[Senate Hearing 113-379]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 113-379


 THE STATE OF U.S. RETIREMENT SECURITY: CAN THE MIDDLE CLASS AFFORD TO 
                                RETIRE?

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                            
                            ECONOMIC POLICY

                                 of the

                              COMMITTEE ON
                              
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                                   ON

 DISCUSSING THE CURRENT STATE OF RETIREMENT SECURITY, FOCUSING ON THE 
  CHALLENGES FACING ASPIRING RETIREES FOLLOWING THE RECENT FINANCIAL 
  CRISIS AND HOW THE LEVEL OF RETIREMENT SECURITY IMPACTS THE ECONOMY

                               __________

                             MARCH 12, 2014

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


                 Available at: http: //www.fdsys.gov /



                                    ______

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                       Taylor Reed, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

                    Subcommittee on Economic Policy

                     JEFF MERKLEY, Oregon, Chairman

             DEAN HELLER, Nevada, Ranking Republican Member

JOHN TESTER, Montana                 TOM COBURN, Oklahoma
MARK R. WARNER, Virginia             DAVID VITTER, Louisiana
KAY HAGAN, North Carolina            MIKE JOHANNS, Nebraska
JOE MANCHIN III, West Virginia       MIKE CRAPO, Idaho
HEIDI HEITKAMP, North Dakota

               Andrew Green, Subcommittee Staff Director

        Scott Riplinger, Republican Subcommittee Staff Director

                                  (ii)


                            C O N T E N T S

                              ----------                              

                       WEDNESDAY, MARCH 12, 2014

                                                                   Page

Opening statement of Chairman Merkley............................     1

Opening statements, comments, or prepared statements of:
    Senator Heller...............................................     2

                               WITNESSES

Ted Wheeler, Treasurer, State of Oregon..........................     4
    Prepared statement...........................................    29
Monique Morrissey, Ph.D., Economist, Economic Policy Institute...     5
    Prepared statement...........................................    30
Robert Hiltonsmith, Policy Analyst, DEMOS........................     7
    Prepared statement...........................................    36
Kristi Mitchem, Executive Vice President, State Street Global 
  Advisors.......................................................     9
    Prepared statement...........................................    39

              Additional Material Supplied for the Record

Prepared statement of Jack VanDerhei, Ph.D., Research Director, 
  Employee Benefit Research Institute............................    46

                                 (iii)

 
 THE STATE OF U.S. RETIREMENT SECURITY: CAN THE MIDDLE CLASS AFFORD TO 
                                RETIRE?

                              ----------                              


                       WEDNESDAY, MARCH 12, 2014

                                       U.S. Senate,
         Committee on Banking, Housing, and Urban Affairs, 
                           Subcommittee on Economic Policy,
                                                    Washington, DC.
    The Subcommittee met at 3:10 p.m. in room SD-538, Dirksen 
Senate Office Building, Hon. Jeff Merkley, Chairman of the 
Subcommittee, presiding.

           OPENING STATEMENT OF SENATOR JEFF MERKLEY

    Senator Merkley. I call this hearing of the Economic Policy 
Subcommittee of the Committee on Banking, Housing, and Urban 
Affairs to order.
    The American dream is a powerful concept that has driven 
generations of Americans to strive for a better life. However, 
the American dream is not limited just to the idea that through 
hard work and determination an American can obtain a good 
living wage job and provide for a family.
    Not limited to that, it is also very much a part of our 
dream that hard-working Americans will not have to live in fear 
of their old age--that hard work, prudent saving, and a strong 
safety net will allow them to develop a substantial nest egg to 
support themselves throughout retirement and, possibly, leave 
something behind for their spouse or children.
    Recent reports and projections show that in the decades to 
come, Washington's actions, particularly concerning Social 
Security, will have an increasingly profound effect on whether 
our dream of a secure retirement matches the reality. The ways 
Americans save for retirement have changed substantially over 
the past 30 years, including a significant shift from defined 
benefit plans to defined contribution (DC) plans, which place 
substantially more risk and responsibility on the individual.
    There is also significant evidence that many Americans are 
unable to adequately save for retirement. At least half of 
single households did not have any retirement assets in 2010, 
and the median amount of retirement assets for married 
households was only about $10,000.
    Some of these challenges are a direct result of the great 
recession, but others are long-term problems exacerbated by the 
recent crisis. Decades of stagnant wages coupled with suddenly 
lowered home values leave working class Americans facing 
increasingly steep challenges to being able to save adequately. 
In fact, many young workers find themselves with yet another 
growing impediment in the form of ballooning student loans.
    All of these challenges amplify the importance of Social 
Security, which today provides, on average, about 40 percent of 
income for seniors and disabled Americans and creates a safety 
net for workers and their families. Among seniors who receive 
Social Security benefits, 23 percent of married couples and 
about 46 percent of single persons rely on Social Security for 
the vast bulk of their income--90 percent or more of their 
income.
    Given the current projections, Social Security will, 
without question, play an enormous role in providing retirement 
security for Americans. We are fortunate to have joining us 
today a panel of experts in the economics of retirement 
security. I hope we can have a robust conversation about the 
challenges facing American families and how we can enhance U.S. 
retirement security as a whole.
    So thank you very much for coming. I am now going to turn 
to my colleague, Senator Heller, for an opening statement.

                STATEMENT OF SENATOR DEAN HELLER

    Senator Heller. Chairman, thank you, and to our witnesses, 
thank you for taking time from your busy schedules to be with 
us today.
    Every day American families wonder if they will have enough 
savings to enjoy a comfortable and stable retirement in the 
future. As a new generation of Americans prepare to reach 
retirement age, we are getting a clearer picture of the 
evolving retirement landscape.
    Over the last few decades, new and diversified retirement 
options have been created in an attempt to increase savings and 
provide additional retirement income. A growing number of 
today's workers are preparing for retirement through defined 
contribution plans like 401(k)s and individual retirement 
accounts, IRAs, that allow families to accumulate financial 
assets from investments in stocks, bonds, and mutual funds.
    These retirement accounts, along with the development of 
rules allowing for increased after-tax contribution allowances 
and ROTH plans, are further expanding individuals' abilities to 
contribute earnings to their retirement plan. Although these 
are positive developments, many Americans are still struggling 
to save for retirement.
    The economic downturn and housing crisis have had a 
particular negative impact on the financial situation of many. 
In my home State, Nevada, Nevadans are still grappling with one 
of the highest unemployment rates in the Nation, and for many, 
their home values are under water. For those individuals who 
are struggling to get by, retirement is a distant dream.
    Until the economy improves, Nevada will remain at a 
disadvantage when preparing for retirement. In order to combat 
this crisis, Washington must implement policies that return 
America's economy back to a period of optimism and growth. The 
more people that can return to work, the more retirement 
opportunities will become available to them.
    And for that, I want to thank all our witnesses again for 
attending today's hearing. I look forward to hearing your views 
on the current state of Americans' retirement security. I hope 
that our discussion will shed some light on the important 
issues affecting individuals' ability to financially prepare 
for their retirement, particularly how current Federal policies 
are affecting retirement preparedness and what we can do to 
better prepare all Americans. So thank you. I welcome each of 
your views as panelists. Thank you, Mr. Chairman, for holding 
this hearing.
    Senator Merkley. You bet. And now I will introduce our 
witnesses. Ted Wheeler is the Treasurer of the State of Oregon. 
He holds a B.A. from Stanford, a Master's in public policy from 
Harvard, and an M.B.A. from Columbia. Were there no other 
colleges left to apply to for other degrees? It is a pleasure 
to have you travel out from Oregon. Thank you for joining us.
    He has served as Treasurer of Oregon since 2010. He has 
actively pushed for State-level coordination and action in 
addressing retirement security challenges. In 2013, he 
advocated for legislation successfully in Oregon that created a 
State retirement savings task force to consider the trends, 
current laws, and saving options, and to provide 
recommendations to the 2015 State Assembly.
    He also convened a bipartisan round table of national labor 
organization representatives, financial industry leaders, and 
State treasurers to discuss options to help private sector 
workers without retirement savings plans through their 
employers. Thank you very much for joining us.
    Monique Morrissey has her Ph.D. in economics from American 
University and B.A. from Swarthmore. She is an Economist at the 
Economic Policy Institute specializing in retirement security, 
labor markets, and financial markets. Since joining EPI in 
2006, she has focused on a range of issues, including--this is 
quite a list of things that you have worked on over these 
years--Social Security, pensions, other employee benefits, 
household savings, tax expenditures, older workers, public 
employees unions and collective bargaining, Medicare 
institutional investors, corporate governance, executive 
compensation, financial markets, and the Federal Reserve.
    She is a member of the National Academy of Social 
Insurance. Prior to joining EPI, she worked at the AFL-CIO 
Office of Investment and Financial Market Center. Thank you for 
joining us today.
    Mr. Robert Hiltonsmith is a Policy Analyst at Demos, a 
public policy think-tank based in New York. He has an M.S. in 
economics from the New School for Social Research and a B.S. in 
mathematics and philosophy from Gilford College. He joined 
Demos in March 2010 to provide research and analysis on issues 
surrounding retirement security in the United States, with a 
particular focus on how these issues affected young people.
    He has written on a wide variety of topics, including tax 
policy, fiscal policy, health care, and the labor market. His 
research has been widely covered in the press, including the 
Washington Post, Newsweek, Market Watch, Reuters, and 
Kiplinger. He has appeared on regional and national television 
and radio, including Fresh Air, Frontline, the Lehrer Show, and 
Fox Business News. Thank you very much for coming down from New 
York to join us.
    Our next panelist, I know that Senator Elizabeth Warren had 
hoped to be here in time to introduce you, but she is not able 
to make it this quickly. We are expecting her in a few minutes, 
so I am going to go ahead and introduce you.
    Kristi Mitchem is Executive Vice President of State Street 
Global Advisors and head of the Americas Institutional Client 
Group. She earned her B.A. in political science from Davidson 
College and M.B.A. from Stanford Graduate School of Business. 
In this role, she is responsible for the strategic direction 
and leadership of State Street Global Advisors growing 
institutional business.
    Prior to joining State Street, she worked at BlackRock 
where she most recently served as Managing Director and head of 
the U.S. defined contribution business responsible for building 
with a focus on delivering products for individual 401(k) 
investors. She has over 17 years of experience in the defined 
contribution and equities markets.
    So with that, we are going to put 5 minutes on the clock 
for each of you. We will ask you to try to stay within that. 
There is a little flexibility, but we would like to be able to 
get through all your remarks and have time to ask some 
questions and have some dialogue. Mr. Wheeler.

      STATEMENT OF TED WHEELER, TREASURER, STATE OF OREGON

    Mr. Wheeler. Senators, thank you for having me here. It is 
an honor. For the record, my name is Ted Wheeler. I am the 
Treasurer for the State of Oregon. In that capacity, I am 
responsible for managing the State's $87 billion investment 
operation, protecting the State's strong credit rating, and 
providing banking operations to over 1,000 local jurisdictions.
    But before I held public office, I worked for a private 
sector financial management firm that focused predominantly on 
private sector retirement tools. I was a senior management 
executive in that capacity.
    I want to thank you for shining a light on the critically 
important issue of retirement security for the middle class. 
More needs to be done and quickly to reduce the profound 
economic impact of what I believe is a generational crisis, a 
crisis that threatens to plunge seniors into poverty, disrupt 
entire families, and impact the economy on a significant scale.
    In Oregon, as across the Nation, a lack of sufficient 
retirement savings threatens family security and quality of 
life. What was once considered a matter of personal 
responsibility is increasingly becoming a public crisis, an 
economic crisis, whereby people who do not save adequately for 
retirement then put additional burdens on costly safety net 
programs, both at the Federal level and at the State level.
    Senators, time is not our ally on this matter. In the State 
of Oregon, our older adult population is expected to double in 
the next 20 years; and yet, only about half of Oregon's private 
sector employees have access to retirement planning options at 
their place of employment. A recent study by AARP-Oregon 
concluded that one out of every six employees between the age 
of 45 and 64 in our State have less than $5,000 in retirement 
savings. This is a demographic tidal wave which threatens to 
swamp us.
    We all understand that it is hard to save. We understand it 
is particularly hard for the middle class that has been beset 
by stagnating wages, escalating costs of higher education, and 
uncertainty about future costs of health care, among other 
things.
    But what our constituents are telling us and what the data 
clearly shows is that people are focused on their short-term 
economic needs and they are not as focused on long-term 
retirement security options. A huge number of Oregonians are 
relying predominantly on Social Security for retirement, 
something for which the program was never intended. In the 
absence of Social Security in our State, 40 percent of older 
adults would live in poverty.
    In December, I helped to convene a bipartisan round-table 
of elected State treasurers from across the country. They 
agreed that retirement security demands America's attention. 
And next week, as laid out in Oregon's bipartisan legislation, 
I will convene the first meeting of a new task force that will 
look at ways that we can incent more retirement savings and 
potentially expand pooled and professionally managed investment 
options for Oregon workers.
    Among the questions we will attempt to answer: What options 
are available to bolster the savings of employees who do not 
have options through their place of employment? What should be 
the role of the State's successful investment operations, if 
any? And what options are available to protect the State and 
private sector employers against liability, pool resources to 
keep costs low, and that create portable, accessible, and 
voluntary options for Oregonians?
    I think it is appropriate that States are taking on this 
issue in parallel with your efforts here in Congress. Different 
States are going to come up with different innovations and 
different solutions, in large measure based on different 
expectations about the role of Government. But it is my hope 
and my expectation that those different ideas and solutions 
will only contribute to a positive dialogue, much in the same 
way that the States came together to help the Federal 
Government pass the 529 tax laws which provided robust savings 
vehicles for higher education and job training.
    In conclusion, I will just remind everybody that this is a 
bipartisan issue, that it is an urgent issue, and that I want 
to thank you, in particular, Senator Merkley and Senator 
Heller, for your focus on an issue of retirement security, 
retirement security that is moving farther away for many 
Americans and is out of reach already for some. Thank you for 
your attention to this.
    Senator Merkley. Thank you very much. Dr. Morrissey.

