
intended. I mean, we don't sit up here and say we want to do 
something bad to somebody. We all have good ideas, but they 
pile up, and then when you're down here getting a loan, anybody 
who gets a mortgage loan knows it's absurd. Nobody reads it. 
Nobody can read it or understand it. You really have less 
disclosure because of more regulation.
    So rather than complain about the regulation, let's just 
start from scratch and say what could we do. Let's followup 
Senator Warren's comments, and mine, and that of others here. 
All of you seem to think simplicity makes a big difference, and 
I'm sure that's true.
    Any comments on any of that by any of you?
    Ms. McCarthy. Thank you for the opportunity. We look 
forward to it. We have a lot of good ideas. We will bring them 
forth.
    The Chairman. Thank you very much, Senator Alexander.
    And now Senator Murphy.

                      Statement of Senator Murphy

    Senator Murphy. Thank you very much, Mr. Chairman. What an 
important hearing. Just one quick thought, and then one or two 
questions.
    To my mind, the most important barrier to savings is not 
simplicity or regulation. It's stagnant wages. The fact is that 
the average worker is making 4 percent less in real wages than 
they were in 1970. They haven't had any gains since 2005. 
Meanwhile, all sorts of other costs are going up. Healthcare 
went from 8 percent of your budget to 18 percent of your budget 
in the last 40 years. It's tough to save if you don't make any 
more than you did 10 or 20 years ago.
    I know we are not going to tackle that in the context of a 
bill on pensions, but I just think it's worth noting that if 
Congress doesn't tackle the issue of stagnant wages, there's 
not a lot we can do around the edges to try to make money 
appear out of nowhere.
    That being said, younger generations today still think they 
are living in their parents' world. I mean, they still think 
that if they go to work, that they're just going to end up 
getting taken care of. They probably rely too much on Medicare 
and Social Security, but I think they also just don't 
understand how much the obligation has now shifted to them.
    Mr. Moslander, I was really glad that you brought up the 
Lifetime Income Disclosure Act. This is a bill that Senator 
Isakson and Senator Bingaman supported. I'm hopeful to join 
you, Senator, this session in reintroducing it. But I just 
wanted to ask you to followup on your support for that piece of 
legislation, because this is a pretty innovative idea to just 
sort of put right in front of workers, especially younger 
workers, what the true annuity benefit of their savings is.
    I guess I will ask a devil's advocate question about a bill 
that I support. But given that these forms sort of come to you 
with lots of information already, and a lot of workers don't 
pay too much attention to them in the first place, what do we 
think the confidence is that adding another number, which will 
be a pretty startling number, the amount of money you are 
actually going to get if you continue on your current savings 
trajectory, what kind of confidence do we have that that might 
actually change people's savings patterns?
    Mr. Moslander. A couple of things. I'm not sure that young 
people are as confident that they're going to be ``taken care 
of.'' I think there is some skepticism among young people about 
the viability and what there will be in Social Security and the 
like for them by the time they get older. I think there is some 
research that shows that younger people are a little bit more 
inclined to consider saving for retirement.
    At TIAA-CREF, for years and years and years, even before 
there were quarterly statement requirements, we sent people a 
projection, a statement at the end of each year that projected 
their income, and it wasn't important that they looked at it 
every year. It was important that they got it every year. And 
over time, we believe that presenting them with that income 
figure, as opposed to just an accumulation figure, created a 
mindset toward lifetime retirement income security.
    One of the reasons we believe we have seen a lot more 
annuitization in the higher education market than you see in 
the profit-making sector, part of it is the products that are 
used in that marketplace, but it is also, we believe, because 
we presented this, and the employers have reinforced the fact 
that the plan is for retirement income, and this was a 
reinforcing mechanism as a mindset issue more than as an 
actual--it does help people save more, but it also gets them in 
the mode of thinking this is not something I cash out when I'm 
done. This is something that I receive income from.
    Senator Murphy. And one additional question to build on 
this line of conversation around simplicity. I think it's 
incredibly important, and we have sort of been talking about it 
with respect to simplicity as it relates to employers. Maybe I 
will direct this to Professor Madrian.
    What about the barriers to savings from an employee 
perspective? I mean, it's dizzying the verbiage surrounding 
retirement savings today. What do we know about the barriers 
presented to people who want to put money away when they are 
confronted with this absolute multitude of words and phrases 
and vehicles that are available to them?
    Ms. Madrian. Yes, the alphabet soup of retirement savings 
plan options in the United States. You should have come to my 
class yesterday. This is exactly what we talked about.
    I think the big challenge is not so much that people don't 
want to save, but they don't know how to do it. It's a 
combination of a lot of people don't have really high levels of 
financial literacy. They are not comfortable with choosing. At 
Harvard University, up until a year and a half ago, we had 259 
different investment options. That's a lot of choices to sort 
through if you're trying to decide how to invest your money.
    I think that's the key reason why automatic enrollment is 
so successful. Automatic enrollment is the extreme form of 
simplification. You don't have to do anything if you want to be 
saving. In fact, the action needs to be taken by individuals 
who don't want to save. They are the ones who have to opt out 
of the plan.
    The fact that when opt out happens, it happens immediately. 
It's not like people discover a year later that my employer is 
taking money out of my paycheck, I didn't want that to happen, 
I want to opt out. That, to me, is indicative of a strong 
desire for most people to save, and the simplification is 
really key. Even in plans without automatic enrollment, we 
found that if you provide a simplified option to sign up for 
the plan, think of a postcard that has a box on it that you can 
check and we'll enroll you in the savings plan, and we've 
picked an investment allocation for you, even initiatives like 
that can substantially increase savings plan participation.
    I think the simplification is key for both the employee and 
the employer.
    Senator Murphy. Thank you.
    Senator Alexander [presiding]. Senator Isakson.

