[Senate Hearing 113-402]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 113-402
 
                         RETIREMENT SAVINGS FOR 
                           LOW-INCOME WORKERS 

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

                                HEARING

                               before the

                   SUBCOMMITTEE ON SOCIAL SECURITY, 
                      PENSIONS, AND FAMILY POLICY

                                 of the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 26, 2014

                               __________
                                     

            Printed for the use of the Committee on Finance

                               ----------

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                          COMMITTEE ON FINANCE



                      RON WYDEN, Oregon, Chairman

JOHN D. ROCKEFELLER IV, West         ORRIN G. HATCH, Utah
Virginia                             CHUCK GRASSLEY, Iowa
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
DEBBIE STABENOW, Michigan            PAT ROBERTS, Kansas
MARIA CANTWELL, Washington           MICHAEL B. ENZI, Wyoming
BILL NELSON, Florida                 JOHN CORNYN, Texas
ROBERT MENENDEZ, New Jersey          JOHN THUNE, South Dakota
THOMAS R. CARPER, Delaware           RICHARD BURR, North Carolina
BENJAMIN L. CARDIN, Maryland         JOHNNY ISAKSON, Georgia
SHERROD BROWN, Ohio                  ROB PORTMAN, Ohio
MICHAEL F. BENNET, Colorado          PATRICK J. TOOMEY, Pennsylvania
ROBERT P. CASEY, Jr., Pennsylvania
MARK R. WARNER, Virginia

                    Joshua Sheinkman, Staff Director

               Chris Campbell, Republican Staff Director

                                 ______

      Subcommittee on Social Security, Pensions, and Family Policy

                     SHERROD BROWN, Ohio, Chairman

JOHN D. ROCKEFELLER IV, West         PATRICK J. TOOMEY, Pennsylvania
Virginia                             MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         JOHNNY ISAKSON, Georgia
BILL NELSON, Florida                 ROB PORTMAN, Ohio
BENJAMIN L. CARDIN, Maryland

                                  (ii)


                            C O N T E N T S

                               __________

                           OPENING STATEMENTS

                                                                   Page
Brown, Hon. Sherrod, a U.S. Senator from Ohio, chairman, 
  Subcommittee on Social Security, Pensions, and Family Policy, 
  Committee on Finance...........................................     1
Isakson, Hon. Johnny, a U.S. Senator from Georgia................     3
Cardin, Hon. Benjamin L., a U.S. Senator from Maryland...........     4

                               WITNESSES

Iwry, J. Mark, Senior Advisor to the Secretary and Deputy 
  Assistant Secretary for Retirement and Health Policy, 
  Department of the Treasury, Washington, DC.....................     5
Oakley, Diane, executive director, National Institute on 
  Retirement Security, Washington, DC............................     7
Utkus, Stephen P., principal and director, Vanguard Center for 
  Retirement Research, Malvern, PA...............................     9
Miller, Judy A., MSPA, FSA, MAAA, director of retirement policy, 
  American Society of Pension Professionals and Actuaries 
  (ASPPA), and executive director, ASPPA College of Pension 
  Actuaries, Arlington, VA.......................................    11

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Brown, Hon. Sherrod:
    Opening statement............................................     1
Cardin, Hon. Benjamin L.:
    Opening statement............................................     4
Isakson, Hon. Johnny:
    Opening statement............................................     3
Iwry, J. Mark:
    Testimony....................................................     5
    Prepared statement...........................................    35
    Responses to questions from subcommittee members.............    44
Miller, Judy A., MSPA, FSA, MAAA:
    Testimony....................................................    11
    Prepared statement...........................................    47
Oakley, Diane:
    Testimony....................................................     7
    Prepared statement...........................................    62
Utkus, Stephen P.:
    Testimony....................................................     9
    Prepared statement...........................................    73

                             Communications

AARP.............................................................    83
Employee Benefit Research Institute (EBRI).......................    92
Women's Institute for a Secure Retirement (WISER)................   103

                                 (iii)


                        RETIREMENT SAVINGS FOR 
                           LOW-INCOME WORKERS

                              ----------                              


                      WEDNESDAY, FEBRUARY 26, 2014

                           U.S. Senate,    
               Subcommittee on Social Security,    
                       Pensions, and Family Policy,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10 a.m., 
in room SD-215, Dirksen Senate Office Building, Hon. Sherrod 
Brown (chairman of the subcommittee) presiding.
    Present: Senators Cardin and Isakson.
    Also present: Democratic Staff: Kara Getz, Senior Tax 
Counsel; and Tom Klouda, Professional Staff Member, Social 
Security. Republican Staff: Jeff Wrase, Chief Economist; and 
Preston Rutledge, Tax Counsel.

 OPENING STATEMENT OF HON. SHERROD BROWN, A U.S. SENATOR FROM 
OHIO, CHAIRMAN, SUBCOMMITTEE ON SOCIAL SECURITY, PENSIONS, AND 
              FAMILY POLICY, COMMITTEE ON FINANCE

    Senator Brown. The subcommittee will come to order. Thanks 
to Senator Isakson for joining us, and the four panel members. 
I really appreciate your being here for an issue of increasing 
importance in our country. We know that there is a growing 
retirement crisis in the United States.
    For many Americans, the traditional 3-legged retirement 
system--that we have all talked about pretty much all our 
lives--of pensions, personal savings, and Social Security seems 
to no longer work for so many. That 3-legged stool lacks 
stability for too many people.
    The annuitized income of Social Security remains a 
safeguard of retirement security for working-class families. 
Social Security provides the overwhelming amount of retirement 
income for more than half the population. For a large number of 
people, it is essentially their entire income.
    For too many, it is the private retirement system that is 
not working. Fewer than half of American workers, nearly 75 
million, have employer-provided retirement plans or other 
opportunities to save for retirement through workplace 
contributions. Even more so, the half who do have some kind of 
retirement plan, in many cases have little in retirement 
assets. The median retirement account balance is $3,000 for all 
working-aged households, including those that have none. But 
the median is $3,000 and $12,000 for households nearing 
retirement.
    While tax-preferenced retirement accounts have helped spur 
a great deal of savings, the dollars in these private 
retirement accounts are typically concentrated among the top 
quartile or the wealthiest among those who have savings. 
Households in the top fifth of the income distribution account 
for 72 percent of IRA and 401(k) assets. The average 
disbursement among all seniors is just under $1,500. Only 19 
percent of senior households receive any disbursements at all.
    So, what do we do? Today we will discuss the dimensions of 
this crisis and a number of policy responses to it. These 
policies are specifically targeted towards low- and moderate-
income workers. They all follow the same theme: doing more of 
what works.
    We know Social Security works for low-income workers; the 
only question is whether the benefit is adequate. A great deal 
of evidence suggests that, because of the state of the other 
two legs of the stool, that income is not sufficient.
    Sixty-plus percent of low-income families are at risk of 
having insufficient income to maintain their standard of living 
in retirement. For them, we are talking about the difference 
between a modest retirement and living in poverty.
    The Employee Benefit Research Institute has developed a 
model to predict whether retirees will have sufficient income 
to cover their expenses, and, in general, retirees in the 
bottom income quartile do not have enough money to cover those 
expenses in retirement. We will explore what those levels 
could, and should, be later in the hearing. The model predicts 
that just 16.8 percent of low-income retirees will have enough 
money for any kind of a decent retirement.
    The President's decision to withdraw what I believe is the 
ill-
conceived policy of chained CPI should put an end to treating 
Social Security as another trading piece in budget 
negotiations. Now we can have the thoughtful debate we need: 
not Social Security as a budget issue, but Social Security as 
part of retirement security and what we can do in a more 
comprehensive way.
    We need to debate how to expand the kind of guaranteed 
annuitized income that Social Security provides. My colleague, 
Senator Harkin, has proposed a way to do this, his USA 
Retirement Accounts. It is legislation, I believe, with great 
merit. I am proud to be a co-sponsor.
    The bottom line is that access to tax-preferenced 
retirement accounts must not be something workers receive when 
they cross the threshold into the middle class, but a tool that 
helps them start that journey to get into the middle class. The 
proposal from Treasury to introduce the myRA program is a step 
in the right direction. In particular, the myRA plan addresses 
the gap in access to tax-preferenced savings.
    Mr. Iwry, I know, will talk in some detail about that. 
Fifty percent of full-time workers participate in an employer-
sponsored plan, but only 13 percent of workers at companies 
with fewer than 10 employees participate in an employer-
sponsored retirement plan.
    There are no easy answers, but, in a system where we 
primarily administer programs to encourage private retirement 
savings through the tax code, we need to make sure the 
incentives align to the need better than they have.
    The tax incentives do not much affect low-income people, 
and they only marginally and unevenly affect moderate-income 
people, those incentives we provide through the tax code. Those 
are some of the questions we need to explore.
    I appreciate Senator Isakson being here, and Senator Cardin 
also, who has been a leader in pension issues throughout his 
time in the other House on the Ways and Means Committee. Thank 
you for being here, Senator Isakson.

           OPENING STATEMENT OF HON. JOHNNY ISAKSON, 
                  A U.S. SENATOR FROM GEORGIA

    Senator Isakson. Well, thank you very much, Chairman Brown. 
I appreciate your calling this hearing on an important issue 
for all Americans.
    The recent recession left a glaring reminder to many that 
Americans simply are not saving enough, if any at all. We have 
made some progress over the years, but I argue that we can do 
more. Creating an environment for sound retirement is not only 
good for participants, it is good for America. The more we can 
empower individuals to save and plan for themselves, the less 
they have to rely on the government to take care of them in 
their latter years.
    Both in this committee and in the HELP Committee, we have 
been examining retirement issues. We have been presented with 
evidence that is clear that the most important factor in 
determining whether or not an individual is saving for 
retirement is whether or not their employer offers them a plan.
    If our goal is to increase the number of Americans saving 
for retirement, we should be expanding the options available to 
employers through existing structures rather than creating a 
new mandate or a new program which seems overly complicated for 
such a simple goal.
    I applaud Senator Orrin Hatch, the ranking member of this 
committee and a senior member of the Senate, for introducing 
last year a series of reforms for American workers and 
employers which would create stronger tools and options for 
providing pensions and more security in retirement.
    According to the Small Business Administration, small 
business makes up a substantial majority of the U.S. employer 
firms. We can certainly find ways to make it easier for these 
businesses and their employees to participate in savings 
vehicles and retirement vehicles by reducing unnecessary 
administrative and testing burdens. Further, at a time when we 
are trying to encourage higher retirement saving participation 
rates, we should certainly not be limiting individuals' 
investment education and advice as the Department of Labor is 
proposing. With this proposal to redefine the term 
``fiduciary,'' Department of Labor is unilaterally seeking to 
over-regulate 401(k) plans and IRAs, both critical tools for 
Americans investing in their own retirement.
    As we continue to examine the issue of retirement savings, 
I would continue to urge the Secretary of Labor and the 
Department of Labor to revisit the Department's approach to 
this issue and preserve access to professional advice for low- 
and moderate-income investors.
    I am pleased that the committee is continuing to explore 
ways to increase retirement savings for all Americans. I hope 
that we work together to find ways to simplify and improve 
access for business, to improve plans, as well as create an 
environment that continues to encourage the American people to 
save for their retirement and their future.
    Thank you, Mr. Chairman.
    Senator Brown. Thank you, Senator Isakson.
    Senator Cardin, your opening statement, please?

         OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, 
                  A U.S. SENATOR FROM MARYLAND

    Senator Cardin. Well, thank you, Mr. Chairman. I very much 
appreciate you calling this hearing. Senator Isakson, thank you 
for your leadership on this. I regret that I am going to have 
to leave shortly to chair a hearing in the Foreign Relations 
Committee, because this is a subject of great interest to me, 
and you have an incredible panel of experts who can really help 
us.
    Now, Mr. Chairman, you correctly have identified the huge 
problem we have in this country, and that is retirement 
security. We have made progress with some legislation that has 
been passed over the last decade, but we need to do more.
    The 3-legged stool that you mentioned is absolutely 
accurate. We have to, first, protect Social Security, make sure 
it is strong and remains strong. It is critically important. 
For many Americans, it is their primary or sole source of 
retirement security.
    We need to build on what has worked. The Saver's Credit has 
worked. Millions of Americans today have retirement accounts 
who would not have retirement accounts but for the Saver's 
Credit, so let us look at ways that we can strengthen the 
Saver's Credit. I think there have been some suggestions that 
have been made that would make that more available.
    We need to continue to work on providing appropriate 
incentives for employers to sponsor retirement accounts. Your 
observation is absolutely correct, Mr. Chairman, that the tax-
deferral incentive, particularly for low-income families, in 
and of itself has not been effective in getting them to 
participate in retirement accounts.
    The Saver's Credit puts money on the table, therefore they 
are likely to want to take advantage of the money being on the 
table. If an employer sponsors a plan and puts money on the 
table, workers are more likely to participate.
    With the Federal Government's Thrift Savings Plan, we see 
high participation rates. We have also found that automatic 
enrollment is an effective way to get people to participate in 
retirement savings. Americans make decisions by inaction, and 
therefore the automatic enrollment feature where you have to 
opt out has also been effective.
    I would just identify another problem that we have, and 
that is, it is too easy to take out retirement funds for things 
other than retirement. They are all well worthwhile, we 
understand that: to buy a home, or health care, or similar 
needs. But retirement accounts should be for your retirement. 
It is also easy to take out funds in lump sums rather than in 
annuities, and I think we need to look at the realities that 
people do not predict well how long they are going to live, and 
we should offer incentives so that people have income 
throughout their life.
    Many people start their retirement years with a healthy 3-
legged stool for retirement security, only to find that the 
only leg that remains is Social Security, because they spend 
their retirement savings prematurely.
    So I think there are things that we can work on. There are 
bipartisan proposals that have been made, and I think this 
hearing will be very helpful to us to work our way through to 
find ways that we can really help Americans save for their 
retirement.
    Thank you.
    Senator Brown. Thank you for your insight, Senator Cardin.
    The first witness will be Mark Iwry, Senior Advisor to the 
Secretary and Deputy Assistant Secretary for Retirement and 
Health Policy at the U.S Treasury Department. Mr. Iwry is the 
architect of the myRA program being launched by the Treasury 
and has extensive knowledge of all issues related to retirement 
and savings policy.
    Diane Oakley is executive director of the National 
Institute on Retirement Security. Before joining the NIRS, she 
served as Senior Policy Advisor to Congressman Earl Pomeroy 
from North Dakota. Welcome to you.
    Stephen Utkus is principal and director of Vanguard Center 
for Retirement Research in Philadelphia. Mr. Utkus is 
responsible for conducting the Center's extensive research on 
retirement savings in the United States.
    Judy Miller is the director of retirement policy of the 
American Society of Pension Professionals and Actuaries. She 
served on the Finance Committee staff here from 2003 to 2007. 
We are glad to welcome her back.
    Mr. Iwry, if you would begin. Thank you.

STATEMENT OF J. MARK IWRY, SENIOR ADVISOR TO THE SECRETARY AND 
 DEPUTY ASSISTANT SECRETARY FOR RETIREMENT AND HEALTH POLICY, 
           DEPARTMENT OF THE TREASURY, WASHINGTON, DC

    Mr. Iwry. Thank you, Mr. Chairman. Chairman Brown, Senator 
Isakson, Senator Cardin, thank you for the opportunity to 
appear before you today to discuss retirement savings for low-
income Americans.
    The administration and Treasury remain committed to working 
with Congress to help secure a dignified retirement for all 
workers, and, first and foremost, Social Security is and must 
remain a rock-solid, guaranteed, and progressive benefit on 
which every American can rely.
    To supplement Social Security, as you have said, Mr. 
Chairman, as well as you, Senator Isakson, Senator Cardin, most 
secure retirement planning traditionally has included employer-
sponsored retirement plans as well as individual savings. But 
too many of us are not on a path to be sufficiently prepared 
for retirement. Tens of millions of workers lack access to 
employer-sponsored plans or retirement savings, and this puts 
the onus on the individuals to set up individual retirement 
accounts and save for retirement on their own.
    Fewer than one out of 10 workers eligible to contribute to 
an IRA actually does so. By contrast, roughly seven or eight 
out of 10 who are eligible to participate in an employer plan 
actually participate, and up to nine out of 10, to your point, 
Senator Cardin, in a plan with automatic enrollment. The risk 
of an insecure retirement is especially acute for women, for 
minorities, and for lower-income Americans.
    A number of factors are at work here. In addition to lack 
of 
access to employer-sponsored plans, those who are not currently 
saving may encounter minimum balance requirements and 
administrative- or investment-related expenses that make it 
difficult to sustain very small accounts. Also, many potential 
new savers may be hampered by concerns about investment risk 
and volatility, the challenge of making decisions regarding 
investment options and other financial choices, and the need to 
take initiative to establish an account.
    To help address these concerns and fill a gap in retirement 
saving, the President announced in his recent State of the 
Union address that Treasury would make available a new, 
specially designed savings bond to be held in a Roth IRA to 
provide an investment for deposits that may be too small to be 
of interest to most commercial financial institutions that 
offer IRAs.
    Called myRA, which stands for My Retirement Account, this 
vehicle will be targeted especially to moderate- and lower-
income workers, especially to those who are first-time savers 
or potential first-time savers and those who are not eligible 
to participate in employer-sponsored plans, to give them a 
simple, safe, and affordable way to start saving.
    Contributions to be made by payroll deposit at the 
workplace could be as small as $5 each, with a minimum 
investment as little as $25. The bond will have an add-on 
feature so that additional contributions will increase the 
value of the bond instead of requiring the individual to 
purchase additional bonds in order to add to their saving.
    As a starter account, the myRA will be limited to $15,000 
as a cumulative balance--obviously not a target for saving, but 
only a transition point at which people who have not already 
rolled over from their myRA account to a private-sector Roth 
IRA would then shift to a private-sector IRA.
    While it is obviously not nearly enough for a secure 
retirement, $15,000 may be enough to prime the pump to instill 
a habit of saving to make a new Saver's Account viable in the 
private sector. These accounts could therefore serve as 
incubators for small accumulations of savings whose 
administrative costs might otherwise exceed their earnings. 
After savers graduate to private-sector Roth IRAs, they will be 
able to continue saving and accumulating balances greater than 
$15,000 that could be invested in diversified investment 
portfolios that have more growth potential.
    Employees who are eligible for employer plans will not be 
the target audience for the myRAs. They will have many good 
reasons to continue participating in those plans instead of 
myRAs, which will complement and not compete with 401(k)s or 
other employer plans.
    The administration and Treasury are committed to expanding 
and enhancing retirement security and retirement saving, 
especially for lower- and moderate-income workers. To that end, 
much remains to be done, including, among other things: 
promoting more lifetime income in defined benefit and defined 
contribution plans; facilitating portability and consolidation 
of savings; encouraging employers to make 401(k)s more 
available, more automatic, and more effective; and extending 
coverage to tens of millions of workers not currently in the 
system.
    The President emphasized, in his State of the Union 
address, the administration's continued support for legislation 
to provide for automatic enrollment in workplace IRAs for 
employees of firms that do not sponsor any 401(k) or other 
retirement plan. But until Congress acts, meaningful steps can 
be taken administratively and by plan sponsors to give workers 
better access to retirement saving, and we view the myRA 
initiative as one such step. We welcome the opportunity to work 
with the committee to achieve these important objectives.
    Senator Brown. Thank you, Mr. Iwry.
    [The prepared statement of Mr. Iwry appears in the 
appendix.]
    Senator Brown. Ms. Oakley, thank you for joining us.

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

    Ms. Oakley. Thank you, Chairman Brown, Senator Isakson, 
Senator Cardin.
    From the survey work that my organization, NIRS, has done, 
we found out that Americans are worried about retirement. In 
fact, 55 percent of Americans told us they were very concerned 
about their prospects for retirement, and six out of 10 
Americans strongly agreed that Washington needed to give 
retirement security a higher priority, so I am sure they are 
going to be very interested in the findings of today's hearing.
    When NIRS also went and looked at the readiness of all 
working households for retirement, one of the things we 
realized was that the concerns Americans were expressing in 
their opinions were well-founded, especially when we looked at 
the levels of coverage, ownership, and savings as a percent of 
income.
    Clearly, the data shows that employer-sponsored plans are 
the most important source of retirement income after Social 
Security, but large shares of the American workforce lack 
access to a pension or a retirement plan, and increasingly 
individuals are relying on assets accumulated in defined 
contribution plans and have less access to a predictable income 
from a defined benefit pension.
    Those areas of the economy without access for workers 
typically tend to be small employers. Two-thirds of the 
employees who work for small employers lack access to a pension 
plan, mostly because the employer feels it is too costly or 
complicated to offer a plan, and yet both large and small 
employers in low-wage industries are also less likely to offer 
a plan.
    The net impact, when we looked at data from the Federal 
Reserve Survey of Consumer Finances, showed us that 45 percent 
of households had neither the head of the household nor the 
spouse of the head of the household having a retirement 
account, and that actually translates into about 38 million 
households that have no dedicated retirement account assets.
    The other thing we found is that ownership of an account 
was very highly correlated with income and assets, and that 
households that owned retirement accounts had twice the level 
of income as households that did not own accounts and had five 
times the level of non-retirement assets as those individuals 
who did not have accounts.
    We also noted that account ownership was highly 
concentrated with regard to income. When you look at the top 
quartile of the income scale, nine out of 10 households had a 
retirement account in their financial package. When you looked 
at the bottom quartile of households by income, three-quarters 
of the households had no retirement account, so there really is 
this polarization in terms of that.
    When we looked at it, particularly in another study with 
regard to race, it was even more stark. Sixty-two percent of 
white workers have access to a retirement plan, 54 percent of 
black Americans and Asian Americans have access, but strikingly 
only 38 percent of Latino individuals have access to a 
retirement plan through their work.
    We also looked at account balances, and what we found there 
was, again, that same starkness. We often hear higher numbers 
because people just look at people who have retirement accounts 
and do not include in those numbers the number of households 
that have nothing saved. What we found there was that the 
median account balance for all households across the country 
between ages 25 and 64 was $3,000. For those within 10 years of 
retirement, it was $12,000.
    When we looked at that as it relates to people's income, 
because ultimately the purpose of a retirement plan is to 
replace your paycheck when you retire--and interestingly, we 
recently did some survey work, and people rated a paycheck, a 
monthly paycheck, equally important with the concept of 
portability in a pension plan. When we looked at retirement 
assets, eight out of 10 households across the whole age 
spectrum had less than 1 times their current salary put aside 
in retirement accounts.
    That is fine for people at the lowest level where they are 
probably on track, but when you get to individuals who are, 
again, between 55 and 64, what we found there was six out of 10 
households had less than 1 times their salary put aside in 
retirement accounts. Another three of 10 had somewhere between 
1 and 3 times their salary, and less than one out of 10 
households had 4 times their salary or more, and at that age 
they really should have 5 times their salary, according to some 
financial sources.
    What we need to do, in our mind, or things that we should 
be looking at, are strengthening Social Security, as has been 
said, expanding access to low-cost and quality plans, such as 
the myRA, and I think we are seeing some action in a number of 
States where they are looking at what might be done.
    Maryland is one State that has been looking at this, 
Senator Cardin and others, and also, I think there are other 
bills that are targeted at expanding access. And you are 
absolutely right, the Saver's Credit is a very valuable tool. 
Six million workers today are getting a benefit. The benefit is 
extremely modest. It is less than $170, on average. I think 
there is some room to make that more attractive, more 
appealing, and make it a real viable option and a way to get 
people to save.
    Senator Brown. Thank you for your insight, Ms. Oakley.
    [The prepared statement of Ms. Oakley appears in the 
appendix.]
    Senator Brown. Mr. Utkus, thank you for joining us.