  STATEMENT OF MONIQUE MORRISSEY, Ph.D., ECONOMIST, ECONOMIC 
                        POLICY INSTITUTE

    Ms. Morrissey. Thank you, Chairman Merkley and Ranking 
Member Heller, for inviting me to testify on the state of 
retirement security in the United States.
    My name is Monique Morrissey. I am an Economist working on 
retirement issues at the Economic Policy Institute, a 
nonpartisan think-tank focusing on the needs of low- and 
middle-income workers.
    Retirement security improved significantly in the post-war 
decades as Social Security expanded and participation in 
employer-based plans grew. However, the 1980s began a period of 
retrenchment. Social Security cuts that are still being phased 
in reduced retirement benefits by almost one-fourth. Meanwhile, 
private sector employers replaced secure pensions with 401(k) 
plans, shifting costs and risks onto workers. Though this could 
have broadened access by making it easier for employers to 
offer benefits, participation in employer-based plans declined 
in the new millennium.
    Though assets in retirement funds have grown faster than 
income in the 401(k) era, retirement security worsened as 
retirement wealth became more unequal and outcomes more 
uncertain. 40 percent of families approaching retirement have 
nothing saved in retirement accounts and 10 percent have 
$12,000 or less. Though the median amount for older families 
with savings is $100,000, this is not even enough to purchase a 
$5,000-a-year joint life annuity at 65.
    As my co-author and I found in our Retirement Inequality 
Chart book, a family in the 90th percentile has nearly 100 
times more retirement savings than the median family, which has 
a negligible amount. All told, households in the top fifth of 
the income distribution account for more than two-thirds of 
savings in retirement accounts.
    There are stark differences by race, ethnicity, and 
education, as only white households and college graduates are 
more likely than not to have retirement account savings. An 
already bad situation was made worse by the collapse of the 
housing bubble and financial crisis which wiped out $13 
trillion in household wealth and left many homeowners under 
water. This is particularly tragic for minority families whose 
net worth fell by more than half.
    Just as workers' retirement prospects are increasingly 
affected by economic shocks, researchers at the New School, 
which is Robbie's alma mater, have shown that 401(k) plans also 
contribute to macroeconomic instability. Where Social Security 
helps shore-up household incomes during recessions, 401(k) 
plans encourage older workers to retire in boom times and hang 
on to jobs when asset values are depressed.
    401(k) plans were invented by a benefit consultant working 
on a bonus plan for bankers. Congress never intended for them 
to replace traditional pensions as a primary investment 
retirement vehicle, and they are poorly designed for this 
purpose. Because 401(k) plans limit the scope for risk pooling 
and forego economies of scale, contributions to these plans 
must be nearly twice as high as traditional pensions to ensure 
a similar retirement income in retirement.
    In addition, few participants have the time or ability to 
make good investment decisions. IRAs, primarily composed of 
funds rolled over from 401(k)s, offer fewer protections and 
typically have even higher fees. Our retirement system, which 
never worked well for low-income workers, now also fails the 
middle class. Our first priority should be expanding Social 
Security to replace some of the benefits cut in 1983 and better 
protect beneficiaries from rising health costs.
    Second, we should take steps to preserve existing defined 
benefit pensions in the public and private sector. Contrary to 
conventional wisdom, most public pensions are in reasonably 
good shape, and those that are not are in trouble because 
elected officials neglected to make required contributions over 
many years. The focus should be on preventing this from 
happening in the future, not reneging on promises to workers or 
switching to defined contribution plans.
    Third, we should address some of the worst problems of 
401(k)s and IRAs before encouraging workers to save more in 
these plans. The Thrift Savings Plan offered to Federal workers 
is one model for reform because of its low fees, limited 
investment options, and the availability of low-cost annuities. 
However, it does not resolve the fundamental problems of market 
risk and upside-down tax subsidies.
    Fourth, we should explore ways to make defined contribution 
plans more like defined benefit pensions, while recognizing 
that many private sector employers are not in a position to 
take on long-term liabilities. Senator Harkin's USA Retirement 
Funds and the California Secure Choice plan are two examples of 
this approach.
    Last, but not least, we should reconsider our reliance on 
tax incentives for retirement savings. This approach is 
inherently inefficient because there is no way to guarantee 
that tax subsidies encourage people to save more, as opposed to 
shifting funds to tax-favored accounts. Nevertheless, a subsidy 
in the form of a refundable credit or Government match would be 
much more efficient and fair than the current system.
    EPI's Guaranteed Retirement Account plan proposed 
converting tax subsidies for retirement savings into flat 
credits to offset the cost of universal accounts earning a 
modest rate of return guaranteed by the Federal Government. EPI 
is working on a variation with a Government guarantee that uses 
a balancing fund to maximize the share of retirees who achieve 
a target rate of return. Thank you very much.
    Senator Merkley. Thank you very much, Doctor. We will now 
turn to Mr. Hiltonsmith.

     STATEMENT OF ROBERT HILTONSMITH, POLICY ANALYST, DEMOS

    Mr. Hiltonsmith. Thank you, Chairman Merkley and Ranking 
Member Heller, for the opportunity to testify today.
    I am Robbie Hiltonsmith. I am a Policy Analyst at Demos, 
which is a public policy organization working for an America 
where we all have an equal say in our democracy and an equal 
chance in our economy.
    I am happy to be here today to testify on the state of 
retirement security because as our other panelists have said, 
we really are at a crucial point here in that retirement 
security has declined immensely over the past 10 and 20 years, 
but it really is one of the lynchpins of economic security for 
the middle class.
    One of the reasons, as other panelists have alluded to, is 
these--are the issues with 401(k)s and IRAs, defined 
contribution-type plans which have become the primary 
retirement savings vehicle for most Americans. It is on those 
that I am going to focus my testimony today.
    So in 2012, less than half of all private sector workers in 
the United States participated in workplace retirement plans. 
However, even those actively saving are still at risk of 
retirement security primarily because they have access only to 
a 401(k)-type plan. And as Senator Merkley mentioned in his 
opening remarks, these plans place all of the risk of saving 
for retirement on workers, exposing them to the risk of losing 
their savings in a stock market plunge or outliving their 
retirement savings, among others.
    I was going to quote the stats that Monique already used. 
But, you know, 40 percent of people approaching retirement have 
nothing saved and even those that do the median amount is not 
enough to provide a secure retirement income. And it is, in 
fact, because of these issues with 401(k)s, these risks and 
high fees, that contribute to this retirement inadequacy.
    So I will talk about the four major types of risk that 
401(k) participants face, which are market risk, longevity 
risk, leakage risk, and contribution risk. So market risk. 
During the last stock market plunge, 401(k) and IRA assets lost 
$2 trillion in value and have only, for many, have only 
recently, mostly in the past year, seen their balances go 
beyond where they were.
    So longevity risk, which is the possibility that account 
holders that outlive their retirement savings is, of course, 
increasingly worrisome as life expectancies of mostly higher 
earners rise. We know they are not rising much for the lower 
end of the income distribution. And individuals generally 
under-estimate their own probabilities of living to an old age, 
which makes this particularly difficult for them to calculate 
how long they are going to actually need to live.
    So leakage from 401(k)s through pre-retirement withdrawals, 
loans, and cash-outs zapped nearly $75 billion from retirement 
accounts in 2010, and that was about a quarter of all money 
that was put into them.
    And finally, we will talk about contribution risk. Workers 
under-contribute for three main reasons. Either they are not 
earning enough, which is one of the major problems here we are 
dealing with. They do not trust 401(k)s and financial markets 
in general, or they may not have the financial literacy to 
understand how these plans work or how much to contribute.
    The effect of this contribution risk is especially evident 
in lower contribution rates among workers of color. They have 
rates for Latinos and African-Americans who do have lower 
average incomes, and surveys show trust for the initial markets 
less, trailing significantly behind contribution rates of white 
and Asian Americans.
    Finally, the many fees charged by the funds in which 401(k) 
assets are invested make it even more difficult to accumulate 
sufficient savings. These fees, often around 1 percent of 
assets per year, can seem small. Over a lifetime, it can 
compound significantly to drain workers' savings. According to 
one of our reports, they can reduce the size of a typical 
household's nest egg at retirement by about 30 percent.
    The issue is not that, of course, people are paying fees; 
it is that they are paying excessive fees, of course. They are 
paying fees that do not need to be paid. And there are a lot of 
factors contributing to these excessive fees from savers' and 
plan sponsors' lack of knowledge and, two, advice from plan 
investment advisors that often runs counter to savers' 
interests, in part due to the compensation structure of many of 
these financial advisors.
    One recent study estimates that savers lose an average of 
nearly 1 percent in returns due to what they call fiduciary 
loss, which are, in essence, poor choices by plan fiduciaries, 
and in part due to poor or counter-productive advice by their 
financial advisors.
    So Monique summed up pretty well a lot of different things 
we need to do to fix this, but it seems pretty clear that 
401(k)s do need to be significantly reformed or even replaced 
if we are going to have individual savings plans be the primary 
retirement vehicle for most Americans.
    Senator Merkley. Thank you, Mr. Hiltonsmith. Ms. Mitchem.