                      Statement of Senator Isakson

    Senator Isakson. Thank you, Senator Alexander. I want to 
memorialize here publicly, in front of everybody, including 
those on television, that, Senator Murphy, I'm delighted to 
accept you as the replacement for Jeff Bingaman as the lead co-
sponsor of the act.
    Senator Murphy. Looking forward to it.
    Senator Isakson. And I appreciate the plug very much.
    I appreciate the comments of Mr. Moslander regarding the 
drawdown phase, because we are always talking about the 
accumulation phase and beginning the process, but taking the 
money out the wrong way can leave people without any retirement 
while they're still alive, and I think it's very important that 
we focus on that education.
    Ms. McCarthy, I want to ask you a question. I think you 
said in your testimony that participants who seek guidance take 
action and have better outcomes. Is that correct?
    Ms. McCarthy. Absolutely correct.
    Senator Isakson. The Department of Labor the last 2 years, 
and I understand continuing this year, is trying very much to 
change the definition of the term ``fiduciary.'' Would you give 
me your opinion on if that change takes place, what effect that 
would have on people getting education in terms of retirement 
savings?
    Ms. McCarthy. Yes. Thank you for the opportunity to talk 
about it. I fear that it would have a very dramatic effect on 
sponsors or partners, vendors, recordkeepers' ability to 
provide guidance to participants. We've done a tremendous 
amount of research amongst the participants that we service to 
understand what drives their behavior enrolling in the plan, 
not enrolling in the plan--and one of the key dynamics is, 
again, simplicity, as we've been talking about; auto enroll has 
been dramatic; but simply not knowing what to do.
    When we think about guidance, guidance really boils down to 
help. It's as simple as that. The prospect of not allowing 
providers to help participants engage in their plan will, I 
have confidence, have a dramatic impact on this issue we're 
talking about today, and it won't be advantageous.
    Senator Isakson. I appreciate your testimony very much, 
because I feel exactly the same way. I think education and 
transparency is invaluable in people making the right decision 
for themselves. Every time we put a barrier between them 
getting that good information, we're causing bad things to 
happen. That's not the intent, but that's the result.
    And that brings me to Ms. Hounsell's commentary, 
particularly about women, second-career women, divorce and 
things of that nature. I ran a company for 22 years where all 
my workers, all my salespeople were independent contractors, 
and I had 1,000 of them, and almost all of them were second-
career women, divorced women or women over 50 years old who 
came back to have a career in real estate out of some life-
driven necessity. Most of them had not saved or did not have a 
husband who had saved and were not prepared for retirement when 
it might come, which would be in 10 to 15 years.
    But because I used independent contractors as salespeople 
in my organization, the IRS prohibition against me providing 
any information or any help in savings made it impossible for 
me to help them, which brings me to the point of the fiduciary 
and everything else. We probably need a one-page list of all 
the things that we do up here that are negative toward people 
starting their retirement savings either in the tax code and 
IRS rules and regulations or what the Department of Labor might 
do.
    Those are not the intended consequences, but they are the 
consequences. They were with me. I finally--and I don't know if 
it's still true. The independent contractor test used to be a 
10-point test at IRS, one of which was you could not provide 
information, vehicles, or anything else. You could direct them 
to an IRA set, but somebody else had to be the administrator 
and advisor.
    Could you do that for us? With the people you deal with and 
the trials and tribulations you have with people having access 
to that, would you give us a list of all those things that we 
require that, in the end, are negative toward formation of 
capital savings and retirement?
    Ms. Hounsell. I would be happy to do that, but I can't do 
that off the top of my head now.
    Senator Isakson. I know that, but you're very experienced 
with exactly the type of people we're concerned about.
    Ms. Hounsell. I think what you're saying is that you 
actually directed people toward some kind of a retirement plan, 
but you weren't supposed to.
    Senator Isakson. No, I didn't know.
    [Laughter.]
    Ms. Hounsell. You didn't know. OK.
    Senator Isakson. I could not direct them to a plan. I could 
advise them they ought to seek information, but I couldn't give 
them the direction or anything else. I just would tell them, 
``You really ought to go take care of this.'' They'd say, ``Can 
you help me?'' I'd say, ``I can't.''
    Ms. Hounsell. Right, and that's often what helps people get 
retirement income, because somebody will direct them to what 
they should be doing, especially if they don't have auto 
enrollment.
    Senator Isakson. The reason I mentioned it, Senator Harkin 
made the statement about non-traditional--I think he called 
them ``non-traditional employees.'' With the Affordable Care 
Act and some of the other things that are happening, there are 
going to be more independent contractors as workers in this 
country, I think, and more part-time workers in this country, 
and it's going to be more and more difficult with some of the 
prohibitions that are in the law now, and regulation, for them 
to get the right type of information.
    I thank all of you for your testimony.
    Ms. Hounsell. I think that's important.
    Senator Alexander. Senator Baldwin.

                      Statement of Senator Baldwin

    Senator Baldwin. Thank you. I want to also thank the 
Chairman and Ranking Member for holding this important hearing, 
and our witnesses for testifying.
    I'm deeply concerned about some of the statistics from my 
home State of Wisconsin, the number of citizens who rely solely 
on Social Security as a source of income once they retire. 
Figures shared by AARP suggest that 28 percent of Wisconsinites 
who receive Social Security have reported that this benefit is 
their only income, and two out of three Wisconsinites age 65 or 
older reported that Social Security makes up more than half of 
their monthly income. So the figures and trends are certainly 
troubling.
    I also appreciate my colleague, Senator Murphy, for talking 
about some of the issues that we're not grappling with here 
today, stagnant wages, ET cetera, as we look at the health of 
our middle class. I just think about the hallmarks of middle-
class status, and one of them in my mind is retirement 
security. Of course, we're discussing the fact that that's in 
jeopardy for some.
    Ms. Hounsell, I appreciate your testimony. This is the week 
in which we celebrate the fourth anniversary of the signing of 
the Lilly Ledbetter Act into law, and we're hopeful that that 
Act, along with future legislation that we're working on, will 
begin to decrease the wage gap that exists between men and 
women. But until that happens, obviously, it's clear that women 
earn less, and therefore that affects the capability of saving 
for retirement.
    A report by the Joint Economic Committee released this 
week, chaired by our colleague on this committee, Senator 
Casey, states that for women over 65 years of age, Social 
Security accounts for two-thirds of their total income, while 
for men over the age of 65 it's roughly 54 percent. In your 
written testimony, you reference the importance of the National 
Education and Resource Center on Women and Retirement Planning 
in educating women on how to plan for retirement. It's a 
program funded by the Administration on Aging.
    It's my understanding that if sequestration proceeds, the 
Administration on Aging would see a decrease in its 
discretionary budget of about $121 million in 2013 alone. So I 
wonder if you can discuss generally the importance of this 
program in promoting retirement savings and whether you believe 
or have heard that sequestration would have an impact on the 
initiative.
    Ms. Hounsell. Yes, it will have an impact on all of the 
programs that are at the Administration on Aging, and a lot of 
these programs are minimally funded but have such a big reach. 
The way we've actually operated the Center was to train 
trainers all over the country, and we've actually worked with 
the Wider Opportunities for Women and a number of people in 
Wisconsin. Wider Opportunities just came out with their report 
last week. I don't know if you saw that. What it does is it 
sort of shows what people over 65 need to live on in various 
States and cities. I don't remember Wisconsin, but I know that 
for single women it's anywhere from $19,000 to $29,000. That's 
just minimal, just rent, heat, all of those things that are 
absolutely necessary.
    I work with a lot of organizations, and everyone will say, 
we need one-on-one, especially for the Latina groups. We need 
one-on-one for everyone, really. That's what everybody wants, 
and you sort of know that from your research as well.
    I think what's really important is senior centers, places 
where people can actually come for help. FINRA's got this great 
project on libraries, and there aren't that many of them. I 
think there are about 25 they have funded. I've been to a 
number of them, doing programs with them. They're incredible.
    There are ways that we could do this, but there's no 
coordination, no reach nationally, except for these little 
programs. The National Council on Aging does a great initiative 
as well.
    I don't know what will happen after sequestration.
    Senator Baldwin. Thank you.
    Senator Alexander. Senator Franken.