STATEMENT OF STEPHEN P. UTKUS, PRINCIPAL AND DIRECTOR, VANGUARD 
          CENTER FOR RETIREMENT RESEARCH, MALVERN, PA

    Mr. Utkus. Thank you very much, Chairman Brown, Senator 
Isakson, and Senator Cardin. Thanks for the opportunity to 
address you today on this topic of low-income workers and 
retirement.
    At Vanguard, we manage over $2 trillion on behalf of tens 
of millions of investors, Americans, most of whom are saving 
those assets for retirement. Our mission at Vanguard is to take 
a stand for all investors, to treat them fairly, and to give 
them the best chance for investment success.
    We are particularly known for our efforts to drive down the 
cost of investing. All other things being equal, lowering the 
cost of investing is one of the critical levers that 
individuals and institutions do have to improve retirement 
outcomes. So we applaud the subcommittee's attention to this 
issue today. Having a low lifetime income is one of the 
important risk factors for lack of preparation for retirement.
    Now as we consider this issue, I think it is particularly 
important to think about low-income workers in two categories. 
First, there are those who will remain at the lowest economic 
rungs for their working career. For these workers, Social 
Security does remain the bedrock of financial security. One 
critical way, of course, to strengthen retirement security for 
these workers is to ensure that Social Security is placed on a 
fiscally sustainable footing in the long run.
    Now, in addition, many Social Security reform proposals in 
recent years, while trimming benefits for the better-off, have 
expanded benefits for low-income workers and their surviving 
spouses. So Social Security is a particularly targeted and 
efficient way to help those with low lifetime incomes, and it 
also recognizes that many of these households lack the 
discretionary income to generate private savings.
    There is also a second group of low-income workers to 
consider: those who have low income today but who have rising 
income prospects in the future. For these workers, as their 
incomes grow, Social Security benefits will represent a smaller 
fraction of their retirement resources, and they will need more 
in private savings.
    Now, several developments in the private defined 
contribution system have emerged to improve retirement 
outcomes. As we have discussed already, one is automatic 
enrollment. Today, the majority of new hires into the private 
sector DC plan system are automatically enrolled, and automatic 
enrollment substantially increases plan participation among 
groups we have talked about: low-income workers, young workers, 
and among minorities.
    Now, a second important development has been the growing 
use of automatic investment solutions or programs. Defined 
contribution programs in the past have been criticized because 
they place the burden of investment decision-making on often 
unsophisticated workers. However, the landscape has changed 
considerably, so much so that we at Vanguard estimate that, 
within 5 years, the majority of American participants will be 
leaving investment 
decision-making in their retirement accounts to professionals 
chosen by their employers. This is particularly due to the 
expanded use of target-date funds, though not exclusively. So 
in effect, the pendulum has swung, and fewer workers are being 
asked to undertake the complex portfolio construction decisions 
that did occur within the retirement accounts.
    A third development I would highlight is the increased 
price competition that has been fostered by plan sponsor fee 
disclosure regulations from the Department of Labor. At 
Vanguard, we strongly believe that costs, as I said, are the 
important third lever for influencing retirement outcomes. As a 
result of these new Department of Labor rules, combined with 
intensive market competition, retirement plan costs are 
declining.
    Just as one illustration of this point, we now estimate 
that nearly 45 percent of target-date assets in defined 
contribution plans are passively invested, or index-invested, 
for lowest possible cost. Now part of this is, admittedly, what 
we call a Vanguard effect. By our estimate, we are now the 
leading provider of target-date funds and defined contribution 
plans. But it is also due to our competitors, who offer index 
offerings and, above all, to employers' attention to the issue 
of costs.
    I would like to conclude my comments today by making a 
broader statement about retirement security in the U.S. Now, 
some have suggested a sort of glass half full/glass half empty 
view of retirement security based on a wide number of published 
studies, yet there are other studies suggesting that 70 to 75 
percent of Americans may be prepared for retirement.
    Now, because of these different findings, there is 
actually, as you can see, a robust disagreement over a very 
basic policy question: is there a retirement crisis in America 
or not? As you consider this debate, I would recommend thinking 
of retirement security using a 3-part model.
    First, there is a group of Americans who are clearly on 
track, accounting for half or more of the population. For this 
group, maintaining current programs and incentives makes sense.
    There is also clearly a group of at-risk Americans, no 
doubt about that, often including many with low lifetime 
incomes. Strengthening Social Security is a critical policy 
lever.
    And then finally, there is this third group about which we 
disagree, an intermediate group. I call them the partially 
prepared, they who have taken the first steps but need to do 
more, either by saving more or working longer. Many of the 
automatic programs that I discussed today are designed to help 
improve outcomes among this particular group.
    Thank you for your attention this morning.
    Senator Brown. Well said, thank you.
    [The prepared statement of Mr. Utkus appears in the 
appendix.]
    Senator Brown. Ms. Miller, welcome back. Thank you for 
joining us.

   STATEMENT OF JUDY A. MILLER, MSPA, FSA, MAAA, DIRECTOR OF 
 RETIREMENT POLICY, AMERICAN SOCIETY OF PENSION PROFESSIONALS 
AND ACTUARIES (ASPPA), AND EXECUTIVE DIRECTOR, ASPPA COLLEGE OF 
                PENSION ACTUARIES, ARLINGTON, VA

