[Senate Hearing 113-651]
[From the U.S. Government Publishing Office]
S. Hrg. 113-651
CAN WE DO MORE TO KEEP SAVINGS IN OUR
RETIREMENT SYSTEM?
=======================================================================
HEARING
OF THE
COMMITTEE ON HEALTH, EDUCATION,
LABOR, AND PENSIONS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING KEEPING SAVINGS IN THE RETIREMENT SYSTEM
__________
MARCH 19, 2013
__________
Printed for the use of the Committee on Health, Education, Labor, and
Pensions
Available via the World Wide Web: http://www.gpo.gov/fdsys/
U.S. GOVERNMENT PUBLISHING OFFICE
94-737 PDF WASHINGTON : 2015
____________________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].
COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS
TOM HARKIN, Iowa, Chairman
BARBARA A. MIKULSKI, Maryland
PATTY MURRAY, Washington
BERNARD SANDERS (I), Vermont
ROBERT P. CASEY, JR., Pennsylvania
KAY R. HAGAN, North Carolina
AL FRANKEN, Minnesota
MICHAEL F. BENNET, Colorado
SHELDON WHITEHOUSE, Rhode Island
TAMMY BALDWIN, Wisconsin
CHRISTOPHER S. MURPHY, Connecticut
ELIZABETH WARREN, Massachusetts
LAMAR ALEXANDER, Tennessee
MICHAEL B. ENZI, Wyoming
RICHARD BURR, North Carolina
JOHNNY ISAKSON, Georgia
RAND PAUL, Kentucky
ORRIN G. HATCH, Utah
PAT ROBERTS, Kansas
LISA MURKOWSKI, Alaska
MARK KIRK, Illinois
TIM SCOTT, South Carolina
Pamela J. Smith, Staff Director and Chief Counsel
Lauren McFerran, Deputy Staff Director
David P. Cleary, Republican Staff Director
(ii)
CONTENTS
__________
STATEMENTS
TUESDAY, MARCH 19, 2013
Page
Committee Members
Harkin, Hon. Tom, Chairman, Committee on Health, Education,
Labor, and Pensions, opening statement......................... 1
Alexander, Hon. Lamar, a U.S. Senator from the State of
Tennessee, opening statement................................... 2
Warren, Hon. Elizabeth, a U.S. Senator from the State of
Massachusetts.................................................. 3
Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming.. 30
Witnesses
Fellowes, Matt, Ph.D., Founder and Chief Executive Officer,
HelloWallet, Washington, DC.................................... 4
Prepared statement........................................... 6
Borland, Alison Thomas, FSA, Vice President, Retirement Solutions
and Strategies, Aon Hewitt, Lincolnshire, IL................... 8
Prepared statement........................................... 9
Weller, Christian E., Ph.D., Professor of Public Policy and
Public Affairs, McCormack Graduate School, University of
Massachusetts Boston and Senior Fellow, Center for American
Progress, Washington, DC....................................... 16
Prepared statement........................................... 18
ADDITIONAL MATERIAL
Statements, articles, publications, letters, etc.:
Response to questions of Senator Enzi and Senator Warren by
Alison Thomas Borland, FSA................................. 39
Response to questions of Senator Warren by:
Trooper Sanders, Senior Advisor, HelloWallet............. 39
Christian E. Weller, Ph.D................................ 40
(iii)
CAN WE DO MORE TO KEEP SAVINGS IN THE RETIREMENT SYSTEM?
TUESDAY, MARCH 19, 2013
U.S. Senate,
Committee on Health, Education, Labor, and Pensions,
Washington, DC.
The committee met, pursuant to notice, at 2:30 p.m., in
room SD-430, Dirksen Senate Office Building, Hon. Tom Harkin,
chairman of the committee, presiding.
Present: Senators Harkin, Enzi, Alexander, Warren, Murphy.
Opening Statement of Senator Harkin
The Chairman. Good afternoon. The Senate Committee on
Health, Education, Labor, and Pensions will come to order. I
want to welcome everyone to the latest in our ongoing series of
hearings focusing on retirement security. I think we've been
doing this now for over 2 years. Today, we're going to take a
closer look at an issue that has been in the news a lot
recently, namely, whether we're letting too much of our
retirement savings leak out of the system. It's an important
issue, because we're facing a retirement crisis in this
country.
Whether it's a young family struggling to pay off student
loan debt and save for their children's education and put
something aside for their own retirement, or someone whose body
just can't handle the stress of work any longer, Americans are
terrified that they will not have enough money to live on when
they stop working, and they're right to be scared. As we
learned in our last hearing on this topic, most people simply
are not saving enough for retirement, and the dream of a secure
retirement is growing more and more remote for middle class
families.
The retirement income deficit, that is, the difference
between what people have saved for retirement and what they
should have saved, is estimated to be as high as $6.6 trillion.
Half of Americans have less than $10,000 in savings. We have an
obligation to address this retirement crisis, so I've made
improving the retirement system a top priority of this
committee.
Last year, I proposed to provide universal access to a new
type of privately run pension plan called a USA Retirement Fund
that would ensure that everyone has the opportunity to earn a
pension benefit they can't outlive. I'm hopeful that together
with my colleagues on this committee we can move a bill this
year that helps middle class families save for retirement.
However, addressing the retirement crisis means not only
helping people save enough for retirement, but also ensuring
that the money is still there at retirement. All too often,
people cash out their retirement accounts well in advance of
their retirement years. This is especially true when people
change jobs, because it's often easier to withdraw from a
401(k) and pay the penalty than to go through all the trouble
of rolling over the balance to a new plan or an IRA.
Most 401(k) plans allow people to borrow against their
savings. It's common for people to use their 401(k)s for all
kinds of things unrelated to retirement, for down payments on a
new house, for education, to cover medical expenses, et cetera.
Now, I'll be the first to admit that giving people access to
their retirement savings is not all bad. There is some evidence
that loans may actually increase participation in these plans,
plus there's no question that it can be better to borrow from
your 401(k) than to take out a high interest payday loan.
But that said, I'm extremely worried that 401(k)s are
becoming just a savings account rather than a retirement plan.
The whole reason we encouraged employers to offer 401(k) plans
in the first place was to prepare people for retirement. We
know that when people run out of money when they get old, they
see their living standard decline, they become a burden on
their families, they lean more and more on the social safety
net, squeezing government at all levels.
So it's abundantly clear that 401(k) contribution rates are
already too low. And it's troubling that leakage could be
taking a toll on America's already meager retirement accounts.
Today, our aim is to get a better handle on the extent of the
leakage problem and explore whether there are ways to keep more
money in the system. I know that one of our colleagues, Senator
Enzi, has already done a lot of thinking along those lines, and
I applaud him for all the work that he has done on this issue.
I also want to encourage everyone who works with retirement
plans to get creative. We'll hear some ideas today, but a lot
more thinking needs to be done on this subject of having a
good, secure retirement system that will be there when people
retire, a pension, so they can't outlive it.
We have an excellent panel of witnesses. It should be an
informative discussion. I thank you all for being here today,
and I yield to my colleague, Senator Alexander.
Opening Statement of Senator Alexander
Senator Alexander. Thanks, Mr. Chairman and Senator Warren,
and thanks to the witnesses for coming today. We look forward
to your comments.
Senator Harkin and Senator Enzi, who was the ranking
Republican before I was, have done a good deal of work on this.
Senator Enzi and Senator Isakson on this side of the aisle have
both done some thinking on this and will have some legislation.
I think Senator Harkin outlined what we're here today to hear,
and I don't need to rehash it.
Basically, we want to know if people will have enough money
when they retire. How much should that be--some advisors would
say as much as you can--and what are the guidelines that you
think are useful for us to hear about? I know that one company
suggests a rule of thumb called the eight times plan--have
savings of eight times your annual income by the time you
retire. So if you make $50,000 a year, that would be $400,000
in the bank by the time you retire at age 65.
Yet if you were to have $400,000 in the bank and you
retired at age 62, it helps to see what amount of money that
would produce on a monthly basis. One of the things that we try
to think about here is how to encourage Americans to think
about these issues rather than trying to order them to do
specific things with their own money.
I've noticed on the Senate Thrift Savings Plan each year
that on my retirement account statement, there's a little
number on it that says, if I were to retire with this current
account balance, this is the annuity I would receive for the
rest of my life. That's very interesting to me. It's printed in
pretty bold letters. It stood out, and it got my attention. And
I wonder how often that is printed on information that
employees receive about the amount of money they have in their
retirement accounts.
Senator Harkin mentioned the different reasons that savers
take money out of their accounts. They're all valid reasons.
It's their money. But it becomes a national issue if too many
Americans end up without enough money to help them when they
retire.
Today we have a distinguished panel of witnesses. I look
forward, Mr. Chairman, to hearing their comments and having a
chance to ask questions.
The Chairman. Thank you very much, Senator Alexander.
We have an excellent panel of witnesses today, people who
have done a lot of thinking. I read through your testimony last
evening. We'll hear first from Dr. Matt Fellowes, the CEO of
HelloWallet. Prior to founding HelloWallet, Dr. Fellowes was a
fellow at the Brookings Institute where he specialized in
consumer finance.
Second will be Alison Borland, Vice President of Retirement
Solutions and Strategies at Aon Hewitt, where, among other
things, she oversees the retirement research team. She is also
a frequent author and speaker on retirement issues.
Now I'll yield to Senator Warren for an introduction of our
next panelist.
Statement of Senator Warren
Senator Warren. Thank you, Mr. Chairman. I want to welcome
Dr. Christian Weller, who is Professor of Public Policy and
Public Affairs at the University of Massachusetts in Boston and
a Senior Fellow at the Center for American Progress. Dr. Weller
got his Ph.D. in economics from UMass Amherst. And pension work
runs in the family. His wife, Beth Almeida, is also a
recognized scholar on pensions.
I don't know with a new baby and another baby on the way
whether or not you're going to grow another generation of
pension experts. But I'm delighted that you're here. And I
should say when I was still teaching at Harvard, Dr. Weller and
I had many, many spirited lunches talking about retirement
pensions, the economics of America's middle class, and I found
him always to be thought provoking and a good partner in any
conversation.
Welcome, Dr. Weller.
The Chairman. Thank you very much, Senator Warren.
Your statements will all be made a part of the record in
their entirety. We'll start with Dr. Fellowes. If you could sum
up in 5 minutes or so, we'd sure appreciate it.
Dr. Fellowes.
STATEMENT OF MATT FELLOWES, Ph.D., FOUNDER AND CHIEF EXECUTIVE
OFFICER, HELLOWALLET, WASHINGTON, DC
Mr. Fellowes. Thank you. Chairman Harkin, Chairman
Alexander--I'm sorry--Ranking Member Alexander, Senator Warren.
Senator Alexander. That's OK.
[Laughter.]
Mr. Fellowes. Thank you for the invitation to testify
today. My name is Matt Fellowes, and I am the founder and CEO
of HelloWallet, which is a software company that helps
employers improve their compensation and benefit outcomes by
providing individualized guidance to their employees about
their paychecks and benefits.
Prior to HelloWallet, I was at the Brookings Institute, and
I also taught at Georgetown and George Washington in their
graduate programs. I ultimately decided to leave Brookings
because I discovered new technology that could be used to
democratize for the first time independent, personalized
guidance to U.S. workers.
This was during the mortgage foreclosure crisis when I
decided to leave Brookings and work on this, when I was
advising numerous elected officials about the fact that 5
million people had bought homes that they were never
realistically ever going to be able to afford to keep. That
dynamic of U.S. workers having difficulty making good decisions
about their paychecks is played out every day in every consumer
finance market and every employer benefit market in America.
With this new technology, I saw an opportunity to create a
scalable solution to this really systematic problem in the U.S.
economy.
But I'm here today, specifically, because throughout 2012,
I talked to a lot of different plan sponsors. And one of the
things I learned is that there are plans today where a majority
of the participants in the 401(k) plans, over 50 percent, will
cash out their entire 401(k) balances within 5 years of
starting their plan, even though in each of those cases, the
savings deferral rates have been going up in the plan, the
participation rates have been going up in the plan, and the
assets under management have been going up in the plan.
I became curious about whether this was a general phenomena
in the 401(k) market, and I put my academic hat back on and
looked at data from the Federal Reserve and IRS and the Census
Bureau. What I found, ultimately, is that about 25 cents of
every dollar now that's contributed into a 401(k) plan will be
taken out for non-retirement purposes. So with such a large
amount now going to non-retirement spending needs, it really is
fair to your point, Chairman Harkin, that the 401(k) is
becoming an everyday savings account for workers and really not
the retirement account it was designed to be.
Since I left Brookings, to be frank, I'm really not
involved in the day-to-day policy details of the subject for
today's hearing. But I am asked almost weekly by businesses for
advice about how to improve their benefit programs and their
401(k) programs. So I thought it would be helpful if I shared
just a couple of things that I share with them.
First, I always stress that we need better measures of
success for these programs. If 401(k)s are ultimately about the
retirement readiness of the participant and, for sponsors,
about their ability to attract and retain talent, then those
should be the measures of success and not just ultimately the
401(k) balance, which is really only one measure.
Second, my advice is to address the underlying causes of
early withdrawals and low savings rates. In our research, we
found that workers were much more likely to withdraw from their
401(k)s if they didn't have a budget--about 80 percent of U.S.
households don't even budget--or if they lacked three or more
months of their monthly income in an emergency savings account,
which is about 85 percent of U.S. households.
To see why this is the case, I like to use a step ladder as
a metaphor for what's going on in the market. Today, we have a
large percentage of workers that are saving for retirement,
which I consider a rung that is at the top of the ladder,
because they reach that at the end of their career. But
underneath that top rung, there are missing rungs which are
just as fundamental to retirement security.
Few people have budgets, for instance. Few have emergency
savings. Few have college savings. Few have vacation savings.
Few have car savings and so on. And those are just as critical
to retirement security, that people reach those rungs on the
ladder before retirement.
What's happened today as a result is that you've got a
large share of U.S. workers kind of dangling at the top of the
ladder with sufficient retirement savings or a lot of
retirement savings, but they don't have those lower rungs of
the ladder filled out. So my advice is ultimately that we put
as much attention on helping workers make better paycheck
decisions as we do helping them with investment decisions,
because, ultimately, workers who make better paycheck decisions
can have many more times an impact on the retirement security
than just even the best investment advice.
The bottom line is that I think what we've learned is that
we can automate good retirement savings referral rates. We can
automate good participation rates. But you cannot automate
retirement readiness. For that to happen, we've really got to
engage employees in their day-to-day decisions that they're
making about finances and provide independent solutions to help
them make better paycheck decisions on a day-to-day basis.
Finally, I'd just like to thank you, Chairman Harkin, for
your years of leadership on this issue. And thank you again to
all of you for the invitation to be here today.
[The prepared statement of Mr. Fellowes follows:]
Prepared Statement of Matt Fellowes, Ph.D.
The Retirement Breach in Defined Contribution Plans: Size, Causes,
and Solutions
summary
For every $1 that is annually deposited into 401(k) and other
Defined Contribution (DC) plans every year, approximately $.25 is now
withdrawn for non-retirement spending, adding up to about $70 billion
in annual withdrawals. Among participants that are younger than 55, up
to $.45 of every $1.00 deposited is withdrawn prior to retirement every
year for non-retirement spending. About 15 percent of that withdrawn
money is in the form of temporary loans, the bulk of which will be
repaid. The vast majority of withdrawn funds, however, is in the form
of lump-sum cash-outs, which are permanent withdrawals of retirement
savings.