                      Statement of Senator Franken

    Senator Franken. Thank you. This topic brings up so many 
subjects about what is happening to the workforce, what kind of 
jobs people are going to do, what kind of companies people are 
going to have in the future. We're changing, and people are 
going to have a lot more different jobs as we go into the 
future. It's long past where you had the same job for your 
entire career.
    That's an issue that I wonder about--not only do people 
change jobs, but companies exist for sometimes shorter times. 
What is the effect of that? What is the effect of people maybe 
having 20 jobs in their career, or 30 jobs in their career, 
going from one thing to another, and what happens when the 
place where you have your pension goes out of business? Anybody 
can speak to that.
    Ms. Hounsell. I can speak to that for a minute because it 
happened to me. I have a frozen benefit at the PBGC. I worked 
for a company for 16 years, and there went the DB plan. At some 
point it was frozen, then went to the PBGC. So what you do is 
people are going to have to cull together many of these 
different benefits wherever they go and look for them.
    Senator Franken. I imagine your benefit under the Pension 
Benefit Guarantee Corporation is going to be a lot less than 
you had expected.
    Ms. Hounsell. Yes. It was frozen for 25 years, so it's a 
lot less.
    Ms. Madrian. I think Julia can probably talk best about 
what happens from the plan administration standpoint. What I'd 
like to point out is, I think the fact that people are changing 
jobs so often really highlights the importance of getting 
employers to set higher default contribution rates and to 
address the problems of leakage, because those are both issues 
that are really tied to job changing.
    If you think of a system where companies have automatic 
enrollment and they enroll you at a low contribution rate that 
escalates over time, and you're changing jobs every year, 
you're always getting re-started at a low contribution rate and 
you never get up to a high enough contribution rate to really 
set aside money for retirement. That's a key reason why we need 
a higher default contribution rate with automatic enrollment.
    And then we know that a lot of the leakage from the system 
is generated when people change jobs and suddenly they're 
presented with this option to leave the money in the plan, to 
roll it over to another plan or, a-ha, I can take the money out 
and do something with it today, and that's when the leakage is 
occurring.
    We need to think about ways to discourage employees from 
doing that, and to the extent some of them may need money 
because they're unemployed, to limit the extent to which 
they're taking money out of the plan. Really important.
    Senator Franken. I know you want to speak, Ms. McCarthy. I 
just want to put a bookmark in my head here, because that all 
goes to financial literacy. But, go ahead.
    Ms. McCarthy. Yes, it absolutely does. I agree with 
everything Brigitte is saying. It does come back to financial 
literacy and education on the implication of compounding. There 
are a number of different studies out there that talk about how 
long these next generations will stay in their roles, ranging 
from 10 years to 20 years, as you said--very, very different 
than the environment that we've grown up in.
    Portability is incredibly important. The ability to take 
your benefit and consolidate it, roll it together, so when you 
start to think about retirement projections, you really have a 
comprehensive view of what you've accumulated and you continue 
to build on that.
    We have a study that shows participants age 20 to 24, 51 
percent of them don't engage in the plan at all. There's a 
portion that just simply aren't engaging. Forty-four percent of 
this population cash out. That's the problem. If you're autoing 
them at 30, at 3 percent, maybe they get to 4 percent, you cash 
them out, they go on to the next company, they will never 
accumulate retirement wealth.
    Senator Franken. Thank you. I want to just touch base on a 
couple of things.
    On financial literacy, we're also the Education Committee. 
We're the Health Committee, we're the Labor Committee, and 
we're the Pension Committee. We need to have financial literacy 
taught in our schools. Was it Senator Enzi who gave you a big 
assignment? I would have another set of your students work on a 
math curriculum that uses all the issues in retirement to teach 
math, but also teach financial literacy at the same time, 
because I remember we used to have shop and home ec, and home 
ec is home economics. So that is the place. There is a place 
for us to teach, to have kids understand the world that they're 
going into so they don't get in trouble with credit cards, so 
they don't buy a house with a bad contract, so that it takes 
some of the pressure off the CFPB.
    [Laughter.]
    The other thing I want to mention is annuities. I was on 
the Special Committee on Aging, and I heard something that 
shocked me, and then I guess in retrospect it isn't that 
shocking, that people actually, when asked how long do they 
think they're going to live, underestimate it. So we need to 
get people into annuities. We need to do that so that they 
don't outlive their savings.
    Thank you.
    Senator Alexander. Thanks, Senator Franken.
    I want to thank the four witnesses. This has been very, 
very helpful.
    We'd like to leave the record open for 10 days. Senator 
Harkin had to step out, so I'm going to conclude the hearing, 
but several of us may have followup questions that we'd like to 
ask you. If you would be kind enough to respond to them, I 
think you can tell from the level of interest in your comments 
that we'll surely pay close attention. You've gotten two big 
assignments here.
    This is encouraging to me because the legislation that 
passed in 2006 seems to have had some good effects, and we've 
gotten some good information about ways to meet Senator 
Harkin's goal, which is to narrow the gap between what 
Americans ought to be saving for retirement and what they do 
save for retirement.
    From my own point of view, it seems to me that a good deal 
more work needs to be done on complexity, legalese, and 
liability. This is a committee where we supposedly have very 
different ideological views, but I think you've heard some 
common suggestion here that rather than taking off regulations, 
we might try a model that starts from scratch with the 
objective of making it easier for business enterprises to offer 
retirement plans. We have a changing country where apparently 
more Americans are going to be independent contractors, not 
full-time employees, or maybe be part-time employees--how do we 
make it easier for employers of any kind to offer retirement 
savings and to do it in a way that closes the gap that Senator 
Harkin called this hearing about?
    I thank you very much for coming, I look forward to hearing 
back from you, and I suspect you'll be hearing from several of 
us with specific questions.
    The hearing is adjourned.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

       Response to Questions of Senator Harkin and Senator Enzi 
                          by Edward Moslander
                             senator harkin
    Question 1. One of the features of the defined contribution system 
is that it places investment risk on families rather than employers. 
Investing is complicated and most people don't have the time or the 
knowledge to constantly monitor and adjust their portfolios. There has 
been a lot of work done to make investments simpler, for example, with 
target date funds. Is there more we can do to improve the investments 
available and make them more effective?
    Answer 1. One potential area of improvement lies within the 
Qualified Default Investment Alternative (QDIA) regulations. While we 
believe the Department of Labor's (DOL) current QDIA rules allowing for 
the use of target date funds as a default investment in retirement 
plans is a significant improvement from the previous rules, there are 
steps Congress and/or the DOL should take to improve the default 
investments available to plan participants. We believe the focus of the 
final 2007 QDIA rules on liquidity and market value may have unintended 
consequences. The ability to withdrawal accumulated balances in a lump 
sum when an individual terminates service from an employer is a 
difficult temptation to resist for many. The results of these actions 
over an individual's career could result in insufficient balances in 
his or her defined contribution plans, which consequently could place 
more stress on public entitlement programs. Additionally, these 
withdrawals can create an excess tax burden on employees who would be 
subject to penalty taxes for taking the cash today as opposed to 
waiting for distributions at normal retirement age.
    We ask that the QDIA rules be improved by allowing plans to offer 
guaranteed products as part of the QDIA. Guaranteed products protect 
investors on the downside, while also offering them a lifetime stream 
of income when it is time to begin drawing down the plan balances. 
Allowing for the inclusion of guaranteed vehicles within retirement 
plans that provide for lifetime income and not just a mark-to-market, 
cash payout at termination, is an effective way to allow plan 
participants to accumulate assets and plan for their eventual income 
stream. It also helps change the framing of defined contribution plans 
from wealth creating investments to vehicles whose end goal is to pay 
out benefits for as long as an employee lives in retirement.

    Question 2. One of the concerns I have heard about matching 
contributions is that lower income workers are at a disadvantage 
because they frequently can't take full advantage of the match. Do you 
have any thoughts about how to make sure that low-income workers are 
being treated fairly with respect to company matches?
    Answer 2. We fully support reforms that strengthen retirement 
security for workers throughout the income distribution and for lower 
income workers in particular. Over the past decade, regulations that 
have encouraged employers to adopt provisions, such as automatic 
enrollment, default contribution rates and an automatic escalation of 
those contribution rates, have helped increase the retirement security 
prospects of many lower income workers. In addition, existing non-
discrimination rules help ensure that these benefits are distributed 
across the income distribution. Unfortunately, too many low-income 
workers with access to employer-based retirement plans do not take full 
advantage of the savings incentives. For these workers, we recommend 
the consideration of regulatory and legislative reforms that would 
encourage employers to adopt plan designs that place greater emphasis 
on employer non-elective contributions as the primary source of 
contributions for lower income workers.