    Ms. Miller. Thank you. Thank you, Chairman Brown and 
Senator Isakson, for the opportunity to talk with you about 
retirement savings for low-income workers.
    Our retirement system today is working for tens of millions 
of Americans, many of whom are low-income. The system is not 
perfect, though, and more needs to be done to build on the 
success of this system and make workplace retirement savings 
available to more of those who currently do not have access, 
whether that is 20 percent or 40 percent.
    There are a number of existing legislative proposals that 
would expand coverage while preserving existing plans. For 
example, the Starter 401(k) proposal in the Hatch SAFE Act * 
would be a big step in the right direction, as would a number 
of other proposals in that bill that would simplify the 
operation of current plans, encouraging small business owners 
to keep current plans and to establish new ones.
---------------------------------------------------------------------------
    * The Secure Annuities for Employee (SAFE) Retirement Act of 2013.
---------------------------------------------------------------------------
    ASPPA also supports auto-IRA proposals that would expand 
access to workplace savings and, like Starter 401(k), encourage 
employers to later step up to a more robust arrangement. Of 
course, there are proposals which will do the exact opposite, 
like proposals to slash contribution limits or turn the current 
year's exclusion into a credit. These proposals would 
discourage employers, especially small business owners, from 
setting up or continuing to operate a retirement program.
    Why do these proposals exist? I think they buy into what I 
have called myths that distort an honest retirement policy 
discussion. In September of 2011, I testified before the full 
committee about these myths. I now think ``myth'' might be too 
mild a word because it sounds benign, and I do think these are 
potentially dangerous, but I will still call them myths anyway 
for lack of a better term.
    The first myth is that less than half of workers have 
access to retirement savings at work. Now, this is dangerous, 
because it gives the impression current incentives that have 
been targeted at substantially full-time workers have failed, 
when in fact the opposite is true. Bureau of Labor Statistics 
data shows 78 percent of full-time workers have access to a 
workplace plan, with 84 percent participating.
    The second myth is that only rich people save in 401(k)s. 
Now, this is absolutely false. In fact, 80 percent of 401(k) 
plan participants are middle-income Americans from households 
making less than $100,000, and 43 percent of those households 
make less than $50,000 a year.
    The third myth is that the current tax incentive is upside-
down. Now, this reflects a failure to understand that the 
incentives for workplace retirement plans are different than 
just about any other tax incentive in the code. First, it is a 
deferral, not a permanent exclusion, so every dollar excluded 
from income now will be included in a future year. But even if 
you just look at current-year benefits, this incentive is 
different. It is different because employer retirement plans 
are subject to non-discrimination rules that make sure 
contributions do not discriminate in favor of the highly paid.
    The result is, the current tax incentive for employer-
sponsored defined contribution plans is actually more 
progressive than the current income tax system. Taxpayers 
making less than $50,000 pay only 9 percent of Federal income 
taxes, but they get 28 percent of the tax incentives for 
defined contribution plans. By contrast, households making more 
than $200,000 pay 48 percent of income tax, but only receive 17 
percent of retirement plan tax incentives.
    Compare this to capital gains. Nearly 90 percent of the 
capital gains tax benefit goes to those earning over $200,000, 
and about 1 percent goes to those earning under $50,000. Now, 
that is upside-down. A retirement tax incentive that provides 
28 percent of the tax benefit to those paying 9 percent of 
taxes, I think, is actually very right-side up.
    Another myth is that small businesses will sponsor 
retirement plans without an appropriate tax incentive. I 
personally spent over 20 years talking to small business owners 
about why they should set up or keep operating their plan, and 
with very rare exceptions the tax incentive was a very key 
factor, and in most cases really the factor, that supported the 
decision to put in the plan.
    Now, small business owners are really wonderful people with 
very, very rare exceptions, and it is not that they do not want 
to help their employees save for retirement. It is just that 
most small business owners do not have much cash. You need the 
cash savings generated from the tax incentive to help make 
contributions that are required by the non-discrimination 
rules.
    So it is a trade-off there, and reducing the incentive 
literally would have reduced available cash and allowed them to 
do less. So, there is no doubt in my mind that a reduced 
incentive is going to reduce coverage or lower contributions 
for those plans that are left over.
    The last myth is that it does not matter if employers 
terminate their plans because of reduced incentive because, if 
we re-engineer the incentive, make it a refundable credit, it 
will lead more employees to save on their own. The fact is, as 
Mark said earlier, 70 percent of workers in the $30,000 to 
$50,000 range will participate in an employer-sponsored plan, 
but less than 5 percent will save on their own in an IRA when 
there is no plan at work.
    So, changing the exclusion to a credit would have to 
inspire 15 times more people to go out and take action on their 
own to make up less ground, and that is not considering what is 
so often forgotten in this discussion: the employer 
contributions that are going into these people's accounts, 
which do not show up when you are analyzing strictly the tax 
benefit. If they have no tax liability, they have no supposed 
tax benefit, but they are getting an employer contribution.
    In summary, the key to promoting retirement security is 
expanded workplace savings. Proposals like Starter 401(k) and 
auto-IRA would expand access by building on the successes of 
the current system. Some other modest changes could also be 
made to make it easier for employers, particularly small 
businesses, to sponsor retirement plans. I think that these 
small changes would make a huge difference.
    Again, thank you for inviting me. I would be pleased to 
discuss these issues further.
    Senator Brown. Thank you very much, Ms. Miller, for your 
insight.
    [The prepared statement of Ms. Miller appears in the 
appendix.]
    Senator Brown. Senator Isakson is going to have to leave, 
so he is going to do the first question, or questions, if you 
need to.
    Senator Isakson. Just a couple of short ones. Thank you 
very much for your courtesy, Mr. Chairman.
    Mr. Iwry, let me ask you a question. Mr. Utkus made the 
statement that the cost of retirement accounts or the cost of 
setting up savings for retirement was somewhat of a deterrent--
I think that was the comment that you made--or had an effect on 
people saving for their retirement. Does the myRA program have 
costs associated with it that the saver would have to pay for 
custodial fees or administrative fees?
    Mr. Iwry. Senator, the myRA program is designed so that 
there would be no fees or costs that the saver would have to 
pay. It is a very simple arrangement. The saver would be able 
to contribute as modest an amount as they would like, down to 
as little as $5 each time, and have no fees involved in this 
account.
    Senator Isakson. And I suppose, like a regular IRA, the 
benefit would ultimately be taxable when they withdrew it, is 
that correct?
    Mr. Iwry. Senator Isakson, it is like a regular Roth IRA.
    Senator Isakson. All right.
    Mr. Iwry. You are correct. In fact, the bond would be held 
in a Roth IRA that could then roll over to the private sector, 
would indeed roll over to the private-sector Roth IRAs.
    Senator Isakson. Ms. Miller, I had a question pop up in my 
mind when you were talking about small business people. I was a 
small business person in my other life, and many small 
businesses do not have employees--they have independent 
contractors.
    One of the tests on independent contractors to qualify for 
that status is, you cannot offer a benefit program like a 
retirement plan. Would it be of interest to pursue IRS 
rethinking their position in terms of the independent 
contractor test so that small business people would be 
encouraged to offer plans for their employees to save for their 
retirement?
    Ms. Miller. I am not that familiar with the independent 
contractor rules, but, if what you say is true, then that 
certainly should be considered, yes.
    Senator Isakson. It was not a trap, I promise.
    Ms. Miller. No, I know. I know.
    Senator Isakson. It just popped into my mind.
    Ms. Miller. I did not mean to say ``if what you say is 
true.'' I should not have said that.
    Senator Isakson. No, no.
    Ms. Miller. But, no. If that is the case, then yes, they 
should.
    Senator Isakson. Senators are always subject to being 
questioned. Do not worry about it. [Laughter.]
    And one last question. Are you familiar with the proposal 
Ms. Solis made on the fiduciary rule when she was Secretary of 
Labor?
    Ms. Miller. Generally, yes.
    Senator Isakson. And I understand that that is surfacing 
again under Secretary Perez.
    Ms. Miller. Yes.
    Senator Isakson. Would you have any comments on what would 
happen if we changed the fiduciary rule as they tried to do it?
    Ms. Miller. We are very concerned about that, particularly 
in the small business context. We think that some significant 
changes have to be made to the re-proposed rule or else it will 
be a disaster.
    Senator Isakson. I think if we prohibit investment advice 
for savers, we are going to have even fewer savers than we had 
before, right?
    Ms. Miller. I believe that is true, yes.
    Senator Isakson. Thank you very much for your courtesy, Mr. 
Chairman.
    Senator Brown. Thank you. Thank you, Senator Isakson.
    Thank you all for your testimony, and those are all good 
insights. I appreciate that.
    I want to start with Ms. Oakley. We are starting to see 
some kind of cross-currents in the discussion, from what some 
might call retirement crisis deniers who think that there is 
some claim that the retirement crisis is based on a pretty 
fairly selective reading of data.
    I would like you to walk us through the data. What are the 
key numbers we should be paying attention to? Why do experts 
interpret the status so differently?
    Ms. Oakley. You know, there are a lot of different sources 
of data. The source, for example, that we used is the Survey of 
Consumer Finances, which is a comprehensive analysis done once 
every 3 years by the Federal Reserve. That is based on a 
survey.
    A number of other survey instruments exist, such as the 
consumer population survey done by the Bureau of Labor 
Statistics, BLS, and others. There are other, various surveys. 
There is also some data that becomes available via tax 
information as well, and there are different cuts of that.
    Now, each one of those has pluses and minuses. Some of the 
tax data might be missing. As you know, there are a large 
number of households where their income is so low that they do 
not pay taxes.
    But one of the things is, if you look at the survey data, 
even though people may understate the values of their accounts, 
there still are pretty consistent responses across a various 
range of survey data that lead you to understand that the data 
is fairly accurate, or as accurate as we have in terms of a 
picture. The triennial update from the Consumer Finance Study 
is only done once every 3 years, so the data we have is based 
on 2010.
    The 2013 data in the survey just finished being out in the 
field, and that data will probably be released by the Fed 
sometime later this year. So, there are a lot of different 
sources. But if you just look at people, just saying the amount 
in an account, that is very helpful for people who have 
accounts. But one of the real data pieces that is missing is 
this large group of Americans who have nothing saved.
    If we are concerned about low-income individuals, those are 
really those same individuals in many cases, and so you have to 
get to databases that are broader than just looking at account 
balances and mutual fund accounts.
    Mr. Utkus. Senator, could I add something to that?
    Senator Brown. Yes. Certainly, Mr. Utkus. Then the next 
question is for you. But go ahead.
    Mr. Utkus. So I was going to say, though, that there is 
actually a quite varied set of studies about the sort of extent 
of the vulnerable population. So I think there is a general 
agreement that there is a vulnerable population in the United 
States. The question is its size and the degree of 
vulnerability.
    So I would encourage you--in my formal testimony, I did 
actually cite some of the papers from Rand, University of 
Michigan, the Federal Reserve, Williams College, and others, 
where independent economists have arrived at sort of different 
estimates of what constitutes a vulnerable population.
    So there is a robust debate, like there is about the 
weather in Washington, I guess, about these long-term 
forecasts, and they range in this area from half of households 
to three-quarters of households being prepared. So I think 
there is an actual debate about that.
    Senator Brown. Each of you, if you would--and thank you for 
the lead-in to that. I mean, fundamentally we know a few 
things. We know, first of all, the fundamental question, the 
challenge for all of us as we work on pension and retirement 
issues, is how do you build retirement security for whatever 
the number is of people who have inadequate retirement savings. 
I mean, it is fundamentally a problem of wages and all that 
comes with that.
    But give me your read, each of you, and start if you would, 
Mr. Iwry, on how do you gauge retirement adequacy? I mean, how 
do we define that in your mind as people sort of strive for 
enough security to have a decent kind of lifestyle after their 
retirement? How do we define that to start with? And I will ask 
each of you that.
    Mr. Iwry. Mr. Chairman, it is a matter, I think, of looking 
at the financial risks that individuals face after their 
working years or after their full-time work starts to phase 
down, how they can protect themselves against the risk of not 
having enough assets to maintain a reasonable standard of 
living for the rest of their life as a supplement to the 
bedrock Social Security guarantee.
    There is the longevity risk that is so hard for individuals 
to estimate. There is the financial risk of losses in their 
assets; there is inflation risk. People need to think of their 