Using Federal Reserve data, we considered numerous reasons why
households are using their 401(k) and other DC savings for non-
retirement spending. The strongest predictors that a participant will
use their retirement savings for non-retirement savings is if they (a)
do not actively budget (approximately 80 percent of U.S. households)
and (b) do not have 3 or more months of emergency savings
(approximately 85 percent of U.S. households). Other issues, such as
age, income, and educational attainment are also related to this
decision.
We also use Census Bureau data to determine the reasons
participants self-report that they take money out of their 401(k) and
other DC plans for non-retirement needs. Over 50 percent report that
they withdraw these funds to pay bills, loans, and other debts; only 7
percent report that they take out this money because they have been
laid-off.
These findings indicate that employers are subsidizing an expensive
retirement benefit that a large, and growing, share of workers do not
use for retirement, signaling a broader misalignment between the
advanced financial needs subsidized by employers and the basic, unmet
financial needs of workers. Furthermore, because retirement plan
breaching is often not among the metrics reported by plan managers,
this growing problem is largely invisible to employers sponsoring
retirement benefits.
recommendation
Among our recommendations, we suggest that attention be given to
the (a) data that corporate plan sponsors need to better manage the
efficacy and ROI from their retirement investments, (b) the guidance
needed to help sponsors improve the access their participants have to
independent, holistic, financial guidance and management, which is the
foundation of retirement success, and (c) the plan flexibility needed
for sponsors to address the basic emergency savings needs of workers
alongside their longer term retirement savings needs.
For further information, contact Matt Fellowes at 202-803-5262 or
matt@hello
wallet.com.
______
Chairman Harkin, Ranking Member Alexander and members of the
Committee on Health, Education, Labor, and Pensions, thank you for
inviting me to testify today about the opportunity to help Americans
improve their retirement security.
My name is Matt Fellowes, I am the founder and CEO of HelloWallet,
a Washington, DC-based Software Company that helps firms improve their
benefit and compensation outcomes by providing independent guidance to
workers about their benefits and finances. Prior to founding
HelloWallet in 2009, I was an academic at The Brookings Institution,
and also taught at Georgetown and George Washington Universities here
in Washington. I decided to leave Brookings when I discovered new
technology and behavioral psychology insights that can be used to
democratize access to independent, personalized financial guidance.
This was during the mortgage foreclosure crisis when I was advising
Governors and the Bush administration about how to respond to the fact
that 5 million people had willingly bought homes that they never were
going to be able to afford. I saw an opportunity to create a proactive
solution to a systematic problem, so I decided to become an
entrepreneur and founded HelloWallet.
I'm here today because of conversations I had throughout 2012 with
numerous plan sponsors about the health of their defined contribution
plans. Among the things I learned in those conversations, is that there
are plans today where a majority of participants will cash-out their
entire 401(k) balance within 5 years of signing-up, even though in each
of those cases the savings deferral rates had increased, the
participation rate had increased, and the assets under management had
increased. In fact, those data were just a mirage of retirement savings
success because underneath those numbers, there was a massive amount of
turnover and churn--the majority would not actually be using all or
some of their savings for retirement.
I decided to figure out whether the story that these data were
telling me were generalizable to the entire defined contribution
market, or just isolated to those plans. So, I put my academic hat back
on and examined Federal Reserve, Census Bureau, and IRS data so I could
better understand the problem these plan sponsors were encountering.
Mr. Chairman, what I learned is that a large and growing number of
defined contribution participants are using their defined contribution
plans for non-retirement spending needs. In particular, I learned that
for every $1 that is annually deposited into 401(k) and other defined
contribution plans; approximately $0.25 is now withdrawn for non-
retirement spending. Among participants that are younger than 55, up to
$0.45 of every $1.00 deposited is withdrawn prior to retirement every
year for non-retirement spending. Now, about 15 percent of that
withdrawn money is in the form of temporary loans, the bulk of which
will be repaid. The majority of withdrawn funds, however, are in the
form of lump-sum cash-outs, which are permanent withdrawals of
retirement savings. And, no short-term spending needs should ideally be
addressed by relying on a long-term savings vehicle like the 401(k).
Now, since I left Brookings I am no longer working in the day-to-
day policy details of the subject for today's hearing nor other public
policy issues that I used to be involved in for that matter.
Nonetheless, large employers ask me weekly for practical business ideas
to keep savings in the retirement system, outside of policy. They also
ask me how to increase savings into those plans. So, Mr. Chairman, I
thought it would be useful for you to hear what I tell them they can do
to keep more savings in the retirement system.
First, my advice is to accumulate more data about their plans. If
these plans are supposed to be about improving retirement readiness,
then the measure of success should not be confined to just 401(k)
savings data. The median household near retirement has 10 accounts, and
the 401(k) is just one of those. So, I stress that the measure of
success should include data on the actual retirement readiness of the
workers and the ROI that the company is getting from that retirement
investment. That helps sponsors understand what participants the plan
is helping, what participants it is not helping, and what specific, and
personalized, steps need to be taken to improve program outcomes.
Sponsors, in short, need a management dashboard to understand their
employees' retirement readiness, not just their retirement program
performance.
Second, when participants are not saving enough or, worse, taking
money out of their plans for non-retirement spending needs, my advice
is to address the underlying causes. In our research, we found that the
strongest predictors that a participant will use their retirement
savings for non-retirement purposes is if they do not actively budget--
which is approximately 80 percent of U.S. households--and if they do
not have three or more months of emergency savings--which is
approximately 85 percent of U.S. households. Both findings make sense.
If workers are not budgeting, its not realistic for us to expect to
progress on retirement readiness.
To see why this is the case, I find that a ladder is an effective
metaphor. Today, we have a large percentage of workers that are saving
for retirement, which I consider a top rung of the ladder that
individuals reach because it occurs at the end of a worker's career.
But, underneath that top rung, there are missing rungs that people
lack, which are fundamental to retirement security. Few people have
budgets, for instance, which is a critical step on the ladder because
it helps workers control their debt, spend less than they make, and
save for other things in life that they need. Likewise, few have
adequate emergency savings, few have college savings, few have savings
for home ownership and many have high interest credit card debt, all of
which are rungs on the ladder that people reach before they retire.
What has happened as a result is that you have a large share of U.S.
workers that are dangling from the top of the ladder with retirement
savings, but they lack any foundation underneath them because they
don't have the other rungs of the ladder to stand on. This is why the
401(k) is losing so much money every year to non-retirement spending.
It's not a matter of insuring against the risk of falling off the
ladder; it's that there are not enough rungs on the ladder to begin
with.
Companies can address this market dynamic by giving more attention
to the foundations of retirement success, which include making good
day-to-day financial decisions, managing debt in a healthy manner,
saving for other goals, and so on. In short, I advise that as much
attention is given to how the entire paycheck is allocated as companies
currently give to retirement investment allocation. Effectively
allocating monthly income, after all, has many, many times greater an
effect on retirement security than even the best investment allocation.
The bottom line of my advice, Mr. Chairman, is that we have learned
that sponsors can automate higher 401(k) and defined contribution plan
balances, investment decisions, and savings deferral rates. But, we
cannot automate retirement readiness. For that to happen, we need to
engage workers in their day-to-day decisions, and provide independent
solutions to help them make more optimal choices for their own
retirement security.
Mr. Chairman, I'm including a copy of the aforementioned research,
``The Retirement Breach in Defined Contribution plans'' and a 1-page
summary with my written testimony. Thank you for your leadership on
this issue and thank you for the opportunity to participate in today's
panel.
The above referenced material may be found at http://
www.hellowallet.com/
research/retirement-breach-defined-contribution-plans/.
The Chairman. Thank you very much, Dr. Fellowes. I
appreciate that.
Ms. Borland, please proceed.
STATEMENT OF ALISON THOMAS BORLAND, FSA, VICE PRESIDENT,
RETIREMENT SOLUTIONS AND STRATEGIES, AON HEWITT, LINCOLNSHIRE,
IL
Ms. Borland. Thank you. Chairman Harkin, Ranking Member
Alexander, and members of the committee, my name is Alison
Borland, and I'm honored to be here today representing Aon
Hewitt to discuss retirement plan leakage. We have a unique
perspective as the largest independent provider of retirement
plan administration services, serving more than 14 million plan
participants.
The employer-provided system plays a critical role in
helping Americans retire. Significant progress has been made to
increase savings through automatic enrollment and contribution
escalation, reduced fees, and solutions to help workers make
smart decisions. Working against these efforts is leakage or
taking funds out prematurely. Our research shows that for every
dollar contributed to DC plans today, approximately 20 cents
leak out.
Leakage occurs primarily in three ways. First, withdrawals
are taken during active employment. Second, loans are taken out
and aren't repaid in full. And, third, retirement savings are
cashed out upon a job change. I'll talk about the first two
briefly, discuss cash-outs, and then present recommendations to
improve the situation.
First, withdrawals. Our research shows that hardship
withdrawals are used by about 2 percent of plan participants
each year, and they are used for dire need. They're not being
abused. Other withdrawals are made on or after age 59\1/2\,
perhaps as a part of a phased retirement approach, or they are
a withdrawal of after-tax dollars. While they should be
appropriately managed and monitored, they are not the worst
culprit behind leakage today.
Second, we'll address loans. Loans are widely available in
DC plans, and they are used frequently. Significant risk to
retirement security occurs when participants default on the
loans, which often occurs because loans become payable in full
generally within 60 days of termination.
At the same time, loans play an important role because they
attract workers who may not otherwise save. Loans also enable
workers to access credit without causing them to miss employer
matching contributions or, even worse, take a permanent
withdrawal. The key to curbing leakage due to loans is to
reduce the defaults.
Third, cash-outs. Cash-outs cause a complete and total
eradication of retirement savings. Cash-outs occur when workers
receive a distribution of their balance after a job change and
can occur both in DC plans, defined contribution plans, and in
defined benefit plans when benefits are offered in a lump sum.
Small balances are much more likely to be cashed out, putting
frequent job changers at heightened risk.
Consider the following example. A typical participant
retires after saving for 30 years. During her tenure, she
changes jobs three times. If assets are retained in the system,
when she retires she'll have $872,000. If on the other hand she
cashes out her assets with each job change, she retires with
only $189,000. Cashing out due to these job changes will cost
her more than three-fourths of her retirement nest egg. It's
devastating.
In our experience, cash-outs receive the least attention
despite the high prevalence and the magnitude of the damage.
Decreasing cash-outs is a very important opportunity to
increase overall financial security for American workers.
So with that, I suggest 10 recommendations to reduce
leakage while balancing the need for flexibility and access for
workers. No. 1, modify the types of contributions available for
loans and withdrawals, such as allowing them based on employee
savings only, not employer contributions. No. 2, consider
requiring some to all of an employee's balance to remain within
the tax-preferred system until retirement, absent dire need.
No. 3, consider waiting periods before a second loan or
withdrawal can be taken. No. 4, support easier repayment of
loans following termination of employment, especially upon
involuntary termination. No. 5, increase the penalty for
withdrawing money from the tax-preferred system, absent dire
need, up to 15 percent or even more.
No. 6, allow flexibility to DB-plan sponsors to eliminate
lump sum options. Consider encouraging this through funding
flexibility and/or reduced PBGC premiums. No. 7, encourage
lifetime income regardless of plan design. No. 8, promote the
employer system. While in a qualified employer plan,
participates often benefit from lower fees, professional
management, tools and education, advice, and fiduciary
protections.
No. 9, simplify the process of cashing in dollars from one
qualified plan to another or from IRAs into qualified plans.
No. 10, provide education and resources to improve overall
financial literacy.
We appreciate the opportunity to share our recommendations
with the committee and are pleased to offer our data,
resources, and expertise to continue efforts that will help
improve retirement security for all Americans. Thank you.
[The prepared statement of Ms. Borland follows:]
Prepared Statement of Alison Thomas Borland, FSA
Mr. Chairman, Ranking Member Alexander and members of the
committee, thank you for the opportunity to submit this statement for
the record.
Aon plc. is the leading global provider of risk management,
insurance and reinsurance brokerage, and human resource solutions and
outsourcing services. We have 65,000 colleagues in 120 countries around
the world. Aon has been named repeatedly as the world's best broker,
intermediary, reinsurance intermediary, captives manager and best
employee benefits consulting firm by multiple industry sources.
As the global leader in human resources solutions, Aon Hewitt is
the largest independent provider of administration services for
retirement plans, serving more than 14 million retirement plan
participants in the United States. We have more than 7,500 retirement
professionals dedicated to helping plan sponsors maximize retirement
outcomes for their employees, manage risk and control total plan costs.
My name is Alison Borland, and I am the vice president of Retirement
Solutions & Strategies at Aon Hewitt. I am honored to be addressing the
committee today to discuss retirement plan leakage and opportunities to
improve the retirement security of Americans.
The employer-provided retirement system plays a critical role in
helping Americans meet their financial needs. Our research of
predominately large corporations shows defined contribution (DC) plans
are now the primary source of retirement income for Americans at three-
quarters of employers, up from 67 percent in 2009 \1\ and just 41
percent in 1999.\2\ This has largely shifted the risk and
responsibility of planning for retirement on to the shoulders of
workers, which has proven to be a challenging task for many Americans.
---------------------------------------------------------------------------
\1\ Aon Hewitt, 2011 Trends & Experience in Defined Contribution
Plans (Lincolnshire, IL: Aon Hewitt, 2011), 15.
\2\ Aon Hewitt, 1999 Trends & Experience in 401(k) Plans
(Lincolnshire, IL: Aon Hewitt, 1999), 7.
---------------------------------------------------------------------------
Our research shows that only 29 percent of American workers are
projected to meet 100 percent of their needs in retirement.\3\ While
many factors contribute to this savings shortfall, as more people rely
solely on a DC plan for their employer-provided retirement income, the
risk to individuals and society is growing.
---------------------------------------------------------------------------
\3\ Aon Hewitt, The Real Deal (Lincolnshire, IL: Aon Hewitt, 2012),
6.
---------------------------------------------------------------------------
Significant progress has been made to increase savings through
techniques such as automatic enrollment and automatic contribution
escalation. More employers are reducing fees for participants and
hence, improving returns and offering solutions to improve the
effectiveness of investments. Working against these efforts is leakage,
or taking funds out of retirement savings prematurely. Leakage occurs
in both defined benefit (DB) and DC plans, though there are increased
risks in DC plans. It is undermining the efforts to help workers
address the myriad challenges they face when planning for retirement.
Leakage can be particularly damaging to specific segments of the
population such as minorities, those who change jobs frequently and
lower income workers. Leakage occurs primarily in three ways:
I. Withdrawals are taken during active employment.
II. Loans are taken out and not repaid in full.
III. Retirement savings are cashed out upon a job termination
or change.
Plan sponsors have become increasingly focused on leakage and asset
retention within their plans. Our data show 94 percent of plan sponsors
are concerned about the use of loans, 85 percent are concerned about
participants taking hardship withdrawals and three quarters are worried
about participants cashing out.\4\ As a result, employers are
monitoring leakage behaviors. We regularly track and report these
findings for our clients and actively work with them to find ways to
reduce leakage. We have seen an increase in education about leakage and
increased encouragement to roll dollars into qualified plans and retain
dollars in plans after job termination or retirement.
---------------------------------------------------------------------------
\4\ Aon Hewitt, Employer Perspectives on Defined Contribution Plan
Leakage Survey (Lincolnshire, IL: Aon Hewitt, 2010) 13.