                              senator enzi
    Question 1. Haven't we made financial disclosures too complex? How 
can we make financial literacy more interactive? With smartphones and 
tablets increasing exponentially, how can we utilize these tools for 
workers to let them know how much they need to save for retirement?
    Answer 1. Regarding the complexity of financial information and 
efforts to make a more financially astute, informed and retirement-
ready American public, there are several challenges one should 
consider. For example, there are varying opinions about how much money 
workers need to save for retirement. It is difficult to create a 
financially literate populace that wants to save for its future if you 
cannot tell individuals what ``success'' actually looks like for them. 
That said, there is a consensus that workers should look to replace 
somewhere between 70 and 90 percent of their pre-retirement income. 
This number can vary depending on the lifestyle the person desires in 
retirement, the expenses they will have and their debt load, 
particularly the existence or absence of a mortgage.
    Once an individual decides on a percentage that would keep him or 
her relatively comfortable in retirement, an ideal interactive tool 
would be one that measures progress toward that goal based on one's age 
over his or her working career. For instance, most financial advisors 
agree that saving somewhere between 10 to 15 percent of one's salary 
each year, including any employer match that may be received, is going 
to keep most people on track toward a successful retirement.
    With respect to today's interactive planning tools, there are 
opportunities to make these more effective. One shortcoming is a 
general inability to account fully for what retirement will look like 
for a specific individual. A truly effective financial planning tool 
should be able to look at any given worker's annual income and make 
projections on how much Social Security income he or she will receive 
in retirement, project other income sources such as annuity payments, 
calculate the future value of money, make inflation and interest 
projections, and account for long-term debt (such as a mortgage).
    Another factor is healthcare. For most people, healthcare is the 
single largest expense they will have in retirement, but effectively 
projecting and communicating these costs is difficult. Integrated 
mobile tools would be well-suited to project for workers what their 
healthcare costs might be, perhaps by providing examples of healthcare 
costs for people in similar physical condition and offering projections 
of the future costs of those services based on standard cost inflation.
    A further aspect of creating a technology-informed, financially 
literate and retirement-ready population can be gleaned by learning 
from the teachers who make up the core of TIAA-CREF's participant base 
and have a unique perspective on the value of lifetime income products. 
TIAA-CREF offers teachers lifetime income products (i.e., annuities) in 
nearly all its retirement plans. Individuals who invest in guaranteed 
lifetime income products tend to have a much stronger sense of 
financial security and are more confident they are on track to reach 
their retirement goals than those who do not. The reason is these 
people know that even if things go awry in retirement, which they 
sometimes do, they will have a steady stream of income that will cover 
basic living expenses no matter how long they live. We feel that 
lifetime income products are a key element in the success of any 
retirement plan, yet we see an American public that is, for the most 
part, not familiar with the value of these products and how critical 
they can be to a well-rounded retirement portfolio. Financial education 
should focus far more in this area.
    People are hungry for information--both technology-driven and from 
well-
informed personal advisors. The more tools people have to help them 
project what their future will really look like based on the actions 
they take every day, the more likely they are to rely on those tools to 
build their future. Perhaps, in the future, we will be able to compile 
all the data needed to build an online financial tool capable of 
providing feedback on all the factors discussed above, but that day is 
not quite here yet. In the meantime, people should seek assistance from 
qualified, low-cost financial advisors who can help them build their 
future by providing objective advice not only on how much to save and 
where to invest, but on how to evaluate lifetime income products, make 
intelligent healthcare choices and understand how all these factors 
work together to paint a successful picture of retirement. TIAA-CREF 
offers this type of advice through its financial advisors and is 
working toward migrating many of its online calculators to the mobile 
space so they are accessible to our clients across multiple platforms. 
Our clients also leverage these tools as well as a number of financial 
literacy tools we offer to educate their employee base.

    Question 2. Small businesses with low profit margins are already 
overburdened by the day-to-day obligations of running a small business. 
How can we give small businesses greater access to the 401(k) system 
when they do not have the extra money to spend? In addition, how can we 
provide small business owners with greater access to financial literacy 
tools at a low cost?
    Answer 2. For many years, TIAA-CREF has provided thousands of very 
small plans with access to our high quality retirement products. As a 
mission-driven organization itself, TIAA-CREF has established 
partnerships with small colleges, independent schools, libraries, 
foundations and other types of institutions to support their respective 
missions by providing low-cost retirement services to their dedicated 
employees.
    With recent changes in industry regulations, including increased 
focus on individual plan pricing, continuing to service these clients 
in a cost-effective manner is a great challenge. However, we remain 
committed to all of our institutional clients and their participants 
and therefore have continuously sought out ways to make plan 
administration more affordable. Over the last several years, we have 
invested resources into streamlining the administration of these plans 
and improving their overall economics. Some of these efficiencies 
include the reduction of paper enrollments by more than 57 percent 
since 2009 and an almost full elimination of remittances via paper 
statements and checks. To assist plan sponsors with their ability to 
cover administration and other eligible expenses, we have also provided 
access to a new generation of institutionally owned contracts that 
allow for plan-level wrap fees that contribute to plan revenue. With 
the work we have already done and other enhancements we are planning, 
we are confident we will be able continue improving their respective 
plan financials and remain their provider of choice.
    In addition to these improvements, we have also developed a new 
client offer for eligible small businesses that meet some basic 
financial requirements. At a high level, such businesses need to have 
$2 million in mappable assets or at least $250,000 in annual 
remittance. This offer leverages institutionally owned contracts and 
provides access to an extensive list of non-proprietary and proprietary 
investment options.
    Beyond 401(k) and 403(b) offerings, TIAA-CREF supports small 
businesses by offering custodial services through individual retirement 
account (IRA) offerings. Specifically, TIAA-CREF has offered the 
Simplified Employee Pension (SEP) IRA since 2005. In addition, TIAA-
CREF in 2013 began offering the Savings Incentive Match Plan for 
Employees (SIMPLE) IRA. SIMPLE and SEP IRAs are available to business 
owners to provide retirement benefits for the business owners and their 
employees and offer simplified and less costly administration. Further, 
employees of businesses that adopt SIMPLE or SEP IRAs with TIAA-CREF 
have access to the tools, advise and planning services, and financial 
information offered by TIAA-CREF.
    Finally, another potential means of making plan administration more 
affordable for small (and large) employers is to modernize and simplify 
regulations related to providing electronic disclosure of documents to 
plan participants. Current regulations make it difficult for plans to 
provide their participants with disclosures via 
e-mail or online and rather encourage the continued use of paper as the 
preferred means of disclosure. We encourage the DOL to modernize its 
electronic delivery guidance to largely permit electronic delivery as 
the default method of delivery, subject to certain safeguards to 
preserve each participant's right to request to receive paper delivery 
of any required disclosure materials at any time without charge. A 
default e-delivery standard will benefit both plan sponsors and plan 
participants through reduced expense and more timely and effective 
access to plan materials.

    Question 3. In the 112th Congress, Senator Kohl and I introduced 
the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 
2011, or the SEAL 401(k) Savings Act. The SEAL 401(k) Savings Act is a 
bipartisan effort to reduce leakage and increase savings. The Act bans 
certain products that actively encourage participants to tap into their 
savings, often accruing large fees in the process. Can you explain how 
studies have shown that leakage from retirement plans can significantly 
reduce worker's retirement savings and the amount of money they will 
have when they retire?
    Answer 3. TIAA-CREF understands the concerns about retirement plan 
leakage and supports efforts to enhance existing provisions affecting 
retirement plan loans and distributions. The SEAL 401(k) Savings Act 
was a positive step in the direction of addressing such concerns and 
helping increase retirement security for plan participants. While there 
are measures in place to discourage individuals from taking premature 
distributions from their retirement savings, events do arise where an 
individual finds it necessary to tap into his or her savings prior to 
normal retirement age. Fortunately, many plans do offer their 
participants the flexibility to access some of their savings through 
plan loans and/or hardship distributions.
    Plan loans allow participants to borrow against their savings and 
then payback the loan over a specified period (generally 5 years). When 
participants take a loan, they avoid the income taxes and potential tax 
penalties that apply to early withdrawals retirement accounts as long 
as the loan is paid back within the defined term. If the terms of the 
loan are not met and a participant fails to pay the loan back in a 
timely manner, the loan can go into default. In such situations, the 
amount in default would be removed from an individual's plan 
accumulation to ensure the loan is paid in full and, accordingly, this 
amount becomes subject to taxes and potential tax penalties. To 
minimize the risk of this occurring, we believe it is important to take 
steps to ensure participants are educated on the consequences of a 
default and that steps are taken to ensure they avoid defaulting on the 
loan. The SEAL 401(k) Savings Act includes a provision that would help 
those who have terminated service with an employer and are required to 
repay outstanding loans in full within 60 days after termination. The 
provision would extend the rollover period for plan loan amounts for 
participants who default on a plan loan because they were unable to pay 
the loan back within the 60 day period by allowing them to contribute 
the amount outstanding on their loan to an Individual Retirement 
Account (IRA) up until the time they file their taxes for that year. 
While TIAA-CREF structures its plan loans so that participants are not 
required to pay back loans within 60 days of termination, we believe 
this provision would be helpful in plans that do.
    Hardship withdrawals are another means of allowing participants to 
access retirement funds to, among other things, avert potential 
financial crises (e.g., foreclosure or eviction). When individuals take 
a hardship withdrawal, however, they are in most cases required to 
cease contributing to their plan for 6 months after the withdrawal. 
Requiring an employee to stop contributing to his or her retirement 
plan is counterproductive when it comes to retirement security for two 
reasons. First, for individuals who have been compelled to deplete 
their retirement nest egg due to a hardship and as a result have 
experienced a setback in their retirement savings goals, it is 
important for them to continue to contribute to their plan to begin to 
replenish this amount. Second, since it is often difficult to get 
employees to initiate contributions in the first place, it also could 
be a challenge to get them to restart their contributions after the 6-
month waiting period, potentially placing them on a path toward 
retirement insecurity. For this reason, we support the proposal in the 
SEAL 401(k) Savings Act that would eliminate this mandatory 6-month 
contribution hiatus following a hardship contribution.
      Response to Questions of Senator Harkin, Senator Enzi, and 
                    Senator Warren by Julia McCarthy
                             senator harkin
    Question 1. A lot of plans offer participants access to all kinds 
of tools and calculators so that people can get a better sense of what 
they need to save for retirement. How many people are actually using 
those tools?
    Answer 1. Fidelity offers a variety of tools and calculators that 
are available via a phone representative or online via NetBenefits for 
our 401(k) participant population including:

     Retirement Quick Check (used to determine how much money 
they will need in retirement).
     Income Simulator (used to display current savings 
trajectory, including social security assumptions and other retirement 
income, and how this income translates into a monthly retirement 
paycheck).
     Retirement Income Planner (targeted at customers who are 
within 5 years of retirement, or already in retirement and designed to 
answer questions such as, ``How much can I spend in retirement?'' and 
``How long will my income last?'').
     Portfolio Review (helps participants design an appropriate 
asset allocation).
     Income Strategy Evaluator (provides targeted guidance to 
help retirees make transition from retirement savings to managing 
retirement income by integrating a broad mix of products to develop the 
right solution for the participant, including mutual fund investments, 
fixed annuities and variable annuities).

    A monthly average of 211,000 participants uses our on-line tools 
and calculators. This does not include guidance interactions via the 
phone.\1\
---------------------------------------------------------------------------
    \1\ 2011 Monthly Average Usage: 133,086; 2012 Monthly Average 
Usage: 223,463; 2013 Monthly Average Usage: 233,709 (January data 
only). There is no usage data available for Income Simulator, our 
newest tool, which is still in the process of being rolled out to 
participants.
---------------------------------------------------------------------------
    Fidelity continues to study ways to increase participants' 
involvement with their workplace retirement plans as our research has 
shown this to be the biggest inhibitor to greater use of educational 
tools and guidance. Once a participant has engaged either on-line or 
via a phone representative, our research shows that he/she is likely to 
have higher asset balances, is less likely to take a loan, and 
contributes at a higher overall savings rate. On average, 34 percent of 
participants do not engage with their plan during the course of a year.

    Question 2. You say in your testimony that automatically increasing 
people's contributions is a good way to help them save more. Do you 
have a sense of what the ideal increases should be? For example, is 1 
percent per year enough?
    Answer 2. We typically recommend that employers auto-enroll 
participants in the plan at 6 percent and institute an annual increase 
program that increases contributions by 1 percent each year up to 12 
percent.
    Yearly automatic increases combined with typical company match 
programs should get participants to a level of 12-15 percent annual 
savings (9 percent average employee savings and average 3-6 percent of 
company match) that will produce better outcomes. It is also our 
recommendation that automatic increases occur in tandem with salary 
increases to minimize the effect on the employee's net take-home pay. 
In addition, Fidelity data reveals that few employees decline to 
participate. Ninety-three percent of those enrolled by their employer 
remain within the program.
                              senator enzi
    Question 1a. Haven't we made financial disclosures too complex? How 
can we make financial literacy more interactive? With smartphones and 
tablets increasing exponentially, how can we utilize these tools for 
workers to let them know how much they need to save for retirement? 
Also, how can we provide small business owners with greater access to 
financial literacy tools at a low cost?
    Answer 1a. Yes. A participant in a 401k plan will receive a minimum 
of 13 required disclosures in their first year of eligibility in a 
plan. Some of these disclosures can be 25 or more pages in length. 
While this information is important, the sheer volume and complexity of 
content often overwhelms employees who participate in a variety of 
benefit programs each with a separate disclosure program. The ability 
to streamline disclosures, enrollment and education materials, make 
them interactive, and accessible on a mobile device has the potential 
to significantly increase participant engagement in saving for 
retirement, in addition to addressing the cost of providing such 
disclosures, a major deterrent to small businesses to offer such plans.
    Fidelity is experimenting with interactive approaches to engage 
more participants in managing their 401k. For example, in 2012 we 
worked with a Fortune 100 company to create an interactive game with 
the expressed purpose of making retirement education fun.
    The results were impressive (based on a 35 percent response rate):

     Eighty-five percent of participants reported learning more 
about investing and/or their retirement plan;
     Seventy-nine percent of participants plan to review and 
update their investments;
     Fifty-eight percent plan to increase their deferral rate 
as a result of playing.

    We are working to bring more of this type of interactive approach 
into our product offering by developing an eEducation program which 
features a suite of videos using animation and movement to maintain 
attention while using digestible content. Concepts are introduced via 
short animated videos and then more fully explored through the use of 
podcasts, Brainsharks (an online learning tool), and articles. We are 
also updating our existing suite of tools for compatibility with mobile 
devices including access to live channel support.
    Fidelity is leveraging the unique features of the mobile channel so 
customers can interact with us using their smartphones and tablets. We 
are building simple user experiences with interactive content 
encouraging communication through SMS texting and other actions 
naturally tailored to a mobile device. 
    As Fidelity deploys these approaches more broadly, we continue to 
evaluate which approaches, content, and interactions are most effective 
in helping our customers learn more about investing for their future. 
However, we are mindful that we still must meet current regulatory 
requirements for disclosure.

    Question 1b. How can we provide small business owners with greater 
access to financial literacy tools at a low cost?
    Answer 1b. The use of Web sites, Internet discussion forums, blogs, 
and online financial management tools are all low-cost ways to educate 
consumers on saving for retirement and financial best practices. 
Technology expands financial literacy educational options by providing 
flexibility in how, when, and where learning occurs. It is our 
experience that participants prefer learning through technology given 
its accessibility, ability to provide instant feedback, and its use of 
interesting and impactful graphics, and video.

    Question 2. Small businesses with low-profit margins are already 
overburdened by the day-to-day obligations of running a small business. 
How can we give small businesses greater access to the 401(k) system 
when they don't have the extra money to spend?
    Answer 2. The three principles that should guide a retirement plan 
for small business are:

    (1) minimized ERISA fiduciary responsibilities and reduced 
administrative costs through simplified design and execution;
    (2) small business financial incentives to establish and maintain 
plans that include key automatic design features;
    (3) access to online guidance and education at no cost (included 
with recordkeeping arrangement).