retirement preparedness in terms of probabilities, not just a 
flat amount that they need to save and have as a nest egg when 
they start into retirement.
    Circumstances differ. The income replacement, the degree to 
which one needs to maintain a standard of living that they had 
while they were working, is the way to start defining it, what 
income do you need for your life, and then look back into 
present values and strategies for achieving that. We have been 
trying to help people--and I think many of my co-panelists have 
been very much involved in this--to think about that question 
on an individual household basis.
    The Department of Labor has put out guidance to ask 401(k) 
plans to state the amount someone has accumulated as an income 
flow in retirement, not just as a lump sum. We know that the 
lump sum characterization or the account balance is something 
that most folks find difficult to translate into a pension 
paycheck. How much of my monthly income can I supplement?
    Senator Brown. And the amount suggests more security to 
many people than it really is.
    Mr. Iwry. Of course, yes. And, Mr. Chairman, just to wrap 
up, I would encourage all of us--and I know you are very much 
focused on this too--to keep our eyes on the prize here. We 
know the data are important, the debates over how to view the 
data are important, but the most important thing is what we are 
doing about the problem.
    Proposals such as the President's automatic IRA proposal 
provide a breakthrough in coverage. Initiatives like the myRA--
and I am proud to be a part of the team that developed it at 
Treasury under Secretary Lew, and under the President--will do 
what we can without legislation to get more people saving, more 
people covered. I think we can all agree very much on the 
direction in which we need to move and on the serious need to 
take action in that direction.
    Senator Brown. Thank you.
    Ms. Oakley, how do you gauge retirement adequacy? You 
talked about 4 times, 5 times income upon retirement in 
savings, 4 to 5 times of income in savings. Give me as precise 
a definition as you can.
    Ms. Oakley. Well, let me start with a little story, 
Senator, if I could, just to give you some sense of how 
complicated this is. I was giving a speech, and I went and 
Googled, ``how much do I need to retire,'' and in 37 seconds I 
got 3.8 million answers coming up on Google in my search. So it 
is not an easy question to answer, and everybody has a 
different answer to it.
    But there seems to be a growing consensus. There has been 
this thing of, do you need 70 percent, do you need 80 percent 
to replace your income to maintain your standard of living? You 
could also look at, what do you need for bare expenses? There 
has actually been a study done. What does someone need, bare 
living expenses? My eyes popped open when I looked at it.
    They would say a household, a couple, needs about $20,000 a 
year for basic living expenses. But that might mean rent of 
only $500. I live in the DC area, and I am trying to think of 
where I could get an apartment for $500. So I think there are 
different levels of that for each household.
    If we also care in this country about our economy, one of 
the things we know is that retirees spend their money, and it 
is a really powerful part of our economy. It generates a 
trillion dollars of economic output in the GDP.
    So, if we have a large generation of individuals who have 
to cut their standard of living dramatically because they do 
not have the resources, what I will also say is, we found 
interesting studies that were done by Fidelity and another 
group called Aon Hewitt, done with the University of Georgia, 
where they looked at and tried to simplify this for Americans 
so that they could say, well, when you are 50 years old, you 
need 5 times your salary put away for retirement.
    The Fidelity numbers came up, when you are 67, you need 8 
times your salary. That is in addition to Social Security. When 
we look at the numbers where most of the households are in our 
work from the Federal Reserve data, we are so far beyond that. 
We have nine out of 10 households that are not on those sort of 
graded benchmarks that Fidelity has put out there. So I think 
we do have people who are falling behind. Some people can make 
up the difference, but we also have a lot of people who just 
are not in the game, and getting them in the game and what has 
been proposed with the myRA, I think, will make some 
differences.
    Senator Brown. Mr. Utkus?
    Mr. Utkus. So again, maybe I will answer this slightly 
differently. I think Ms. Oakley pointed out properly that there 
are various measures of adequacy. I think from a policy point 
of view, there are measures of, is it about creating minimum 
standards or optimal replacement rates for households? Those 
are the questions in front of the committee.
    But I come back to this model of, we have three really 
distinct audiences. We have a group of audiences who appear to 
be well-prepared. It is half of Americans, possibly more. Then 
there is a group of Americans who have very low lifetime 
income, for whom, by the way, additional discretionary savings 
is not an appropriate policy lever. You have to figure out 
where to draw the line of where that threshold is where Social 
Security will be the principal and sole retirement income 
support.
    And then really the debate is, what is the extent of the 
problem we are trying to solve for this remaining quarter of 
Americans who earn higher than the sort of lowest possible 
income group, yet on the other hand are not doing enough with 
the available tools? I think that sort of crystallizes the 
question in front of policymakers. There are three very 
different audiences.
    Senator Brown. Thank you.
    Ms. Miller, let me phrase it a bit differently with you----
    Ms. Miller. Sure.
    Senator Brown [continuing]. Partly because you have said 
some things that the others seem not to agree with in some 
cases. The Census Bureau's Survey of Income and Program 
Participation--slightly different numbers from yours but not 
significantly different, maybe--indicate 70 percent of workers 
had access to a retirement plan, and 80 percent of those with 
access made contributions. That would mean 56 percent of 
workers--if 70  80 equals 56, which I think it does 
[laughter]--participate in a retirement plan, understanding 
that participation does not necessarily suggest adequate 
dollars, obviously.
    Ms. Miller. Absolutely.
    Senator Brown. So how much money do workers need so they 
are ready? I mean, how many near-retirees are on track to be 
ready for retirement? Your thoughts on that--how many are 
there?
    Ms. Miller. I have to build on what everybody is saying, 
which is, it is unfortunately not a simple answer. I would add 
one other, what I think is an incredibly important piece to 
this puzzle, which is: what happens with Medicare, and what 
have we done to help people with things like nursing home 
expenses or medical assisted living? Because one of the 
differences with some of these models is what they assume about 
medical expenses in retirement, and how that is going to 
interact.
    So you have to assume status quo and kind of go from there, 
and I think that what makes for a secure retirement is 
absolutely individual. In my hometown of Greensburg, PA, I 
think you can get by on a pretty modest amount of income, 
whereas, if one were to stay here, it is very different. Many 
of us who live here--myself included--in order to retire 
comfortably, intend to sell our home and move to a place where 
we can buy one a lot less expensively and have something else 
to add to it.
    So when we are looking at--and I am not trying to avoid the 
question, it is just that I think that we have to look at the 
bare expenses as an absolute minimum. I think, as others have 
said, for people who are at an income level where they do not 
have discretionary income to build up a substantial retirement, 
Social Security is obviously where that is largely going to 
come from.
    Then having some discretionary funds available for unusual 
expenses, whether it is a car repair or some other kind of lump 
sum need, I think is important. Like many of us, I think of 
this in very personal terms. It has been 20 years since my 
mother retired, but when she did, she basically was able to 
live on Social Security in Greensburg, and she had her IRA and 
she did cash out her DB plan, in spite of whatever advice.
    Senator Brown. In spite of her expert daughter's advice.
    Ms. Miller. But her monthly income was fine for that 
environment. Having that pot of money to use to occasionally 
get a new car or occasionally to go out to dinner with her 
friends made her pretty comfortable. Well, I would not want to 
live like that. My measurement is a different measurement.
    So, unfortunately, I am not giving you a good answer, 
because there really just is no easy answer to this, and it 
really depends on where you live, what your medical needs are, 
what other assets you have to deal with that.
    Senator Brown. And it is interesting that--well, let me go 
somewhere else here. You were the first person, I think, on the 
panel to mention housing. I think Ms. Oakley mentioned the cost 
of an apartment.
    Ms. Miller. Yes.
    Senator Brown. But the whole issue of equity in a home. If 
your mother was like many of her generation in small towns, she 
maybe had her home paid off by then.
    Ms. Miller. She had an apartment.
    Senator Brown. She had an apartment?
    Ms. Miller. Yes.
    Senator Brown. All right. But what do we include? I said to 
Senator Isakson before he left that one of the tragedies of 
this whole discussion is that the equity people had in their 
homes 5 years ago or 10 years ago has largely evaporated, or 
worse.
    Ms. Miller. Exactly.
    Senator Brown. Does it make sense to include home equity in 
measurements of retirement preparedness, do you think, Ms. 
Oakley?
    Ms. Oakley. No. I think your home equity or even your cost 
of housing is just another important piece. A lot of retirees--
we are seeing more and more people go into retirement with 
mortgages. In my organization, we are just in the midst of 
really preparing for another study to be released.
    On a preliminary basis, we are looking at the cost of 
housing for seniors, and we are finding that, compared to 
before the recession, when there were about 14 States where 30 
percent of retirees were at the level of having more than 30 
percent of their income being paid towards housing costs, we 
are now at double that amount in terms of States where there is 
a large majority of individuals having more and more of their 
total income going toward housing costs.
    So housing costs are important. I think the housing value 
is something you have to look at as well. A lot of people do 
not want to sell their house that they have grown up in and 
lived in, even though they have equity in it.
    I think if you want to talk about stories of my mother, 
when my mother went into the nursing home, I found this yellow 
sheet on which she was calculating how much money she could 
spend each year--or how little money she could spend each 
year--so that she could stay in her house before she would have 
to sell her home. I mean, that is the type of debate that is 
going on around kitchen tables all over America.
    Mr. Utkus. Just on the housing issue, you have to, in any 
calculation of retirement adequacy, include it because, if you 
live in your home--let us say you live in a home in an 
expensive area--that is $1,000 worth, if you will, of rental 
income you do not have to pay a month. That is $12,000 a year.
    Senator Brown. That is your Social Security check for many 
people.
    Mr. Utkus. So if you take out, of course, the cost of 
maintenance and utilities and so forth, still, the whole point 
is, economists are pretty clear that at least part of that is a 
substantial resource. It is rental costs avoided. That is why, 
for example, some of these numbers that we talk about on 
retirement adequacy always do look better. So I think that is 
the important issue on housing.
    Senator Brown. Mr. Utkus, what are these reverse mortgages 
that Senator Thompson and others hawk on TV to this question, 
without judging what he is doing?
    Mr. Utkus. Well, Senator, I have to plead relative 
ignorance about the reverse mortgage market. What we do know 
about home equity in retirement is this--we know two things: 
(1) it is used first and foremost as a way to save on the cost 
of living while in the early phases of retirement, and (2) we 
know from economics research that it is used at the time of 
either the death of a spouse or your own illness for paying 
costs for nursing home care. As you know, before you qualify 
for Medicaid for nursing home care, you want to deplete assets 
and use those private resources to pay for private nursing 
care.
    So it does seem that a house is a really interesting 
resource in the first sense, in that it helps you save on 
rental costs while you are sort of in the active stage of 
retirement, but later in life it is a critical resource used to 
pay for private nursing home care before Medicaid kicks in.
    Senator Brown. All right. I think this is probably for you, 
Ms. Oakley and Mr. Utkus, but any of the four of you can 
respond to it. You talked about the distributions in private 
retirement accounts. Andrew Biggs, who testified here on 
another couple of retirement issues a while ago, and Sylvester 
Schieber write that seniors are doing better than we think 
because Census data does not include lump sum distributions to 
IRAs and 401(k) accounts.
    The question is not whether these distributions exist, 
obviously, or their size. We know they exist. We are talking 
about a great deal of retirement wealth. You know a lot about 
that, Mr. Utkus, at Vanguard, as your competitors do. Talk to 
me if you could about who is receiving the distribution from 
these private retirement accounts. I mean, obviously people who 
made more money have more in their accounts, but give me some 
information about, who is the beneficiary of these 
distributions? Ms. Oakley, you want to start?
    Ms. Oakley. We do not have data on that, but we actually 
did a study looking at the income sources of seniors in 
retirement. Again, looking at the data, not so much the survey, 
what we generally found was that the data with regard to 
distributions coming from 401(k) accounts was negligible in 
terms of an impact in keeping people out of poverty.
    But we did notice, in contrast to that, that for 
individuals who were receiving distributions, predictable DB 
plan payments, monthly checks in retirement, we found that 
there was a real important role that those accounts were 
playing, such that someone who had a defined benefit plan 
payment was 9 times less likely to fall into poverty than 
someone who did not have a defined benefit type of payment. So 
we think the idea of making sure that there is some type of 