 STATEMENT OF KRISTI MITCHEM, EXECUTIVE VICE PRESIDENT, STATE 
                     STREET GLOBAL ADVISORS

    Ms. Mitchem. Good afternoon, Chairman Merkley, Ranking 
Member Heller, and Members of the Subcommittee. Thank you for 
this opportunity to talk about the state of the U.S. retirement 
system and the role of the employer in helping to ensure 
retirement adequacy for the middle class.
    My name is Kristi Mitchem and I am an Executive Vice 
President for State Street Global Advisors, the investment 
management arm of State Street Bank and Trust Company. State 
Street Global Advisors is one of the largest asset managers in 
the world, entrusted with over $2.3 trillion in assets. 
Importantly, we manage more than $305 billion for 401(k) and 
other defined contribution investors.
    Having worked with retirement plan sponsors for the 
majority of my career, I recognize the important role that 
employers can play in assisting workers with retirement 
preparation. My objective today is to highlight the success 
that we are having with the largest employers in the United 
States that are helping their workers to achieve retirement 
adequacy within the context of a DC-dominated system, and to 
suggest ways in which we can make this success more universal 
by removing barriers that currently prevent many smaller 
companies from offering well-structured retirement savings 
programs.
    When it comes to individual retirement planning and 
preparation, we believe the great divide is more around 
employer size than employee income level. Large employers are 
much more likely to provide a retirement plan, and when they 
do, the plan produces better results for those employees that 
participate in it regardless of their income level.
    I would highlight several statistics for you that 
illustrate the impact of employer size on retirement readiness. 
Eighty-nine percent of large companies offer DC plans. However, 
only 14 percent of small employers sponsor some type of plan 
for their employees to save for retirement. The average savings 
rate in large plans is 7.3 percent. For the smallest plans, 
that drops to only 5.6 percent. The average account balance in 
the largest plans is over two times the average across all plan 
sizes.
    The question then becomes, why have large plans been more 
successful in developing individually funded plans that work? 
The answer, in my view, lies in the fact that the largest plans 
in the United States are leveraging changes in public policy 
and incorporating insights from behavioral finance to drive 
real improvements in retirement readiness. Specifically, they 
are taking steps to automate good behaviors, simplify choices, 
and enhance transparency, such as auto-enrollment, auto-
escalation, and simplified investment menus.
    A recent study conducted by the Employee Benefit Research 
Institute underscores the impact of these measures in helping 
employees achieve retirement adequacy. EBRI estimates 85 to 90 
percent of younger middle-class workers participating in a plan 
that incorporates both auto-enrollment and auto-escalation 
would achieve retirement readiness.
    So how do we replicate the large plan experience in the 
small plan market? Part of the answer, in our view, lies in 
helping convert small employers into large plans by supporting 
the pooling of retirement assets. Specifically, we would 
recommend that the current nexus requirements be eliminated for 
participant-funded retirement programs and that a safe harbor 
be offered to participating members of a multiple-employer DC 
plan, provided that certain best-in-class plan design features 
such as auto-enrollment and auto-escalation are incorporated.
    Developing and encouraging the use of pooled plans would 
reduce the barriers to plan adoption among small companies by 
spreading the administrative and personnel-related costs across 
a number of employers. Importantly, it would also help smaller 
plans achieve the kind of fee leverage that larger plans now 
enjoy.
    In other words, access to pooled plans would make 
retirement plan provision more attractive to small employers 
and would allow participants in these plans to keep more of 
what they save through lower plan expenses.
    In conclusion, one of the unique facets of the U.S. 
retirement system is that the employer plays a central role in 
helping individuals to plan and save for retirement. What may 
not always be well understood, however, is that this workforce-
centered design actually motivates savings in individuals that, 
left to their own devices, would not save.
    A recent study shows that half of DC participants strongly 
agree or somewhat agree with the following statement: I 
probably would not save for retirement if I did not have a 
retirement plan at work. And for those with a household income 
of less than $50,000, that response rate increases to 70 
percent.
    Given the important role that employers play in enabling 
retirement savings, it is only natural that any exploration of 
how to improve the system begin with an examination of why 
certain employers are achieving success and others are not. In 
our view, the dominant explanatory variable is plan size. We 
have presented solid evidence that the largest employers in the 
United States are creating plans that work by incorporating 
auto-features and using their size and their scale to drive 
down costs.
    The next step in the evolution of DC plans should be to 
bring aspects of that model to a wider range of plan sponsors. 
In our view, this can be accomplished, in part, by supporting 
the creation of well-structured, multiple employer plans. Thank 
you again for the opportunity to testify on the importance of 
ensuring retirement security for America's middle class. I 
would welcome any questions you might have.
    Senator Merkley. Thank you very much for all of your 
testimony. We are going to turn first to Senator Warren for 
questions because she has an appointment that means she will 
have to leave in a few minutes. So we wanted to give her a 
chance to get her part of this dialogue underway.
    Senator Warren. Thank you very much, Mr. Chairman. It is 
very gracious of you and thank you, Ranking Member Heller, for 
letting me do this first.
    Such an important topic and I have a whole stack of 
questions I would like to get through, and I am particularly 
interested in what you raised, Ms. Mitchem, about the 
importance or the opportunities presented if we look into 
pooling retirement plans for small employers. I really think 
getting more small employers into retirement systems is the key 
to getting more employees into retirement systems. So thanks 
very much on this.
    I want to ask another question, though, about fees. Fees 
charged to administer and invest in retirement savings plans 
have an important impact on retirement security. The 
differences in fees may seem very small, but compounded over a 
lifetime of savings, they can make a huge difference. So I did 
a little math on this. For a median income worker who starts 
contributing 5 percent of her salary at the age of 25, having 
401(k) fees that are set at 1 percent of assets, as compared 
with a quarter of a percent in assets, would leave that worker 
with $100,000 less at the time of retirement, forcing an 
additional 3 years of work to make up the difference.
    If the fees are 1.3 percent, the cost at retirement would 
jump to over $300,000, and she would have to save 7.5 percent 
of her salary, a 50 percent increase, over her entire lifetime 
to make up that difference. In other words, fees matter.
    In 2012, the Department of Labor implemented new rules for 
the first time that required disclosure of fees in 401(k) 
plans. So I just wanted to ask briefly, what has been the 
impact of required disclosure on fees? Anyone who would like to 
do that? Ms. Mitchem?
    Ms. Mitchem. I would be happy to take it and I would like 
to qualify that my commentary is really going to refer to the 
large plan market because that is what we service 
predominantly.
    Senator Warren. Fair enough.
    Ms. Mitchem. But if we look specifically at the largest 
plans in the United States, what we saw is that on the basis of 
that regulation, in combination, I would add, with other 
important trends like the move to lower cost index funds, has 
actually resulted in a decrease in fees of about 20 to 25 
percent. So not only do fees matter, disclosures matter.
    Senator Warren. Absolutely. And that is driving down costs 
which means helping people have more secure retirements. Let me 
then take that to the next place. It is starting to help in 
401(k) plans, but we still do not have anything in individual 
retirement accounts. So individuals picking out IRAs are aware 
of the impact of fees. It is important that they be aware of 
the impact of fees on the bottom line.
    There is more money held in IRAs than there is in 401(k)s, 
$5.3 trillion versus $3.5 trillion in 2012. And about 95 
percent of the money in IRAs comes from funds that were rolled 
over from 401(k)s. And yet, there is no requirement that IRA 
fees be disclosed. Instead, companies could use misleading 
advertisements for no-fee IRAs that might actually have fees, 
and fees can be buried deep in legalese in different parts of 
the document.
    So I want to ask, is there a principled reason why we 
should not require the same kind of disclosure for IRAs to make 
it clear up front what the fees will be for families? Mr. 
Hiltonsmith, would you like to jump in on that?
    Mr. Hiltonsmith. Sure. I absolutely do not think there is 
any principled reason why we should not require that 
disclosure, but just to build on what Ms. Mitchem said, I 
actually think that the fee disclosures, both for 401(k)s and 
potentially for IRAs, need to go further than they do now.
    Senator Warren. Please say more.
    Mr. Hiltonsmith. Yeah. I mean, just from my own discussions 
with people and with reporters who have been reporting on the 
issue, they have been finding people really confused by the 
disclosures, that sometimes they are appearing on Page 26 of 
their statements, and in some cases, they are not really saying 
very much more than they did before in that you still had--you 
always had that table of expense ratios and now you have got a 
different table and people still are not understanding, as you 
mentioned, the lifetime impact of these things, how big of a 
difference that 1 percent versus half percent versus, you know, 
25 basis points makes.
    And so, I really do think that not only do we need 
potentially some kind of standard for it, that these things 
need to be up-front and in some, you know, clear format like 
with credit cards might be required with them, and that also we 
really do need to give them some kind of estimate of how much 
of a difference, you know, these fees can make over a lifetime, 
because when they see 1 percent, they are like, Oh, you know, 
that does not seem like very much. But they do not realize that 
it is 1 percent of assets every year and that, in essence, is 
reducing their returns by 1 percent, you know, is the other way 
to think about it.
    Senator Warren. Well, thank you very much and I am out of 
time and I do not want to take more here, but I really do want 
to say, it sounds like such a small point, but getting not just 
disclosure, as you rightly say, Mr. Hiltonsmith, disclosure 
that is clear, that is in the same place on every document, 
that is reported in exactly the same way that it covers 
401(k)s, that it covers IRAs.
    And I will throw in the pitch what would have been my third 
question is when people rollover from 401(k)s to IRAs, that 
moment of marketing, that we make sure that people are fully 
informed. It is not the only thing we need to do in the 
retirement area. We need to do a whole lot more. But this is a 
step we ought to be able to do and do quickly. So thank you 
very much for having the hearing and thank you for your 
indulgence in letting me go first, and thank you all for 
showing up here today. Thank you.
    Senator Merkley. Thank you. Thank you very much, Senator 
Warren. I wanted to turn to Dr. Morrissey, to some of your 
testimony. Your testimony makes very clear that Social Security 
is the foundation of so many Americans' retirement. According 
to the Social Security Administration's estimates, in 2011, 
nearly 64 percent of beneficiaries depend on Social Security 
for over 50 percent of their income, and 35 percent depend on 
it for 90 percent of their income.
    Just to round those off, for one-third of the recipients or 
beneficiaries, it is the vast bulk, 90 percent or more; for 
two-thirds, it is at least half. And that is a very significant 
role to play. Social Security payments in that context keep a 
lot of our seniors out of poverty. Just 7 percent of Social 
Security retirees are below the poverty line. I think that 
should be claimed as a significant victory in the war on 
poverty.
    But a lot of folks are right at the poverty line. And so, 
it is a very modest amount of assistance, which is why we are 
so interested in other vehicles. But, Dr. Morrissey, do you 
think the current Social Security benefits are enough to meet 
seniors' expenses, or do seniors deserve a modest raise in 
order to pay for medication, to put food on the table? Can 
Social Security do even more to provide retirement security for 
my citizens in Oregon and certainly the citizens of our entire 
Nation?
    Ms. Morrissey. Yes, I very strongly feel that we should be 
expanding Social Security. In recent years, a lot of the talk 
inside the Beltway has been about cutting it. Fortunately, we 
have managed to avoid that. But I do not think most people are 
aware of the fact that benefits have already been significantly 
cut.
    And when these benefits were cut in the early 1980s, and 
these cuts are still being implemented, nobody envisioned that 
we were going to, at the same time, be reducing the quality of 
benefits in the private sector plans at the same time, and also 
nobody envisioned that we would have the great recession, which 
is a once-in-a-lifetime catastrophe as far as the economy.
    So for all of these reasons, those changes were in the 
wrong direction and we should be reversing these cuts. So I do 
not like to think of it as expanding Social Security as much as 
restoring benefits that were cut earlier that were 
understandable at the time, but that in retrospect were a 
mistake.
    And yes, I completely agree that people do not realize that 
even though the poverty rate for seniors is fairly low, many, 
many seniors have modest incomes just above the poverty line 
and my colleagues at the Economic Policy Institute have 
documented there are many seniors--especially older women, who 
are very close to poverty or live very modestly.
    Another way of looking at it is, if we need more retirement 
income, we can do it two different ways. We can urge people to 
save more and while continuing the cuts in Social Security that 
are still being phased in, or we can say, Well, nobody is over-
saving, so we should expand this very efficient, very cost-
effective system and, at the same time need to rely less on 
these savings plans that have just not worked very well.
    Senator Merkley. Well, I do feel that as we see the 
decrease of defined benefit programs in the private sector, it 
greatly increases reliance on the defined benefit Social 
Security program, and I strongly agree that we can do more to 
strengthen this program. So thank you for that point.
    I want to turn to Treasurer Wheeler. While the conversation 
was going on on disclosures, I believe you were shaking your 
head or nodding and I am not sure if that was an affirmative or 
disagreement, but do you want to comment a little bit from your 
experience on the disclosure side?
    Mr. Wheeler. Yes. Thank you, Senator Merkley and Senator 
Heller. I absolutely agree. My experience was and continues to 
be that it is not just disclosure of the fees, just as the rest 
of the panelists had indicated. It is the understanding of what 
those fees actually mean. And so, we heard a pitch for 
disclosure. We heard a pitch for consistency in that 
disclosure. So one vendor to another vendor to a third vendor 
and so on. You are going to see those fees presented in exactly 
the same format, in the same manner.
    And then there has to be an understanding of what is 
underlying those fees. As Senator Warren pointed out, the 
miracle of compounding is very powerful when you are talking 
about a savings tool, and it is absolutely damning when you are 
talking about compounding fees that you are paying. And people 
need to understand what that actually means. So it is 
consistency, it is simplicity, and it is just, frankly, 
disclosure. I am profoundly in support of all three of those 
things.
    Senator Merkley. And do you agree with the sense of 
extending that into the IRA realm?
    Mr. Wheeler. I absolutely do. The end result for a consumer 
is exactly the same. They are in those vehicles for the purpose 
of saving for their retirement. So from my own personal 
perspective, it makes sense that you would have similar, 
consistent, and clear disclosure requirements for both.
    Senator Merkley. You noted in your testimony--actually, my 
time is up, so I am going to turn this over. Well, I think we 
might go through a couple rounds of this----
    Senator Heller. I think so, yes.
    Senator Merkley.----as long as we have time to do so.
    Senator Heller. Mr. Chairman, thank you. Mr. Wheeler, in my 
previous life, I was Chief Deputy State Treasurer. I was hoping 
some day I would become State Treasurer of Nevada. Instead, I 
became a United States Senator, I guess.
    But needless to say, the questions that I have--do you, in 
your position, current position, do you manage the public 
employees' retirement system for Oregon?
    Mr. Wheeler. Senator Heller, the answer is affirmative. The 
State treasury, in combination with the Citizen's Council, 
manages the public pension, the investments in the public 
pension.
    Senator Heller. So that is a commission that you are a part 
of, a commission that you are part of?
    Mr. Wheeler. Absolutely, yes, sir.
    Senator Heller. How much was that, $86 billion?
    Mr. Wheeler. Today the pension itself is about $68 billion, 
but in addition to that, we have other trust funds that we are 
responsible for, which total about $87, $88 billion today.
    Senator Heller. You talked about, in your testimony, a task 
force. Can you give me any update on how that is going?
    Mr. Wheeler. The task force was just convened. It is 
actually meeting for the first time in the next couple of 
weeks. So we have not actually had the opportunity to meet yet.
    Senator Heller. What are the goals of that task force?
    Mr. Wheeler. So the goals of the task force are, first of 
all, to identify potential savings tools, to identify the 
current baseline situation with retirement security in the 
State of Oregon. Each State has different issues. For example, 
in our State, we know that retirement insecurity 
disproportionately skews toward women head of households, 
toward minority head of households, toward small business 
employees, and as a small business State, that is of importance 
to us.
    We are also supposed to evaluate any tax incentives that 
either currently exist or could potentially exist in the future 
that might help incentivize savings. We are supposed to look at 
the impact of pooled and professionally managed solutions on 
retirement security for the State of Oregon. And finally, we 
are supposed to come back to the 2015th legislative session 
with any particular ideas that fit within the sideboards that 
were provided to us by the legislature in the original 
legislation.
    Senator Heller. Is there any suggestion that the public 
employees retirement system should be involved in individual 
retirement accounts?
    Mr. Wheeler. There is no suggestion that in the State of 
Oregon we will have public sector--excuse me. There is no 
indication and, in fact, we are required not to have members of 
the public participating in the public employee retirement 
system. Amongst the sideboards that were placed on the 
legislation, we are not increasing the risk to the State of 
Oregon through whatever means we recommend to the legislature. 
So the answer would be no.
    Senator Heller. Is your system healthy today?
    Mr. Wheeler. Senator Heller, I believe the State of 
Oregon's system is healthy. We have gone through three rounds 
of reforms on the liability side. Today, our pension system is 
funded at 92 percent, excluding side accounts. It is funded at 
98 percent, including side accounts. At the beginning of this 
recession, we were 107 percent funded. At the height of the 
recession, we were only 42 percent funded. So scrapping our way 
back to 92 percent makes me happy.
    And I might further say that the investment pool was 
recently identified as the number one pension investment pool 
in the United States for pensions in excess of $1 billion in 
the 1-, 5-, and 10-year period. So I would answer yes, we are 
healthy today.
    Senator Heller. So using your numbers, are you 8 percent 
unfunded? You have an unfunded liability of 8 percent?
    Mr. Wheeler. We have an unfunded liability, yes.
    Senator Heller. What is the dollar amount of that?
    Mr. Wheeler. The--I do not have the current number with me, 
but I could easily provide that.
    Senator Heller. OK, OK. The only reason I ask is that 
Nevada is, quote-unquote, healthy also and they are about $10 
billion unfunded. I worry sometimes about the health of these 
pension plans and what is deemed to be healthy today and what 
is not deemed healthy.
    Let me ask you another question. You know, in your position 
that if you are collecting Social Security and you have a State 
or municipal retirement also, that they reduce your Social 
Security by the amount that you receive in these pensions. What 
are your thoughts on that?
    Mr. Wheeler. Senator Heller, I have not actually given this 
thorough consideration, so I would be reluctant to give an 
answer here in front of a Congressional Committee. It is 
something that I would want to consider carefully before you 
giving you an answer.
    Senator Heller. Anybody have an opinion on that? I do. I 
mean, if you have put----
    Senator Merkley. Would you please let us know, Senator 
Heller?
    [Laughter.]
    Senator Heller. I mean, if you put a lifetime of savings 
into Social Security and you are also participating in a 
municipal, State, local pension plan, that is your money. Why 
the Federal Government deems it is necessary to remove that 
money from your Social Security only because you have another 
pension plan, because you were responsible enough to have 
another pension plan, I think, is a mistake.
    So if we are ever looking for something coming out of this 
Committee that I think would help those that are on Social 
Security, it is to make sure that they receive all the funds 
that they have actually put into it. It is their money. For the 
Federal Government to take it away from them because they are 
in a plan that you help manage, I think, is vastly unfair, 
vastly unfair. I think at that, I will turn it back to you.
    Senator Merkley. Thank you very much. I want to turn, Dr. 
Morrissey, to a comment you made in your testimony, that if you 
have $100,000 at retirement and you convert it to an annuity to 
start at age 65, that you would not even be able to purchase an 
annuity that was equivalent to $5,000 per year. Or let me 
translate, that is roughly $400 per month.
    In that case, if someone is getting Social Security in the 
range of about $1,400, that is equivalent--and I am asking this 
as a question, but my impression is--that is equivalent to 
having $300,000 to $400,000 in the bank when you retire.
    Ms. Morrissey. Yes, it is. People tend to undervalue Social 
Security and are not aware of how much retirement wealth is in 
the form of Social Security benefits. When I said that these 
are the savings people have, I did not include measures of the 
value of Social Security benefits. If you include those, 
overwhelmingly, Social Security is by far the largest component 
of retirement wealth and it has been the case since Social 
Security grew to a substantial program.
    Senator Merkley. Thank you. I think that it helps me get my 
hands around how significant those monthly payments are, or 
even a modest private sector pension, how it is equivalent to a 
sizable amount of savings.
    Mr. Hiltonsmith, you mentioned the excessive fees. Is there 
any type of regulation or oversight of the level of fees that 
apply to IRAs?
    Mr. Hiltonsmith. Are you asking me if there are currently 
any?
    Senator Merkley. Yes.
    Mr. Hiltonsmith. Not that I know of. Not that I am aware 
of, in any case. Monique, I am not sure if you know more about 
that.
    Ms. Morrissey. What was the question?
    Mr. Hiltonsmith. Is there currently regulation on IRA fees?
    Ms. Morrissey. Not that I am aware of, no. In fact, I think 
it is kind of the wild west.
    Mr. Hiltonsmith. Yes.
    Senator Merkley. It is my impression that a significant 
number of fees are taken off the top before the returns are 
distributed. In that case, are the fees clearly disclosed to 
individuals?
    Mr. Hiltonsmith. No.
    Senator Merkley. I mean, it is just an issue of the format?
    Mr. Hiltonsmith. Yes, the disclosure is there but it is 
hidden?
    Senator Merkley. It is hidden, or is it that there is not 
disclosure?
    Mr. Hiltonsmith. You know, I think it is a mix of these, in 
a sense. You know, I do not think people do understand that 
they are taken off the top, that when you see on your statement 
that you have gotten 10 percent returns for the past year, that 
those returns would say 12 percent before fees or 11 percent 
before fees. You know, I do not think they understand that that 
is, in essence, the way that they work.
    And then, you know, furthermore, as Senator Warren and 
people have mentioned, they really understand just the 
magnitude of the impact of that over a lifetime, particularly 
with this, you know, compounding.
    Senator Merkley. Thank you. I will come back to you in a 
moment, Ms. Mitchem. I wanted to turn quickly to Treasurer 
Wheeler. You mentioned that half of the private sector 
employees do not have an employer who provides a savings 
option, a retirement savings option. Do you have any specific 
suggestions for how more employers could be induced to provide 
such a retirement option?
    Mr. Wheeler. Senator Merkley, in deference to the Committee 
work that we are about to embark on, I do not want to jump to 
the solutions, but there are a number of solutions that have 
been preferred here that would center around incentivization, 
around pooling resources to reduce the cost, around 
professional management to increase the return opportunities. 
But in deference to my colleagues on the task force, I do not 
want to get to the answer statement about what we are going to 
offer.
    Senator Merkley. OK, great. I hope that as your task force 
proceeds, that my team can stay in contact and share that with 
the Committee because I think that would be relevant.
    Mr. Wheeler. Yes, sir.
    Senator Merkley. Ms. Mitchem, I wanted to invite you. You 
had some thoughts on the fee issue, disclosure issue?
    Ms. Mitchem. Yes. I just wanted to make sure that we were 
clear, that IRAs are regulated by the SEC. They invest 
predominantly in mutual funds. Mutual funds have very, very 
clear requirements with regard to fee disclosures, both in the 
prospectus as well as the short form prospectus.
    So I think the question is less about are the fees being 
disclosed. It is more about, do participants actually have the 
knowledge and the interest and the time to understand those 
fees and the impacts that they have on their investments, 
whether that be in an IRA or in a large DC plan.
    I also think it is important to note, even if we just think 
about the name of it, an individual retirement account. The 
cost of those accounts are going to be more expensive because 
they are provided to individuals as opposed to large collective 
organizations. So I would just highlight that I do think there 
are things that we can do to help with the fee equation in the 
IRA market by looking at the 401(k) plan market.
    I think one of the things that we could do is we could 
actually provide incentives for employers to keep employees in 
the plans post-retirement. I think another thing that we could 
do is we could foment broader access to retirement income 
options on 401(k) menus.
    So one of the very interesting things that we find is when 
we look at 401(k) menus today, they are dominated by 
accumulation options. You can invest in the S&P 500 index. You 
can invest in the Lehman Aggregate index. What in most cases 
you cannot invest in is a strategy that helps you de-accumulate 
your assets.
    So in order for people to stay on plans, to continue to get 
the fee savings that come with scale, we need to actually 
provide plan sponsors to offer lifetime income and longevity 
hedging within the 401(k) plan context.
    Senator Merkley. Thank you. That response raised a whole 
series of questions which maybe we will be able to come back to 
in a few moments.
    Senator Heller. Ms. Mitchem, in your testimony, you said 
that retirement plan participants believe that they needed to 
save about 14 percent of their income, pre-tax wages for a 
retirement plan. How did you come to that conclusion?
    Ms. Mitchem. We actually produce a survey of plan 
participants twice annually. We go out and we ask actual plan 
participants, a random sample, statistically significant, what 
they believe is important to save for retirement and that is 
how we came up with the 14 percent.
    Senator Heller. So it is now State Street's opinion?
    Ms. Mitchem. No.
    Senator Heller. It is the survey that comes out.
    Ms. Mitchem. It is a survey. It comes from participants. 
And the reason why I think it is so powerful, if I might, 
Senator Heller, is because what it proves is that by auto-
enrolling participants, we are actually auto-escalating them up 
to a significant percentage of----
    Senator Heller. Explain that to me, auto-enrolling.
    Ms. Mitchem. OK. So auto-enrolling means that when you come 
to work for a corporation, we automatically put you in the 
plan. You do not have to do anything. And if we set your 
initial contribution rate at 6 percent and then we provide for 
what is called auto-escalation, so each year that you stay with 
us we actually increase your savings rate by a percent, we can 
get you up to those levels.
    Senator Heller. Are you increasing the employer 
contribution on that? Is that what you are doing?
    Ms. Mitchem. Well, what happens is both the employee and 
the employer increase their contribution in many instances.
    Senator Heller. OK. How do you manage with the risk and 
volatility of the markets today? If you take a look at the 
Federal Reserve and the very, very low interest rates that you 