    Here are the key plan design features that align with those 
principles:

    A. Minimized ERISA fiduciary responsibilities and reduced 
administrative costs through simplified design and execution:

     Eliminate discrimination testing requirements if workers 
are enrolled at 6 percent;
     Fiduciary responsibilities delegated to approved private 
sector plan Service Providers with professionally managed accounts 
(QDIA) for participants;
     Simple, relevant, and actionable communications and 
disclosures;
     Allowance of electronic means as the default form of 
communication for all required disclosures,
     Consolidation and streamlining of required participant 
disclosures and notices;
     Government as repository for small orphaned accounts via R 
bonds and larger account balances would be rolled over to current 
workplace plan or IRAs to enable consolidation of accounts for a highly 
mobile workforce;

    B. Small business financial incentives to establish and maintain 
plans that include key automatic design features:

     Automatic enrollment of all employees, regardless of age 
and service at 6 percent with opt down option;
     Incentives for small business owners to start plans (e.g., 
startup tax credits);
     Automatic annual increase program for all employees;
     Optional employer contributions--higher tax credit or 
other tax incentives for additional employer contributions;
     Expand the savers credit for low-income workers;
     Maintain current limits and retirement incentives on 
employee or employer contributions;
     Restriction of loan provisions;
     Hardship withdrawals restricted to safe harbor provisions 
only;
     Simple web-based administration for plan sponsor and 
participant including mobile and digital access.

    C. Increased access to no-cost guidance and education:

     Access to on-line guidance and education to participants 
at no cost;
     Significant participant education services included as 
part of recordkeeping arrangement;
     Uniform curriculum across providers--starting with simple 
basics of budgeting and saving to broader topics of investing and 
retirement income planning.

    Fidelity has conducted extensive research in understanding and 
meeting the needs of small employers. In fact, we categorize these 
clients as our ``Fiduciary Segment'' because meeting that 
responsibility is their greatest concern. This group of plan sponsors 
are looking for providers to ``keep them out of trouble'' while 
providing quality benefits to their employees at a reasonable cost. To 
that end, we have prototyped multiple concepts ranging from a fiduciary 
training college and a dynamic monitoring dashboard to an assurance 
model that would include a standardized investment lineup, use of a 
volume submitter document, simplified testing etc. These concepts have 
been well-received and we will continue to refine them based on client 
feedback.

    Question 3. In the 112th Congress, Senator Kohl and I introduced 
the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 
2011, or the SEAL 401(k) Savings Act. The SEAL 401(k) Savings Act is a 
bipartisan effort to reduce leakage and increase savings. The Act bans 
certain products that actively encourage participants to tap into their 
savings, often accruing large fees in the process. Can you explain how 
studies have shown that leakage from retirement plans can significantly 
reduce worker's retirement savings and the amount of money they will 
have when they retire?
    Answer 3. Fidelity believes that in order for employees to stay on 
track and accumulate sufficient assets toward retirement, plan loan 
restrictions are essential as too many loans can have a significant 
negative impact on retirement savings.
    Attached is an illustration from Fidelity's most recent piece on 
loans entitled Borrowing From Your Retirement which shows the effect a 
loan can have on your retirement assets.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    The chart above is hypothetical and for illustrative purposes only. 
Please see below for the methodology.
    IMPORTANT: The projections or other information generated by 
Fidelity's planning tools regarding the likelihood of various 
investment outcomes are hypothetical in nature, do not reflect actual 
investment results and are not guarantees of future results. They are 
intended to provide a rough estimate of investment scenarios over time.

    Additionally, EBRI's Retirement Security Projection Model simulated 
the impact of loans on DC participant retirement savings. The 
projection simulates a full-time career employee who takes a loan and 
then stops saving for the duration of the loan repayment period (5 
years). Ceasing deferrals during the loan repayment period is expected 
to decrease future retirement income by 10 percent to 13 percent. If 
two loans are taken, this reduction nearly doubles. On the other hand, 
if the participant continues to save during the repayment period, the 
loan causes little changes to expected retirement income.
                             senator warren
    Question 1. In the HELP hearing on January 31, 2013, Professor 
Madrian suggested that it might make sense to provide employers with a 
simple way to participate in retirement plans, with a minimal burden 
and minimal regulatory requirements. She indicated support for 
``piggybacking'' on activities that employers are already required to 
do. What specifically are the points at which it might be possible to 
modify existing employer activities to seamlessly integrate a pension 
element and how effective do you believe intervention at each of those 
points might be? Please address new employee forms, employer 
withholding actions, and employer quarterly tax forms, as well as any 
other points that you might think would provide such an opportunity. 
Any draft sample forms would be particularly helpful.
    Answer 1. Employees typically receive wages on a weekly, bi-weekly 
or monthly basis. Thus, payroll deduction has proven to be an easy and 
convenient way for employees to participate in retirement plans, and 
simultaneously for employers to transfer an employee's pre-tax 401(k) 
contributions to a service provider.
    Introducing new retirement plan processes and forms may cause more 
complexity for employers and additional confusion for employees. 
Instead, we believe in proven solutions such as automatic workplace 
enrollment and an automatic annual increase program.
    Since the passing of PPA in 2006 we have seen our customer's 
adoption rate of automatic enrollment increase from 2.6 percent in 2006 
to 23 percent as of 
12/31/2012. The participation rate in plans with automatic enrollment 
is 83.5 percent versus 53.1 percent for plans that do not offer 
automatic enrollment.

    Question 2. How would you suggest structuring a default employer 
participation requirement that employers could opt out of if they 
determined that they would prefer, for whatever reason, not to provide 
such a plan for their employees?
    Answer 2. Historically, the passage of the Pension Protection Act 
(PPA) addressed many of the concerns plan sponsors had with respect to 
employer participation requirements or automatic contribution 
arrangements as it influenced whether an employer adopted an employer 
participation requirement/automatic enrollment arrangement. The PPA 
guidance on a Qualified Automatic Contribution Arrangement (``QACA'') 
eliminated the need for non-discrimination testing, clarified State 
withholding laws, and provided parameters for acceptable default 
elections. Fidelity saw an 18 percent increase in plans adopting these 
arrangements from 2006.
    Plans unwilling to commit fully to the QACA safe harbor were able 
to model their Automatic Contribution Arrangements (ACA) based on 
allowable QACA configurations. Any concerns about having too high or 
too low a deferral rate were effectively solved by mirroring the safe 
harbor election. Providing an additional safe harbor will motivate ACA 
Plan Sponsors to re-evaluate their deferral percentages to match the 
new safe harbor higher deferral limits.
    Recently, Fidelity proposed a new safe harbor (or a second safe 
harbor) for automatic arrangements including the following features:

     The minimum levels of default contribution would be 6 
percent for the first year, 8 percent for the second year, and 10 
percent for the third year and all subsequent years.
     The plan sponsors adopting this safe harbor would receive 
a tax credit equal to 10 percent of the employer and employee 
contributions made on behalf of non-highly compensated employees to a 
maximum of $10,000. This credit would apply for the first 3 full years 
the new safe harbor is in effect.
     The same non-elective contribution rule applies; however 
the matching contribution requirement would be modified to 50 cents on 
the dollar on the first 2 percent, then 25 cents on the dollar on the 
next 8 percent.

    Question 3. What are the factors that might influence whether a 
default employer participation requirement would materially increase 
the levels of employer participation in these plans across the country?
    Answer 3. Generally, we believe that the following factors would 
influence employer participation in offering workplace plans:

    (1) minimized ERISA fiduciary responsibilities and reduced 
administrative costs through simplified design and execution;
    (2) small business financial incentives to establish and maintain 
plans that include key automatic design features;
    (3) access to online guidance and education at no cost (included 
with recordkeeping arrangement).

    In 2012, a cross-company team of Fidelity associates partnered with 
Stanford's University School of Design to better understand the true 
needs of participants in retirement plans and to better design 
retirement plans for future generations. A major theme of those 
discussions was the need for simplicity for both employers and 
employees in the design and operation of plans. A second issue of no 
less importance involves lowering the employer startup and maintenance 
costs of an employee savings plan.
    Fidelity is happy to engage in conversations with you and your 
staff regarding employer participation and ways to make employer 
participation simpler and more cost-effective.