lifetime payment does have a really big difference in terms of 
senior poverty levels and maintaining----
    Senator Brown. Well, we kind of know that. But the question 
is not, is it desirable, because they are disappearing----
    Ms. Oakley. Right. But we found that the defined 
contribution plans, really, right now on the data that is out 
there, just do not show up as a significant force.
    Senator Brown. Mr. Iwry, do you want to speak on that?
    Mr. Iwry. Mr. Chairman, I would add to what Diane Oakley 
has said. I think you are focusing on a key issue. The nature 
of the distribution matters. When there is guaranteed lifetime 
income, such as the Social Security program provides, such as 
defined benefit pensions have traditionally provided but 
increasingly less so, such as even 401(k)s and IRAs can 
provide, we make it much easier for the individual to make sure 
they do not run out of savings during their retirement.
    It is easier for the individual to manage their assets and 
figure out how much they can prudently spend consistent with 
retirement security. Treasury and the Labor Department have 
been working for the past several years to emphasize the 
importance of keeping the pension, the regular monthly payment 
for life, in our private pension system.
    We have been issuing guidance designed to encourage 
individuals to consider seriously these lifetime income 
options, to encourage plan sponsors to consider seriously 
putting lifetime income into their plans or making them a more 
salient choice for the individuals in those plans, whether they 
are 401(k)s, IRAs, or defined benefit pensions, which so often 
pay lump sums instead of lifetime income.
    Senator Brown. Mr. Utkus?
    Mr. Utkus. I was going to add--if I could use Judy's mother 
as an example--so when Judy's mother went to her IRA and used 
money from her IRA to support her standard of living in 
retirement, economists doing the work in Census decided that 
that was not income because it was an aperiodic or an ad hoc 
withdrawal. So if I, for example----
    Senator Brown. It would have been income if she had 
annuitized it.
    Ms. Miller. Right.
    Mr. Utkus. Or if she had set it up as a monthly withdrawal 
plan. But because she took the money and spent it--so for 
example, if I take money from an IRA or a 401(k) plan on the 
advice of a financial planner once a year and put it in my 
checking account and use it for income, that does not count as 
income from my IRA because I took it once and it was not 
scheduled. So there is just an empirical problem that----
    Senator Brown. But either way, the distribution is going to 
a relatively small number of people, and the tax code incents 
any of us who can to take advantage of that, and people who set 
up----
    Mr. Utkus. Well, this gets back to your earlier question, I 
think, which is that today, among older households, about half 
of households have what you would call tax-deferred retirement 
accounts. The benefits of those accounts obviously accrue to 
those households. As I think Diane pointed out, the median 
balance of those owning those accounts today at retirement age 
is $100,000, but the median balance of those, of course, not 
owning accounts is zero. So I think you have to think about two 
different elements of this. One is that the median balance of 
people who have these savings vehicles is $100,000----
    Senator Brown. And that $100,000, the group you are talking 
about is all ages or those above 55?
    Mr. Utkus. I was talking about pre-retirees.
    Senator Brown. Any period--so a 40-year-old with $60,000 is 
part of that average of a 60-year-old with $120,000, correct?
    Mr. Utkus. No, no. I was just saying for people, say pre-
retirement age, say 60 to 65----
    Senator Brown. Oh, 60 to 65, it is $100,000.
    Mr. Utkus. It is actually about the same number----
    Senator Brown. So, even if the universe is only those who 
have savings, retirement savings, excluding those who have 
zero, that number is inadequate, clearly, depending on if they 
have a defined pension benefit and all that, obviously.
    Let me ask you the question this way. Is the reason that 
baby boomers--well, first of all, I assume that baby boomers 
are less prepared for their retirement than those who have more 
recently retired, are slightly older, correct?
    Is the reason for that incomes, or is the reason for that 
the decline of savings, or is the reason for that decline of 
defined pension benefits? Or is it all three, the reason that 
baby boomers are less prepared for retirement than those who 
have retired in the last 10 years?
    Are we as baby boomers--which I think the four of you and I 
are; I do not want to judge the age of anybody, but I think 
so--less prepared because we have fewer defined pension 
benefits, or we save less, or our incomes have stagnated, or is 
it all three? Do you want to answer that, Ms. Oakley?
    Ms. Oakley. It is really a combination of all three. We 
have looked again at the data from the Federal Reserve about 
who has a DB plan. So the baby boomers, the early baby 
boomers--because they go over, like, 20 years, the baby 
boomers----
    Senator Brown. Right.
    Ms. Oakley. So the people between 55 and 64, about 60 
percent of those households have someone, either the spouse or 
the household head, who has a defined benefit plan either on 
its own or as part of their retirement account mix. When you 
look at the second----
    Senator Brown. That could be a 401(k) with annuitized 
planned payment payout.
    Ms. Oakley. It could be an IRA or something like that. 
Right. If you look at the younger level of the baby boomers, 
those people between 45 and 54, the level drops precipitously 
so that now the majority of people are really going to rely 
only on a defined 
contribution-type of an account in retirement at that level. So 
there is a difference among the baby boomers themselves, 
besides what has happened in the past. Then when you start to 
look at those account values again, people in or out of----
    Senator Brown. So let me interrupt. So the baby boomers 
born in the 1940s are better off, taking into account age, than 
baby boomers born in 1958 or 1959?
    Ms. Oakley. Yes.
    Mr. Utkus. I do not know that that is the case.
    Ms. Oakley. Well, they have----
    Senator Brown. They have a higher percentage of defined 
benefit, DB, plans.
    Ms. Oakley. They will have a higher percentage of those 
households having some type of defined benefit income.
    Mr. Utkus. I just want to be clear, though. So there is the 
median American versus people in defined benefit plans. It is a 
very different group. We know that defined benefit plans were 
typically held by affluent, long-tenured men, college-educated, 
in major corporations in the United States. Those are where the 
most generous benefits accrued. That was not the typical 
American.
    I think the estimate is that boomers' resources, in terms 
of Social Security, Medicare, Medicaid, 401(k)s, DB plans that 
are still in existence, and so forth, the resources that they 
command compared to their parents, will purchase more in 
income, and they will have an absolutely higher standard of 
living.
    But because baby boomers were richer than their parents in 
terms of income and did not save as much, whether through DB 
plans or through 401(k)s or through personal savings, they in 
fact will have somewhat lower replacement rates.
    So I think it is very clear in the data that boomers will 
be richer than their parents but relatively less well-off on a 
replacement basis. You just have to look at the real value 
going from Social Security to Medicare, but it would be 
substantially greater to the boomer generation.
    Ms. Miller. I would like to add that one of the things that 
happened with boomers is, those who did have a defined benefit 
plan and had it frozen and then had their 401(k) plan that they 
probably had not had for their whole working lifetime, lost 
accruals in DB plans when they were most valuable--because the 
accruals are worth more as you get older--and instead are 
saving in their 401(k) plan when there is less time for it to 
accrue.
    I know that Steve has said--and I wish I had it in front of 
me, but I do not--EBRI has done some work that I think shows 
boomers as being probably not the group as a whole that we 
should be most worried about; rather, it is a little further 
down the line.
    Ms. Oakley. Although there are some other studies from the 
Urban Institute where they looked at those late boomers, the 
second half. Senator, what they found was that, of middle-
income boomers, four out of 10 are at risk of falling into low-
income levels when they retire just because of not having saved 
enough, not having enough time to recover, for example, from 
the last Great Recession and what that did to their levels of 
savings as they get ready to retire.
    Mr. Utkus. And I think that is right. All I observe is 
that, look at older retirees today. The old-age retirement 
income is $30,000 a year, most of which is coming from 2-earner 
Social Security.
    So that is typical, and I think that gets back to this 
question of, who is the focal point? The low-income worker, I 
think, is quite different from the median-income worker, who is 
different from sort of the upper-income worker. That is why 
they get----
    Senator Brown. Let us talk about that. The lowest-income 
worker is--I mean, some significant number of them have a 
negative net worth, some significant number of them, so just by 
definition they cannot save unless they have had some myRA 
exposure opportunities. The second quartile, the second-lowest 
quartile, if you will, has an average net worth of $35,000. For 
that group, there can be some retirement savings. Let me back 
up on the low end.
    The lowest quartile, I mean, a minimum-wage worker, 
particularly if we can raise it to--this is more commentary on 
the low minimum wage in my mind. But if we raise the minimum 
wage to $10, or to $10.10 as the President suggests and our 
legislation does, that is not a lot more income than Social 
Security.
    The average Social Security check in Ohio is $1,300 a 
month. Is that right? Something like that. So that is not a lot 
less than the minimum wage. But put that group aside for a 
minute. The second quartile--what does their retirement picture 
look like, Mr. Utkus? I mean, you have talked about, the lowest 
earners are not going to be able--I mean, we just have not 
addressed their savings. How about the second quartile, second 
to the lowest?
    Mr. Utkus. Well, this is where I definitely agree with Ms. 
Oakley that, as you go up the income level, retirement 
preparation improves. So, when you go into that second quartile 
group, you are going to see some people--you are still going to 
see people at risk, but you are going to see some improvement 
in the number of people who are partially prepared and maybe a 
few who are adequately prepared.
    So I think it does get to the heart of the question of, of 
this group, where private savings is possible, as opposed to 
the lower group, where I think we all agree that if you are 
earning less than--the bottom quartile, I think, is $24,000. I 
looked that up before our discussion today. So, for households 
earning less than $24,000----
    Senator Brown. This is the $24,000 for pre-retirement 
earners?
    Mr. Utkus. Yes. Yes. Or working-age households.
    Senator Brown. Yes.
    Mr. Utkus. Yes. That is sort of the bottom, I think, 
quartile. That is a group that is very unlikely to accumulate 
private savings, and, when they do--I think I had this 
conversation with one of your staff members--when they do, they 
are more likely to apply it to debt reduction, emergency 
savings, even purchase of a home.
    So that is where the savings among the very lowest-income 
households go. When they do in fact save, they are going to do 
it mostly for emergency savings. I think the debate then is 
what to do about this second quartile of income in terms of 
plan offering and plan participation.
    Senator Brown. Thank you.
    What does your company, Mr. Utkus, say about the importance 
of Social Security? You do not obviously make a lot of money 
off the lowest quartile--even the two lowest quartiles, but 
especially the lowest quartile. What do you say about Social 
Security, as a company, about its importance, its changes, 
suggested changes? Have you addressed the issue or taken a 
position on the issue, or should we find a way to increase 
payout to low-income workers, to the lowest-income workers? 
What does Vanguard say, as a company?
    Mr. Utkus. Senator, we actually have not developed a fully 
fledged proposal on Social Security reform. However, what I 
observed in my testimony is that every proposal, from the ones 
that create private accounts to the one that maintains its 
defined benefit character, every proposal that I am aware of 
over the past 15 years always included provisions to increase 
minimum payments for low-income workers and their surviving 
spouses to deal with some of the issues I think Ms. Oakley 
raised.
    So there really is this seemingly unanimous agreement that, 
for the lowest-income households, that is going to be the 
critical policy lever. The current minimum benefit in Social 
Security, which really no one really qualifies for because it 
is so low, is really an ineffective policy instrument. So I 
think that has been the uniform recommendation from all those 
studies.
    Ms. Oakley. Senator, if I could add, when we did some of 
our survey work, one of the questions we asked Americans was, 
what were some of the barriers to using saving for retirement, 
or to you getting a secure retirement? Most of the lower-income 
individuals, people with incomes under $35,000, said their 
salary was one, an important one, but there was also a really 
interesting thing about Social Security.
    We asked about raising the Social Security normal 
retirement age to 67, and there was a big divergence in opinion 
on that between households at an income level of $35,000 and 
below, where 69 percent of them said that that was a major 
challenge to their retirement security. And I think the one 
thing we all know is, when we raise the retirement age--and 
that is one of these proposals often in reforms--that really 
translates into a benefit cut, especially if individuals retire 
earlier. That means they get less income from Social Security.
    So we clearly see at the low-income level a concern about 
that. That is, when we ask the same question of people from 
households with $75,000 of income, it was a concern of only 40 
percent of the individuals who responded to the survey. So I 
think, at the low-
income level, there is a real difference in terms of, what do 
you do and how do you change Social Security?
    Senator Brown. Pope Francis said not too long ago that he 
exhorted his parish priests to go out and smell like the flock. 
When I hear talk of raising the retirement age or raising the 
Medicare eligibility age, I think that all of us who do this 