---------------------------------------------------------------------------
Our testimony will discuss the different types of leakage and
present tangible ideas about what can be done to curb it.
i. withdrawals
Withdrawals during active employment are of concern primarily for
defined contribution (DC) plans. In-service withdrawals from defined
benefit (DB) plans are allowed only in limited circumstances at or near
retirement age. Withdrawing money early from a DC plan represents a
permanent and irrevocable type of leakage that can significantly reduce
long-term savings accumulation, depending on the amount and frequency
of withdrawals.
Withdrawals are permitted only under certain circumstances. The
vast majority of plans (93 percent) allow hardship withdrawals, which
are commonly restricted to very specific and dire needs.\5\ Utilization
of hardship withdrawals is low--only 2 percent of participants took a
hardship withdrawal in 2012 and the reasons were sound; in 54 percent
of cases, the withdrawal was taken to prevent eviction or foreclosure.
Medical expenses ranked second (15 percent) and education expenses were
third (13 percent). Only 18 percent of hardship withdrawals were for
other reasons. The average hardship withdrawal was $5,160.\6\
---------------------------------------------------------------------------
\5\ Aon Hewitt, 2011 Trends and Experience in Defined Contribution
Plans, 76.
\6\ Aon Hewitt, 2013 Universe Benchmarks (Lincolnshire, IL: Aon
Hewitt, 2013).
---------------------------------------------------------------------------
Other permitted withdrawals generally include those for employees
who have reached age 59.5, or those based on after-tax contributions.
In some cases, employer dollars are available for withdrawal. Nearly 5
percent of active participants took a non-hardship withdrawal in 2012
and the average non-hardship withdrawal amount was $16,167.\7\
---------------------------------------------------------------------------
\7\ Ibid.
---------------------------------------------------------------------------
Our research shows that lower salaried participants are more likely
to take hardship withdrawals than other participants. Those earning
between $20,000 and $39,000 per year took hardship withdrawals at a
rate of approximately 4 percent, compared to only 0.5 percent for
workers earning over $100,000.\8\
---------------------------------------------------------------------------
\8\ Ibid.
Withdrawals by Salary
----------------------------------------------------------------------------------------------------------------
Percentage of
participants--any Percentage of Percentage of
Salary type of participants--hardship participants--nonhardship
withdrawal withdrawals withdrawals
----------------------------------------------------------------------------------------------------------------
<$20,000.................................. 5.7 1.4 4.5
$20,000-$39,999........................... 8.4 3.9 5.0
$40,000-$59,999........................... 8.8 3.2 6.3
$60,000-$79,999........................... 6.4 1.6 5.2
$80,000-$99,999........................... 4.7 0.9 4.0
$100,000+................................. 3.2 0.5 2.8
----------------------------------------------------------------------------------------------------------------
Columns do not add because small numbers of participants took multiple withdrawals.
When we view the issue of withdrawals through the lens of race and
ethnicity, a more problematic perspective emerges. Our research shows
that 9 percent of African-Americans and 3 percent of Hispanic
participants initiated a hardship withdrawal during 2010, compared to
just 2 percent of Whites and 1 percent of Asian-Americans. Even when
contributing factors such as salary and age are held constant, African-
Americans are 276 percent more likely and Hispanics are 47 percent more
likely to take hardship withdrawals than Whites.\9\
---------------------------------------------------------------------------
\9\ Aon Hewitt, Ariel Investments, 401(k) Plans in Living Color
(Chicago, IL: Aon Hewitt/Ariel Investments, 2012), 11.
---------------------------------------------------------------------------
Gender within ethnic and racial groups also significantly impacts
the likelihood of hardship withdrawals. Middle-income African-American
women (those earning $30,000 to $60,000) are more likely to take a
withdrawal than their male counterparts. Approximately 14 percent of
African-American women in this group took withdrawals, compared to 9
percent of African-American males in this income level. Our survey
shows that half of African-American women took loans to pay for
unexpected emergencies, 30 percent for day-to-day living expenses and
28 percent to pay off debt. African-American men cited similar
reasons.\10\
---------------------------------------------------------------------------
\10\ Ibid., 12.
---------------------------------------------------------------------------
While the fact that the percentage of participants who are in dire
financial straits is troubling, hardship withdrawals are not being
abused today and remain a better alternative than eviction or
foreclosure. Other withdrawals are unusual outside of those employees
nearing retirement, which could be part of a phased retirement approach
and those using after-tax savings in their plans. Withdrawals should be
monitored and managed, especially for groups at greater risk, but
should remain an important resource to employees in need. Our clients
are closely watching trends in hardship and other withdrawals, and
taking action to address the volume when appropriate. In some cases,
this means changing the eligible reasons for a withdrawal. In others,
it could be communication reinforcing the importance of avoiding
withdrawals.
ii. loans
Loans are widely available in DC plans and are used frequently.
They are not available in DB plans. Our data show that 94 percent of DC
plans provide access to loans.\11\ Standard repayment terms are 5
years, though 82 percent of plans also offer a loan strictly for a home
purchase with a repayment term of between 10 and 30 years. Loans are
generally available up to the smaller of $50,000 or 50 percent of the
worker's total plan balance. In 2012, 27 percent of participants had at
least one loan outstanding.\12\ The average loan amount outstanding was
$8,074, representing about 21 percent of participants' total account
balance.\13\
---------------------------------------------------------------------------
\11\ Aon Hewitt, 2011 Trends and Experience in Defined Contribution
Plans, 81.
\12\ Aon Hewitt, Ariel Investments, 401(k) Plans in Living Color,
12.
\13\ Aon Hewitt, 2013 Universe Benchmarks.
---------------------------------------------------------------------------
To the extent that loans are repaid in full and participants
continue to contribute money to the plan while they repay the loan,
there is little impact on long-term financial security. Our research
shows that in 2012, 81 percent of participants with outstanding loans
continued to make contributions while repaying the loan via payroll
deductions.\14\ In this way, participants can access savings dollars
while still benefiting from the employer match and continuing to
accumulate retirement savings.
---------------------------------------------------------------------------
\14\ Ibid.
---------------------------------------------------------------------------
The primary risk to retirement security occurs when participants
default on loans, which almost always follows termination of
employment, not during active employment. The vast majority of plans
require that if an outstanding loan is not repaid within 60 days, it is
treated as a distribution, resulting in taxes and possible penalties
that create a permanent loss--a leakage--from participants' retirement
savings, in addition to a higher tax bill for that year. Nearly 69
percent of participants with loans who terminate employment default on
the repayment following termination of employment.\15\
---------------------------------------------------------------------------
\15\ Ibid.
---------------------------------------------------------------------------
As with hardship withdrawals, minorities take loans at a higher
rate and are more likely to default on their loans, creating greater
risk for permanent loss of their retirement savings. Our data shows
that almost half (49 percent) of African-Americans and 40 percent of
Hispanics have outstanding loans, compared to 26 percent of Whites and
22 percent of Asian-Americans.\16\ This disparity remains persistent
across all income levels.
---------------------------------------------------------------------------
\16\ Aon Hewitt, Ariel Investments, 401(k) Plans in Living Color,
12.
---------------------------------------------------------------------------
In our opinion, loans play an important role because they attract
participants who may not otherwise contribute. This is especially true
among minorities, where more than a third (34 percent) of African-
Americans and 29 percent of Hispanics say the ability to take loans
from their plans if they need the money is a ``strong'' influence on
their decision to invest in a DC plan, compared to 17 percent of Asian-
Americans and 13 percent of Whites.\17\ Furthermore, loans enable
participants--who continue to work--to access credit, possibly at lower
interest rates than what they might receive from other sources, without
permanently reducing financial security by missing employer matching
contributions, or even worse, taking a withdrawal. The key to curbing
leakage due to loans is to reduce defaults. Plan sponsors are closely
monitoring loan activity, and some have taken action to reduce the
number of loans. Examples include updating education and communication
and providing it at point of need, adding a loan fee as a deterrent and
reducing the number of loans available. We have not seen plan sponsors
eliminating the loan provision.
---------------------------------------------------------------------------
\17\ Ibid. 12.
---------------------------------------------------------------------------
iii. cash outs
Cashing out of a retirement account occurs when plan participants
take a full distribution from their plan, incurring tax liability and,
depending on age, an additional 10 percent penalty. Cash outs are
available from DC plans upon termination of employment and from DB
plans when lump sums are available after termination of employment or
retirement. Cash outs often represent a complete and total eradication
of retirement savings and are the biggest threat to American's
retirement security when it comes to leakage due to high availability
and utilization.
Cash Outs in Defined Contribution Plans
Among participants who terminated employment in 2012, 43 percent
took a cash distribution.\18\
---------------------------------------------------------------------------
\18\ Aon Hewitt, 2013 Universe Benchmarks.
---------------------------------------------------------------------------
Participants with lower account balances are much more likely to
cash out, so the 43 percent (above) can be misleading. Fully 81 percent
of participants with less than $1,000 in the plan cashed out and 49
percent of those with balances between $1,000 and $5,000 did so.\19\
However, only 7 percent of balances of more than $100,000 were cashed
out.\20\ The larger the balance, the more likely the dollars are to
remain in the plan. Rollovers also increase with balance, though more
gradually than the amounts remaining in the plan. It is worth noting
that the plans in our database are large and benefit from significant
scale, so participants with large balances are likely to recognize the
value of lower fees, explaining the tendency to remain in the plan.
---------------------------------------------------------------------------
\19\ Ibid.
\20\ Ibid.
---------------------------------------------------------------------------
Post-termination behavior by participants' plan balance is
summarized in the table below:
Again, minorities are at a higher risk of leakage from cash outs.
Upon termination, 63 percent of African-Americans and 57 percent of
Hispanics cashed out their retirement plans, compared to 39 percent of
Whites and 34 percent of Asian-American participants.\21\ In terms of
assets, African-Americans cashed out 19 percent of assets and Hispanics
cashed out 17 percent, compared to just 7 percent of assets for Asian-
Americans and only 6 percent of assets for Whites.\22\
---------------------------------------------------------------------------
\21\ Aon Hewitt, Ariel Investments, 401(k) Plans in Living Color,
14.
\22\ Ibid., 14.
---------------------------------------------------------------------------
Even when looking across ranges of account balances, we saw that
the tendency to cash out remained markedly higher for African-Americans
and Hispanics. Nearly 3 in 10 African-American participants with more
than $100,000 in account balances cashed out their plans upon
termination, compared to 16 percent of Hispanics, 15 percent of Whites
and 11 percent of Asian-Americans.\23\
---------------------------------------------------------------------------
\23\ Ibid., 15.
Cash-out Rate for 2010 by Account Balance
----------------------------------------------------------------------------------------------------------------
African- Asian-
Account balance American American Hispanic White
(percent) (percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
$1,000-$2,499............................................... 18 15 21 9
$2,500-$4,999............................................... 28 4 23 12
$5,000-$7,499............................................... 38 17 26 16
$7,500-$9,999............................................... 31 8 30 13
$10,000-$19,999............................................. 30 6 16 12
$20,000-$39,999............................................. 34 7 26 12
$40,000-$69,999............................................. 21 12 29 13
$70,000-$99,999............................................. 35 2 20 14
$100,000+................................................... 29 11 16 15
----------------------------------------------------------------------------------------------------------------
Source: Aon Hewitt/Ariel Investments, 401(k) Plans in Living Color, 2012. The findings are based on year-end
2010 information from 60 of the largest U.S. organizations across a variety of industries and sectors. The
data represents 2.4 million participants.
The threat to participants' financial security from cashing out can
be significant, as illustrated in the example below. While very large
balances are less likely to cash out, many workers change jobs
throughout their career, with a low account balance each time. The
accumulated impact of these potential cash outs can be devastating to
long-term financial security.
Example of Cash Out Effects
Consider the impact of three cash outs on a worker who saves
for 30 years and retires at age 65. Let's assume she saves 8
percent of pay before tax per year, receives a match of 5
percent of pay per year, earns 3 percent annual salary
increases on a starting salary of $50,000, and earns 7 percent
in investment return per year.
After factoring in taxes, penalties, and lost interest, if
the individual cashed out benefits each time, she would
accumulate only $189,000 in her account by age 65, whereas, had
she kept the money in the plan, she would have $872,000 in her
account by age 65. Cash outs, the largest of which was just
over $60,000 after taxes and penalties, cost this individual
almost 80 percent of her ultimate nest egg.
In our experience, cash outs from DC plans receive the least
attention and focus from plan sponsors compared to loans and
withdrawals. While providers do include ample communication and
education throughout the experience to discourage cash outs, there are
few specific initiatives and changes occurring specifically targeting
cash out behavior. Because terminated employees no longer have the
relationship with the plan sponsor, plan sponsors are generally less
likely to invest time and money in helping them preserve their
financial security. Where we do see activity that can help curb cash
outs is from the new employers. Plan sponsors are increasingly
interested in encouraging participants to ``cash in'' their prior plan
balance by rolling the money into the new employer's plan.
Cash Outs in Defined Benefit Plans
Leakage through cashing out is also a threat for participants with
DB plan benefits and the risk is growing as plan sponsors consider
adding or expanding lump sum opportunities for participants.
According to the Employee Benefit Research Institute about 73
percent of retirement-aged people take the lump sum option when it is
offered.\24\ According to our 2012 recordkeeping data, more than half
(56 percent) of lump sum payments were cashed out, with the remaining
lump sums rolled into another tax deferred vehicle. We see a similar
trend with respect to the lump sum value as we see with DC plans, with
lower amounts being cashed out at much higher rates than larger
amounts. The average size cash out from a pension plan in 2012 was
about $14,000, compared to the average rollover of almost $47,000. Once
again, the larger the balance, the more likely the participant is to
remain in the tax-preferred system.
---------------------------------------------------------------------------
\24\ Banerjee, Sudipto, Annuity and Lump-Sum Decisions in Defined
Benefit Plans (Washington, DC: EBRI, January 2013)1.
---------------------------------------------------------------------------
Lump sum windows also continue to grow in popularity. This option
provides a brief period of time, usually 60 days, during which
terminated participants can elect a lump sum pension payout that would
otherwise not be available. These windows are most often limited to
terminated vested participants who leave the organization for another
job, though in certain cases plan sponsors are considering offering
lump sum payments to retirees already in payment status. Nearly 4 in 10
(39 percent) of companies reported that they are ``very likely'' or
``somewhat likely'' to add or liberalize lump sum options through a
window approach in 2013.\25\ When this option is offered to
participants, our research shows the average lump sum election rate is
55 percent, with the alternative being retention of an annuity form of
payment.\26\
---------------------------------------------------------------------------
\25\ Aon Hewitt, 2013 Hot Topics in Retirement (Lincolnshire, IL:
Aon Hewitt, 2013), 10.
\26\ Aon Hewitt, Pension, 2.
---------------------------------------------------------------------------
We see little additional effort to specifically target cash out
behavior in DB plans. However, for plans that offer lump sum windows,
we are working with many plan sponsors to provide online help,
communications and special call center support designed to help
participants make informed, smart decisions about their distribution.
While most conversations and research on leakage focus on DC plans,
leakage does and has always occurred from defined benefit plans as
well. Any efforts to curb leakage should consider possibilities for
both.
iv. recommendations to decrease leakage
Leakage is, without question, eroding the financial security of
American workers. At the same time, providing workers with access to
funds in certain situations is a benefit that encourages more robust
plan participation. To provide some perspective, based on a sample of
DC plans totaling about $300 billion in assets, the amounts contributed
to plans in 2011 totaled about five times the amount that leaked out.
While savings plans are growing and significant assets are being
accumulated, a careful balance is required.