have today, how could someone plan today knowing that these 
rates, frankly, are manipulated to the low standards that they 
are today in order to make sure that you have saved enough 
money? I mean, I know it is killing seniors today.
    Seniors today that have money that is already invested with 
these low bond rates and everything else making it very, very 
difficult. How does someone at 25 years of age know what the 
rate of savings is going to be if you have the Federal Reserve 
making the kind of decisions and actions that they have been 
taking in the last 5 years?
    Ms. Mitchem. So I think the simple answer is they cannot 
know, and much of the best planning really relies on average 
returns. And so, the hope is, obviously, that if you save a 
reasonable amount of your pre-tax income, that over time you 
will achieve the types of returns that we have actually 
achieved in the past.
    The other thing that I would just note there is that the 
most important contributor to what you have at the end of the 
day is what you put in. So we really do need to focus on 
getting people access to 401(k) plans and ensuring that they 
are putting enough away.
    In terms of investment options, I would always recommend a 
well-diversified investment default. So that is a strategy that 
has a mix of different asset classes, stocks and bonds, to 
generate the types of returns that are hopefully capable of 
pushing people toward retirement adequacy.
    Senator Heller. Any other comments? Mr. Hiltonsmith, do you 
have a 401(k)?
    Mr. Hiltonsmith. I do indeed. I have two of them.
    Senator Heller. Oh, you do?
    Mr. Hiltonsmith. I have had trouble getting them into one.
    Senator Heller. In your testimony, you talked about 
reforming or replacing them. Do you want to reform or replace 
your own 401(k)?
    Mr. Hiltonsmith. I spent the last 2 years doing that at 
Demos actually. We had a poor plan and I think this actually 
indicates one of the difficulties with, you can know all--you 
know, you can even have the knowledge of portfolio 
diversification and fees, but through your employer have little 
opportunity to change the plan your employer selected if it is 
not good. And so, this is what I have spent the past years 
doing at Demos, is getting us into a better plan.
    Senator Heller. So you have replaced?
    Mr. Hiltonsmith. Yes. I did get us to switch plans to a 
lower fee and, hopefully, a better option.
    Senator Heller. But is that not what we are trying to 
achieve here in the marketplace, is lower fees? I mean, you had 
an opportunity to do that. If you look at your 401(k)----
    Mr. Hiltonsmith. Absolutely.
    Senator Heller.----and taking out 1 percent, you are not 
happy with 1 percent because you are educated enough to know 
that that may be 30 percent of your plan?
    Mr. Hiltonsmith. Absolutely.
    Senator Heller. Did you shop for lower rates? And you are 
able to do that. Why would the average American not also be 
able to do that, also?
    Mr. Hiltonsmith. Well, I have an employer who is kind 
enough and collaborative enough to be able to listen. A lot of 
people do not feel like they are in that position, their jobs, 
or that they can actually push that even if they do have that 
knowledge. And then, of course, there is the whole problem with 
half employers or half of people not being covered by an 
employer plan whatsoever. We will have that, nearly half.
    Senator Heller. That is an issue. What would you replace it 
with then? Because you are talking about reforming and 
replacing 401(k)s. What would you reform or replace it with?
    Mr. Hiltonsmith. Well, we need an option that shares some 
of these features that everyone here has talked about. One that 
does have better risk pooling, you know, that has better 
annuity options, that actually really does follow you from job 
to job.
    As I mentioned, I have spent 2 years trying to roll my one 
401(k) into the other and have yet to succeed. So it is not 
always an easy process. So something that, you know, so instead 
of having to go from 401(k) to IRA back to 401(k) to IRA and 
being for somebody of my age, 10, 15 times throughout their 
career, potentially, or maybe hopefully not, but for some of 
us, you know, we really need something that is portable and 
that, you know, has low fees, that is pooled, something that is 
a simpler option for people.
    But that, as Ms. Mitchem said, you can contribute through 
your employer because that is really, as we have seen, if you 
have contributions through the employer, that is really where 
you get people to save and somebody's future, like auto-
enrollment and auto-escalation really, really help because a 
lot of times, people do not even know it is coming out of their 
paycheck, to be honest.
    Senator Heller. Very good. Thank you.
    Mr. Hiltonsmith. Thank you.
    Senator Merkley. I think you were reminding us, Mr. 
Hiltonsmith, how much younger you are than we are when you talk 
about 10 or 15 more jobs.
    [Laughter.]
    Senator Merkley. Returning to this conversation about fees 
and disclosure, I was looking at a description of some of the 
fee structures that are in different accounts. This is a 
summary from the Consumer Federation of America. And it 
mentions there are front-end loads, back-end loads, redemption 
fees, deferred sales fees, revenue-sharing fees, maintenance 
fees, sales charges.
    How is an average person to get their hands around this and 
evaluate and compare plans? Anyone want to jump into that?
    Ms. Mitchem. I would just say, you know, I think it is very 
difficult for the average person to become their own chief 
investment officer. It takes hours and hours and hours, as you 
know, to become expert on something as complex as finance. And 
so, I think that is why we need to make sure that really the 
center of our retirement security system is with the employer 
and with fiduciaries that are capable of understanding fees and 
making these decisions on behalf of plan participants.
    Senator Merkley. So one idea that I recall from the Card 
Act debate--and this may have been Senator Wyden's bill, but if 
it is not, Senator Wyden, do not take offense. But it was an 
idea of rating cards according to their fee structure to help 
citizens have an easy handle. This is a five-star--I think it 
is a five-star rating. And so, folks who are sophisticated 
could evaluate all these front-end, back-end.
    I am wondering, is something like that a possibility as 
something that would be helpful for consumers, Dr. Morrissey?
    Ms. Morrissey. We certainly need to make fee disclosure 
more simple and salient and to make people aware of the 
cumulative effect of fees, how they erode your balances over 
time. That said, I had a similar experience as Robbie with 
trying to switch in our own employer. We ended up not 
switching, and the reason being that we economists were not 
able to convince many of the other staff people who were just 
looking at the historical returns at some of these actively 
managed funds, and to them that was what they were focusing on, 
not the fees. There is a limit to how heavy-handed, frankly, 
the economists could be in terms of saying, the historic 
returns on these actively managed funds are not what you should 
be focusing on.
    Anyhow, so there is this tendency to be locked into high-
cost plans. It is very hard to switch them out. So it is not 
competitive in any real sense. It is very hard to change plans 
and it is very hard to make people understand how these fees 
function.
    For that reason, I think we do need much better disclosure. 
We need to do it in a way that illustrates to people the 
cumulative effect in terms of eroding account balances. But I 
also think that we need to move toward a structure more like 
what the Federal employees have in the Thrift Savings Plan 
where you really have a limited number of investment options 
and all of them make some sense.
    Now, that said, I actually have some issues with the TSP. I 
think that their life cycle funds, which are about to become 
potentially the default investments, are very aggressive. But 
nonetheless, at least, you know, each of those funds--you can 
make it a defensible case for why you should invest in them, 
whereas a lot of what we have with the investment options in a 
lot of 401(k)s and IRAs, really, nobody should be investing in 
them.
    Senator Merkley. So I have 1 minute before I turn this 
conversation back over. So is there a connection between some 
of the higher fee structures and the sales commissions that go 
to those who are marketing the funds? Is that a concern? Does 
anybody want to weigh in on that?
    Mr. Hiltonsmith. Sure, I would be happy to quickly. Yeah, 
absolutely. We are doing it the way--not only the sales 
commission for some of the marketers, financial advisors, but 
honestly, even for the way that the planned--you know, the plan 
custodians and plan record-keepers get their revenue as well. 
They get, you know, these--it is called revenue-sharing 
payments from the mutual funds that they put in a particular 
plan.
    So there is a couple layers where--and both the commissions 
and these revenue-sharing payments are usually, you know, some 
kind of share of the fees charged by a fund. So this really 
can--you know, there are several layers of this where there can 
be incentives to push higher fee funds kind of against people's 
best interests.
    So it is not to say the employers do not, you know, have a 
fiduciary duty to look out for the lowest fee funds, but in 
many cases, like with Demos, I mean, honestly, before I came 
there, nobody had any idea that paying 1.7 percent for an 
international fund was not the best, or .9 percent for our 
index fund.
    Senator Merkley. To clarify, are you saying the revenue-
sharing payments went to the employer or to the original sales 
force?
    Mr. Hiltonsmith. So that the revenue-sharing that I am 
talking about is between the mutual funds and kind of the plan 
record-keepers, the people who bundle the mutual funds and 
other vehicles into plans.
    Senator Merkley. I see.
    Mr. Hiltonsmith. So, for example, if you have one 
corporation's name on a 401(k) and other mutual funds in that 
plan, there is a revenue-sharing between those mutual funds and 
that bundler, and then there is also the front-end commission 
and stuff that you talked about as well.
    Senator Merkley. Thank you.
    Senator Heller. Mr. Chairman, thank you. Mr. Hiltonsmith, I 
want to come back to you for just a minute because of some of 
the numbers that you reported, talking about the 1 percent fee 
accumulated over a lifetime may be as high as 30 percent. It 
was just pointed out to me that in your calculations, it did 
not include the employer contributions. Can you tell me why you 
did not include the employer contributions in that calculation?
    Mr. Hiltonsmith. Yeah. You know, for one, having the 
employer contributions, the fee still comes off those, so that 
kind of--the 30 percent calculation is really just based on 
what percentage, because the way to really think about fees is 
what percentage of overall returns, long-term returns they are 
eating up.
    So if we talk about an aggregate dollar amount that it 
costs, like as Senator Warren referred to, $100,000 to 
$200,000, then yes, employer contributions would affect that, 
but not this kind of what share of, you know, how much it 
lowers the overall nest egg by that percentage. That would not 
change whatsoever.
    But we did not include employer contributions because, 
honestly, there has been a tendency toward fewer contributions 
by employers. We have seen their share. There is a number I 
like to quote. Their share of plan expenses has gone to--they 
used to pay about 20 percent of all plan expenses on the 
expense side and now they pay about 9 percent.
    But also, the amount that they are matching, the generosity 
and stuff, in many cases, has gone down. You have seen the news 
infer some corporations trying to cut their matches and, you 
know, many small businesses do not match or do not have the 
luxury to match whatsoever. So we kind of want to just focus on 
what you yourself put in, in our calculations.
    Senator Heller. Ms. Mitchem, in Nevada, and I always hate 
to say this, we have the highest unemployment, highest in 
foreclosure, highest in bankruptcy, and you can imagine now how 
many people are now risk-averse to what has happened in the 
last 5 years. How has this changed savings and investment plans 
for the average American after what they have seen in the last 
5 years?
    Ms. Mitchem. So I think you are absolutely right in that 
participants' attitudes toward risk have shifted. The question 
then becomes whether that really impacts their ultimate 
allocations. And what we find generally is that most 
participants never make a change, at least for several years, 
to their initial investment allocation.
    So their attitudes may have changed, but the likelihood is 
that it probably has not been reflected in how they invest. I 
would also note that one great corrector for that just to come 
back to auto-enrollment, is auto-enrolling people and putting 
them into a well-diversified default fund.
    So it actually takes those sort of periodic times when 
people may be overly risk-averse, just at times when perhaps 
they should be accepting risk and corrects for that through a 
well-diversified default.
    Senator Heller. Does the auto-enrollment allow an 
individual to determine the risk they are going to take?
    Ms. Mitchem. No. I mean, auto-enrollment is typically 
placed into a qualified investment default alternative, or 
QDIA. There are three types of QDIAs permitted under the safe 
harbor by the Department of Labor. One of those is a target 
date fund, which we have discussed.
    Another is a balanced fund which generally meets a 
demographic test for being suitable for the employee population 
at large. And the third is a managed account, which would be a 
customized allocation just for a specific individual. If an 
individual, once being auto-enrolled and defaulted, decides to 
make a change to the investment option, they can do so.
    Senator Heller. OK. I want to thank all the witnesses for 
being here today. I am not able to ask any more questions, but 
I certainly appreciate your time, your energy, your efforts, 
and your testimony and what you have brought to the table 
today. So thank you. Mr. Chairman, thank you.
    Senator Merkley. Thank you very much, Senator Heller. I 
wanted to go back to the conversation about why a lot of 
employers do not set up a plan. Treasurer Wheeler, you noted 
that half employers, or at least maybe it was half the 
employees, do not have an employer who provides a plan.
    At one point I was an executive director of a small 
nonprofit, and I thought, you know, there should be some form 
of option here for employees. And I was told to take a look at 
the SIMPLE IRA, acronym SIMPLE. And so I did, and after several 
important meetings of trustees of the nonprofit, I presented 
this and said this is how it will work, they approved it, and 
we set it up.
    It was pretty easy to set up and it was pretty easy to 
operate and it was a fairly modest minimum requirement. I was 
just trying to check it while Senator Heller was speaking. But 
I think it is the same now as it was then, which was a 
requirement of 2 percent, matching the first 2 percent of your 
employees' contributions, or 2 percent of their wages up to 
that amount that they contribute.
    And so, I look at that and I think, given that this is a 
fairly modest employer contribution, and I think the whole idea 
behind the SIMPLE IRA was, hey, we have a problem with 
employers dealing with complex 401(k)s or other vehicles, let 
us just make something very straight-forward.
    Why has that strategy not worked? What could we do to 
encourage more employers to set up a modest retirement 
structure for their employees? It is like raising their 
employees' income since the employees can set aside those funds 
tax-free. It seems like a win-win. Any thoughts on that?
    Mr. Wheeler. Sorry about that, Senator. I do have some 
thoughts and this is something that I hope that our task force 
in Oregon focuses a considerable amount of time on. Your 
supposition is correct, that if we could create a pooled 
product and if that product was simple, if that product was 
cost-effective, if it was easily accessible by employees, it 
makes sense that more people would want to save for retirement, 
since our constituents tell us this is something they would 
like to have.
    Some of the current obstacles that we have already 
anecdotally come across: If you are a small business employer, 
and in our State, Senator, most people are employed by small 
businesses, the small business owner typically does not have a 
lot of time to give toward things like setting up a retirement 
plan.
    That, in combination with retirement plan providers who, 
frankly, are not that interested in supplying an institutional 
quality retirement plan to a very small business, the economies 
of scale that come into play with a large employer also hold 
true on the fee side. It is just more productive from the 
perspective of a provider to find a large employer as opposed 
to a micro-employer.
    There are other issues as well. A lot of small business 
owners already struggle with the issue of mobility of their 
workforce, and while 401(k)s and the like are, in fact, 
transportable, they go with the employee. They can roll them 
over into other plans. For an employer that is looking at an 
employee who is not going to be there for very long, it may not 
just be worth the effort.
    So if we could create some sort of a pool that is 
successful, that is simple, that has low fees, that has 
institutional quality fund management for those types of 
employers, I believe there would be a strong interest in it, 
Senator.
    Senator Merkley. Thank you very much. Anyone else want to 
jump in on this question of how do you--and I should note that 
I should expand to if anyone has comments on the myRA, which 
the President put in his State of the Union as one approach to 
fill in for folks who do not have access to retirement plans, 
wants to share any thoughts on that, on that policy proposal?
    Ms. Mitchem. I guess I would just make two comments. I 
think with regard to myRA, it gets at the heart of the 
conversation we are having today, which is how do we actually 
expand access and get a larger percentage of American workers 
actually covered by workforce retirement programs.
    And then I think with respect to your smaller plan 
question, again, I would probably go back to much of what I put 
in my testimony, which is, everything that we see in the 
context of behavioral economics tells us that if we want 
someone to do something, let us make it easy for them to do it. 
Let us make it simple and let us make it straight-forward.
    And I think if we can bind some of the features of SIMPLE 
with some changes that allow multiple employers to pool their 
retirement assets together, I think that we could get--or at 
least go a long way toward increasing access at the smaller end 
of the marketplace, and that is certainly what I would suggest.
    Senator Merkley. And when you say that, does it resonate 
with what Treasurer Wheeler just referred to?
    Ms. Mitchem. It absolutely resonates with what he is 
referring to. I think that, you know, one of the things that I 
really liked about what Treasurer Wheeler said is that one of 
the nice things about really fomenting more collective pools of 
retirement assets is that they would spur innovation from 
providers, I think, and a relatively under-served market would 
get more attention and that would be a good thing.
    Senator Merkley. So one thing I was struck by in one of 
your testimonies was the comment that 401(k)s and IRAs are 
inherently less efficient. I think the comment was by a factor 
of 50 percent. Was that your comment, Dr. Morrissey?
    Ms. Morrissey. Yes.
    Senator Merkley. Now, in a normal defined benefit, if you 
die, then you are no longer pulling funds from the pool on an 
IRA or a 43(b) or 401(k). If you die, you still have a balance 
that goes on to your estate. Is it because of that estate 
effect that a defined benefit pension plan is so much more 
efficient?
    Ms. Morrissey. That is part of the explanation. And, in 
fact, for this reason, you could argue then that we are 
overstating the case. By the way, I came up with that 
calculation. But independently, also, the National Institute on 
Retirement Security came up with similar estimates, and in my 
case, I had help from Ron Gebhardtsbauer, who is a very well-
known actuary, and he checked my numbers and I thought he had 
also independently come up with similar figures.
    It does assume that the average person with a DC plan is 
going to die and bequeath some to their heir, because they need 
to have a little bit extra set aside for longevity risk, but a 
lot of the difference also had to do with, we were assuming, 
for example, I forgot exactly, but I think a 100-basis-point 
difference in the rate of return. So there were other 
inefficiencies worked into the system.
    But some of it is because you do have to set aside a little 
bit extra because you just do not know how long you are going 
to live and you do not have access to a cost-effective annuity.
    Senator Merkley. OK. Related to this, there was a comment--
and this was also yours, Dr. Morrissey--that the tax 
expenditures, so the money that we provide through the Tax Code 
to support retirement, that the vast bulk of it goes to the 
best-off Americans.
    Actually, this may not have been from you, but this is the 
statistic I have in front of me, that 66 percent of the tax 
expenditures to help folks plan for retirement goes to the 
richest one-fifth of Americans, and that the bottom 40 percent 
get only 7 percent of those tax expenditures. So essentially, 
we are spending our public resources, if you will, 
overwhelmingly to help the best-off who have the least need for 
retirement. Is there anything about that observation that 
provides insights on ideas for changing how we do this?
    Ms. Morrissey. Well, first of all, yes, I did--we estimated 
that it is even more than that, but I think CBO's numbers are 
that about two-thirds. So either way, most estimates are that 
about two-thirds go to the top income quintile. Avoiding the 
whole issue of how these tax expenditures actually work, which 
is that they incentivize investment income rather than 
incentivize savings, it is striking if you look at President 
Obama's earlier proposals to expand the Saver's Credit, and 
also at his more recent proposals to limit the tax deferral to 
28 percent, the cost of the former is on the order of $3 
billion a year and the cost savings from the latter is about a 
billion dollars, compared to the total cost of these tax 
expenditures for DC plans, which is on the order now of about 
$60 billion or $70 billion. President Obama's proposal to 
expand the tax Saver's Credit, which would do it in a very 
smart way--by making it refundable, and also a fixed amount. It 
would be 50 percent match, like a Government match.
    He was also raising the limit for the eligibility up to, I 
think, $85,000 for married couples. So this is an enormous 
expansion of the Saver's Credit, and yet, the cost would amount 
to about $3 billion per year. So we are spending $60 billion, 
$70 billion a year and this supposedly big dramatic change in 
the Saver's Credit, which I wholeheartedly support, would still 
only cost a fraction of what we are already spending.
    Likewise, the proposal to limit the amounts going to the 
very wealthiest people by capping it at 28 percent only saves 
about a billion dollars a year. So if both proposals, which I 
think are both good ideas, were implemented, it would only have 
a very small effect on the cost. I mean, it would only be a 
minor correction.
    They are well worth doing. They are a politically difficult 
lift, I understand that, but it is an illustration of just how 
bad the problem is and how even things that are vehemently 
opposed by the industry are really actually just minor 
corrections of an overwhelmingly bad system.
    Senator Merkley. Thank you. Ms. Mitchem, did you want to 
comment on this?
    Ms. Mitchem. Yes. I was just going to comment that, we do 
find that auto features are really a great equalizer, and there 
is some recent research that was actually done by Brigitte 
Madrian and a group of researchers out of Harvard University. 
And specifically, they looked at a Fortune 500 company that was 
implementing auto-enrollment and auto-escalation.
    And they looked at it pre and they looked at it post. Pre, 
they found the kind of distinctions that we are talking about 
where groups, on the basis of race and ethnicity, and even sex, 
did not participate at the same levels in the 401(k) plan.
    Senator Merkley. I am afraid to ask. Which gender is the 
better saver?
    Ms. Mitchem. Well, actually, women, without auto-enrollment 
actually under-save.
    Senator Merkley. Oh, under-save?
    Ms. Mitchem. Yes, along with blacks, Hispanics, lower-
income workers, younger workers. So those are the people that 
actually fall out of the system when you do not use auto-
enrollment and auto-escalation. When you use auto-enrollment 
and auto-escalation, we find it to be the great equalizer.
    So, you know, the reality is that everyone suffers from 
inertia, but people who are under-educated or maybe do not 
trust markets actually suffer from inertia at an even higher 
degree. So when we combat inertia with smart things like auto-
enrollment and auto-escalation, we get better results for 
everyone, and, I think, ultimately a much more even 
distribution of the tax incentives across income groups, race 
groups, and sexes.
    Senator Merkley. That is very interesting. I will follow up 
on that study. Thank you. Mr. Hiltonsmith?
    Mr. Hiltonsmith. I would just add one minor thing to that, 
that I think auto-enrollment is certainly helpful, but can only 
go so far as far as correcting these disparities in who is 
getting the tax benefits, because, you know, as of right now, 
as we know, the cap on tax deferred savings is $17,500 a year. 
There are some ways to get around that actually.
    But, you know, we have to think of what percentage of 
workers can actually afford to save $17,500 a year. So, you 
know, even if we get more people into plans and get them saving 
more, you know, somebody who makes $50,000 a year just is not 
going to be able to save that much, while someone who makes 
$300,000 a year probably can.
    So, I mean, you know, there--based on the level of that, 
you know, that cap, I think that is going to--inequality is 
going to remain no matter what we do.
    Senator Merkley. Point taken. Let me turn to the auto-
enrollment. When I set up the SIMPLE IRA for the nonprofit, I 
sat down with each member of the team and said, Please, just 
sign up. Fill out this form. In a month from now, you can get 
off if you want. But look, where else are you going to get 100 
percent return, because we are matching the funds you set 
aside.
    And folks who made that initial decision at that point, as 
you pointed out, there is a lot of inertia, that people tend to 
stay with what they have done. Now, when you are talking about 
auto-enrollment, is it then--is it legal now for an employer to 
basically automatically sign people up without them signing 
anything that says, Yes, you may take X amount out of my 
paycheck? Does that extend to almost all the retirement 
vehicles? Can you do auto-enrollment now in the SIMPLE plan, 
for example?
    Ms. Mitchem. You can. So auto-enrollment is provided for 
under the Pension Protection Act, another specific exemption 
that was written by the DOL. It does have certain requirements 
that go along with it, so there are notification periods. So 
you need to let people know that you are actually going to be 
auto-enrolling them into a plan, so that is an important 
consideration.
    A second thing that you need to do to qualify for the safe 
harbor is to place the assets that come in under auto-
enrollment in what is called a qualified default, and we 
already had a discussion around what those are. And the third 
thing is you have to meet certain thresholds with regard to 
employer matching, to qualify for the safe harbor.
    Senator Merkley. And then you mentioned auto-escalation.
    Ms. Mitchem. Yes.
    Senator Merkley. And is that a set percentage that changes 
as people's income goes up or is that----
    Ms. Mitchem. So generally in the United States, auto-
escalation is done with what they call a time factor. So the 
most common implementation that we see is that employers will 
escalate contributions on an annual basis at 1 percent. And 
when we talk about things that could really improve the system, 
even in the large plan market, I think you have hit on two 
really critical ones.
    The first is this idea of inertia. If we auto-enroll people 
at 3 percent, where do they stay? 3 percent. And left to their 
own devices, incidentally, most people would save at the 6 
percent level. So one of the things that we need to do is we 
need to encourage large plans to be auto-enrolling and using an 
initial contribution rate of 6 percent.
    The second thing we need to convince large plans to do is 
be more aggressive around these escalators for contributions. 
As I mentioned today, it is 1 percent per annum. I would love 
to see that be 2 percent.
    Senator Merkley. Folks, our time has run out. Just this 
conversation has raised so many different pieces of this 
puzzle. So it provides a lot of food for thought. I am 
certainly going to be sharing many of these ideas with my 
colleagues as we wrestle with this nationally.
    As a number of you noted, this is not just an issue for the 
individual person, but it is an issue for our national economy, 
for generational issues, for folks' dependence on a safety net 
or lack of need to depend upon a safety net. And so, it is an 
item of great interest to Congress. I appreciate the insights 
that all of you have brought to this gathering.
    I need to formally note something. Hold on a minute. The 
record will stay open 7 days. Members of the Committee may 
submit questions to all of you, and if you would be so kind as 
to respond to their questions, we will include that in the 
record. It would be very helpful. Thank you. With that, I 
adjourn this hearing of the Subcommittee.
    [Whereupon, at 4:36 p.m., the hearing was adjourned.]
    [Prepared statements and additional material supplied for 
the record follow:]
                   PREPARED STATEMENT OF TED WHEELER
                    State Treasurer, State of Oregon
                             March 12, 2014
    My name is Ted Wheeler and I am the State Treasurer in 
        Oregon. In that capacity, I manage the State's investment 
        program, protect our strong credit rating, and oversee the 
        protection of public deposits for more than 1,000 local 
        governments.