    Question 4. What are some mechanisms that you believe might 
minimize the administrative costs of participation in a plan for small 
businesses and other employers?
    Answer 4. We believe employers can reduce administrative costs 
through more standardized plan design, efficient administration 
including periodic plan sponsor/service provider review of plan costs, 
e-delivery communication strategies that drive participant engagement 
and outcomes, and cost-effective investment line-ups suitable for the 
workplace investor.
    We recommend the expansion of e-delivery regulatory policies by the 
Department of Labor and the Treasury Department so that more 
participants can enjoy the convenience of e-delivery. Labor Department 
2011 technical guidance issued in conjunction with Participant 
Disclosure did little to allow for the increased use of technology.
    Most recently, Department of Labor officials have made public the 
contents of a planned survey on benefit statements in furtherance of 
its 2013 regulatory agenda that includes proposed guidance on quarterly 
benefit statement requirements under ERISA. Despite the fact that 
Fidelity's online benefit site, Netbenefits, has more than 2 million 
visits on a daily basis, the survey framework still supports the 
concept that most workplace 401(k) participants receive paper 
statements in the mail. An additional expected requirement within the 
proposed guidance, lifetime income illustrations, is another example of 
guidance that is more easily conveyed via an on-line tool that a 
participant can model to easily understand his/her need to alter 
current savings strategies and take action to produce better outcomes.
    Finally, as stated within our earlier response to Senator Enzi, a 
participant in a 401(k) plan will receive a minimum of 13 required 
disclosures in their first year of eligibility. While this information 
is important, the sheer volume and complexity of the notice can 
overwhelm the employee who participates in a variety of benefit 
programs each with a separate disclosure program thereby defeating the 
regulatory objectives of notification and education. Fidelity's 
experience with 2012 required participant disclosures under section 
404A-5 is illustrative. Fidelity distributed close to 15 million 
lengthy disclosure statements that generated less than 1,000 phone 
calls mostly to inquire, ``What is this?'' and ``Do I need to take any 
action as a result?'' These required disclosures, although well-
intentioned, are expensive to produce yet provide little to no value to 
the participant. Fidelity supports congressional initiatives to review 
and consolidate required disclosures and the elimination of those 
deemed extraneous or duplicative in order to simplify administration 
and lower cost.

    Question 5. Is there data to suggest that tax incentives for 
employers would materially increase the number of employers that offer 
retirement plans to their employees, and do you have any 
recommendations about how those incentives should be structured?
    Answer 5. Although Fidelity has not conducted research on the 
particular point of whether tax incentives for employers would 
materially increase the number of employers that offer retirement plans 
to their employees, certain recent studies have examined how employers 
might react to changes in retirement savings tax incentives, including 
likelihood of offering or reducing retirement savings plans. Findings 
indicate that tax incentives are a critical component in the decision 
to offer and maintain DC plans. In addition to the potential for 
significant negative impact on retirement security, it has been 
determined that changes in income tax exclusion would cause many 
current sponsors to modify their plans by decreasing or eliminating one 
or more plan provisions, while some would likely drop their plan 
altogether.
     Specifically, a 2011 survey by Harris Interactive 
commissioned by the Principal Financial Group survey found that if 
workers' ability to deduct any amount of the 401(k) contribution from 
taxable income was eliminated, 65 percent of the plan sponsors 
responding to the survey would have less desire to continue offering 
their plan.
     The Harris Interactive study further determined that 75 
percent of small and medium-sized employers say current tax deferral 
incentives are the most attractive retirement plan feature to employees 
and eliminating retirement plan tax incentives could reduce the number 
of plans.

        Ninety-two percent of employers state that tax 
incentives for workers are important in their decision to offer a plan.
        Sixty-five percent say their desire to continue 
offering a plan would decrease if those incentives were removed.
        Thirty-six percent of those employers who don't 
currently offer a plan say the lack of tax incentives would decrease 
their desire to start offering one.
        Many employers believe that even a reduction in tax 
incentives would diminish their own desire to offer a plan.

     In a survey conducted by Mathew Greenwald & Associates, 
Inc., on behalf of the American Benefits Institute, 8 in 10 employers 
say the exclusion of employee (81 percent) and employer (77 percent) 
contributions from current employee income taxation is important in 
their company's decision to sponsor a DC plan.
     A 2011 AllianceBernstein survey of plan sponsors found 
that small sponsors were more likely than large employers to respond 
negatively to a proposed change in the deductibility of contributions 
by employees.

    Though these studies did not query whether certain tax incentives 
would materially increase the number of employers that offer plans, 
there is strong evidence to suggest the inverse, in that there would 
most certainly be a dramatic reaction by plan sponsors should certain 
current tax incentives be eliminated or significantly altered. Various 
proposals to modify the income tax exclusion of DC plan contributions, 
such as the 20/20 proposal, a 25 percent tax credit, and a tax 
exclusion limitation, are likely to garner opposition from employers. 
In fact, companies that do not currently sponsor a plan would be less 
likely to start one if one of these proposals were passed, and many 
sponsors expressed a desire to offer no plans at all in the absence of 
tax incentives for employees.
    Finally, if retirement tax incentives are taken away or altered, it 
is unlikely we would continue to see participation rates near 70 
percent among employers that sponsor a retirement plan. In this vein, 
it remains critically important that we continue to listen to employers 
and how tax incentives affect their decisions with respect to plan 
sponsorship.
       Response to Questions of Senator Harkin and Senator Enzi 
                          by M. Cindy Hounsell
                             senator harkin
    Question 1. I get the sense that a lot of people think that they'll 
just be able to work longer to make up for not saving. But as you say 
in your testimony, lots of people end up being forced into retirement--
either because they're disabled or because it's hard for older people 
to find work once they lose their jobs. What can we do to help people 
understand that they can't work forever?
    Answer 1. Helping people understand that they cannot work forever 
is one of many important planning issues that are not understood by 
today's workers. Public benchmarks are needed to help workers plan so 
that they understand what lies ahead for their retirement and can 
measure their future longevity risks and make better decisions. These 
benchmarks can be baselines agreed upon by both public and private 
partners that then become well-known by the public. They should be part 
of any education mechanism--whether workshops, webinars, podcasts, or 
publications--aimed at educating workers about retirement planning.
    Benchmarks should provide a basic guide or roadmap on what steps 
and strategies workers can take and how to implement the lifecycle 
approach as reminders. For instance, many workers know they are 
supposed to be saving and investing but they do not know how much they 
should be saving. The public/private partners would provide information 
based on best practices that would assist workers at each stage of 
life, or ``the life-cycle approach.'' For example, the strategies and 
material provided could advise individuals between ages 25-35 that 
building savings contributions up to 10-15 percent of salary is a 
typical retirement savings goal for their working lives.
    Nonprofits, government agencies (like the IRS, SSA, and DOL), 
employers, and financial institutions should be encouraged to highlight 
these benchmarks on their Web sites and in relevant communications. One 
of WISER's partners has introduced the idea of a national retirement 
readiness education advertising campaign based on one of the top 
advertising campaigns of the 20th century, Iron Eyes Cody. The ``Crying 
Indian'' Public Service Announcement known as the Iron Eyes Cody 
Campaign to clean up America was a combination of community action and 
legislation. It helped to transform the landscape. The nonprofit, Keep 
America Beautiful, had an impact on littering by impacting values and 
behavior and by reducing litter 61 percent since 1969. The ``Crying 
Indian'' is available 40 years later on YouTube and is still getting 
hundreds of thousands of hits.\1\
---------------------------------------------------------------------------
    \1\ Nybo, Stig and Liz Alexander. 2013. ``Transform Tomorrow.'' 
Introduction, 14-16, John Wiley & Sons, Inc., Hoboken, NJ.