Ideas that would decrease abusive leakage while retaining the
needed balance are as follows:
Modify the availability of loans and withdrawals. There is room to
restrict access to certain funds while retaining sufficient flexibility
and access for workers. For example, loans and withdrawals could be
permitted only on employee savings, not employer contributions. Or,
loans and withdrawals could be available only upon documentation of
need, similar to hardship requirements today.
Limit dollars available for loans and withdrawals. While the
average loans and withdrawals are relatively small compared to limits
in place, reducing the maximum allowable amounts would eliminate some
of the largest loans and withdrawals.
Add waiting periods. To discourage repeat borrowers, incorporate a
12-month waiting period before participants can take a loan following
repayment of the prior loan and consider a similar waiting period for
hardship withdrawals. This will add another deterrent before workers
request the distribution.
Enable easier repayment following termination. Most employers
currently do not accept loan repayments after employment termination
because payroll deductions can no longer be made. To solve this
problem, participants could be allowed to continue to make payments
through the term of the loan from personal accounts. This is allowable
today through employer action. Additional flexibility could be
considered for involuntary terminations.
Increase the penalty for withdrawing money from the tax-preferred
system. Unless participants receiving a lump sum from a DC or DB plan
keep their money within the retirement system by leaving it in the
plan, or roll those dollars into other DC plans or IRAs until
retirement eligibility, they would incur an increased tax penalty of 15
percent or more. There could be exceptions to this penalty provided
only for hardship or other dire need. A variation could be to apply
this concept only to employer-funded amounts.
Allow defined benefit plan sponsors to eliminate lump sum options.
Under today's legislative structure, the lump sum form of payment is
protected and cannot be eliminated. Ironically, only for certain plans
that fall below the funded threshold, lump sum payments are limited or
eliminated altogether. Other sponsors do not have this flexibility. In
spite of the increasing prevalence of lump sum payments and windows,
some plan sponsors might be interested in eliminating the lump sum
option, if permitted. In fact, more plan sponsors might consider such
an approach in exchange for increased funding flexibility or decreased
PBGC premiums.
Encourage lifetime income. Whether from a DB plan, DC plan, or
annuity, steady lifetime income provides increased security by
mitigating risks such as investment risk and longevity risk. By
encouraging solutions offering lifetime income within employer plans,
to both plan sponsors and workers, you will promote financial security
and reduce leakage.
Promote the employer system. While in a qualified employer plan,
participants often benefit from lower prices, professional investment
management, tools and education, advice and fiduciary protections.
By educating workers about the benefit of retaining dollars in
their employer plan after employment termination and/or encouraging
rollovers into employer plans and by combating contrary marketing
messages, we will reduce leakage that results from higher retail fees
and biased advice that can occur when participants move money outside
of the qualified plan system. Critical to this effort is simplifying
the process of rolling dollars from one qualified plan to another, or
from IRAs into qualified plans. For example, regulators have an
opportunity to streamline the process by reducing the paper and
certification required.
Provide education and resources. As many employers are already
doing today, providing education and promoting financial literacy can,
over time, make a positive and significant impact on leakage.
v. conclusion
Employer retirement plans play a key and necessary role in the
financial security of American workers. Plan sponsors, legislators and
regulators have the opportunity to take actions that can help Americans
achieve an adequate, financially secure retirement by strengthening
these plans and programs for those who have them and offering
alternatives for those who do not. Reducing unnecessary leakage from
withdrawals, loans and cash outs is a critical part of these efforts--
regardless of the plan design--and can especially make an impact for
minorities who face an increased risk.
We appreciate the opportunity to share our recommendations with the
committee and are pleased to offer our data, resources and expertise to
continue efforts that will help improve retirement security for all
Americans. Thank you.
The Chairman. Thank you very much, Ms. Borland.
Dr. Weller.
STATEMENT OF CHRISTIAN E. WELLER, Ph.D., PROFESSOR OF PUBLIC
POLICY AND PUBLIC AFFAIRS, McCORMACK GRADUATE SCHOOL,
UNIVERSITY OF MASSACHUSETTS BOSTON AND SENIOR FELLOW, CENTER
FOR AMERICAN PROGRESS, WASHINGTON, DC
Mr. Weller. Thank you, Chairman Harkin, Ranking Member
Alexander, and members of the committee.
Thank you very much, Senator Warren, for the nice
introduction. I very much appreciate it.
I will primarily focus on 401(k) loans, but I'm happy to
answer any questions you may have with respect to other policy
recommendations regarding leakage in other forms. By 2009,
immediately after the great recession, 60 percent of households
were not fully prepared for retirement, meaning they didn't
have enough savings to maintain their standard of living in
retirement.
Households clearly need more retirement savings than they
have now, and they need more savings than they did in previous
generations. Life expectancy has increased. The growth of
social security benefits has slowed relative to a household's
pre-retirement earnings. Fewer households have defined benefit
pensions than in the past. And rising healthcare costs will
require additional spending from retirees.
U.S. policy already incentivizes savings by giving
employees the option to contribute to a range of retirement
plans, particularly employer-based 401(k) plans, on a tax
advantage basis. Contributions to these retirement plans, as
you well know, are not subject to income taxes and neither are
capital gains that accumulate in these savings accounts during
an employee's working career. Employees typically decide how
much to contribute, within some limits, to their 401(k) plans,
but the widespread lack of adequate retirement savings suggests
the contributions to 401(k) plans are likely too low.
Allowing employees to borrow from their 401(k) plans, as is
often the case in 401(k) plans, should theoretically raise
employees' contributions. Knowing that money will be available
in an emergency or for large scale purchases such as a first
home should increase employees' willingness to put money into
retirement savings accounts. Research studies, including work I
conducted with Professor Wenger of the University of Georgia,
indeed, suggest that there is a positive correlation between
the ability to borrow from one's 401(k) plan and the share of
earnings that employees contribute to their 401(k) accounts.
Households often borrow from their 401(k) plans because
they have to. We find, for instance, that they borrow mainly
because a household member is sick. There are downsides to
401(k) loans, though. Taking out a loan during one's working
career can substantially reduce retirement savings up to 22
percent in our simulations compared to savings without taking a
loan. And the link between being able to borrow from a 401(k)
plan and contributions to a 401(k) plan is weaker among
households that already have a hard time saving because they
lack financial sophistication, they are myopic, or they look
for more instant gratification than is the case for other
households.
Furthermore, having the ability to borrow from one's 401(k)
plan seems to be associated in our data with more overall debt,
such as credit cards and mortgages, possibly because households
feel that they can easily dip into their 401(k)s if they have
trouble paying back other loans. That is, the increased
contributions due to the ability to borrow from one's 401(k)
plan seem to be offset in some instances by household
characteristics and behavior in other aspects of their
finances.
The distinctly mixed evidence on 401(k) loans suggests
three policy lessons. First, 401(k) loans fill a critical role
for households. Households tend to rely on these loans for a
number of reasons, including paying bills when a household
member is ill. Eliminating these loans could thus cause
substantial economic hardship for some households.
Second, restrictions on 401(k) loans should remain in
place. There is no evidence that households frivolously borrow
from their 401(k) plans. Most households borrow from their
401(k) plans, if they do so at all, to pay for large scale
expenses for which other credit is costly or unavailable, for a
down payment on a first home, or for college education, for
instance. Existing loan restrictions, especially in the reasons
for taking out a loan from a 401(k) plan, seem to work in
getting people the money that they need while preventing the
financing of conspicuous consumption.
Third, there may be room to strengthen the link between a
borrowing option from and contributions to a 401(k) plan. The
link in our data, in our research, is particularly strong for
households who already handle their finances well, while the
link is weaker for households who seem to struggle in managing
their finances in other areas. For those who manage their
finances well, the effect is about three times larger than it
is for households who don't manage their finances well.
One policy option, in our view, may be to make the
borrowing option contingent on past contributions to a 401(k)
plan. Just to give you an example, if a plan has a standard
default contribution rate of 3 percent and has an automatic
enrollment, you could say, ``Well, you get the loan option if,
for at least 12 months or 24 months, you contribute an extra 4
percentage points.'' My co-author says he's happy with any
additional contributions, so I want to make that caveat here.
Four percent is what comes out of our data, the additional 4
percentage points.
The minimum required contribution for having the loan
option could differ or could be phased in over time as long as
there is a requirement for additional contributions to a 401(k)
plan to get the loan option. The borrowing option would no
longer exist if contributions were, on average, lower than the
minimum required during the look-back period.
Getting middle-class Americans closer to a decent standard
of living in retirement will require many separate steps. It
may be possible to use policy changes to 401(k) loans as a
small step in an effort to substantially improve employees'
contributions to their savings plans.
Thank you very much, and I'm happy to answer any questions
you may have.
[The prepared statement of Mr. Weller follows:]
Prepared Statement of Christian E. Weller, Ph.D.
summary
The growth of retirement savings accounts such as 401(k) plans has
raised key policy questions related to getting people to save more
money for retirement than they have in the past. Giving employees the
option to borrow from their 401(k) plans is, at least in theory, one
tool to get people to save more money than they otherwise would in
their retirement savings accounts. Current U.S. policy allows employees
to borrow within limits from their own 401(k) plans as long as they are
employed. Knowing that money will be available in an emergency or for
large-scale purchases such as a first home should increase employees'
willingness to put money into their retirement savings accounts. A
number of research studies indeed suggest that there is a positive
correlation between the ability to borrow from one's 401(k) plans and
the share of earnings that employees contribute to their accounts. And
households often borrow from their 401(k) because they have to--because
a household member is sick, for example \1\--further underscoring that
households indeed rely on their 401(k) savings in an emergency and may
have knowingly contributed more to their savings plans than they
otherwise would have.
There are downsides to 401(k) loans, though. Taking out a loan
during one's working years can substantially reduce retirement
savings--up to 22 percent if a household takes out a loan early in
one's career and only slowly repays the loan.\2\ And the link between
being able to borrow from a 401(k) loan and contributions is
substantially weaker among households that already have a hard time
saving for the future because they lack financial sophistication, they
are myopic, or they look for instant gratification than other
households.\3\ Furthermore, having the ability to borrow from one's
401(k) loan seems to be associated with more overall debt such as
credit cards and mortgages, possibly because households feel that they
can easily dip into their 401(k) plans if they encounter trouble paying
back other loans.\4\ That is, increased contributions due to the
ability to borrow from one's 401(k) plan seem to be offset in some
instances by households' characteristics and behavior in other aspects
of their finances.
The distinctly mixed evidence on 401(k) loans points to several
public policy lessons. First, 401(k) loans fill a critical role for the
economic security of households. They tend to rely on those loans for a
number of reasons, including paying bills when a household member is
ill. Eliminating these loans could thus cause substantial economic
hardships for some households.
Second, restrictions on 401(k) loans should remain in place. There
is no evidence that households frivolously borrow from their 401(k)
loans--the chance of borrowing and loan amounts are moderate, although
both have been growing over time.\5\ And households typically borrow
from their 401(k) loans when access to other forms of credit is costly
or unavailable, such as for down payments on a first home or for a
college education.\6\ Existing loan restrictions, especially on the
reasons for taking out a loan from a 401(k) loan, seem to work and
policymakers should keep those in place.
Third, there may be room to strengthen the link between a borrowing
option from and contributions to a 401(k) plan. The evidence suggests
that the link is particularly strong for households, who already handle
their finances well, while the link is weaker for households, who seem
to struggle in managing their finances in other areas. One possibility
may be to make the borrowing option contingent on past contributions. A
plan that has a default contribution rate of 3 percent of earnings, for
instance, could grant employees the option to borrow from their 401(k)
plan if they contributed more than the default contribution rate--4
percentage points more, for example (that is, if they contributed at
least 7 percent of earnings during the past 12 months or 24 months).\7\
The additional required contribution could be lower than this and could
be phased in--it is important that the loan option is contingent on
additional contributions. The borrowing option would no longer exist if
contributions were on average lower than the minimum during the look-
back period.
______
introduction
Dear Chairman Harkin, Ranking Member Alexander, and members of the
committee, thank you very much for inviting me here today to discuss my
research on 401(k) loans.
The Great Recession of 2007-9 put the issue of inadequate
retirement savings into sharp relief. Many U.S. households had
insufficient savings to maintain their standard of living in retirement
well before 2007, but the loss of wealth during the crisis meant that
60 percent of households were not fully prepared for retirement in
2009.\8\ The majority of U.S. households had saved too little just as
the baby boomer generation started to enter the retirement phase of
their lives.
Households clearly need more retirement savings than they have now
and they need more than previous generations did. Life expectancy has
increased, the growth of Social Security benefits has slowed such that
those benefits have declined relative to households' pre-retirement
earnings, fewer households have defined-benefit pensions than in the
past, and rising health care costs will require additional spending
from retirees.\9\ The bottom line is that households need to save more
than they have in the past just to maintain their standard of living in
retirement.
Public policy in the United States incentivizes savings by giving
employees the option to contribute to a range of retirement plans on a
tax-advantaged basis. Contributions to these retirement plans typically
are not subject to income taxes and neither are capital gains that
accumulate in these savings accounts during employees' working careers.
Employer-sponsored retirement savings plans such as 401(k) plans are
the most common form of these tax-advantaged retirement savings. And
employees typically decide how much to contribute to their 401(k)
plans,\10\ although there are frequently employer contributions to
their employees' retirement savings accounts as well. The widespread
lack of adequate retirement savings outside of Social Security suggests
that contributions to all types of retirement accounts, especially
401(k) plans, are likely too low.
Allowing employees to borrow from their 401(k) plans, for instance,
should theoretically raise employees' contributions to their accounts.
Current U.S. policy indeed allows employees to borrow within limits
from their own 401(k) plans as long as they are employed. Knowing that
money will be available in an emergency or for large-scale purchases
such as a first home should increase employees' willingness to put
money into their retirement savings accounts. A number of research
studies indeed suggest that there is a positive correlation between the
ability to borrow from one's 401(k) plan and the share of earnings that
employees contribute to their accounts. And households often borrow
from their 401(k) because they have to--because a household member is
sick, for example \11\--further underscoring that households indeed
rely on their 401(k) savings in an emergency and may have knowingly
contributed more to their savings plans than they otherwise would have.
There are downsides to 401(k) loans, though. Taking out a loan
during one's working years can substantially reduce retirement
savings--up to 22 percent if a household takes out a loan early in
one's career and only slowly repays the loan.\12\ And the link between
being able to borrow from a 401(k) loan and contributions is
substantially weaker among households that already have a hard time
saving for the future because they lack financial sophistication, they
are myopic, or they look for instant gratification than other
households.\13\ Furthermore, having the ability to borrow from one's
401(k) loan seems to be associated with more overall debt such as
credit cards and mortgages, possibly because households feel that they
can easily dip into their 401(k) plans if they encounter trouble paying
back other loans.\14\ That is, increased contributions due to the
ability to borrow from one's 401(k) plan seem to be offset in some
instances by households' characteristics and behavior in other aspects
of their finances.
The distinctly mixed evidence on 401(k) loans points to several
public policy lessons. First, 401(k) loans fill a critical role for the
economic security of households. They tend to rely on those loans for a
number of reasons, including paying bills when a household member is
ill. Eliminating these loans could thus cause substantial economic
hardships for some households.
Second, restrictions on 401(k) loans should remain in place. There
is no evidence that households frivolously borrow from their 401(k)
loans--the chance of borrowing and loan amounts are moderate, although
both have been growing over time.\15\ Most households borrow from their
401(k) plans, if they do so at all, to pay for large-scale expenses,
for which other credit is costly or unavailable--for a down payment on
a first home or for a college education, for example.\16\ Existing loan
restrictions, especially on the reasons for taking out a loan from a
401(k) loan, seem to work in getting people the money that they need,
while preventing the financing of conspicuous consumption. Policymakers
should keep those in place.