for a living should be doing what the Pope has suggested and 
actually listening to people in situations like that.
    I will never forget, I was in Youngstown 2, 3 years ago at 
a town hall in a poor area of the city. A woman--this is not a 
Social Security issue but it is a retirement issue more or 
less--said, ``I am 63 years old.'' She was working two jobs. 
She had never made much money. She said, ``I am 63 years old. I 
just have to stay alive another year and a half so I can get 
health insurance, so I can get Medicare.''
    To think that you define your life that way: I have to stay 
alive so I can get health insurance, not stay alive so I can 
raise my grandchildren or do something, I mean that is--when I 
hear talk of retirement age and people like us saying it, 
dressing like this and living like this--anyway.
    Mr. Iwry, talk to me more about the myRA. Whom were you 
thinking of when the myRA was conceived? I mean, talk to me 
about the kind of person you were thinking of and describe that 
person to me.
    Mr. Iwry. Mr. Chairman, we were thinking of the kind of 
person you just referred to. We were thinking of ordinary 
Americans, people who do not have savings now, people 
particularly who do not have the good fortune to be in a 
defined benefit pension or have eligibility for a 401(k) or 
another employer-sponsored plan, people who are moderate- and 
lower-income.
    Those groups, moderate- and lower-income, people not now 
saving, people who could be saving if it was made easy and 
convenient enough for them, those are the target audience. 
Because this program has virtually no minimum investment--$25--
has a $5 minimum contribution, has payroll deduction, has the 
convenient way to help people get past the barriers of having 
to open up their own IRA and decide what type and at which 
institution and how to invest their funds and so forth, it is 
done for them to a very great extent.
    Senator Brown. Well, let me ask it this way. Thank you for 
that. Let me ask it this way. The challenges are many, of 
course. One of them is, people become aware of these things. I 
stopped at a fast food restaurant between Dayton and Cincinnati 
a few months ago, right before the health care roll-out. This 
was September. There was a lull, nobody at the counter at that 
time.
    I walked up to the counter, and I was talking. There were 
five or six workers there, mostly in their 30s, probably late 
20s, 30s. None of them made more than $10 an hour, except maybe 
the supervisor. I asked them if they had health insurance. One 
did because his wife had it--or her husband, I cannot 
remember--so only one had health insurance.
    I asked them about--this was September. I asked them, were 
they looking forward to the Affordable Care Act, or were they 
going to sign up? None of them knew about it. These were not 
17-year-olds, these were people in their late 20s, early 30s. 
None of them knew about the Affordable Care Act, so they had no 
idea how to sign up.
    So my question is this: how are those fast food workers who 
are not--I mean, one reason I want to raise the minimum wage is 
because I do not really buy that every one of those fast food 
workers is going to graduate to a better, and better, and 
better job and make $50,000 a year, $40,000. Many of them are 
not going to do a lot better than they are doing now because of 
the economic situation, because of their education, because of 
their opportunities, whatever it is.
    So what do these workers lives' look like in 20 years? If 
myRA is implemented the way you want, this now 32-year-old fast 
food worker in Dayton, OH, who in 20 years will probably not be 
working there but probably not be in anything approaching a 
middle-class job--mostly high school graduates, probably not 
Sinclair Community College, probably not University of Dayton, 
whatever, but wherever they are going--where do these myRA 
people end up? What do they look like? What do their lives look 
like in 20 years in your concept of this? So, two questions. 
How do you get it so they know about this, and, second, what do 
their lives look like in 20 years?
    Mr. Iwry. Mr. Chairman, for them to----
    Senator Brown. What do their savings lives look like in 20 
years?
    Mr. Iwry. Right. Understood. First of all, how do we get 
them to know about this? The President started out by 
highlighting the need for more retirement security, for more 
retirement saving, especially among ordinary Americans such as 
the people you are describing, in his State of the Union 
address just a few weeks ago.
    This program, myRA, is intended to start them down a path 
where, 20 years from now, they will be saving regularly on 
their own in a private-sector retirement saving arrangement, 
ideally with employer plans. But whether or not they are 
fortunate enough to be covered by an employer plan, something 
that we want to focus on and expand at the same time is, they 
will have been started into the habit of lifelong saving.
    Senator Brown. Let me interrupt and continue on that.
    Mr. Iwry. Sure.
    Senator Brown. Is implicit in that that they will no 
longer--I mean, is part of this the whole issue of the 
unbanked, that they will not go to the payday lender, that they 
will be at some kind of----
    I assume that--I mean I kind of know what your answer is 
going to be, but include that in the answer too, how that 
translates into changing that pattern of having to go to a 
payday lender and then instead going to some financial 
institution if their myRAs encourage them to do that.
    Mr. Iwry. The process of starting to save and watching 
one's self accumulate a nest egg is something that has worked 
wonders for a lot of people, including people in the lower 
ranges of the income distribution. We know, Mr. Chairman--and 
this is very much a bipartisan point--that saving on one's own, 
saving with the benefit of convenient aides for saving, such as 
a myRA or automatic enrollment in a 401(k) or automatic 
enrollment in IRAs, as the President has proposed, helps people 
gain a sense of greater independence, of financial security, of 
hope that they can keep going, keep saving, keep accumulating, 
reduce their debt, avoid financial practices that are not good 
for them, increase their financial capability, their financial 
literacy.
    It is an occasion for people to learn more and to grow and 
to particulate in the system more actively. There are all sorts 
of benefits, tangible and intangible, once we get people into a 
lifelong habit of saving. The two critical elements to that 
are: get them to start, get them to continue. The myRA is 
intended to get people to start, to encourage them to do so. It 
is voluntary with employers, it is voluntary with individuals. 
But the idea is that it is not only that these people do not 
earn so much and do not have a lot of disposable income that 
keeps them from saving now, it is also that the saving 
arrangements are not easy or convenient enough.
    That is the importance of employer plans, or lacking an 
employer plan, payroll deposit saving, the automatic nature of 
it, Mr. Chairman--that once it starts it just continues, and it 
can continue for those whole 20 years and longer. That is what 
we would hope, that 20 years from now millions more of those 
people you are talking about will have actually had their lives 
transformed for the better by having gotten into the saving 
habit this year. By the end of this year, we are hoping that 
the myRA program will be ready to be implemented.
    Through that, plus more sweeping measures that Congress can 
enact--such as automatic enrollment of tens of millions of 
people in payroll-deduction IRAs--we can have those folks in a 
much better place in terms of financial security and a sense of 
independence and full participation in our system.
    Senator Brown. Thank you.
    Mr. Utkus, so with this fast food worker who puts $20 a 
paycheck, if they can do that much, into their myRA, and then 
they reach the $15,000 level, and then they get to experience 
the Vanguard effect, if I can bring that up--talk to me. I 
understand your fees, or what I have been given is a ratio--the 
average expense ratio for Vanguard funds is slightly less than 
two-tenths of 1 percent, one-fifth what is average for the 
mutual fund industry. That is the number I have been given.
    Two things. One is, how do we make sure that those myRA 
managers charge the bare minimum when workers get to the 
$15,000, if they come to you, if they come to Fidelity, to 
whomever they go? Second, how do we educate those who hold 
these myRAs in sophisticated issues of investment? I know you 
said that it is good news.
    I understand it also would be good for your company, but it 
is good news, and I agree with that, that more and more people 
are turning those investment decisions over to professionals 
chosen by their employer. This will be a different situation.
    So this fast food worker who now has the $15,000 and comes 
to Vanguard, how can we be assured that it is going to be done 
right, and how do you advise that person when there is not a 
lot of money to be made from that person's account? Where does 
that go then when they get to that number 4 years from now, or 
whatever?
    Mr. Utkus. Well, interestingly enough, what happens today 
if you show up with a $15,000 IRA is, overwhelmingly, people at 
Vanguard choose target-date funds as their IRA choice because 
of the simplicity of choice.
    It used to be, by the way, that when individuals would show 
up with their IRA contributions, they might make decisions 
based on recent fund performance, funds that were doing 
particularly well, which is actually not always a good way to 
structure these decisions. But the innovation of a target-date 
fund really has eliminated this focus on accumulating different 
types of assets for your portfolio and focusing instead on the 
date you expect to retire, the risk of the portfolio you are 
taking on, and of course the cost you are paying. So I think 
that is, in fact, what would happen in this kind of 
arrangement.
    In fact, I know Mark has discussed the whole question of 
how these arrangements will leave the Treasury platform and 
move into the private sector. That is an open area of 
discussion, exactly how that might happen. But certainly our 
thought would be that a simple solution would be a target-date 
series solution with low cost.
    Senator Brown. Are you concerned that these myRAs would 
crowd out, compete with, or replace private retirement 
accounts? Are you concerned about any competition from them for 
your company?
    Mr. Utkus. No, we do not think of it in those terms, 
because this is a group of employers that does not offer 
retirement plans today. We actually have a fairly robust and 
growing relatively new offering serving small employers, but 
those of course are the employers that do offer plans, sort of 
Judy's natural clientele. But in fact, we think it is a useful 
addition to the savings landscape.
    I think Mark characterized it very well. It is a bit of 
what we would call a sandbox, or an experiment to sort of work 
through the mechanics of serving the millions of small 
employers who may be interested in it. But the real question, 
the real lever in influencing retirement savings, comes with 
automatic enrollment, not the voluntary nature as it is 
structured today.
    Senator Brown. I want to talk at some point, Mr. Iwry, but 
I want to move to other things. We have about half an hour. On 
the whole financial literacy question, I just hope that--I 
assume you are, but I hope--you are doing a lot of thinking 
about that and how to engage with people who have myRAs on 
financial literacy questions, but I cannot imagine you are not 
thinking about them already.
    Let me talk about the Saver's Credit. Any of you certainly 
can respond to this. How do you reform the Saver's Credit to 
make it a stronger incentive for, I guess, the bottom two 
quartiles or quartiles we are talking about today, the bottom 
half or bottom 40 percent? Who wants to start on that? Do you 
want to start? Just, how do we do this better?
    Everybody on this panel, and the other two Senators, seemed 
to like the Saver's Credit. I think it generally gets good 
reviews, but it is obviously a bit inadequate still, or more 
so. So talk that through, if you would. Each of you, if you 
have an opinion, I would like to hear it.
    Mr. Iwry. Mr. Chairman, the Saver's Credit was originally 
designed in the late 1990s-2000 to be much more robust than the 
Saver's Credit as enacted. It had a 50-percent credit rate 
instead of the 10-percent, 20-percent, and for a few eligible 
people 50-
percent, credit rates that it now has.
    The 50-percent rate was much more robust, applied across 
the board. It would be available to a larger portion of the 
middle class in America. The income limits right now go up to 
$30,000 individual, unmarried, and $60,000 married filing 
jointly. It could usefully be extended to more of the middle-
income group beyond those maximums. It could be made 
refundable.
    Right now the Saver's Credit is not refundable, yet the way 
it was originally designed and proposed, it would have been 
available to the 50 million or so families who pay their Social 
Security taxes and participate as working households in our 
economy but do not owe Federal income tax because their income 
is not high enough or because they have an Earned Income Tax 
Credit.
     So the refundability of the Saver's Credit, having a 
single 50-
percent credit rate instead of the three rates that it now 
has--which are much less of a playing field leveler for the 
lower- and moderate-income people who are eligible for the 
Saver's Credit--and having it extend to more of the middle 
class, middle-income people, would be fundamental reforms.
    Many have also suggested that the credit be deposited in 
the account in which the person is saving, so, if you are 
saving in a 401(k) or an IRA, that the credit go into that 
account. That is another possible improvement. It would have to 
be administratively feasible before that is done.
    But right now, that is why the myRA has been designed to be 
encased in an IRA account, a bond with the full faith and 
credit of the United States backing it in a Roth IRA so that 
the individual who is contributing to this retirement savings 
bond would get a Saver's Credit under current law, and 
hopefully, if we can expand the Saver's Credit, a more robust 
one in the future.
    Senator Brown. You wanted to comment too, Ms. Oakley?
    Ms. Oakley. I guess, Senator, the one thing I would add is, 
having worked for Congressman Pomeroy, he actually introduced a 
bill to do almost everything Mark talked about when he was in 
the House, which was expanding the credit, making it 
refundable, enabling that credit to perhaps go back into the 
account and perhaps even giving the employer, if it was an IRA 
or a 401(k) account, some of that credit as something to help 
them meet some of the non-discrimination tests as a way to 