    Before I entered elected office, I worked in the financial 
        services industry including at a Portland investment firm 
        called Copper Mountain Trust, which specialized in private 
        sector retirement planning.

    I am also a fiduciary for the financial interests of 
        Oregonians, and my concerns about the future of Oregon families 
        are what bring me here today.

    Thank you for your attention to the critically important 
        matter of retirement security for the middle class. More needs 
        to be done, and quickly, to reduce the profound economic impact 
        of what I believe is a generational crisis, which threatens to 
        plunge seniors into poverty, disrupt entire families and impact 
        the overall economy.

    In Oregon and across the Nation, a lack of sufficient 
        retirement savings threatens family security and quality of 
        life, and could place an increasingly heavy burden on social 
        safety net programs

    Time is not our ally.

    In Oregon, with bipartisan support, we decided to take a 
        hard look at retirement security. Oregon's senior population is 
        projected to double in the next 20 years. At the same time, 
        roughly half of workers have no retirement savings option at 
        work, and a study released last year by AARP Oregon found that 
        one in six Oregonians aged 45-64 has less than $5,000 in a 
        retirement savings account.

    That puts off some pretty big alarm bells. This is a 
        demographic wave and we are about to get swamped. It is quickly 
        moving from the realm of being a personal issue to becoming a 
        social issue.

    We know it's hard to save, especially for the middle class. 
        It's harder to make ends meet with stagnant wages, skyrocketing 
        post-secondary education costs, and uncertainty about the 
        future of health care. As I travel the State, the stories I 
        hear simply confirm the data: Oregonians prioritize today's 
        pressing economic needs over the retirement savings needs of 
        tomorrow and too many will be woefully underprepared.

    Many may not be able to stop working. For too many, the 
        golden years could be fool's gold.

    A huge number of Oregonians are primarily dependent on 
        Social Security for retirement. The typical benefit for the 
        roughly half a million Oregon retired workers in 2012 was 
        $15,287 a year.

    How significant is it: Without Social Security, the elderly 
        poverty rate in Oregon would have increased from 1 in 14 (7 
        percent) to 2 in 5 (40 percent).

    In December, I helped to convene a roundtable of State 
        Treasurers and we agreed that this subject deserves America's 
        attention.

    Next week, as laid out in our bipartisan legislation, I 
        will convene the first meeting of a new task force to consider 
        how Oregon can help incent more retirement savings, and to 
        potentially expand the availability of pooled and 
        professionally managed funds for workers.

    Among our questions will be the following:

    1.)  What options can we create, expand upon, or new models can we 
        create to bolster the savings of private sector employees who 
        currently do not have access to a plan through their employer? 
        2.) What role, if any, can the successful investment program 
        run by the State Treasury play in this effort?

    I think it is appropriate that these conversations occur at 
        the State level. Different States will have different solutions 
        based in large part of their differing expectations of 
        government.

    Those innovations and conversations can help to guide your 
        conversations about Federal policy, much like States' efforts 
        helped to shape the 529 laws that provide beneficial tools to 
        save for higher education and vocational training.

    Again, thank you for your audience and your awareness that 
        retirement security is getting further away--if not 
        unreachable--for too many Americans.

    It's a bipartisan concern and time is not our ally.