Third, there may be room to strengthen the link between a borrowing
option from and contributions to a 401(k) plan. The evidence suggests
that the link is particularly strong for households who already handle
their finances well, while the link is weaker for households who seem
to struggle in managing their finances in other areas. One possibility
may be to make the borrowing option contingent on past contributions. A
plan that has a default contribution rate of 3 percent of earnings, for
instance, could grant employees the option to borrow from their 401(k)
plan if they contributed 4 percentage points more, for instance--that
is, if they contributed at least 7 percent of earnings during the past
12 months or 24 months.\17\ The minimum required contribution for
having the loan option could differ or could be phased in as long as
there is a requirement for additional contributions to 401(k) plans.
The borrowing option would no longer exist if contributions were on
average lower than the minimum during the look-back period.
background on 401(k) loans
A 401(k) loan enables the borrower to act like a bank to himself or
herself, albeit within some limits.\18\ Households that have the option
to borrow from their 401(k) plan can borrow up to $50,000, or one-half
the vested balance from the account, whichever is less. Loans must be
repaid within 5 years, except for loans that have been taken out for
the first-time purchase of a home. Home loans for first-time purchases
can be repaid over a period of up to 15 years. Loan repayment is not
tax deductible and neither are interest payments unless the primary
residence secures the loan.
The interest rates on these loans are generally favorable. Of those
401(k) plans that allowed borrowing, approximately 70 percent charged
an interest rate equal or less than the prime rate--the rate that banks
charge their best customers--plus 1 percentage point in 1996, according
to the Government Accountability Office in 1997.\19\
Borrowers can incur penalties if they fail to repay their pension
loan. The outstanding loan amount is then considered a taxable
distribution from the 401(k) plan and subject to income tax on the
outstanding loan amount plus an additional 10 percent as excise tax.
The excise tax disappears for borrowers over the age of 59\1/2\.
401(k) loans have risen over time.\20\ More people have 401(k)
plans; their account balances have grown, and with them the ability to
borrow from their 401(k) plans; and employers have made the loan option
more widely available, leading to more people borrowing from their
401(k) plans. Data from the major mutual fund firms, which handle most
of the assets in 401(k) plans, for example, show that 21 percent of
401(k) plans showed an outstanding loan in 2011. This share had risen
from 18 percent in 2007 and 2008 to 21 percent in 2009 and
thereafter.\21\ The average loan balance has hovered around $7,000 from
1998, the first year for which data are available, to 2011 and stood at
$7,027 in 2011.\22\
The below Table summarizes the probability and amount of 401(k)
loans in 2010, the last year for which data from the Federal Reserve
are available.\23\ These data show a 12.1 percent chance of having an
outstanding loan in 2010 if the household has a 401(k) plan--the
highest share on record, dating back to 1989. And the average loan
amount totaled $13,976 in 2010, which is again the highest on record.
Table--Probability of Having a 401(k) Loan and Average 401(k) Loan
Amounts by Select Demographic Characteristics, 2010
------------------------------------------------------------------------
Has 401(k)
loan, Amount of
contingent on 401(k) loan,
Categories having a if household
401(k) plan has such a
(percent) loan (dollars)
------------------------------------------------------------------------
Total................................... 12.1 $13,976
------------------------------------------------------------------------
Age
18 to 24.............................. 7.0 584
25 to 34.............................. 9.1 4,916
35 to 44.............................. 14.9 6,966
45 to 54.............................. 13.8 8,781
55 to 64.............................. 11.5 44,921
65 and older.......................... 3.1 2,026
Race/ethnicity
White................................. 10.9 8,521
Black................................. 18.6 3,963
Hispanic.............................. 17.3 11,797
Income
Bottom quintile....................... 3.6 19,175
Second quintile....................... 11.1 2,320
Middle quintile....................... 13.7 6,939
Fourth quintile....................... 13.2 6,891
Top quintile.......................... 11.2 27,017
Personal characteristics
Self-identifies as saver.............. 9.8 20,966
Planning horizon of more than 5 years. 10.1 11,566
Relies on professional advice for 11.2 18,538
investments..........................
Homeowner............................. 12.1 $16,435
------------------------------------------------------------------------
Notes: Calculations based on: Board of Governors, Federal Reserve
System, ``Survey of Consumer Finances'' (2012). All demographic
characteristics refer to the head of household. Racial and ethnic
categories are mutually exclusive. Income refers to normal household
income. The upper limit for the bottom income quintile was $20,330,
$35,578 for the second quintile, $57,941 for the third quintile, and
$94,535 (in 2010 dollars) for the fourth quintile. Self-identified
savers are those households who indicated that they save regular or
irregular amounts each month. Professional investment advice refers to
investment advice from regulated professionals such as lawyers,
accountants, investment brokers, insurance brokers, and certified
financial planners.
The data summary further shows that the probability of having a
loan and the average loan amount tend to move in opposite directions.
That is, some population groups such as African-Americans have a high
probability of having a 401(k) loan but below-average loan amounts,
while other population groups such as self-identified savers show
comparatively low probabilities yet large loan amounts. (see Table) Low
probabilities and large loan amounts tend to reflect large savings both
in retirement accounts and elsewhere, which lower the need to borrow
but also give households more assets in their 401(k) assets to borrow
from.
the economics of 401(k) loans
Standard economic theory suggests that offering households the
option to borrow from their 401(k) plans is unambiguously desirable
since it should increase contributions beyond where they otherwise
would be. A more nuanced perspective that accounts for potential
heterogeneity in households' outlook on the future and for differences
in households' savings behavior as a result finds indeed differences in
contributions between groups of households, although the 401(k) loan
option indeed increases 401(k) contributions.
401(k) Loans and Contributions in Standard Economic Theory
Standard life-cycle models of consumption and saving in economics
indicate that the 401(k) loan option will likely increase retirement
savings. The assumption in these models is that well-informed workers
have stable lifetime preferences, will save in accordance with these
preferences, and will save optimally to maintain a preferred level of
consumption over their lifetime. With fixed preferences over time,
there is no need for added incentives to save and thus also no need for
precommit-
ment devices such as limits on 401(k) loans.\24\ Individuals and
households will save less in their 401(k) plans if there is no loan
option than if they can borrow. Alternatively, households will save
more in their 401(k) plans if they have a loan option than if they
didn't.
Research indeed finds that the borrowing option increases the
contribution amount, consistent with the predictions of standard
discounting in a life-cycle model. The Government Accountability
Office, for instance, finds, based on the 1992 Survey of Consumer
Finances, that when plans offered a loan option, workers significantly
increased the contribution rate.\25\ Similarly, Jack VanDerhei from the
Employee Benefits Research Institute and Sarah Holden from the
Investment Company Institute find that a loan option increased
contribution rates by 0.6 percentage points compared to participants
who did not have such a loan option.\26\
These analyses, though, ignore the potential heterogeneity of
households and thus ignore the possibility of different effects of
401(k) loan options on household contributions--a point I will return
to below.
Looking at reasons for 401(k) loans is another way to understand
the standard economic model at work. Households should borrow in this
model for unforeseen events, for which they will unlikely have access
to other forms of credit.
The reasons for 401(k) loans are not widely studied, but evidence
indicates that households borrow out of necessity from their 401(k)
plans. An earlier study by two economists at the Federal Reserve
summarized data from the 1998 Survey of Consumer Finances and found
that 37.7 percent of loans from 401(k) plans were taken out for a home
purchase, improvements, and repairs; another 21.6 percent of loans were
borrowed to consolidate bills; followed by 16.5 percent for car
purchases; and the remaining reasons being education (9.6 percent),
nondurable consumption (8.5 percent), medical, legal, or divorce
expenses (4.5 percent), and investment purposes (1.6 percent).\27\ A
later, more detailed study by Jeffrey Wenger and me finds that poor
health is a consistent and statistically significant predictor of both
the likelihood of having a 401(k) loan as well as the amount borrowed
from a 401(k) plan. We also find that poor health is a more important
determinant of 401(k) loans than home ownership and that households in
poor health with 401(k) loans are most likely to use the loan proceeds
to pay for health-related expenditures.\28\ The systematic link between
health status and 401(k) loans suggests that households indeed use
these loans when they encounter an unforeseen event, for which they
cannot easily borrow from other sources.
This result leads to an obvious implication of 401(k) loans.
Households may face economic pressures in the present that force them
to borrow from their retirement savings plans. But the same pressures
may slow repayment of the loan and make additional 401(k) plan
contributions beyond the loan repayments difficult. A 401(k) loan
essentially hits the pause button on accumulating new retirement
savings and gaining access to some of the tax advantages of a 401(k)
plan until the loan is fully repaid. Gradual repayment and the lack of
additional 401(k) contributions beyond the loan repayments can hence
substantially slow retirement savings accumulations. The exact impact
of a 401(k) loan on total retirement savings will depend on the
interest rate charged for the loan, the interest rate earned on
savings, whether the borrower keeps up with contributions to the
retirement savings plan in addition to repaying the loan, and when the
loan is taken out. A loan taken out early in a worker's career can
reduce retirement savings by more than 20 percent, particularly if
there are no additional 401(k) contributions beyond the loan
repayments.\29\
A Behavioral Economics View on 401(k) Loans and Contributions
Taking a loan from a 401(k) plan can have detrimental effects, even
in the standard economic model, but the loss of potential retirement
savings is likely to be small or even nonexistent if having the loan
option leads to higher 401(k) contributions than otherwise would be the
case.\30\ Contributions not only need to be higher than they would be
without a 401(k) loan option, but they need to be high enough to offset
the potentially detrimental effects of taking a loan from a 401(k)
plan.
This condition that additional contributions need to be high enough
to offset the adverse effect of 401(k) loans on retirement savings is
an important caveat. The standard economic model sees only one type of
household saving for retirement. Allowing for heterogeneity in
household behavior, though, can change the conclusion on the link
between 401(k) loans, additional contributions, and retirement savings.
Additional contributions may in some instances be too small to offset
the negative effects of a 401(k) loan and the combined effect of taking
a loan and additional contributions may still leave the household with
less retirement savings than they would have had without a 401(k) loan
option.
This may occur if households do not save optimally because people
have dynamically inconsistent preferences, are myopic, or are
unsophisticated such that their current desire for future savings is
undone by their own future decisions to not save more--by borrowing
from a defined-contribution plan, for example. Restricting access to
savings before retirement could raise retirement savings and lifetime
consumption and may enhance the total savings accumulation of this
subset of households.
Jeffrey Wenger and I, in our most recent research on 401(k) loans,
thus develop a methodology to separate households into two groups.\31\
One group (Type A) represents standard discounting where people behave
in ways that are consistent with the standard model and another group
(Type B) comprises ``inconsistent'' discounting whereby households
exhibit nonstandard economic behavior. There are many reasons why a
household may demonstrate Type B behavior such as hyperbolic
discounting, mental accounts, myopia, and lack of financial
sophistication. The bottom line, though, is that there are households
that systematically exhibit financial behavior that is inconsistent
with optimizing financial outcomes.
We identify households that objectively engage in financial
decisions that do not easily fit into an optimizing framework and thus
their lifetime consumption as Type B households, while all others are
Type A households. Specifically, if the household has an outstanding
credit card balance beyond the grace period, they compare the credit
card interest rate for the card with the largest balance to the
interest rate on their home equity line of credit, or HELOC. Households
with credit card interest rates larger than HELOC interest rates are
Type B households. All other households are Type A households. This
measures preference heterogeneity as any household that carries a
credit card balance but also has untapped home equity at a lower
interest rate. The assumption is that these households are not
optimizing in the standard way if they choose a higher cost form of
credit when a lower cost one is available to them. Approximately 68
percent of households in the sample are Type A--a percentage that has
varied from 59 percent in 1989 to 73 percent in 2001.\32\
The research shows that preference heterogeneity indeed matters for
total retirement savings because of varying effects of the availability
of 401(k) loans on 401(k) contributions. This research finds that the
contribution rate for people with Type B preferences is about two-
thirds lower than that of people with standard preferences when the
borrowing option is present in 401(k) plans. Type A households increase
their contributions by 3.7 percentage points of earnings in the
presence of a loan option, whereas Type B households only increase
their contribution by 1.4 percentage points.\33\
This research further finds that having the option to borrow from a
401(k) loan is also associated with more overall debt. One explanation
is that households, who have the option to borrow from their 401(k)
plans, may borrow more on their credit cards and mortgages than other
households because they know that they can fall back on their 401(k)
plans if they encounter problems in repaying their non-401(k) loans.
The combined effect of higher savings and more debt can again
differ between households with different behaviors. Type B households,
who contribute somewhat more with a 401(k) loan option than without,
could see less retirement savings than in a situation where borrowing
from a 401(k) plan would not be possible. Type A households, who show
behavior consistent with optimizing financial outcomes, likely end up
with more total savings because of the higher contribution rates than
would be the case if borrowing from a 401(k) plan was not an option,
even if they increase their total amount of debt.\34\
policy implications
The arrival of 401(k) loans creates a curious situation for
households. They can save for themselves and borrow from themselves
with the same financial instrument. The existing research on the
implications of the ability to borrow from a 401(k) loans is somewhat
limited, but a few key findings that are of policy relevance emerge
nevertheless.
First, 401(k) loans fill a critical role for the economic security
of households. They tend to rely on those loans for a number of
reasons, particularly for paying for health care and other consumption
when a household member is ill. Eliminating the ability to borrow from
a 401(k) plan could thus cause substantial economic hardships for some
households who already struggle financially.
Second, restrictions on 401(k) loans should remain in place. There
is no evidence that households frivolously borrow from their 401(k)
loans--the chance of borrowing and loan amounts are moderate, although
both have been growing over time.\35\ And summary data on the reasons
for taking out these loans indicate that most loans are taken for
large-scale projects for which other loan options are either costly or
do not exist--for the down payment on a first home, for college
education, and for health care and related consumption, for
example.\36\ Existing loan restrictions, especially on the reasons for
taking out a loan from a 401(k) loan, seem to work and policymakers
should keep those in place.
Third, there may be room to strengthen the link between a borrowing
option from and contributions to a 401(k) plan. The evidence suggests
that the link is particularly strong for households who already handle
their finances well, while the link is weaker for households who seem
to struggle in managing their finances in other areas. One possibility
may be to make the borrowing option contingent on past contributions. A
plan that has a default contribution rate of 3 percent of earnings, for
instance, could grant employees the option to borrow from their 401(k)
plan if they contributed 4 percentage points more--that is, if they
contributed at least 7 percent of earnings during the past 12 months or
24 months.\37\ The additional contributions could vary and could be
phased in over time as long as people needed to contributed more money
to get access to the loan option in their 401(k) plans. The borrowing
option would no longer exist if contributions were on average lower
than the minimum during the look-back period.
Being able to borrow from one's 401(k) plan can prove valuable to
households under the right circumstances. And policymakers can set the
terms to make sure that households can balance present demands and
future needs with their retirement savings in a thoughtful manner.
Endnotes
1. Christian E. Weller and Jeffrey B. Wenger, ``Easy Money? Health
and 401(k) Loans,'' Contemporary Economic Policy 30 (1) (2012): 29-42.
2. Christian E. Weller and Jeffrey B. Wenger, ``Robbing Tomorrow to
Pay for Today'' (Washington: Center for American Progress, 2008).
3. Jeffrey B. Wenger and Christian E. Weller, ``Boon or Bane:
401(k) Loans and Loan Provisions,'' unpublished manuscript, University
of Georgia. Paper available from authors upon request.