encourage employers to want to accept that money.
    I think the Saver's Credit really can be a very valuable 
tool. It could be a much more substantial benefit for some of 
the individuals. As I mentioned, right now the average benefit 
in that Saver's Credit going to the households who elect it is 
only $170. For many people, if you are putting in $1,000, that 
is not much. But what we used to describe as the Uncle Sam 
match can be a really powerful tool for people who may not have 
an employer match.
    Senator Brown. All right. Thank you.
    Ms. Miller, do you want to talk about that?
    Ms. Miller. Yes. I would agree with, number one, 
simplifying it. If you look at it now, it looks way too 
confusing. I think just having the 50-percent credit as it was 
originally intended would make it a lot easier to talk about.
    That gets to my second point, which is communicating it. I 
found in practice that there were an awful lot of people who 
had no clue that it was out there. They may never know. If they 
file an EZ form, they may not even claim it. So I think there 
was a letter in the Collins-Nelson bill directing IRS to make 
it so that you could claim it on the 1040EZ, which is something 
about which I think letters have gone out from the committee 
before. But I understand it is hard to change a form, but many 
of the people who are eligible for it file the EZ and do not 
even know it is there.
    With regard to depositing it into the account, I think that 
can be a great idea. I have some concerns in that, for people 
who are really low-income to the point where they have a hard 
timing coming up with money to save, being able to tell them, 
you are getting some of it back, can be helpful because it does 
not disrupt their cash flow as much.
    I kind of liked an approach that was in a bill that Mr. 
Neal did on the House side, and others, where you got more of a 
credit if you had it deposited than if you just took it back, 
so there was more of an incentive than a mandate. Again, if 
somebody needs the cash, let them make that judgment. I worry 
that if cash is really a problem, that maybe being able to get 
cash back is helpful.
    Senator Brown. All right. Thank you.
    Mr. Iwry, I know the President's automatic IRA proposal was 
developed by you and then by some people at the Heritage 
Foundation, a gentleman named David John, so there has been a 
broader ideological spectrum than on some issues. Walk us 
through that. One criticism I hear is that it is a potential 
burden on small businesses. How do you address that? Give us 
some information on that, if you would.
    Mr. Iwry. I will be happy to, Mr. Chairman. The President 
has proposed automatic enrollment in IRAs now in each of the 
budgets that he has put forward since he was elected, and the 
idea is really to strengthen the building blocks that we know 
work in our current system, and there is a heck of a lot about 
our current system that works well: employer workplace-based 
saving, payroll deposit as a method of automatically continuing 
saving once it starts, automatic enrollment as a method of 
starting saving so that it can continue then automatically. We 
have seen how dramatically these measures work to increase the 
fewer than one out of 10 who will contribute to an individual 
retirement account on their own without the benefit of payroll 
deduction or automatic enrollment, to raise that one out of 10 
to seven, eight, nine out of 10 or more in a workplace payroll-
deposit, automatically enrolled environment. Small employers 
would not be burdened at all by this. The idea would be to 
simply have an employer that does not already sponsor a plan 
and that we have not successfully encouraged to sponsor a plan 
to at least let their workers use their payroll system as a 
conduit for the worker to save their own wages, whatever 
portion they would like, in a tax-favored account.
    The private-sector employer would not have any outlay, 
would not make a penny of contribution, would not have out-of-
pocket costs. They would be asked simply to add to the payroll 
withholdings that they now have to do for income tax 
withholding--Federal and State, for unemployment insurance, for 
other purposes, including the direct deposit of paychecks that 
so many workers enjoy today--one other payroll deposit that 
would go to, instead of the place where the employee sends 
their paycheck in general, a different routing number, a 
different account number, an IRA, perhaps at that same 
institution, perhaps at a different institution. That would 
mean that the small business simply has to add to its to-do 
list another payroll withholding opportunity using standard 
forms that would be downloaded from a national source, a 
website, not to have fiduciary liability or to make investment 
decisions or to hold assets for individuals. These are small 
employers that we would love to persuade to adopt a 401(k) or 
another retirement plan.
    But if, and as long as we cannot do that, the least they 
could do is take on what is essentially a costless--other than 
adding another item on the to-do list and a certain amount of 
attention that the small business owner would have to pay to 
this, but not much--a virtually costless step to help their 
employees save easily. The Saver's Credit would apply to these 
contributions as well.
    Senator Brown. You have a different view of that, I 
understand.
    Mr. Utkus. I think our view has been that the myRA--so one 
of the main issues with an automatic IRA program is--I will put 
it this way. There are 700,000 401(k) plans in the United 
States. There are 10 million establishments for work.
    So one of the big questions has been, what are the 
administrative costs from helping millions of small employers 
to establish the service? That is why we are very interested in 
the myRA experiment, or sandbox, if you will, to see exactly 
what it would take to serve such a large constituency of small 
employers and what the administrative costs would be.
    Although Mark talked about there being no fees, of course 
there are costs to the program, and they will be paid in one 
way or another. The question is what those costs will be at 
scale, and that is one of the reasons why we find myRA 
encouraging. It would be an interesting experiment to 
understand that better.
    Senator Brown. All right.
    Ms. Miller?
    Ms. Miller. Yes. We are strongly supportive of the auto-IRA 
proposal. As I mentioned in the written testimony, to me an 
ideal world would be auto-IRA coupled with the Hatch 
Starter(k), because, if you are dealing with the small employer 
market, small business owners are so tied up with trying to 
just make their business work that one of the challenges is 
getting them to even think about a retirement plan.
    So, if you had payroll-deduction savings--I mean, you 
cannot have payroll deduction without an employer--that is 
going to be very little effort for that individual, and the 
proposals have a small credit to help defray any start-up 
costs. Then they are at least thinking about retirement, they 
are thinking about having an arrangement for their employees 
and themselves, because many of them will actually qualify for 
the Saver's Credit. But we feel very strongly that, in that 
environment, not everybody is going to be going to myRA. We 
have a lot of folks who would love to be competing in that 
market for the auto-IRA accounts.
    In many cases, they probably would step into a Starter(k) 
right off the bat and have a little higher contribution and 
that kind of thing, having an ERISA arrangement. So, there are 
a lot of private entities that are very interested in serving 
the auto-IRA market as well. Like Diane's organization, we are 
involved in various States in those efforts too.
    Senator Brown. All right. Thank you.
    A couple more questions. I read recently an article by 
Shlomo Benartzi where he talks about the illusion of wealth, 
that a significant lump sum of money, $100,000 in a savings 
account or any kind of a retirement account, seems like far 
more money than it actually is, especially if you have to live 
on that amount, obviously, for some period of time.
    The concern is that workers might think they are saving 
enough for retirement when in reality they are falling far 
short, back to Ms. Oakley's 4 or 5 times what your income has 
been. He suggests that with respect to DC plans, defined 
contribution plans, that there be an escalating kind of clause 
in this, that we combine automatic enrollment with automatic 
escalation that increases savings over time.
    My understanding is, Vanguard has done a lot of research on 
sort of the behavioral issues there. Would you kind of share 
that with us?
    Mr. Utkus. Yes. In fact, we did the original pilot with 
Shlomo Benartzi at UCLA and Dick Thaler in Chicago on the auto-
escalation feature. Actually, about two-thirds of the employers 
that we have who have adopted automatic enrollment today 
combine this auto-escalation feature. It is a really 
interesting question, and it pertains to this issue of low-
income versus middle-income versus higher-income, depending on 
your workforce.
    If tomorrow we auto-enrolled lots of people into 3-percent 
savings accounts, for the vast majority of Americans that would 
be inadequate. But for low-income workers, that might be just 
an additional supplement that would be useful on top of Social 
Security.
    So employers, following actually regulations from the IRS, 
from Treasury, tended to emphasize this 3-percent automatic 
enrollment rate. Realistically, we now realize that that is way 
too low. So, many employers are introducing these auto-
escalation features, and they are targeting more higher savings 
rates, more appropriate for someone, say, at the middle income 
in the category of employees that they employ. So, for some 
firms, the cap on savings might be 10 percent a year, for 
others it might be 15 percent a year depending on how affluent 
their particular workforces are.
    Senator Brown. Mr. Iwry? Each of you, if you would like. 
Yes?
    Mr. Iwry. Mr. Chairman, if I may just add to what Mr. Utkus 
was saying. The President, several years ago, and the Treasury 
Department called attention to the power of automatic 
escalation. Professors Thaler and Benartzi have done great work 
in that area, and Treasury regulations and rulings have 
illustrated and effectively promoted the idea that automatic 
enrollment ought to continue at increasing levels, that it 
ought to start not just at 3 percent of pay--which is what our 
original rulings illustrated back in 1998 when we were trying 
to get automatic features on the map for the first time--but 
that 5, 6 percent of pay, for example, ought to be a reasonable 
place for many employers, if they see fit, to start automatic 
enrollment, then escalate it over time as employees stay with 
the employer to the point where people get into double digits 
of saving, in addition to that employer match.
    What we are really trying to do is encourage the private 
sector to build on the success that it has already had in the 
private pension system, 401(k)s in particular, by taking the 
automatic enrollment to a whole new level, starting higher, 
auto-enrolling not just newly hired employees but people who 
have been with the company who have not been saving in the 
past, escalating, as Steve Utkus has described, over time, not 
stopping that escalation at 10 percent, but continuing as high 
as the employee wants to go with the choice on the part of the 
employee at all times to hop off the escalator, to level out at 
whatever level they are willing to do.
    Also, we need to encourage employers to keep their skin in 
this game, to make robust matching contributions, to make even 
non-matching contributions to retirement security, so that we 
are not only looking at the individual to use increasing salary 
reduction, but we are keeping that incentive there in the form 
of an employer match.
    Senator Brown. Thank you.
    Ms. Oakley?
    Ms. Oakley. Senator, I just want to add to that. I think 
Mark's comment about the employers keeping skin in the game is 
important. When you look at some of these projections, the 
assumption is the employer will make a 3-percent matching 
contribution and stop, and then the worker, to get to an 
adequate retirement income, might then have to be contributing 
up to 12 percent of their pay for every year throughout their 
career if they are going to try to get an 85-percent target 
replacement.
    I have also seen a recent paper published by Jeff Brown at 
the University of Illinois, and he was making a suggestion that 
I would find troubling if it was something that people were 
going to do, especially for the low-income individuals. Mark's 
comment about making sure that people are at least going in so 
they get the full employer match in the auto-enrollment, I 
think is important to many people: go in at 3 percent, if their 
employer matches 50 percent, they get 1.5 percent.
    But, if they do not contribute at that 3-percent rate, then 
they are leaving that other 1.5 percent on the table, and we 
want to make sure they get the full employer benefit. One of 
the things that some people have been suggesting is this idea 
of stretching out the employer match and, instead of matching 
50 percent up to 6 percent of pay, match 25 percent up to 12 
percent of pay.
    The one thing I would caution about something like that is, 
it would have a particular impact on the low-income individuals 
who are going to be the most likely to contribute. And I think 
some of the Vanguard studies show that your lower-income people 
have a much lower contribution into these types of plans, even 
when there is automatic enrollment. So to make sure that they 
still get a vibrant contribution, I think that is going to be 
an important concern to think about.
    Senator Brown. All right. Thank you.
    The last point I want to make is not really a question, but 
for Mr. Iwry is that, I know you are thinking about this, and I 
want to hear more about it later, that is, the rules governing 
myRAs to ensure that managers, once they reach the $15,000 
threshold, charge the bare minimum in fees. So I just want to 
implore you to work on that too.
    Thank you all. A special thanks to Senator Toomey, the 
ranking member of this subcommittee, who could not be here but 
represents your State, Mr. Utkus, for his cooperation on this 
issue and this hearing. Also, thanks to Chairman Wyden and 
Ranking Member Hatch for their support of this discussion. 
There may be some written questions to you from members of the 
Finance Committee, and please follow up with those within 7 
days, if you can. Thanks for the insight you all showed. This 
was a really good discussion, and I think we all learned from 
each other, and I particularly learned a lot from the four of 
you.
    The subcommittee is adjourned. Thanks.
    [Whereupon, at 11:55 a.m., the hearing was concluded.]



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