    Thank you for this opportunity.
                                 ______
                                 
             PREPARED STATEMENT OF MONIQUE MORRISSEY, Ph.D.
                  Economist, Economy Policy Institute
                             March 12, 2014
How has the financial structure of Americans' retirement evolved over 
        the past 50 years?
    Retirement security advanced in the postwar decades. Participation 
in employer-based plans increased from 25 percent of private-sector 
workers in 1950 to 45 percent in 1970 (public sector workers were 
already largely covered) (EBRI 1998). Social Security became nearly 
universal and benefits expanded. The Social Security contribution rate 
more than quadrupled in the second half of the 20th century to pay for 
cost-of-living adjustments and other new benefits (Martin and Weaver 
2005; SSA n.d.).
    The 1980s began a period of retrenchment. Social Security cuts 
enacted in 1983 gradually raised the normal retirement age, delayed 
cost-of-living adjustments, and taxed some benefits. Legislation 
enacted 10 years later increased the taxation of benefits. The National 
Academy of Social Insurance has estimated that the 1983 and 1993 cuts, 
when fully implemented, will reduce Social Security retirement benefits 
by 24 percent (Reno 2013).
    In the private sector, defined-benefit pensions were largely 
replaced by defined-contribution plans, shifting costs and risks from 
employers to individual workers. In 1989, full-time private-sector 
workers with retirement benefits were divided roughly equally between 
those with defined benefit pensions and those with defined-contribution 
plans, including roughly 20 percent who had both. By 2010, 50 percent 
of these workers had a defined-contribution plan and 22 percent had a 
defined-benefit plan, including roughly 13 percent who had both 
(Wiatrowski 2011).
    In theory, the shift from defined-benefit pensions to defined-
contribution plans could have broadened access by making it easier for 
employers to offer retirement benefits. However, participation in 
employer-based plans, which peaked at just over half (52 percent) of 
prime-age wage and salary workers in 2000, fell to 44 percent in 2012. 
This occurred even though the Baby Boomers were entering their 50s and 
early 60s when participation rates tend to be high (Copeland 2013; 
Morrissey and Sabadish 2013).\1\
---------------------------------------------------------------------------
    \1\ This is based on Current Population Survey data for wage and 
salary workers aged 21 to 64. Overall participation is even lower: 39 
percent of all workers in 2012 (Copeland 2013). An employer survey, the 
National Compensation Survey, which tends to show somewhat higher 
participation rates, also shows a declining trend (EBRI, n.d.).
---------------------------------------------------------------------------
    An increase in the labor force participation of women and, more 
recently, older workers helped mitigate the impact of the shift toward 
a do-it-yourself retirement system. The labor force participation of 
Americans 65 and older is now higher than it has been in half a century 
(author's analysis of Bureau of Labor Statistics data). However, 
working longer is not an option for many older Americans. About 40 
percent of workers retire earlier than planned due to poor health, 
caregiving responsibilities, job loss, or similar reasons (Kingson and 
Morrissey 2012). Many other older workers continue working under 
difficult conditions, unable to retire from stressful and physically 
demanding jobs, or end up among the long-term unemployed.
What have been the recent trends in U.S. retirement assets?
    As 401(k)s replaced traditional pensions and the population aged, 
assets in individual and pooled retirement funds grew faster than 
income. By 2010, average savings in retirement accounts had surpassed 
the value of annual household income. However, retirement insecurity 
worsened as retirement wealth became more unequal and outcomes more 
uncertain (Morrissey and Sabadish 2013).
    Mean household savings in retirement accounts increased from around 
$24,000 in 1989 to around $86,000 in 2010. However, the growth was 
driven by a small number of households with large balances. Median 
savings--the savings of the typical household with a positive balance--
peaked at around $47,000 in 2007 before declining to $44,000 in 2010 in 
the wake of the Great Recession, even as the Baby Boomers were entering 
their peak saving years (Morrissey and Sabadish 2013).
    For many demographic groups, the typical (median) household has no 
savings in retirement accounts, and balances are low even when focusing 
only on households with savings. For groups for whom there is 
sufficient data, only white households, married couples, and college 
graduates are more likely than not to have retirement account savings. 
Even for these households, savings are very unequally distributed 
(Morrissey and Sabadish 2013).
    Most Americans approaching retirement have little or nothing saved 
in retirement accounts. In 2010, 40 percent of families in their peak 
saving years (aged 55-64) had nothing saved in retirement accounts and 
10 percent had $12,000 or less according to data from the Federal 
Reserve Survey of Consumer Finances (Bricker, et al., 2012; Rhee 2014). 
Though the median amount for families with savings was $100,000, this 
is not even enough to purchase a $5,000 a year joint life annuity 
starting at age 65 (author's analysis of Bricker, et al., 2012).\2\
---------------------------------------------------------------------------
    \2\ Author's analysis using the Thrift Saving Plan Retirement 
Income Calculator on March 7, 2014, based on an annuity interest rate 
of 2.875 percent, a 50 percent survivor annuity, and rising payments to 
offset inflation.
---------------------------------------------------------------------------
    Home equity and other forms of wealth may also be tapped for 
retirement. Net worth, like retirement savings, has risen faster than 
income since 1989 and grown more unequal (Morrissey and Sabadish 2013). 
Taking into account home equity and other assets and liabilities, 
median net worth for older families was $179,000 in 2010--close to the 
median home value (Bricker, et al., 2012; U.S. Census 2012).
    Retirement account savings are very unevenly distributed. In 2010, 
a household in the 90th percentile of the retirement savings 
distribution had nearly 100 times more retirement savings than the 
median (50th percentile) household, which had a negligible amount. The 
top 1 percent of households had over $1.3 million in retirement account 
savings. All told, households in the top fifth of the income 
distribution accounted for 72 percent of total savings in retirement 
accounts (Morrissey and Sabadish 2013). Assuming upper-income 
households receive tax subsidies at least proportional to their share 
of savings, this suggests that the lion's share of tax subsidies for 
retirement savings go to high-income households.
    Retirement-income inequality has grown because most 401(k) 
participants are required to contribute to these plans in order to 
participate, whereas workers are automatically enrolled in defined-
benefit pensions and, in the private sector, are not required to 
contribute to these plans. Higher-income workers are more likely to 
participate because they have more disposable income and are more 
likely to work for employers who provide matches (CBO 2013; Morrissey 
2009). In contrast, middle- and lower-income workers find it difficult 
to save for retirement, especially since inflation-adjusted wages for 
most workers have stagnated over the past four decades. Higher-income 
households also have a higher investment risk tolerance, allowing them 
to better take advantage of retirement savings incentives that depend 
on investment earnings.
    Disparities in retirement savings partly reflect differences 
between workers at different life stages and between those with and 
without accounts, some of whom may be covered by defined-benefit 
pensions. However, focusing only on workers in their early to mid-50s 
with retirement account savings, the mean is still 2.5 times larger 
than the median. In contrast, defined-benefit pension benefits appear 
fairly equally distributed among older participants, with the mean 
benefit only slightly larger than the median benefit (Morrissey and 
Sabadish 2013).
    There are stark differences by race, ethnicity and education. Black 
workers' participation in employer-based retirement plans, including 
defined-benefit pensions, used to be similar to that of white workers, 
but has lagged in recent years. Hispanic workers, who have always had 
low participation rates, have fallen even further behind. As a result 
of this and other factors, white households have roughly six times as 
much saved in retirement accounts as Hispanic and black households. A 
similar gap exists between college-educated and high school-educated 
households (Morrissey and Sabadish 2013).
    Lower-paid groups are ill-served by a retirement system that shifts 
costs and risk onto workers, including the risk of outliving one's 
retirement savings. Women, blacks, Hispanics, and seniors aged 80 and 
older are more likely to be economically vulnerable in old age, defined 
as having an income that is less than two times the supplemental 
poverty threshold (Gould and Cooper 2013).\3\ Though women by some 
measures are narrowing gaps with men, this is mostly because men are 
faring worse and because married women are less dependent than they 
used to be on their husbands' benefits. Unmarried people, especially 
women, tend to be less prepared for retirement than their married 
counterparts.
---------------------------------------------------------------------------
    \3\ This is based on Current Population Survey income measures that 
exclude lump-sum (as opposed to periodic) distributions from retirement 
plans. However, data from the Survey of Consumer Finances and other 
sources suggests that retirement account savings for these groups are 
modest.
---------------------------------------------------------------------------
    The retirement crisis is growing. It is often suggested that future 
retirees, who are less likely to accrue pension benefits, will have 
more saved in retirement accounts when they retire than Baby Boomers, 
many of whom were covered by traditional defined-benefit pensions at 
some point in their careers. However, the Center for Retirement 
Research has found that workers today tend to have lower wealth-to-
income ratios than earlier cohorts at similar ages, with younger 
cohorts at greater risk (Munnell, et al., 2012). Even before the 2008 
downturn, wealth-to-income ratios were stagnant despite lower defined-
benefit pension coverage, declining Social Security replacement rates, 
rising Medicare premiums, and other reasons younger workers should be 
saving more (Delorme, et al., 2006). As a result, the Center estimates 
that 62 percent of GenXers are at risk of seeing a significant drop in 
living standards at retirement, compared with 44 percent of Baby 
Boomers (Munnell, et al., 2012).
How did the financial crisis and aftermath affect retirement security?
    Retirement prospects were hit hard by the collapse of the housing 
bubble and ensuing Great Recession. The share of households with 
savings in retirement accounts contracted after the downturn. The drop-
off was particularly sharp among older households, a bad sign for Baby 
Boomers' retirement prospects. Though aggregate savings in retirement 
accounts continued to grow faster than income, retirement savings grew 
more unequal and the median account balance declined (Morrissey and 
Sabadish 2013). Household net worth took an even bigger hit, as the 
bursting of the housing bubble resulted in a $13 trillion loss of 
household wealth (Bosworth and Smart 2009).
What roles have homeownership played in the ability of the middle-class 
        to retire?
    Historically, most household savings have taken ``brick and 
mortar'' form, which had advantages and disadvantages. On one hand, 
traditional 30-year fixed-rate mortgages were a form of enforced saving 
and provided many people with secure low-cost housing in retirement. On 
the other hand, household assets were not diversified. Even before the 
housing bubble burst, regional declines could result in homeowners 
facing job loss and collapsing home equity at the same time.
    Many families borrowed to buy homes in the bubble years only to 
find themselves underwater--with negative home equity--after the bubble 
burst, a situation exacerbated by the disadvantageous terms of many of 
these loans. This was particularly tragic for minority communities who 
had earlier been shut out of housing markets. According to a Pew 
analysis of Survey of Income and Program Participation data, the real 
net worth of Hispanic and black households fell by 66 percent and 53 
percent respectively between 2005 to 2009, compared with 16 percent 
among white households (Kochhar, et al., 2011).
What are the macroeconomic impacts of retirement security issues?
    The shift to a retirement system based on individual savings means 
that workers' retirement prospects are increasingly affected by shocks 
to stock and housing markets and broader economic trends.
    In the past, cyclical downturns in the economy prompted increases 
in early retirements, as measured by declines in the share of 60-64 
year olds in the labor force. Thus, early retirees made way for younger 
workers when jobs were scarce. But as 401(k)s have replaced traditional 
pensions, early retirement is no longer associated with labor market 
weakness but rather with housing and stock bubbles. Thus, in the late 
1990s, when labor markets were tight and the stock market was booming, 
there was an uptick in early retirement, though the trend toward later 
retirement resumed after the dot-com bubble burst. Likewise, the labor 
force participation of 60-64-year-olds continued to climb during the 
2008-09 recession (Morrissey 2008).
    Social Security and defined-benefit pensions have traditionally 
acted as automatic stabilizers because benefit outlays increase when 
older workers who lose their jobs during recessions decide to retire 
and workers in poor health who cannot find jobs apply for disability 
benefits. Because retirement benefits are adjusted for earlier 
retirement, an unemployed worker's decision to retire early does not 
have a large impact on Social Security's finances. However, the drop in 
payroll tax revenues and increase in disability take-up during the 
Great Recession did exacerbate Social Security's long-term funding 
shortfall.
    In the last two recessions and weak recoveries, Social Security's 
helpful countercyclical properties were countered by the procyclical 
effects of 401(k) plans. Thus, the number of beneficiaries receiving 
retirement (Old Age and Survivor Insurance) benefits in 2008-2013 was 
roughly the same as the Social Security actuaries predicted before the 
recession, though disability take-up increased (author's analysis of 
the 2007 and 2013 Social Security Trustees reports).
    Nevertheless, Social Security prevented the Great Recession from 
being worse than it would have been in its absence or if benefits had 
been cut as part of a fiscal ``grand bargain.'' In a recent working 
paper, Federal Reserve economists William B. Peterman and Kamila Sommer 
found that Social Security was very effective at mitigating the effects 
of the recession, particularly for poorer and older Americans (2014). 
Likewise, Ghilarducci, et al., (2011) found that Social Security 
generally has a positive effect on macroeconomic stabilization, while 
401(k) plans exhibit a destabilizing effect on the economy.
    These two studies use sophisticated models and statistical 
techniques to estimate the countercyclical effects of Social Security. 
However, Social Security's role in cushioning the effects of the 
downturn is also evident from a simple chart, below, showing a 
statistically significant correlation between the growth in the 
unemployment and the growth in Social Security benefits by State. 


    Social Security is also helpful when the economy faces a chronic 
demand shortage because it is mostly a pay-as-you go system--
redistributing from current workers to current retirees and other 
beneficiaries--and beneficiaries tend to spend their income more 
quickly than workers. In comparison, advance-funded pension and savings 
programs tend to reduce aggregate demand.
What are the major challenges facing Americans in preparing financially 
        for retirement? How well do currently available retirement 
        products, such as IRAs and 401(k)s, meet the needs of 
        consumers? How can they be improved to better meet the needs of 
        today's working families?
    401(k)s are an accident of history. In 1980, a benefit consultant 
working on a cash bonus plan for bankers had the idea of taking 
advantage of an obscure provision in the tax code passed 2 years 
earlier clarifying the tax treatment of deferred compensation and 
adding an employer matching contribution (Sahadi 2001; Tong 2013). 
Though 401(k)s took off in the early 1980s, Congress did not intend for 
them to replace traditional pensions as a primary retirement vehicle, 
and they are poorly designed for this role. Few people have the math 
skills, financial sophistication, or time to make sense of often 
conflicting financial advice and make sound investment decisions. IRAs, 
primarily composed of funds rolled over from 401(k)s, offer even fewer 
protections and typically have even higher fees (Munnell, et al., 
2013).
    By limiting the scope for risk pooling and intergenerational risk 
sharing, the shift from defined-benefit pensions to individual accounts 
has increased the investment, longevity and inflation risks faced by 
participants. Individual savers also forgo economies of scale in 
investment management and administration. As a result, contributions 
must be nearly twice as high with 401(k)-style plans as traditional 
pensions to ensure a similar income in retirement (Almeida and Fornia 
2008; Morrissey 2009).
    Problems caused by the loss of risk pooling are exacerbated by poor 
decisionmaking aggravated by a lack of transparency and conflicts of 
interest. For example, voluntary annuitization introduces adverse 
selection problems that make it expensive for individuals to hedge 
longevity risk--a problem aggravated by the difficulty individuals face 
in navigating tricky annuity markets as well as their tendency to 
undervalue income streams and underestimate the risk of living well 
into their 80s or 90s.
    Investment risks faced by individual investors are often poorly 
understood even among supposed experts. Individual investors are often 
led to believe that bull and bear markets cancel out over time, or that 
target-date funds shield them from risk. They naively interpret excess 
returns as a sign of a good investment going forward. They are often 
lulled into a false sense of security if stock returns are high, fail 
to rebalance in the wake of rallies, or simply gamble on all-stock 
portfolios. Risk taking is encouraged by tax subsidies whose value 
depends on investment earnings, making these particularly ill-suited 
for lower-income workers, who are rationally more risk-averse. Thus, at 
the opposite extreme, some individuals choose to invest very 
conservatively throughout their working lives or lock in low returns by 
selling in the wake of market downturns.
What role can employers, government, and other parties play to improve 
        retirement security? What specific policies would enhance U.S. 
        retirement security? How are States affected by and working to 
        address retirement security issues?
    Our first priority should be expanding Social Security benefits as 
proposed by Sen. Tom Harkin, Rep. Linda Sanchez, and others. Such 
measures could replace some of the benefits cut in 1983 and restore the 
progressivity of lifetime benefits as life expectancy grows more 
unequal (Morrissey 2013; Waldron 2007). The Harkin-Sanchez bill would 
also better protect seniors and other beneficiaries from the rising 
cost of health care and other increases in the cost of living that 
erode the value of their benefits.
    We should also take steps to preserve existing defined-benefit 
pensions in the public and private sector. Contrary to the conventional 
wisdom, most public employee pension plans are in reasonable shape 
despite the effects of the financial crisis. Those that are in the 
worst shape got that way because elected officials neglected to make 
actuarially required contributions, so the focus should be on 
preventing this from happening in the future, not reneging on promises 
to workers.
    Next, we should address some of the worst problems of 401(k)s and 
IRAs before encouraging workers to save more in these plans through 
auto enrollment and similar measures. The Thrift Savings Plan (TSP) 
offered to Federal workers is sometimes put forward as a model 401(k)-
style plan because fees are kept low by pooling assets and investing in 
low-cost passively managed funds. Participants have limited investment 
options and are encouraged to convert savings to a low-cost annuity at 
retirement (Davis, et al., 2010).
    Though the Thrift Savings Plan is an enormous improvement over 
401(k)s available to most private-sector workers, it does not resolve 
the fundamental problems of market risk and upside-down tax subsidies. 
In addition, TSP lifecycle funds, which may soon become the default 
investments, are heavily invested in stock, with an equity allocation 
ranging from 88 to 54 percent during the accumulation phase (author's 
analysis of FRTIB n.d.).
    At the opposite extreme in terms of risk, the MyRA plan proposed by 
President Obama would invest workers' savings in a Government bond fund 
similar to the G Fund, the Thrift Savings Plan's current default 
investment. This low-cost saving vehicle is a convenient and cost-
effective way of meeting the needs of the most risk-averse savers, 
except that account balances must be rolled over to (often high-risk 
and high-fee) IRAs when they reach $15,000.
    Some problems with defined contribution plans may be addressed by 
making them more like defined benefit pensions. Senator Harkin's USA 
Retirement Funds, for example, take advantage of risk pooling, 
economies of scale and professional investment management to provide 
retirees with secure lifetime incomes. The California Secure Choice 
Plan is another innovative approach to providing workers who lack 
access to an employer-based pension with a plan that would shield them 
from the high costs and risks of 401(k) plans. Neither plan would 
require employers to take on long-term pension obligations. Another 
option is the Adjustable Pension Plan, currently awaiting IRS approval, 
which would reduce, but not eliminate, employers' long-term risks.
    Last but not least, we should reconsider our reliance on tax 
incentives for retirement saving. This approach is inherently 
inefficient, because there is no way to guarantee that tax subsidies 
encourage people to save more as opposed to simply shifting funds to 
tax-favored accounts. Nevertheless, a refundable tax credit is a more 
efficient way to encourage voluntary saving than the current system, 
which actually provides a tax break on investment income.
    The Economic Policy Institute's Guaranteed Retirement Account plan 
proposed converting tax breaks for 401(k)-style plans and IRAs into 
flat tax credits to offset the cost of new accounts with a modest rate 
of return guaranteed by the Federal Government. The plan was designed 
to improve the retirement security of most Americans without costing 
taxpayers more than the current system (Ghilarducci 2007).
    EPI is working on a variation of the original GRA plan that, like 
the original plan and the Center for American Progress's SAFE 
retirement plan, would be a pooled and professionally managed fund that 
uses a gain and loss reserve to stabilize returns credited to notional 
accounts (Davis and Madland 2013). Specifically, the aim would be to 
maximize the share of retirees who achieve a target rate of return 
while minimizing the share with poor outcomes. In contrast to the SAFE 
plan, the new ``GRA 2.0'' plan would smooth cumulative rather than 
annual returns. Unlike the original GRA plan, the Government would not 
necessarily need to guarantee returns in the ``GRA 2.0'' model.