4. Ibid.
5. Weller and Wenger, ``Robbing Tomorrow to Pay for Today.'' Jack
VanDerhei and others, ``401(k) Plan Asset Allocation, Account Balances,
and Loan Activity in 2011'' (Washington: Employee Benefits Research
Institute, 2012)
6. Weller and Wenger, ``Robbing Tomorrow to Pay for Today.''
7. The recent estimate shows that the borrowing option increases
contributions by 3.7 percentage points for households who have a good
handle on their finances, but that the contribution increase is only
1.4 percentage points for households who do not have a good handle on
their finances in other areas. Requiring an additional 4 percentage
points for the loan option would thus make no difference for good
financial planners, but it would boost retirement savings for
households who arguably need a stronger commitment device to save for
their retirement. Wenger and Weller, ``Boon or Bane.''
8. Center for Retirement Research, ``National Retirement Risk Index
Fact Sheet No. 2'' (2010).
9. Working longer than in the past is an obvious theoretical
alternative, but the experience of the Great Recession has shown that
older households need to spend more time working longer exactly when
fewer job opportunities are available. Labor and financial markets
regularly move in tandem, so that the experience of older households in
the Great Recession--looking for work after financial markets and labor
markets crashed--is the rule not the exception. See: Christian E.
Weller and Jeffrey B. Wenger, ``Integrated Labor and Financial Market
Risks: Implications for Individual Accounts for Retirement,'' Journal
of Aging and Social Policy 21 (2) (2009): 256-76.
10. This testimony uses 401(k) plans as shorthand to refer to all
employer-sponsored defined-contribution accounts.
11. Weller and Wenger, ``Easy Money? Health and 401(k) Loans.''
12. Weller and Wenger, ``Robbing Tomorrow to Pay for Today.''
13. Wenger and Weller, ``Boon or Bane.''
14. Ibid.
15. Weller and Wenger, ``Robbing Tomorrow to Pay for Today'';
VanDerhei and others, ``401(k) Plan Asset Allocation, Account Balances,
and Loan Activity in 2011.''
16. Weller and Wenger, ``Robbing Tomorrow to Pay for Today.''
17. The recent estimate shows that the borrowing option increases
contributions by 3.7 percentage points for households who have a good
handle on their finances, but that the contribution increase is only
1.4 percentage points for households who do not have a good handle on
their finances in other areas. Requiring an additional 4 percentage
points for the loan option would thus make no difference for good
financial planners, but it would boost retirement savings for
households who arguably need a stronger commitment device to save for
their retirement. Wenger and Weller, ``Boon or Bane.''
18. Government Accountability Office, ``401(k) Pension Plans: Loan
Provisions Enhance Participation But May Affect Income Security for
Some,'' GAO/HEHS-98-5, Report to the Chairman, Special Committee on
Aging, and the Honorable Judd Gregg, U.S. Senate, October 1997.
19. Ibid.
20. Weller and Wenger, ``Robbing Tomorrow to Pay for Today'';
VanDerhei and others, ``401(k) Plan Asset Allocation, Account Balances,
and Loan Activity in 2011.''
21. VanDerhei and others, ``401(k) Plan Asset Allocation, Account
Balances, and Loan Activity in 2011.''
22. Ibid.
23. Calculations based on the Federal Reserve's triennial Survey of
Consumer Finances. See: Board of Governors, Federal Reserve System,
``Survey of Consumer Finances'' (2012).
24. B. Douglas Bernheim and Antonio Rangel, ``Behavioral Public
Economics: Welfare and Policy Analysis with Non-Standard Decision
Makers.'' Working Paper 11518 (National Bureau of Economic Research,
2005).
25. Government Accountability Office, ``401(k) Pension Plans.''
26. Sarah Holden and Jack VanDerhei, ``Contribution Behavior of
401(k) Participants'' (Washington: Employee Benefits Research
Institute, 2001).
27. Annika Sunden and Brian Surette, ``Households' Borrowing from
401(k) Plans,'' Paper presented at the Second Annual Joint Conference
of the Retirement Research Consortium, ``The Outlook for Retirement
Income,'' May 17-18, 2000, Washington, DC.
28. Weller and Wenger, ``Easy Money? Health and 401(k) Loans.''
29. See: Government Accountability Office, ``401(k) Pension
Plans''; Alicia H. Munnell and Annika Sunden, Coming Up Short: The
Challenge of 401(k) Plans (Washington: Brookings Institution Press,
2004); Weller and Wenger, ``Robbing Tomorrow to Pay for Today.''
30. For a detailed discussion of the implications of the standard
economic model, see: John Beshears and others, ``The Impact of 401(k)
Loans on Saving.'' Working Paper (National Bureau of Economic Research,
2010).
31. This summary discussion and the results are based on: Wenger
and Weller, ``Boon or Bane.''
32. Ibid.
33. Ibid.
34. This conclusion is based on simulations derived from the
empirical estimates in: Wenger and Weller, ``Boon or Bane.''
35. Weller and Wenger, ``Robbing Tomorrow to Pay for Today'';
VanDerhei and others, ``401(k) Plan Asset Allocation, Account Balances,
and Loan Activity in 2011.''
36. Weller and Wenger, ``Robbing Tomorrow to Pay for Today.''
37. The recent estimate shows that the borrowing option increases
contributions by 3.7 percentage points for households who have a good
handle on their finances, but that the contribution increase is only
1.4 percentage points for households who do not have a good handle on
their finances in other areas. Requiring an additional 4 percentage
points for the loan option would thus make no difference for good
financial planners, but it would boost retirement savings for
households who arguably need a stronger commitment device to save for
their retirement. Wenger and Weller, ``Boon or Bane.''
The Chairman. Thank you very much, Dr. Weller. We'll now
start a round of 5-minute questions.
I'll start with Dr. Fellowes. Again, we've made a lot of
progress getting savings rates up with plan features like
automatic enrollment, and I'll talk more about that after a
bit. But as you said in your testimony, we can't automate
retirement readiness. People need a lot more education about
how to manage their finances. I've heard that from all three.
But why would employers want to spend all the time and
money trying to educate their employees? They've got other
things they've got to do, like produce things, goods and
services. I mean, you say more education on how to manage
finances, but why would employers want to do that? What
incentive would there be for them to do that?
Mr. Fellowes. That's a fantastic question. And the answer
is that the incentive varies by industry and employer. Some of
our earliest customers were interested in us helping increase
the savings deferral rates because they have an aging
population and are anxious for that population to be able to
retire on time.
And the simple reason is that their healthcare costs and
their compensation costs increase as workers age. They want to
be able to go through a generational cycle that they've been
able to do successfully in the past. But if people aren't
saving enough for retirement, they're not going to be able to
ultimately leave their jobs on time. So that's one incentive.
There's a financial incentive for some employers to want to do
this.
Second, there's another group of employers out there who
are interested in the efficacy of the retirement programs. And
that efficacy for them is defined as: ``Are these programs
really helping my workers prepare for retirement, or are they
helping them create savings for other purposes?'' And it's
effectively higher cost, higher risk compensation.
For those sponsors, they're not interested for financial
reasons. They're not getting an ROI from that. They're
interested in ultimately the efficacy and want to improve that
efficacy by providing a more holistic retirement solution to
their workers.
There's a third set out there, and these are employers of
lower wage workers who are concerned that they're creating an
incentive for their workers to leave their jobs because they
lack any other savings. I was actually sitting at a retailer--I
won't mention the name--when I was working on this paper and
overheard a conversation between two employees there. They were
cashiers on their break, and they were talking about--one of
them had gotten into an accident on the way there in her car,
and she didn't have money to fix that car. And I couldn't
believe it, but they were saying, ``Well, I've got my 401(k)
savings account.''
I've heard that from sponsors, that they feel like they're
creating an incentive for people to quit their jobs to be able
to get access to the funds, the full set of funds. So that's a
third set. But the short answer is the incentive structure
really varies by industry and by employer.
The Chairman. OK. I'll try to absorb all that.
Ms. Borland, I want to ask you about making it easier to
discourage people from cashing out. Could we make the rollover
process simpler? I've heard a lot about this, how tough it is,
how much paperwork is involved, and so people say, ``It's
easier to take my cash. Even though I'd pay a 10 percent
penalty, I don't have to go through all that.'' Is there a way
of making that rollover easier?
Ms. Borland. There is, and there are a couple of different
ways that can happen. I'd say that part of the reason for the
problem is that when an individual leaves an organization, that
organization has lost that connection and is much less
incentivized to help, to go out of their way to make it really
easy for that individual to get their money out in a smart way.
So once the employment relationship ends, the challenge begins.
The new employer, the new plan, does actually have an
incentive to encourage that employee to roll the money in. And
we are seeing increased interest in the plan sponsor community
in doing just that. The problem is the reliance on the prior
plan sponsor and/or provider and/or the IRA provider. In any
case, they're losing the assets. They're losing the money, so
they don't have an incentive to make it really easy. The
requirements that are in place today are reliant on that prior
sponsor or provider.
There are opportunities to take the burden off of the prior
sponsor or provider, allow the individual, the former employee,
to use publicly available information to be able to provide
certification of the qualification of the rollover, so there
are some opportunities there that can be taken. In addition,
quite frankly, there's an opportunity just within the private
sector to work together better to create connections to make it
much easier as well.
The Chairman. A value judgment question. Do you think it
should be easier?
Ms. Borland. Absolutely. We have heard significant noise
and feedback both from our plan participants as well as from
plan sponsors who are frustrated that it's so hard and that
individuals have to try multiple times before they have the
adequate documentation in order for their rollover to be
accepted. And I do think that contributes to the cash-out
problem.
The Chairman. Thank you.
Senator Alexander.
Senator Alexander. Thanks, Mr. Chairman.
Dr. Fellowes, your business now is to help companies help
their employees make better decisions. Is that right?
Mr. Fellowes. That's right.
Senator Alexander. What are the two or three things, in
your experience, that you help the companies do to help their
employees that seems to work in making better decisions about
retirement plans?
Mr. Fellowes. We find that engaging workers with their day-
to-day decisions is the most important value-add that we can
create for someone for their retirement security----
Senator Alexander. But like what?
Mr. Fellowes [continuing]. For a few reasons. The first is
it allows you to be engaged with the worker.
Senator Alexander. No, no. I mean, what specific things do
you have the employee do to help him or her make a better
decision?
Mr. Fellowes. Oh, sure.
Senator Alexander. You mentioned a budget.
Mr. Fellowes. Sure, lots of things. Yes, we will
automatically create, for some, a budget. We're able, through
technology, to track people's spending and their checking
accounts and their credit cards, and that allows us to
automatically create a budget for them.
For instance, individuals that walk into a grocery store or
walk into a coffee shop or a clothing store can look on their
phone and see--it will recognize the store that you're located
in, and it will say, ``I have $100 to spend safely in this
store.'' Providing that information to them at the moment of
transactions is really powerful.
Senator Alexander. Do you find that makes a difference?
Mr. Fellowes. Yes, we certainly do.
Senator Alexander. Do you think having that kind of budget
might make a difference for a government?
[Laughter.]
Now, I want to go to Ms. Borland to followup on Senator
Harkin's questions about the cash-out and loans. Listening to
Dr. Weller, would it be possible that if you made it harder to
get a loan, it could make you think twice before you got a
loan? You'd have to make a decision. Would that be an incentive
to encourage a cash-out perhaps?
Ms. Borland. While the employee is actively employed, he or
she can't cash out, generally, until he or she terminates
employment.
Senator Alexander. But if we created a more difficult loan
option, which might mean fewer employees taking the loan or
fewer employees not paying it back, then would employees be
more encouraged to cash out as a way of getting their money?
Would those two ideas work against each other? That's what I'm
trying to figure out.
Ms. Borland. While an individual is actively employed, he
or she can take a loan for any reason. He or she generally has
to document hardship in order to take a withdrawal. So if
you're asking whether or not an individual--it may be more
difficult to take a loan, so he or she may actually terminate
employment to get access to that money, I'd say that's probably
an extreme measure to get access to a 401(k) and not something
we have seen or experienced.
That said, we do have research that shows the ability to
take a loan is encouraging certain vulnerable populations,
minorities, in particular, to get into the plan in the first
place. So having the existence of a loan, we do think, is very
important.
Many plans actually require a loan to be taken before a
withdrawal is allowed, and that's actually an important step.
The experience an individual has to go through to access a
withdrawal is going to push them and say, ``You have to take a
loan first.'' What we see is that when individuals have taken a
loan, more than 80 percent of them continue to save money in
their 401(k) while they're repaying the loan.
So as long as the individual continues to work and
continues to repay their loan, there really isn't a leakage out
of the system. It's when that termination of employment occurs,
which then triggers in most cases a default, that you see a
leakage.
Senator Alexander. I'm especially interested and
sympathetic to the difficulty of moving your retirement account
as one changes jobs. I'm sort of that way myself. If it's too
complicated, I'll just say, ``Let's just do the simple thing.''
Maybe this is an opportunity for one of Senator Warren's little
competitions that she had for mortgage applications--to have a
competition to see whether there could be some simple way of
giving an employee a chance, to say, ``Here's a 1-page form.
Fill it out and you don't have to worry about it.''
This has been very helpful. I look forward to the rest of
the comments.
The Chairman. Thank you, Senator Alexander.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman, and thank you,
Ranking Member. This is a very important meeting and I thank
you all for being here.
I want to continue to go down this path asking about the
loans against 401(k)s. As I understand it, about one in five
401(k)s has a loan against it. I think that's what I read in
your testimony. And I'd like you to speak, if you would, for
just a minute about the idea of the 401(k) debit card, that
people can actually carry something that looks like a credit
card and just hit against their 401(k).
Dr. Weller, you look like you're ready to speak to that.
Mr. Weller. That's sort of the subprime loan option of the
401(k) market. It's a God-awful idea.
Senator Warren. OK. So we've got God-awful.
Mr. Weller. I think what we have in place, the restrictions
we have, the standards that you can borrow only a certain
amount, up to 50 percent of the balance, that you can borrow
only for certain reasons predetermined, I think, works very
well. It works on both sides. It helps households when they're
in a pinch, but it really doesn't allow them to borrow from
their 401(k) to pay for flat screen TVs. And at the same time,
it incentivizes them to save more.
And with that, I would like to also very quickly address
what Senator Alexander had asked. I think the unintended
consequences of making it harder--like our proposal would be to
require people to contribute more. We don't see any unintended
consequences, because we already see people contributing more
if they have a loan option than if they don't.
We're just saying to codify it a little bit and make it
more explicit incentivizes, especially people who aren't
particularly good financial managers, to contribute--pay up
front, pay it forward, if you will, sort of put a little bit of
money away for that eventual rainy day. The majority of people
don't borrow from their 401(k) plans, though.
Senator Warren. Thank you.
Ms. Borland, would you like to go beyond God-awful?
Ms. Borland. I think God-awful says it quite well,
actually. The only point that I'll add is that with all of the
hundreds of plan sponsors with whom we work on a daily basis,
we have never had a single one actively consider the 401(k)
loan debit card. So while there seems to be a lot of noise
about it, we've never worked with a company who thinks it's a
good idea.
Senator Warren. Dr. Fellowes, have we covered the ground
here?
Mr. Fellowes. I think the ground has been covered.
Senator Warren. OK. I just want to say I know that Senator
Enzi has in his SEAL plan that's being introduced today--is
that right, Senator?--a provision that there will not be 401(k)
debit cards. And I just want to express my very strong support
for that, and I assume strong support from our panel.
Senator Enzi. I think that would allow us to put the word,
God-awful, in there.
[Laughter.]