    Question 2. There are lots of people that don't have traditional, 
40-hour-a-week jobs--part-time workers, temporary workers, and 
independent contractors, to name a few. What do we need to do to make 
sure people with non-traditional employment arrangements have easy 
access to a retirement plan?
    Answer 2. The first problem as it relates to this question is that 
many of the people who work in non-traditional employment are paying 
both the employer and employee payments for Social Security; an amount 
that along with Medicare, adds up to over 13 percent of their pay. Many 
workers think this will be enough to provide them with sufficient 
financial and health security upon retirement, which it will not. While 
Social Security is an important income source, it is just a foundation 
and workers need to have additional savings to provide them with 
sufficient retirement income. One way to entice these workers to also 
consider making a contribution to a retirement plan and to save 
regularly is to provide a retirement plan with the incentive of a 
simplified Saver's Credit that is structured as a matching 
contribution. It could be automatically deposited into either an 
Automatic IRA or an R Bond.
    We know it is important to reach workers who do not have access to 
a 401(k) plan at work, and ways to do that would be through an 
Automatic IRA or a 401(k) through a Multiple Employer Plan. The 
Automatic IRA offers workers the opportunity to save through regular 
payroll deposits that continue automatically. The employer's 
administrative functions would be minimal. With an Automatic IRA, 
employees would automatically be enrolled in an IRA and a percentage of 
their income would be directed to the account automatically. The 
contribution amount would increase year-by-year. The investment fund 
could be a target date fund. The Automatic IRA has the potential to 
reach up to 75 million workers that do not have access to a retirement 
plan at work. But the key to increasing coverage and participation for 
workers in this economic climate is the ability of workers to have easy 
access to a simplified Savers Credit as part of the structure of the 
Automatic IRA or R Bond. There is ample research showing that low-
income workers understand and will respond well to receiving a match.
                              senator enzi
    Question 1. Haven't we made financial disclosures too complex? How 
can we make financial literacy more interactive? With smartphones and 
tablets increasing exponentially, how can we utilize these tools for 
workers to let them know how much they need to save for retirement?
    Answer 1. The financial disclosures are too complex for most 
consumers. Among the thousands of people WISER has interacted within 
our education efforts, only a rare few have said they have ever read 
financial disclosures. We need to change the current model in a way 
that will make people want to read this important information. The 
disclosures need to appear less intimidating and have all the relevant 
information condensed in a summary. If they appear easy-to-read without 
financial jargon, busy consumers will be more likely to read them. 
These disclosures are usually written by lawyers or financial experts 
who are not experienced at writing for the average consumer. This may 
be one topic where input from the Consumer Financial Protection Bureau 
may be helpful, as well as nonprofit and other organizations that 
specialize in financial literacy.

    Question 2. Small businesses with low profit margins are already 
overburdened by the day-to-day obligations of running a small business. 
How can we give small businesses greater access to the 401(k) system 
when they don't have the extra money to spend? Also, how can we provide 
small business owners with greater access to financial literacy tools 
at a low cost?
    Answer 2. Employers have access to a simplified 401(k) plan but it 
has never gotten traction. The Automatic IRA could provide an 
alternative as a way to make sure that workers without a qualified 
retirement plan have access to an automatic-enrollment payroll 
deduction plan. Increasing tax credits are needed as incentives to make 
these cost-effective retirement savings options more attractive to 
small businesses and to defray any costs employers might incur for 
establishing the mechanism of automatic savings for their workers.
    Multiple Employer Plans or MEPS are also a cost-efficient 
alternative for small businesses looking to avoid the expense and 
administrative burden of a stand-alone 401(k) plan. Multiple employer 
401(k) plans provide a way for small employers to join together to 
adopt a 401(k) plan and to share expenses.
    On the issue of small business and financial literacy, there are 
countless resources for free financial literacy information that can 
lead to improved financial decisionmaking. The bigger problem is the 
need for outreach to small employers and finding ways to make them 
aware of the available information, tools, and resources. The 
Department of Labor and employers are both ``agents'' that employees 
trust, and they need to join together to make more information and 
tools available. The Department of Labor could establish a public/
private partnership and work to encourage a larger audience to use 
their tools, including ``Taking the Mystery out of Retirement 
Planning'' and ``Savings Fitness: A Guide to Your Money and Financial 
Future.'' Both are excellent tools for people looking to take the first 
step to plan for their future.
    Other resources include www.mymoney.gov, the site created by the 
Financial Literacy and Education Commission managed by the U.S. 
Department of the Treasury, the American Savings Education Council, 
AARP, the National Endowment for Financial Education, and the American 
Institute of CPAs. Also, as mentioned in our testimony, WISER operates 
the National Education and Resource Center on Women and Retirement 
Planning on behalf of the Administration on Aging. Materials are 
readily available on the WISER Web site, which was recently named by 
Forbes as one of the 100 best Web sites for women. WISER has also been 
highly successful in its approach of training local partners as 
``trusted messengers'' to provide retirement and savings educational 
programs.

    Question 3. In the 112th Congress, Senator Kohl and I introduced 
the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 
2011, or the SEAL 401(k) Savings Act. The SEAL 401(k) Savings Act is a 
bipartisan effort to reduce leakage and increase savings. The Act bans 
certain products that actively encourage participants to tap into their 
savings, often accruing large fees in the process. Can you explain how 
studies have shown that leakage from retirement plans can significantly 
reduce worker's retirement savings and the amount of money they will 
have when they retire?
    Answer 3. We applaud your efforts to help workers keep their 
retirement savings for retirement. A considerable number of studies 
over the years have shown that 401(k) leakage can have a sizable impact 
on retirement security. The SEAL 401(k) Savings Act would ban 401(k) 
debit cards and make it easier for workers to pay back loans in the 
event they lose their job. Consideration should also be given to 
allowing IRAs to accept rollovers of participant loans from qualified 
plans. Another important piece is that the Act would allow workers to 
continue saving for retirement through the plan in the event of a 
hardship withdrawal. Currently, workers have to wait 6 months before 
they can resume saving through the plan.
    The largest area of leakage in 401(k) plans, however, is the cash-
out between jobs. A recent study by Hello Wallet bears this out. Using 
survey data from the Federal Reserve's Survey of Consumer Finance and 
the Census Bureau's Survey of Income and Program Participation, the 
study finds that 19.1 percent of workers have cashed out their 401(k) 
at some point.\2\ The majority of those workers point to bills, loans, 
and other debt as the reason for cashing out.\3\ About 21 percent of 
workers with insufficient emergency savings have cashed out for non-
retirement needs.\4\ We need to ensure that workers realize the 
difference; 401(k) funds should not be considered ``contingency funds'' 
to cover short-term needs. They need to understand the importance of 
setting up a separate emergency fund to cover 3 to 6 months of expenses 
in the event they lose their job. However, while it goes against every 
tenet of retirement preservation there is a need to find a solution for 
the large number of workers who would rollover their retirement funds 
after a job loss if they knew they could borrow from it. We would be 
happy to discuss this issue in more detail with the committee.
---------------------------------------------------------------------------
    \2\ Fellowes, Matt. The Retirement Breach in Defined Contribution 
Plans. HelloWallet.
    \3\ Ibid.
    \4\ Ibid.

    Question 4. You raised the issue of part-time employees and 
temporary workers not being offered retirement benefits. What are some 
ways that you propose extending retirement savings opportunities so 
that part-time and temporary workers have a way to save?
    Answer 4. One way to reach workers who do not have access to a 
401(k) at work is through an Automatic IRA. The Automatic IRA offers 
the opportunity to save through regular payroll deposits that continue 
automatically. The employer's administrative functions would be 
minimal. With an Automatic IRA, employees would automatically be 
enrolled in an IRA, and a percentage of their income would be directed 
to the account automatically. The contribution amount would increase 
year-by-year. The investment fund could be a target date fund or 
Treasury securities. The Automatic IRA has the potential to reach up to 
75 million workers that do not have access to a retirement plan at 
work.
    To incentivize saving among lower income workers, the Saver's 
Credit could be made refundable. Currently, the Saver's Credit is 
nonrefundable, so it offers no incentive for very low-income earners 
who have little or no tax obligation.

    [Whereupon, at 11:33 a.m., the hearing was adjourned.]

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