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                                 ______
                                 
                PREPARED STATEMENT OF ROBERT HILTONSMITH
                         Policy Analyst, Demos
                             March 12, 2014
    Thank you, Chairman Merkley and Members of the Senate Banking 
Committee's Subcommittee on Economic Policy for the opportunity to 
testify today. My name is Robbie Hiltonsmith, Policy Analyst at Demos, 
a public policy organization working for an America where we all have 
an equal say in our democracy and an equal chance in our economy. I am 
happy to be here today to testify on the state of U.S. retirement 
security, because though retirement security is one of the lynchpins of 
economic security for the middle class, it is also proving sorely 
elusive for the majority of Americans. One of the major reasons for 
this brewing retirement security crisis is the inadequacy and 
inefficiency of defined contribution plans. These plans, which include 
401(k)-type plans and IRAs,\1\ are the primary ways for most workers to 
supplement Social Security retirement income, and it is on the inherent 
problems with these plans that I will focus my testimony.
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    \1\ I use ``401(k)'' or ``401(k)-type plan'' as a shorthand to 
refer collectively to the many types of similar employer-based 
individual retirement plans, including 401(k)s, 403(b)s, 457s, and 
Keoghs.
---------------------------------------------------------------------------
    According to the National Compensation Survey (NCS), less than two-
thirds of all private sector workers in the United States (64 percent) 
were covered by any workplace retirement plan in 2012, and just 49 
percent of all such workers participated in their employer plan.\2\ 
However, the retirement security crisis isn't just limited to the half 
of workers who don't participate; even many of those who are actively 
saving for retirement are at risk as well, because most U.S. workers 
participating in a workplace retirement plan are covered only by an 
individual-account, 401(k)-type plan. These plans place nearly all of 
the risk on workers, who face the very real possibilities of losing 
their savings in a stock market plunge or of outliving their retirement 
savings. Even worse, 401(k)s often have high, hidden investment 
management, administration, and trading fees that can eat into their 
returns, making saving for retirement even more difficult. Though 
401(k)s have only become the primary retirement savings vehicle for 
workers in the past three decades, the inadequacies of these plans are 
already showing in retirement savings data: nationally, as of 2010, 40 
percent of households ages 55-64, the first cohort of workers to be 
forced to rely on the 401(k), had nothing saved for retirement, and the 
median retirements savings among those with any was just $100,000.\3\ 
These stark figures, along with many others, show that the fees and 
risks mean that 401(k)s are make them unsuitable to be U.S. workers' 
primary supplement to Social Security in retirement.
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    \2\ U.S. Bureau of Labor Statistics, ``National Compensation 
Survey: Employee Benefits in the United States,'' March 2013.
    \3\ Federal Reserve, 2009 Panel Survey of Consumer Finances, http:/
/www.federalreserve.gov/econresdata/scf/scf_2009p.htm.
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    So, what risks, in particular, does being forced to depend on a 
401(k) for the bulk of one's retirement income force workers to 
shoulder? Retirement experts generally agree that there are five major 
types of risk that 401(k) participants bear. Savers risk losing their 
savings to poor investment decisions, which experts term investment 
risk; high fees and low contributions (contribution risk); or a 
turbulent market (market risk); they also risk outliving their 
retirement savings (longevity risk); and being forced to, or unwisely 
choosing to, withdraw from or borrow against their savings (leakage 
risk). Though many 401(k) proponents believe the private retirement 
market can and will mitigate these risks, the continued inadequacy of 
Americans' retirement savings after nearly three decades of the 401(k) 
suggest otherwise.
    The financial crisis and following recession of the past few years 
has made the magnitude of the effect of market risk on 401(k) 
retirement savings crystal clear. During the stock market plunge of 
2008 and 2009, 401(k)s and IRAs lost a total of $2 trillion dollars in 
value, while the average 401(k)-holder lost over \1/3\ of his or her 
savings.\4\ Retiring during a market downturn generally means either 
doing so with vastly reduced retirement savings, which--though 
retirees' balances may later recover--can certainly affect potential 
retirees' long- and short-term financial planning, or lead them to 
postpone retirement, which in turn prevents younger workers from 
entering the labor force and worsens the already high youth 
unemployment that accompanies such downturns. Just how large of an 
impact can market cycles have on 401(k) balances? By our calculations, 
if an average worker with retirement savings had retired at the height 
of the last big stock market surge in 2000, he or she would have had 
over 50 percent more to live on during retirement than if she had 
retired in the depths of the last recession in 2009.
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    \4\ Monique Morrissey, ``Toward a Universal, Secure, and Adequate 
Retirement System'', Retirement USA, 2009.
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    Another problem with 401(k)s is investment risk--the possibility of 
participants making poor investment decisions. Though the freedom to 
choose one's own investments is lauded as a benefit of 401(k)s, in 
fact, most actual Americans are extremely ill-equipped to choose among 
often inscrutable investment choices. For example, in one study, 84 
percent of retirement plan participants thought that higher mutual fund 
fees guaranteed better performance,\5\ even though multiple studies 
have shown that there is no relationship between the two. 401(k) 
participants, despite years of advice from their investment advisors, 
generally have no idea how to balance their portfolios, often adopting 
an all-or-nothing approach to risk. Twenty-one percent of participants 
have more than 80 percent of their assets in stocks and other risky 
assets, far too much for any but young savers. Another 38 percent have 
none invested in stocks, a far-too-conservative allocation for any 
age.\6\ Individualized investing might seem to conform to our Nation's 
idealized vision of freedom and individual choice, in reality, leaving 
the investment decisions up to financial market professionals would 
result in higher returns and lower risk.
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    \5\ Neil Weinberg and Emily Lambert, ``The Great Fund Failure'', 
Forbes, 2003, http://www.forbes.com/forbes/2003/0915/176_4.html.
    \6\ Employee Benefits Research Institute, ``401(k) Plan Asset 
Allocation'', 2009.
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    Longevity risk, or the possibility that retirees outlive their 
retirement savings, is increasingly worrisome as high-income Americans 
continue to live longer. Though most know that life expectancies are on 
the rise, it's still impossible to know exactly how long we, 
individually, will live. When surveyed, individuals, generally, 
underestimate their own probabilities of living to an old age.\7\ 
401(k)s, by their very nature, simply provide a fixed sum to live off 
of in retirement; ensuring that sum lasts the rest of one's life would 
require exact knowledge of one's exact date of death, a grisly and 
impossible prospect. Investment options such as annuities, which can 
mitigate longevity risk, remain both prohibitively expensive and are 
often extremely complex. The most efficient way to eliminate longevity 
risk is to pool such risk among a wide swath of the country, similar to 
the approach taken by the Affordable Care Act. Unfortunately, the 
structure of the current 401(k) system makes it nearly impossible to do 
so.
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    \7\ Teresa Ghilarducci, When I'm 64: The Plot Against Private 
Pensions and the Plan to Save Them, Princeton University Press, p. 124, 
2008.
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    At first blush, the fact that 401(k)s allow account-holders to make 
early withdrawals or take out loans against account assets to pay for 
unexpected expenses might seem to be an advantage of such plans, 
helping individuals to smooth out life's little financial curveballs 
and potholes. However, the flipside of allowing these early 
withdrawals/loans are that they present another risk--commonly referred 
to as leakage risk--to adequate retirement savings. Leakage can 
significantly damage workers' retirement prospects, particularly those 
of younger workers, who lose decades of compounded returns when they 
withdraw, cash out or borrow. According to Vanguard, one of the largest 
401(k) providers, 3.7 percent of participants younger than age 60 
withdrew an average of 29 percent of their total 401(k) balance in 
2010;\8\ Even more alarmingly, 18 percent of all 401(k) participants, 
and 23 percent of all participants with incomes less than $30,000, had 
a loan outstanding at the end of the year. Ten percent of these loans, 
Vanguard says, are never repaid, significantly affecting retirement 
savings, and the interest lost during the loan period reduces account 
balances for repaid and unpaid loans alike. The GAO estimates that such 
withdrawals and loans (including between-job cashouts) sapped nearly 
$84 billion from retirement accounts in 2006, a number which surely 
rose during the recent recession.\9\ Between-job leakage is actually 
responsible for the lion's share of this leakage, as significant 
pluralities of workers simply cash out their retirement plans when 
leaving a job, particularly younger workers. A recent AON study found 
that 59 percent of Millennials, and 46 percent of Gen Xers, cashed out 
their 401(k)s each time they changed jobs.\10\
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    \8\ https://institutional.vanguard.com/VGApp/iip/site/
institutional/researchcommentary/article/RetResGreatR.
    \9\ Government Accountability Office (GAO), ``Policy Changes Could 
Reduce the Long-term Effects of Leakage on Workers' Retirement 
Savings,'' 2009, http://www.gao.gov/products/GAO-09-715.
    \10\ http://www.aon.com/attachments/
RetirementReadiness_2010_Report.pdf.
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    Finally, perhaps the largest 401(k) risk is contribution risk: the 
risk that workers contribute too little to their retirement over the 
course of their lifetimes. Workers contribute too little to 401(k)s for 
three main reasons: either they're simply not earning enough, they 
don't trust 401(k)s and the financial markets in general, or simply 
don't have the financial literacy to understand how plans work or how 
much to contribute. Employees themselves believe the first reason, lack 
of income, is the also the largest, and decades of stagnant wages would 
seem to lend credence to their claim. In a 2007 poll, 56 percent of 
respondents said that the reason they were not saving for retirement 
was because they couldn't afford to save.\11\ Figures on contribution 
rates by race confirm this claim; those for Latinos and African-
Americans, who have lower average incomes, trail significantly behind 
higher income whites and Asian Americans.\12\
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    \11\ The Rockefeller Foundation, ``American Worker Survey: Complete 
Results,'' 2007, http://www.rockefellerfoundation.org/uploads/files/
1f190413-0800-4046-9200-084d05d5ea71-american.pdf.
    \12\ Ariel/Hewitt, ``401(k) Plans In Living Color,'' 2009, http://
www.arielinvestments.com/content/view/1223/1173/.
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    The variety of fees charged by the funds in which 401(k) assets are 
invested can, too, make it even more difficult to contribute enough to 
individual retirement accounts. These fees, though often seemingly 
innocuous single-digit percentages, actually add significantly to the 
risk that workers are unable to save enough for retirement. According 
to our research, these fees can actually consume 30 percent or more of 
the gross (or before-fee) returns earned by savers' investments. Over a 
lifetime, these fees can add up to a significant chunk of workers' 
savings. According to our model, fees can cost an average household 
nearly $155,000, in fees or lost returns, effectively reducing the size 
of their nest egg by over 30 percent. How are mutual funds able to take 
such a large cut for their services? Mainstream economic theory 
provides a simple answer. When consumers of a product, such as mutual 
funds, do not have enough information or education to choose rationally 
among competing products, suppliers (funds) can charge higher prices. 
And that's precisely what happens: undereducated and overworked 401(k)-
holders often do not choose wisely amongst the limited menu of often 
opaque and seemingly identical mutual funds that their 401(k) provides. 
Employers, too, often lack expertise: employees in charge of many 
firms' 401(k)s only administer the plans part time, and thus often do 
not have the knowledge necessary to choose amongst nearly identical 
401(k) plans, or the incentive or power to push for a plan switch if 
their firm's plan is on the higher end of the cost spectrum. And 
unfortunately, many IRA brokers and 401(k) financial advisors take 
advantage of this lack of knowledge by pushing higher-fee plans on 
savers and employers, because they are not required to look out for the 
best interests of their clients, and are in fact often incentivized to 
push such high fee plans because they receive part of their 
compensation from the fees generated by the plans they sell.
    Though it has been difficult to quantify the losses due to 
``excessive'' fees, in large part because of the lack of publicly 
available data on fees charged by 401(k) plans, recent research has 
shown large losses due to both savers' and plan sponsors' lack of 
knowledge and poor advice from plan investment advisors. One study 
estimates that savers lose an average of nearly 1 percent in returns 
due to poor choices by plan fiduciaries, in part likely due to poor or 
conflicting advice received from their plan financial advisors.\13\ 
These losses could be partially or entirely mitigated by requiring 
financial advisors for 401(k)-type plans give advice in their clients' 
best interest.
---------------------------------------------------------------------------
    \13\ Quinn Curtis and Ian Ayres, ``Measuring Fiduciary and Investor 
Losses in 401(k) Plans,'' February 2014.
---------------------------------------------------------------------------
    The 401(k)'s plethora of risks and excessive fees make a convincing 
case for what many critics have been saying for decades: this national 
experiment in 401(k)-based ``do-it-yourself-retirement'' has been, and 
will continue to be, a failure. A new system to replace 401(k)s is 
urgently needed. All hardworking Americans need a safe, low-cost secure 
account to save for retirement, one that can also provide a lifetime 
stream of income when they retire; in other words, an account that 
protects workers from the severe risks and high costs of 401(k)-type 
plans.
                                 ______
                                 
                  PREPARED STATEMENT OF KRISTI MITCHEM
         Executive Vice President, State Street Global Advisors
                             March 12, 2014
    Good afternoon Chairman Merkley, Ranking Member Heller and Members 
of the Subcommittee. Thank you for this opportunity to talk about 
retirement security and the critical impact it plays in our economy.
    My name is Kristi Mitchem. I am an Executive Vice President for 
State Street Global Advisors, the investment management arm of State 
Street Bank and Trust Company. State Street Global Advisors is a 
leading asset management firm, entrusted with over $2.3 trillion in 
assets under management.\1\ Importantly, State Street Global Advisors 
is one of the largest providers of defined contribution (DC) services 
worldwide, managing more than $305 billion in retirement plan assets on 
behalf of employers and retirement plan participants. Our size and 
penetration within the DC marketplace affords me the opportunity to 
interact with U.S. DC plan sponsors on a regular basis, informing my 
perspective.
---------------------------------------------------------------------------
    \1\ As of December 31, 2013.
---------------------------------------------------------------------------
    Having worked with retirement plan sponsors for a decade, I 
recognize the important role that employers can play in assisting 
workers with retirement preparation. My objective today is to highlight 
the success that the largest employers in the United States have had in 
helping their workers achieve retirement adequacy and to suggest ways 
in which we can make this success more universal by removing barriers 
that currently prevent many smaller companies from offering well-
structured retirement savings programs.
Retirement Today
    For nearly 50 years, the retirement landscape was dominated by 
defined benefit (DB) plans, which provided many Americans with a 
monthly lifetime pension. But in more recent decades, the number of 
Americans covered by DB plans has diminished substantially. We have 
shifted to a system that is much more dependent on self-funded DC 
plans. By year-end 2013, DC plans were more prevalent than DB plans in 
the United States, as well as globally. This trend is likely to 
continue as plan sponsors increasingly look to reduce their pension 
liabilities.