Senator Warren. I want to ask you another one about loans
against 401(k)s. Our plan, the TSP plan that all of us here, I
think, participate in, has this 60-day waiting period, that you
can't take another loan within 60 days of having taken a loan.
And I believe that when that was instituted, we studied the
consequences and there was about a third fewer loans and about
25 percent less in terms of the dollar borrowing. Would you
recommend this become the rule nationally?
How about we start the other way this time? Dr. Fellowes?
Mr. Fellowes. Sure. If the intent is to increase 401(k)
account balances or 457 or 403(b) or whatever the account is in
question, I think the answer is unequivocally yes. I would
agree with the recommendation here. If the intent is, though,
to increase the retirement security of workers, then I think,
ultimately, we need to address the underlying causes for that
loan and cash-out behavior as well, because the economic need
that's prompting those loans and cash-outs is not going to
disappear, even if their retirement savings balances increase.
Senator Warren. Fair enough, Dr. Fellowes, and it's a point
I'm quite sensitive to, about the need. But we actually have
some hard data on this, and I assume, as a group, Federal
employees did not become wealthier when this restriction was
put in place.
Mr. Fellowes. That's right.
Senator Warren. And yet loans against 401(k)s went down by
about a third.
Mr. Fellowes. That's right. And I think it's part of a
solution, to be sure. But we are anxious to broaden the
conversation to address these underlying causes.
Senator Warren. Fair enough.
Ms. Borland, do you want to add anything to that? I'm
almost out of time.
Ms. Borland. No, I think the data is very real. I'd even
suggest potentially a longer waiting period, at least, offered
or encouraged from plan sponsors, maybe even 6 to 12 months, so
that the repeat offenders who continue to take one after the
other are forced to get out of the practice and then wait and
take one again if it's truly needed.
Senator Warren. Dr. Weller, just very briefly, because I'm
out of time.
Mr. Weller. I would go with shorter waiting periods.
Senator Warren. Shorter rather than longer?
Mr. Weller. Like the 60 days rather than the longer ones,
given that most of the loans are taken for good reasons and not
just frivolously. I think getting people to think about taking
another loan, yes, but I think 6 to 12 months could potentially
pose some hardships.
Senator Warren. Thank you very much.
The Chairman. Senator Enzi.
Statement of Senator Enzi
Senator Enzi. Thank you, Mr. Chairman, and thank you for
having this hearing.
And thank you, Senator Warren, for mentioning the SEAL Act.
It's the SEAL leakage. The whole title is Shrinking Emergency
Account Losses. I worked on this with Senator Kohl for a while,
and I'm now working on it with Senator Bill Nelson and hope
that it becomes a part of whatever bill that you do. These are
supposed to be rainy day funds, but it's supposed to be raining
really hard before they can get them out, not just sprinkling.
There are some problems when they're leaving a job. They
have to pay it back immediately or all the penalties are
instituted against them, and so this extends the time so they
have a little more time to put it back in, because if they pay
the penalties, they're not going to put it back in. They've
already paid for it once. Right now, if they take one of these
hardship loans, they're not allowed to contribute for 6 months.
I liked your idea that they ought to have to start paying 4
percent more.
At any rate, they ought to be at least able to put in the
amount that they can get their match from their employer so
that it continues to grow. And, yes, it does ban the debit
card, and I appreciate the list that Ms. Borland had in hers.
We'll take a look at some of those, too.
Dr. Fellowes, I didn't get to hear your testimony because I
had a circuit court judge that I was getting to introduce that
used to be in the State legislature with me. So I had to miss
your comments. But in your testimony, you state that the plan
sponsors need a management dashboard to understand their
employees' retirement readiness. Can you discuss that in a
little more detail, what the management dashboard would look
like?
Mr. Fellowes. Sure. The management dashboard is reflective
of the fact that the average person near retirement has 10
different bank accounts. The 401(k) is one of those accounts.
So retirement readiness is really more a function of everything
else that's going on in someone's life and all of those other
accounts than it is just the 401(k) account.
When we work with sponsors, we present a dashboard that
includes a holistic picture of someone's retirement readiness.
The 401(k) is part of that, but it is not inclusive of
everything that needs to be looked at. What that helps sponsors
do, ultimately, is determine how much bang they're getting for
their buck, or what the ROI is from their investment in the
401(k).
They're able to determine who the 401(k) is working for and
who it is not working for. And among those that it's not
working for, they can see, well, this population has debt
problems. This population has expensive private tuition
problems. I mean, it really runs the gamut. But this holistic
data gives employers a much more clear and actionable set of
information about the health of their plans.
Senator Enzi. And that's without encouraging them, then, to
go into the higher growth funds?
Mr. Fellowes. That's right.
Senator Enzi. Ms. Borland, you stated that the key to
curbing the leakage due to loans is to reduce defaults, and I
think that's pretty basic. But you suggest the plan sponsor
should update education and communication and provide it at a
point of need. When should plan sponsors provide this education
and communication? How did you envision that? What would it
entail?
Ms. Borland. Some of it is in place today, and we're seeing
active engagement and new ideas. An example is when an
individual goes on the Internet and clicks a button that says,
``I'm ready to take a loan,'' there's something as simple as a
pop-up box that comes up and says, ``Are you really sure about
that? Have you considered all of your other options? There's a
phone number you can call for counseling,'' for example.
It's one thing to sort of send out a bunch of pamphlets and
brochures to everyone when they may or may not even be
considering a loan, but it's another thing to deliver the tools
and education right when the person is making a decision.
Another example is when they go out to model a loan, you're
providing links along the way of ``Take a look at what this
actually means to you. Let's put an example of what this
depletion could mean when you turn age 65.''
A similar thing with cash-out--cash-out is unique because
there's so much marketing and energy out there in the
marketplace of ``Give me your old 401(k). Let me take it. I can
do better. I can guarantee returns.'' So there's a big risk.
There's so much energy encouraging people to get out of the
401(k) system, and plan sponsors find it difficult to compete
with those sort of deep pockets in marketing messages to say,
``You know what? You don't actually have to take your money
out, and you have really inexpensive funds in the plan.''
Helping plan sponsors to deliver those kinds of messages
without believing that they're putting themselves at risk,
fiduciary risk, or other exposure in doing so would be a good
way to sort of help market the qualified plan system and the
tax-preferred system as well.
Senator Enzi. Dr. Weller, do you have any comments? And
maybe you could tell me where the 4 percent came from.
Mr. Weller. The 4 percent comes out of our estimates. We
find that people who are managing their finances well
contribute, on average, next to 4 percentage points of their
earnings if there's a loan option present in their 401(k)
plans. For people who do not manage their finances well in
other aspects of their life, the effect is much smaller. It's
about 1.3 percentage points extra.
That gets to a point that, I think, cuts across all of
these answers, and that is--I'm very sympathetic to Dr.
Fellowes' suggestion to sort of have a holistic approach to
financial management. But there has to be sort of a policy
dimension here, I think, because this proposal comes through
the employer side. A lot of people are self-employed, so the
employer nexus wouldn't work, and it's only for employers who
actually offer a retirement plan. A lot of employers do not
offer a retirement plan.
So I think it's very important to get more comprehensive
financial and regulated advice to individuals to save and
prepare for retirement. But it needs to be much broader than
just simply going through the employer-based retirement system,
to sort of address all of these issues that we've talked about
and many others.
Senator Enzi. My time has expired. Thank you.
The Chairman. Thank you, Senator Enzi. We'll just start
another round.
I wanted to raise one other issue that kind of hasn't come
up. When people take a loan, are they charged a processing fee?
Ms. Borland.
Ms. Borland. Yes. In the majority of situations, plan
sponsors do charge a fee. It's typically around $50 to $75 to
initiate a loan, and then a smaller percentage, but not
insignificant, also charge an ongoing fee of approximately $25
per year. The reason for that is actually to discourage loan
taking to begin with. So we've actually seen some plan sponsors
add a loan fee who didn't have one before, specifically to
create another sort of speed bump in the process to say, ``Are
you really sure you want to do this? It's going to cost you
something. Please think twice.''
The Chairman. Do the people who are taking the loans--you
say they know that up front?
Ms. Borland. Yes, absolutely. It's disclosed.
The Chairman. Dr. Weller, in some of our hearings in the
past, people, I think, tend to look--this is my own judgment--
people tend to look upon their contributions differently than
employer contributions. I have mine, and then the employer puts
in his.
So when we come down to this idea of taking loans or
withdrawals, what if we tighten the limits on the employer
contributions, like saying, ``OK. You can take out yours, but
you have a limit, you either can't, or you can have a severe
limit on what you can take out.''
Mr. Weller. Certainly, you can impose some limits. It would
have to be sort of a research question of how much that limit
actually would be in terms of the balance. We already have some
limits. You can't borrow the entire amount from your 401(k). So
it's unclear whether that would change a lot in practicality.
But, certainly, some loan limits--you could certainly
impose some on the employer contributions. You could sort of
impute the tax advantages and limit that and say that can't
be--like the government's money essentially can't be borrowed
against, or something like that. There's a number of things you
can do in that regard.
The Chairman. Any views on that, Dr. Fellowes, about
limiting how much you can take out from the employer
contribution side?
Mr. Fellowes. Yes. I think that if you put limits in place,
you're definitely going to be limiting the loan activity in
that account. The waiting period, for instance, that Senator
Warren was talking about is one way that you can do that. There
are lots of other mechanisms to do that.
But I think that the core issue here is that the consumer
is living in a world with lots of different financial demands
on them, and the 401(k) is just one of those. So if we're going
to ultimately put that restriction in place to increase their
retirement security, as I've said, I think it does need to come
along with an expectation that we have a more holistic approach
to retirement readiness so that whatever that economic need was
that's motivating the interest in a loan is addressed at the
same time that that vehicle becomes less easy to get access to.
The Chairman. Dr. Weller, in your written testimony, you
said this research finds that having the option to borrow from
a 401(k) loan is also associated with more overall debt. You go
on to explain that what happens is people will borrow more on
their debit cards and all kinds of things, knowing they can
fall back on their 401(k).
Mr. Weller. That's our interpretation. We can only see in
the data that having a loan option in a 401(k) is generally
associated with more debt generally, typically mortgages. And
we do not know from the data sources that we use--we use the
Survey of Consumer Finances from the Federal Reserve. We sort
of can't look in people's brains to see why they're doing it.
But one logical interpretation is that they know they can fall
back on their 401(k) if they fall behind on their credit cards
or their mortgage payments.
The Chairman. That's kind of disturbing to think that by
having a 401(k), we're actually encouraging people to take on
more overall debt.
Mr. Weller. I think it depends a little bit on what the
debt is for. I think at this point we're sort of still shell
shocked from the incredible consumer debt boom of the last 10
years. But if you look to the years prior to the mortgage and
housing boom, higher levels of debt were associated with faster
asset growth and more wealth building.
So there is sort of a fine line in understanding and seeing
debt. And I think, hopefully, we're getting back to a more
normal situation where, through the regulatory system and the
tax system and through sort of steering consumers' behavior,
we're getting people to use their debt more wisely and actually
build assets rather than destroy assets.
The Chairman. Thank you very much, Dr. Weller.
Senator Alexander.
Senator Alexander. Dr. Fellowes, do you have many
competitors? Have other companies been formed to help employers
help their employees make better decisions about these matters?
Mr. Fellowes. It's a great question to ask. When I was at
Brookings, I thought of competition as think tanks competing
for the attention of Senators. But today, I am in the private
market, and, yes, we have seen in the last year several
competitors pop up.
Senator Alexander. And how long have you been in this
business?
Mr. Fellowes. I started the business about 3 years ago. We
launched it almost 2 years ago.
Senator Alexander. So you've been in it long enough to get
a sense of whether it is growing? Is there a demand for it?
Mr. Fellowes. Yes, there is. It's growing quite quickly.
Senator Alexander. Let me ask about another form of
consumer debt. There's a lot of worry about what some call the
student loan bubble. And as I listened to you, one of the
solutions to the student loan bubble is the same kind of
solution we're talking about with people managing their
retirement funds, to help students understand what they're
getting into when they're 20 years old or 22 years old and they
can get free money pretty easily.
There's a wide divergence of what happens. I know at
Tennessee Tech University, students borrow very little money,
and it's a cultural thing, I think. It's more of a rural
school. It's an engineering school, and I think the school does
a good job of counseling about finances. This topic is a little
far afield of this hearing, but do you suspect that a similar
sort of business might help universities counsel students about
how much money to borrow in order to go to college?
Mr. Fellowes. I do. If I may, I'll give you about a minute
response, and then I'll sort of digress just a little bit.
Senator Alexander. Sure.
Mr. Fellowes. I'll put my Brookings hat back on here. But
there's a really interesting trend that happened in the 20th
century in the financial services market that Senator Warren
knows, I know, very well. But there was a broad democratization
of financial products to consumers throughout the 20th century,
and student loans were one of those. Mortgages were another.
Credit cards were another, and 401(k)s, of course.
What didn't democratize, though, was the advice needed to
figure out how to use all these new products and services,
primarily because the business model in use is still very
expensive, which is you have to pay someone, sit down across
the table from them, and ask them for guidance, and that's very
expensive. So there's an incentive for advisors, then, to
constantly go upstream in terms of income because they want to
work with the wealthiest clients as well.
Using new technology today, though, you can really provide
an equivalent advisor experience at a very, very low cost,
because, ultimately, advisors are working with inputs, which is
all your assets and your liabilities. And then the output is
what should you do next.
Senator Alexander. So you could imagine a business or a set
of advisors who would go to the University of Tennessee and
make a contract and say, ``We'll advise your students on better
practices for borrowing money.''
Mr. Fellowes. Absolutely.
Senator Alexander. And the incentives for the university to
do that would seem to me to be similar to the incentives for
the employer with retirement plans in many ways.
Mr. Fellowes. That's right. And in many respects----
Senator Alexander. Well, they might have more, because the
default rate on loans can create a real problem for the
university.
Mr. Fellowes. They could probably have more, yes. That's
right. And the kids at that university are going to be some of
the most amenable in the country to technology solutions.
Senator Alexander. Well, that's right, too.
Mr. Fellowes. So I think it could be powerful.
Senator Alexander. Well, thanks for wandering off with me
on that.
Dr. Weller, I want to make sure I understand. Your point,
as I get it, is that loans aren't so bad from your accounts
because they encourage more people to set up retirement
accounts--there is evidence of that. You could have a
requirement to increase contributions to that retirement
account as a result of taking a loan. And then, I guess, third,
it's the saver's money and they may truly need it. Is that sort
of a summary of where you come out?
Mr. Weller. That is correct, yes. We find that having the
option to borrow, not just actually borrowing, but having the
option, that people value that and contribute to that, and
that's consistent with other research. The other part is that
people do borrow, largely because a family member is ill.
That's one of the primary reasons, but you'd also look at other
things. And when a family member is ill, they use it to pay
medical bills, but they also pay for other consumption items.
The other reasons why people take a loan from their 401(k)
is for a down payment for their first home or for student
loans. In some cases, that may be just simply good finances and
lower cost borrowing. And that goes to the question you just
had about student loans.
I do agree that giving students and their families more
comprehensive financial advice makes sense. That comes out of
the data. Having regulated good financial advice from an
accountant, from a lawyer, from a regulated broker does lower
the cost of borrowing. It manages--increases wealth.
But the important piece here is that the advice has to be
regulated, and it has to be from a regulated, responsible
adult, if you will. What we find also in the data is that just
getting advice at work from colleagues, from friends, from
family does nothing and often destroys wealth.
The Chairman. Thank you, Senator Alexander.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
I hear the point. Don't eliminate the loans. Keep
restrictions in place. But there seems to me to be something of
a conundrum here. Senator Enzi talked about it. The whole idea
behind the loans is that we don't use them when there's a
modest need, presumably because you can find other ways to
satisfy that need, and you can pay that back over time. We only
think about giving people access to 401(k)s or loans against
401(k)s only if there's an extreme need.
But I want to ask about two other parts to the conversation
that just haven't been here so far. One is the question around
all the people who got in trouble on their homes. I'm just
thinking about the most recent crisis and the number of people
who, when a teaser rate mortgage reset, cashed out their
401(k)s to try to keep up with those mortgages.
The consequence was they eventually lost the home and had
no retirement incomes at the end. I talked to many, many
families in Massachusetts for whom that was the case, and I
think it's been the case across the country. So here they are
with nothing at the end.
The second one goes right to where you are, Dr. Weller, and
that is medical bankruptcy. If someone borrows against the
401(k) and pays down or pays off a very large medical debt,
they've just lost the asset. If they really can't manage the
debt and end up in bankruptcy, then they're in bankruptcy and
they're left with nothing.
But we very carefully in our bankruptcy laws said
retirement income is so important that we will set it aside.
It's an exception, and creditors can't reach it. And so people
going into bankruptcy who did not tap their 401(k)s, who did
not borrow against their 401(k)s, have more assets and more
capacity to recover post bankruptcy.
So I'm a little caught in the heart of this question, and
that is we're trying to measure needs now--a person has a
medical problem, a person is behind on the home mortgage, a
person has lost a job--versus needs later, and that is they
will spend many years in retirement and they need some assets
to be able to cover them. I welcome any of your thoughts on
this.
Dr. Fellowes, do you want to start?
Mr. Fellowes. Sure. That's another just terrific point, and
it points to the complexity of really promulgating good public
policy on this issue. And successfully, for workers, being able
to convert their paychecks into economic mobility, because
they've just got--there's so many different dimensions to this
issue, as you were talking about in the housing crisis.
You're absolutely right--as a vehicle for people to save
their housing. And, yes, it doesn't promote their long-term
retirement security, but it sure does promote their ability to
live in a house.
Senator Warren. For a while.
Mr. Fellowes. For a while. Sorry to be a broken record
here, but I do think what this points to and what prompted me
to leave my very comfy perch in a think tank is that, I think
through technology now, we really do have a scalable solution
to these issues. And the vision is that you create a private
bank relationship for the mass market through technology,
because that private banker ultimately is presiding over
someone who is wealthy--their assets and liabilities and
financial decisions.
Senator Warren. You raise a good point on this about the
advice, because there is a real tilt in the advice.
Mr. Fellowes. Yes.
Senator Warren. I am told that debt collectors, not
infrequently, will ask if people have a 401(k) and recommend
that they tap the 401(k) in order to stop the debt collection
calls. It would be nice if people had another place to get
advice. The debt collectors are not acting in the best interest
of the family.
Thank you, Dr. Fellowes.
Ms. Borland, any comment?
Ms. Borland. My only comment--I don't have a solution for
the mortgage challenge, but I will say, though, that the way
the system is constructed today, the focus on loans and
withdrawals is important. But when an individual changes
employment--say, they lose their job in that process anyway,
they have full access to cash out their total 401(k)
regardless.
Even if they repay their loan, if they're going to cash it
out the next day, it's really irrelevant. I think focusing on
the cash-out issue first and sort of stemming that leakage will
then support leakage from other sources as well, since that one
is a really big deal.
Senator Warren. Fair point, although we might just say you
need a comprehensive solution here that watches where the money
is going.
Ms. Borland. Yes.
Senator Warren. Dr. Weller.
Mr. Weller. I would just add that we can't expect the
401(k) loans to do everything. And I think we have to recognize
that 5 years after the recession we still have 40 percent of
unemployed people looking for a job for more than 6 months. So
we have a perfect storm for middle-class families, and while
there's lots of things going wrong for individuals, changing
little things on the 401(k) loans are not going to change the
situation.
There are other policy measures that need to be addressed,
the labor market risks, the need to comprehensively restructure
financial advice, and we need to go beyond that. I think the
401(k) world as it is structured, the 401(k) loans as they work
right now, do work relatively well.
Senator Warren. Well, I appreciate it, and I appreciate you
being here to talk about this. Thank you.
The Chairman. Thank you, Senator Warren.
I just have one last question I want to ask each of you.
The purpose of this hearing was to talk about leakage. We all
know it's happening. People aren't saving for retirement. They
need a lot more money put away for retirement. We know about
the leakage problem.
Dr. Fellowes, Ms. Borland, Dr. Weller, if you could do one
thing, if you could today say, ``I'm going to do this''--
``we're going to do this one thing to stem this leakage,'' what
would it be? Just give me your best idea. What's the one thing
you'd do?
Mr. Fellowes. I would define what 401(k) success means.
What that will do is create a set of incentives for other
issues to be addressed, including more data to be collected
about the health of retirement plans, about who it's working
for, about who it's not working for. I think that one change
would instigate a lot of healthy changes.
The Chairman. You mean define it legislatively?
Mr. Fellowes. Perhaps. Again, I am not involved in the day-
to-day policy issues of today's hearing. So that's just my own
opinion, top of mind.
The Chairman. Define the purpose.
Mr. Fellowes. Define what success means for a 401(k) plan.
The Chairman. Ms. Borland, what would you do? What's the
one thing you'd do?
Ms. Borland. I'd suggest we recommend tackling the cash-out
issue by, at a minimum, requiring employer-funded contributions
to remain in the tax-deferred system until retirement, similar
to a traditional defined benefit plan.
The Chairman. That means that if you were to borrow or to
take it out, you could take yours but not the employer
contribution.
Ms. Borland. That's right, and even after job termination.
The Chairman. Yes, exactly. I understand that. And that
could be done legislatively.
Ms. Borland. Yes, it could.
The Chairman. OK. We'll think about that.
Dr. Weller.
Mr. Weller. Being sympathetic to encouraging more
contributions to 401(k) plans, I think what we do need is a
universal secure retirement plan that is sort of a default
option for people who are not covered, that people can roll
into from their current jobs, that would catch when people
leave their jobs, similar to what you had proposed, Senator
Harkin.
The Chairman. Anything else? Well, this has been very good,
very thought provoking. Thank you very, very much for being
here. The record will remain open for 10 days for members to
submit other questions or comments. And I hope that as we move
along on this that you would make yourselves available to the
committee and our staff for further inquiries and suggestions.
Thank you all very much. The committee will stand
adjourned.
[Additional material follows.]
ADDITIONAL MATERIAL
Response to Questions of Senator Enzi and Senator Warren by
Alison Thomas Borland, FSA
senator enzi
Question. Ms. Borland, you presented a list of ideas that would
decrease abusive leakage. One of those ideas was to promote the
employer system by simplifying the process of rollovers. You stated
that regulators have an opportunity to streamline the process by
reducing the paper and certification required. Can you provide more
detail on what that would look like?
Answer. As electronic investing has become the norm and most
enrollments are performed via the web, the current rollover process
that requires paper certification and qualification of the rollover is
often confusing and cumbersome. We envision a process whereby
individuals would sign on to their new employer's recordkeeping system
as a part of their initial enrollment in the new plan, and merely have
to enter a few pieces of information about their old employer and old
employer's plan (Employer's Federal ID number, recordkeeper, etc.) and
then have the funds electronically transferred from the old employer's
plan to the new employer's plan. Relief or clarification from the
current documentation requirements, as well as some private sector
investment, would be required.
senator warren
Question 1. In 2004, the Thrift Savings Plan (TSP) for Federal
employees started limiting loans, made lenders cover the administrative
expense of issuing the loan, and required a 60-day waiting period
between loans. This resulted in a third less loans the following year
and a 25 percent decrease in assets loaned out. Do you think more
private plans adopting similar rules would lead to less leakage?
Answer 1. It is likely that plans adopting similar rules would lead
to less leakage. Based on our data of large employer plans, among
companies who allow more than one loan, more than 40 percent of
participants with a loan outstanding have multiple loans at the same
time. Consequently, we believe limiting the availability of loans would
likely reduce leakage, including adding a waiting period.
Generally, we see plan sponsors interested in reducing loans
actually add a fee for the borrower, as a deterrent to taking the loan.
Those fees align the fees with the individuals who incur the costs,
rather than having it paid from general administrative expenses paid by
all participants. We would not expect that the loaner cover fees would
reduce leakage; on the contrary, we would expect requiring the borrower
to cover the cost would reduce leakage.
Question 2. Three and half years ago the Government Accountability
Office (GAO) released a report entitled Policy Changes Could Reduce the
Long-term Effects of Leakage on Workers' Retirement Savings. This
report suggested Congress should consider changing the current
requirement for a 6-month contribution suspension following a hardship
withdrawal, Senators Enzi and Bill Nelson have included this provision
in the SEAL 401(k) Act. The 2009 GAO report also includes open
recommendations to the Department of Labor to promote best practices
for reducing leakage and to the Department of Treasury to clarify rules
and require plans to document loan exhaustion before allowing
withdrawals. Could enacting these recommendations help reduce leakage?
Answer 2. The elimination of the 6-month suspension is unlikely to
reduce the number of hardship withdrawals, but it will enable those
participants who take a withdrawal to begin accumulating retirement
contributions sooner, thus increasing their overall retirement savings
and lessening the impact of the leakage.
The other recommendations, including showing participants
projections and offering modeling tools, are generally in place today,
based on our experience. The market continues to innovate to provide
point-of-need education and support to reduce cash outs and help
participants make good decisions.
Response to Questions of Senator Warren by Trooper Sanders,
Senior Advisor, HelloWallet
Question 1. In 2004, the Thrift Savings Plan (TSP) for Federal
employees started limiting loans, made lenders cover the administrative
expense of issuing the loan, and required a 60-day waiting period
between loans. This resulted in a third less loans the following year
and a 25 percent decrease in assets loaned out. Do you think more
private plans adopting similar rules would lead to less leakage?
Answer 1. Yes. The available evidence would suggest that requiring
a 60-day waiting period between loans will lead to a lower loan volume.
However, there are two important considerations to keep in mind. First,
such changes may trigger increases in turn-over and cash-outs. Data
from our customers in high-employment industries, for instance,
indicate that (a) companies without loan policies tend to have higher
cash-out rates and (b) that the loans in these industries tend to cover
bills and debts, which is why there is such a high recidivism rate. It
would be worth assessing whether the TSP plan changes triggered any of
these secondary effects before moving forward with a policy
recommendation. Second, and more importantly, limiting loan access may
not necessarily improve the retirement readiness of workers, if that's
the intended goal of this policy change. Participants that would have
borrowed from the TSP prior to this policy change, may instead seek out
more readily available and costly sources of cash, such as credit card
cash advances, payday loans, and other high cost alternatives. While
TSP assets increased, in this scenario, the participants assets may
have been flat or declined. Greater impact would be found in policy
that strives to reduce the underlying demand for loans in the first
place, such as encouraging the TSP and other DC plans to adopt
independent financial guidance that supports better day-to-day
financial decisions. Most Americans do not budget and spend more than
they make in income as a result, for instance, which produces growing
financial insecurity as their debt accumulates over time, raising the
likelihood that they will take out a loan or cash-out their balances.
Similarly, most Americans have fewer than 3 months of their annual
income saved for emergencies, which increases the likelihood that they
will use their DC plans for non-retirement spending. Independent,
holistic guidance can address these, and other, underlining causes of
loan volume.
Question 2. Three and half years ago the Government Accountability
Office (GAO) released a report entitled Policy Changes Could Reduce the
Long-term Effects of Leakage on Workers' Retirement Savings. This
report suggested Congress should consider changing the current
requirement for a 6-month contribution suspension following a hardship
withdrawal, Senators Enzi and Bill Nelson have included this provision
in the SEAL 401(k) Act. The 2009 GAO report also includes open
recommendations to the Department of Labor to promote best practices
for reducing leakage and to the Department of Treasury to clarify rules
and require plans to document loan exhaustion before allowing
withdrawals. Could enacting these recommendations help reduce leakage?
Answer 2. Changing the requirement for a 6-month contribution
suspension following a hardship withdrawal is worth serious
consideration. Most experts believe that the current suspension policy
limits the savings potential of DC plans. Changing the policy may allow
individuals facing financial hardship to resume the habit of
contributing toward retirement, however modestly, more quickly and
avoid penalizing people who may tap retirement savings for hardship
events. Similarly, the GAO's recommendations to promote industry best
practices, clarifying current rules, and encouraging plans to document
loan exhaustion before allowing withdrawals may potentially help reduce
leakage. However, leakage is occurring not because of an informational
problem: most participants that are withdrawing their funds early are
doing so because they have to meet bill and debt obligations, think
(often mistakenly) that housing is a better investment than their DC
plans over the long term, or because of a cash-flow problem. None of
the GAO recommendations address these underlining causes. Any
improvements to DC balances from these recommendations, as a result,
will be modest, at best, and potentially unsustainable. On the other
hand, addressing need for holistic, independent guidance, which attacks
the root of the leakage and insufficient savings problem, will create
non-incremental improvements to the retirement security of U.S.
workers.
For more information, you may contact me at
[email protected].
Response to Questions of Senator Warren by Christian E. Weller, Ph.D.
Question 1. In 2004, the Thrifty Savings Plan (TSP) for Federal
employees started limiting loans, made lenders cover the administrative
expense of issuing the loan, and required a 60-day waiting period
between loans. This resulted in a third less loans the following year
and a 25 percent decrease in assets loaned out. Do you think more
private plans adopting similar rules would lead to less leakage?
Answer 1. The simple answer is yes, more restrictions on loans from
defined contribution plans will result in less leakage. The more
complicated answer is that the possibility of access to money in
defined contribution plans increases savings rates. Greater
restrictions may weaken this savings incentive. I am doubtful that this
is the case with carefully limiting the number of loans that an
employee can take. Many employees are not fully aware of their plan's
details. They may know if loans are possible, but they are often
unlikely to know all of the rules under which they can take a loan from
their defined contribution plan. Employees cannot respond to changes in
rules governing their defined contribution plans if they are not fully
aware of those rules in the first place.
Question 2. Three and half years ago the Government Accountability
Office (GAO) released a report entitled Policy Changes Could Reduce the
Long-term Effects of Leakage on Workers' Retirement Savings. This
report suggested Congress should consider changing the current
requirement for a 6-month contribution suspension following a hardship
withdrawal, Senators Enzi and Bill Nelson have included this provision
in the SEAL 401(k) Act. The 2009 GAO report also includes open
recommendations to the Department of Labor to promote best practices
for reducing leakage and to the Department of Treasury to clarify rules
and require plans to document loan exhaustion before allowing
withdrawals. Could enacting these recommendations help reduce leakage?
Answer 2. Yes, all of the steps outlined seem reasonable in getting
employees to save more. Allowing people to more quickly contribute to
their defined contribution plans should increase their overall savings
in some instances. Informing people about the potentially detrimental
effects of taking a loan, which can lower retirement savings by more
than 20 percent under reasonable assumptions, should again give pause
to some people. And finally, getting employees to take a loan rather
than a withdrawal should increase the chance that savings will stay in
defined contribution plans for some employees. Each of the measures
outlined in the GAO report individually will likely have only small
effects, but the widespread lack of adequate retirement savings
requires that policymakers should consider all best practices to
increase retirement savings by the maximum amount for the maximum
number of people.
[Whereupon, at 3:40 p.m., the hearing was adjourned.]
[all]