    DC plans are now the primary source of retirement benefits for 
millions of Americans. We believe these plans have the potential to 
provide retirement security to the majority of American workers. 
However, realizing this potential will require substantial progress 
from where we are today. We recognize and applaud regulators and 
legislators for acknowledging the existing issues around access, 
participation and cost.
    In developing solutions to these problems it may be useful to 
consider how and where we are having success in retirement preparation 
today. Specifically, we believe that many of the largest and most 
sophisticated plans in the United States have designed and implemented 
adequate, self-funded retirement plans. The challenge we face is 
determining the public policy shifts necessary to close the gap between 
large and small employers with regard to DC plan provision and 
structure.
The ``Great Divide''
    When it comes to retirement planning and preparation, we believe 
the ``Great Divide'' is more around employer size than employee income 
level. Large employers are much more likely to provide a retirement 
plan. And when they do, the plan produces better results for those 
employees that participate in it. Comparing data from large and small 
plans across a number of dimensions illustrates the impact of employer 
size on retirement readiness.

    Access: 89 percent of large companies offer DC plans;\2\ 
        however only 14 percent of small employers sponsor some type of 
        plan for their employees to save for retirement.\3\
---------------------------------------------------------------------------
    \2\ Bureau of Labor Statistics.
    \3\ GAO Study on Challenges and Prospects of Employees of Small 
Businesses, July 16, 2013.

    Participation Rate: The average participation rate in the 
        largest plan segment is close to 80 percent. For the smallest 
        companies that offer a plan, participation rates dip down to 
        74.2 percent.\4\
---------------------------------------------------------------------------
    \4\ PLANSPONSOR DC Survey 2013.

    Savings Rates: In the largest plans, the average savings 
        rate is 7.3 percent while for the smallest plans it is 5.6 
        percent.\5\
---------------------------------------------------------------------------
    \5\ Ibid.

    Account Balances: The average account balance in the 
        largest plans is about two times the average across all plan 
        sizes--$140,000 compared to $63,878.\6\
---------------------------------------------------------------------------
    \6\ Inside the Structure of Defined Contribution/401(k) Plan Fees: 
A Study Assessing the Mechanics of the `All-In' Fee 2011. Deloitte.
---------------------------------------------------------------------------
DC Advances within the Large Plan Market
    The largest plan sponsors are clearly outpacing small employers in 
the race to provide a viable replacement for DB plans; the question 
then becomes why have they been able to create more successful defined 
contribution offerings.


    The answer in my view lies in the fact that the largest plans in 
the United States are leveraging changes in public policy and 
incorporating insights from behavioral finance to drive real 
improvements in retirement readiness. Specifically, they are taking the 
following actions to automate good behaviors, simplify choices and 
enhance transparency:

    Automatically enrolling new employees.

    Automatically increasing contribution rates for 
        participants over time.

    Offering their participants a more streamlined and 
        simplified menu of investment choices to help participants make 
        better investment choices.

    Embracing well-diversified target date funds as default 
        investment options to aid participants in managing key 
        investment risks.

    Negotiating lower investment fees on behalf of participants 
        across all types of investments and asset classes.

    Utilizing high-quality, low-fee index based investments 
        where appropriate on retirement plan investment menus.
Comparing Characteristics of Smaller and Larger Plans


Helping Small Employers Increase Plan Sponsorship
    So how do we translate the successful evolution of DC plans 
sponsored by large
    employers into success for the small employer market? First, we 
must remove current obstacles that make plan sponsorship more 
challenging for small employers. Unlike large employers, small 
businesses often do not have the time, resources and expertise to 
administer a retirement plan. The administrative burdens and fiduciary 
responsibilities associated with plan sponsorship can be overwhelming 
and inhibit adoption.
    We believe that if smaller companies could have access to a 
multiple-employer plan (MEP) through an industry group or other 
association, they would be more likely to offer a workplace retirement 
plan. We would therefore suggest that you consider changes to current 
policy that would support the growth of multiple-employer DC plans. 
Specifically, we would recommend that: 1) the current DOL nexus 
requirement be eliminated for participant-funded retirement programs, 
and; 2) a safe harbor be offered to participating members of a 
multiple-employer DC plan, provided that certain best-in-class plan 
design features are incorporated. Developing and encouraging the use of 
MEPs would reduce the barriers to plan adoption among small companies 
by spreading administrative and personnel related costs across a number 
of employers. Importantly, it would also help smaller plans achieve the 
kind of fee leverage that larger plans now enjoy. In other words, 
access to MEPs would make retirement plan provision more attractive to 
small employers and allow participants in these plans to keep more of 
what they save through lower plan expenses.
A Future Model for Small Employers
    As discussed above, we believe one potential way to close the gap 
between large and small plans would be to create a safe harbor for 
employers that participate in well-structured, multiple-employer DC 
plans. These well-structured MEPs should mimic the largest plans in the 
United States by leveraging automation and simplification to drive 
better participant outcomes. In our view, the features required for 
safe harbor coverage should include:

    Auto enrollment starting at a minimum of 6 percent with 
        default into an indexed target date fund.

    Automatic contribution rate escalation at a minimum of 1 
        percent annually up to a cap of 15 percent.

    A simplified investment menu including an index target date 
        fund, a limited number of core options and a lifetime income 
        option to help manage longevity risk.

    A loan program available only for hardship to prevent plan 
        leakage.

    A total plan expense ratio under a certain limit based on 
        the size of the MEP.

    An optional employer match or discretionary profit-sharing 
        type contribution.

    In order to make participation in MEPs easier and more attractive, 
we believe the following additional changes in public policy should 
also be considered:

    Removal of testing and reporting requirements for employers 
        under a certain size.

    Acceptance of aggregated 5500-type reporting with a 
        breakdown of contribution amounts by participating employers.

    Alterations to the tax code to prevent disqualification of 
        a multiple-employer plan despite a violation by one or more 
        participating members.

    We believe granting small businesses the ability to participate in 
simplified MEPs would send an important signal to the retirement 
market. This change would inspire DC plan service providers and 
investment managers to create more products tailored to small 
businesses, providing a broader range of choices and greater economies 
of scale to an underserved market segment.
Are Large Plan Advancements Sufficient?
    In the sections above we explored the differences between large and 
small plans and suggested potential ways to replicate the large plan 
experience in the small plan market. One critical question that we have 
not explicitly addressed, however, is whether or not well-structured 
plans, such as those currently prevalent at the larger end of the 
market, are capable of delivering retirement security to the middle 
class. In order to answer this question, we look to data produced by 
the Employee Benefit Research Institute (EBRI). In December of 2013,\7\ 
EBRI's Retirement Security Projection Model (RSPM) analyzed the 
potential of DC plans to produce ``adequate'' income replacement for 
retirement. EBRI data shows that when plans adopt automatic enrollment 
and auto escalation, retirement adequacy rates are high. According to 
EBRI, 85 percent to 90 percent of younger middle class workers 
participating in plans with auto features are expected to replace 80 
percent of their income in retirement.\8\ Importantly, lower income 
quartiles also do well under the auto feature condition, with 90 
percent of lower income workers expected to replace 80 percent of their 
preretirement income.
---------------------------------------------------------------------------
    \7\ EBRI Retirement Security Project Model findings from EBRI/Jack 
Vanderhei testimony to the U.S. Senate Committee on Finance, 
Subcommittee on Social Security, Pensions, and Family Policy, Hearing 
on Retirement Savings for Low-Income Workers. Statement of record, 
Wednesday, February 26, 2014.
    \8\ EBRI Assumptions: `` . . . assuming current Social Security 
benefits are not reduced, 86 percent of workers in the lowest-income 
quartile with more than 30 years of eligibility in a voluntary 
enrollment 401(k) plan are simulated to have sufficient 401(k) 
accumulations that, when combined with Social Security retirement 
benefits, would be able to replace at least 60 percent of their age 64 
wages and salary on an inflation-adjusted basis. When the threshold for 
a successful retirement financing is increased to 70 percent 
replacement, 76 percent of these workers will still meet the threshold, 
based solely on the combination of projected 401(k) savings and Social 
Security combined. At an 80 percent replacement rate, 69 percent of the 
lowest-income quartile will still meet the threshold. It should be 
noted, however, that the percentage of those in the highest-income 
quartile deemed to be ``successful'' from just these two retirement 
components drops to 59 percent from 83 percent when measured against 
the 60 percent threshold.''
---------------------------------------------------------------------------
    Despite these encouraging statistics, there is more that plan 
sponsors can and should do to improve the retirement prospects of those 
with fewer years to retirement and to provide a buffer for newer 
employees. In our view, two of the most impactful steps that plan 
sponsors could take to further increase retirement adequacy would be to 
utilize more aggressive defaults and incorporate lifetime income 
options in their plan menus.
    EBRI and other industry associations, such as the Defined 
Contribution Institutional Investment Association (DCIIA), have done 
extensive research in the area of defaults and demonstrated the strong 
relationship between initial deferral rates and retirement adequacy. 
Because many employees will ``stick'' at the default rate, it is 
important for plan sponsors to choose default savings rates that are 
high enough to provide for adequate savings. Increasing the default 
savings rates from 3 percent to 6 percent can impact accumulated 
balances substantially.\9\ If we double the savings rates of 45-year-
old middle-class workers, their accumulated balances at retirement 
would grow by 41 percent.\10\
---------------------------------------------------------------------------
    \9\ DCIIA: The Impact of Auto-Enrollment and Automatic Contribution 
Escalation on Retirement Income Adequacy, Jack VanDerhei, Employee 
Benefit Research Institute, and Lori Lucas, Callan Associates. Also see 
EBRI September 2012 Notes, Vol. 33, No. 0, ``Increasing Default 
Defferral rates in Automatic Enrollment 401(k) Plans: The impact of 
retirement saving success in plans with automatic escalation,'' p. 12.
    \10\ Based on SSgA assumptions: beginning saving at age 25 at 3 
percent per annum, increase of savings to 6 percent per annum at age 
45. Contributions are made annually with a static return of 5 percent 
per annum and wage growth estimated at 3 percent per annum.
---------------------------------------------------------------------------
    The provision of lifetime income is another key enabler of 
retirement success because investors in these types of strategies 
benefit from managing longevity risk. In DC plans where a lifetime 
income product is not offered, participants are required to generate 
enough savings within their personal retirement plan accounts to 
support themselves in the event that they live well past the average 
life expectancy (age 82). Investors in lifetime income products 
transfer the risk of outliving their assets to an insurer who, by 
pooling many individuals together, can manage to the mean life 
expectancy rather than the outer bounds of longevity. The broad 
adoption and usage of retirement income products in the United States 
would materially increase the probability of success for many savers by 
decreasing the accumulated savings needed to achieve adequacy by 
approximately 20 percent.\11\
---------------------------------------------------------------------------
    \11\ SSgA calculation comparing the present value of a cash flow 
from age 65 to the 90 percent joint survivor age (98) to the present 
value of a mortality weighted joint survivor cash flow from 65 until 
death. Mortality assumptions based on Social Security cohort life table 
for birth year 1950 and cash flows discounted by the Treasury yield 
curve from 3/3/14.
---------------------------------------------------------------------------
The Voice of the Participant
    One very important voice, which we have not considered as part of 
our testimony up to this point, is the voice of the participant--the 
employee who is or will participate in a workplace savings plan. If 
participants tolerate but do not accept automation, it is unlikely to 
have lasting impact. Further, if income options are offered but not 
embraced, participants will not experience the benefits of longevity 
hedging. At State Street Global Advisors, we regularly survey 
participants on their attitudes toward a range of issues and have 
explored both of these questions. The good news is, our survey results 
have shown that Americans want to save for retirement, believe in 
automation and would like to see lifetime income strategies 
incorporated into DC investment menus.
Highlights from State Street Global Advisors Participant Surveys
    In our 2011 DC Investor Survey, we found:

    On average participants thought that they should be saving 
        approximately 14 percent of their pre-tax wages in a retirement 
        plan.

    74 percent of participants surveyed indicated that they 
        wanted their employer to automatically make them do something 
        to prepare for retirement.

    In our 2012 DC Investor Survey, there was a similar desire for 
higher savings rates and automation.

    More than half of participants surveyed indicated they 
        would increase their savings up to 10 percent or more if 
        automatically increased by 1 percent a year.

    With regard to income strategies, our 2013 DC Investor Survey 
showed the increasing need for addressing the decumulation phase of 
retirement.

    Over 60 percent of those surveyed said they plan to take 
        monthly withdrawals.

    7 out of 10 recognize they will need an additional source 
        of guaranteed income in retirement, separate from Social 
        Security.

Concluding Comments
    One of the unique facets of the U.S. retirement system is that the 
employer plays a central role in helping individuals to plan and save 
for retirement. What may not always be well understood, however, is 
that this workforce-centered design actually motivates savings in 
individuals who otherwise would not contribute. A recent research piece 
by Holden and Bass (2013) reports that half of DC participants strongly 
or somewhat agree with the statement ``I probably wouldn't save for 
retirement if I didn't have a retirement plan at work.'' And for those 
with a household income of less than $50,000 a year, that response rate 
increases to nearly 70 percent.
    Given the important role that employers play in enabling retirement 
savings, it is only natural that any exploration of how to improve the 
system begin with an examination of why certain employers are achieving 
success and others are not. In our view, the dominant explanatory 
variable is plan size. We have presented solid evidence that the 
largest employers in the world are creating plans that work by 
incorporating auto features and using their size and scale to drive 
down costs. We believe the next step in the evolution of DC plans 
should be to bring aspects of that model to a wider range of plan 
sponsors. In our view, this can be accomplished in part by supporting 
the creation of well-structured multiple-employer DC plans.
    Thank you again for the opportunity to testify on the importance of 
ensuring retirement security for America's middle class. I welcome any 
questions you may have.

              Additional Material Supplied for the Record