[Senate Hearing 113-723]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 113-723

 RETIREMENT SAVINGS 2.0: UPDATING SAVINGS POLICY FOR THE MODERN ECONOMY

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                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 16, 2014

                               __________

                                     
       
       
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            Printed for the use of the Committee on Finance
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                          COMMITTEE ON FINANCE

                      RON WYDEN, Oregon, Chairman

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

                    Joshua Sheinkman, Staff Director

               Chris Campbell, Republican Staff Director

                                  (ii)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                            C O N T E N T S

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                           OPENING STATEMENTS

                                                                   Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee 
  on Finance.....................................................     1
Hatch, Hon. Orrin G., a U.S. Senator from Utah...................     3

                               WITNESSES

Bogle, John C., founder and former CEO, The Vanguard Group, Inc., 
  Valley Forge, PA...............................................     5
Reid, Brian, Ph.D., chief economist, Investment Company 
  Institute, Washington, DC......................................     7
Betts, Scott F., senior vice president, National Benefit 
  Services, LLC, West Jordan, UT.................................     8
Madrian, Brigitte C., Ph.D., Aetna professor of public policy and 
  corporate management, John F. Kennedy School of Government, 
  Harvard University, Cambridge, MA..............................    10
Biggs, Andrew G., Ph.D., resident scholar, American Enterprise 
  Institute, Washington, DC......................................    13

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Betts, Scott F.:
    Testimony....................................................     8
    Prepared statement...........................................    37
Biggs, Andrew G., Ph.D.:
    Testimony....................................................    13
    Prepared statement...........................................    49
Bogle, John C.:
    Testimony....................................................     5
    Prepared statement with attachments..........................    61
Hatch, Hon. Orrin G.:
    Opening statement............................................     3
    Prepared statement with attachments..........................   124
Madrian, Brigitte C., Ph.D.:
    Testimony....................................................    10
    Prepared statement...........................................   172
Reid, Brian, Ph.D.:
    Testimony....................................................     7
    Prepared statement...........................................   178
Schultz, Ellen E.:
    Prepared statement...........................................   210
Wyden, Hon. Ron:
    Opening statement............................................     1
    Prepared statement...........................................   216
    ``Individual Retirement Accounts: Preliminary Information on 
      IRA Balances Accumulated as of 2011,'' Government 
      Accountability Office, September 16, 2014..................   218

                             Communications

The Church Alliance..............................................   229
Coalition to Protect Retirement..................................   233
Employee-owned S Corporations of America (ESCA)..................   237
The ERISA Industry Committee (ERIC)..............................   242
The ESOP Association.............................................   250
Great-West Financial and Putnam Investments......................   259
National Association of Manufacturers............................   267
National Education Association (NEA).............................   274
National Volunteer Fire Council (NVFC)...........................   276
Plan Sponsor Council of America (PSCA)...........................   280
Principal Financial Group........................................   282
The Savings Coalition of America.................................   289
Small Business Council of America and Small Business Legislative 
  Council........................................................   297

 
                        RETIREMENT SAVINGS 2.0:
                      UPDATING SAVINGS POLICY FOR
                           THE MODERN ECONOMY

                              ----------                              


                      TUESDAY, SEPTEMBER 16, 2014

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:10 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Ron 
Wyden (chairman of the committee) presiding.
    Present: Senators Stabenow, Cantwell, Nelson, Cardin, 
Brown, Casey, Hatch, Grassley, Crapo, Thune, and Portman.
    Also present: Democratic Staff: Kara Getz, Senior Tax 
Counsel; Todd Metcalf, Chief Tax Counsel; and Joshua Sheinkman, 
Staff Director. Republican Staff: Preston Rutledge, Tax 
Counsel; and Jeff Wrase, Chief Economist.

   OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM 
             OREGON, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The Finance Committee will come to order.
    When you take a look at the state of retirement savings in 
America, it is clear that something is out of whack. The 
American taxpayer delivers $140 billion each year to subsidize 
retirement accounts, but still millions of Americans nearing 
retirement have little or nothing saved. The fact is, the 
incentives for savings in the American tax code just are not 
getting to those who need them most.
    A pair of new studies spells out the issue. The Federal 
Reserve found last month that an employee with middle-of-the-
pack savings has about $59,000 set aside for retirement. Yet, 
according to the Government Accountability Office, some 9,000 
taxpayers have IRA accounts worth more than $5 million. It 
would take several lifetimes of work for the typical middle-
class American to save that much money.
    [The report from the Government Accountability Office 
appears in the appendix on p. 218.]
    The Chairman. So how did those massive IRA accounts come to 
be? In many cases, they seem to be sweetheart stock deals that 
most investors would never have access to. Executives buy 
stocks at a special rock-bottom price--sometimes fractions of a 
penny per share--and use an IRA as a tax shelter. The stocks 
start out dirt cheap, but just like that, they turn to gold, 
and the IRA shoots up in value.
    Now, wise investors have every right to use all of the 
tools available to them, and no one should begrudge them their 
success. But IRAs were never intended to be a tax shelter for 
millionaires. They were designed to help the typical American 
save for retirement. As the Finance Committee continues to work 
on modernizing the tax code, it needs to take a good and 
bipartisan look at fixing this issue. With limited resources, 
it is crucial to use taxpayer dollars as wisely as possible.
    The same study from the Federal Reserve included another 
alarming piece of information. Nearly a third of workers, 
according to the Fed, have no pension and nothing set aside for 
retirement. It is a fact of today's economy that millions of 
Americans are walking on an economic tightrope and are unable 
to save.
    Report after report has shown that America's middle class 
is, at best, struggling to stay afloat. Five years after the 
Great Recession, it remains tough for many people to find and 
keep a steady job. The cost of a college education continues to 
rise. Millions of Americans had their wealth tied up in their 
homes before the housing collapse, and they are not yet close 
to a full recovery. And many working families continue to see 
their take-home pay drop.
    At the same time workers, especially younger ones, are 
changing jobs more frequently than ever before, and they find 
it difficult to save without portable savings accounts. Women 
face special challenges to saving that have to be addressed as 
a part of tax reform. That is also true of part-time workers. 
This ``Leave it to Beaver'' ideal of a worker spending 40 years 
with one firm and then retiring with a generous pension and a 
gold watch is sorely outdated.
    Retirement policies need to keep up with the times, and the 
Finance Committee is beginning today to examine those savings 
issues. One proposal worth looking at is being pursued by my 
home State of Oregon. Less than half of Oregon businesses offer 
retirement plans to their employees, and many Oregonians have 
trouble saving anything at all. So the State set up a 
Retirement Savings Task Force to look at solutions.
    Just yesterday they recommended the State set up an auto-
IRA program for any Oregon worker who is not covered by an 
employer retirement plan. A percentage of employees' paychecks 
would go into the savings accounts, and the contributions would 
rise with time. It would not be mandatory. Employees could opt 
out at any time, but it certainly has the potential to be a 
first step towards retirement security for many Oregonians.
    In my view, the tax code should give all Americans the 
chance to get ahead, and making it easier to save is one of the 
best ways to accomplish that. That is why it is important for 
the committee, on a bipartisan basis, to look at how to improve 
these savings incentives and ensure that they help middle-class 
Americans prepare for retirement and not just set up tax 
shelters for millionaires.*
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    * For more information, see also, ``Present Law and Background 
Relating to Tax-Favored Retirement Savings,''Joint Committee on 
Taxation staff report, September 15, 2014 (JCX-98-14),https://
www.jct.gov/publications.html?func=startdown&id=4665.
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    [The prepared statement of Chairman Wyden appears in the 
appendix.]
    The Chairman. Senator Hatch, I look forward to working with 
you, as always, on a bipartisan basis on this, and I welcome 
your statement.

           OPENING STATEMENT OF HON. ORRIN G. HATCH, 
                    A U.S. SENATOR FROM UTAH

    Senator Hatch. Thank you very much, Mr. Chairman.
    I think this is an important hearing. It is an important 
topic, and we have an outstanding panel of witnesses. I think 
we are going to have a very interesting discussion.
    Retirement policy has always been an especially important 
topic to this committee. It also has always been bipartisan. 
Most of the major pieces of retirement legislation that 
Congress has passed in recent decades have been named for 
Senators from the committee--one from each party. I am talking, 
of course, about legislation like Bentsen/Roth, Roth/Breaux, 
Grassley/Bob Graham, Grassley/Baucus/Hatch/Pryor, which, in the 
other body, came to be known as Portman/Cardin, for the two 
excellent legislators that I am proud to say are now colleagues 
of ours on this committee.
    I believe this tradition of bipartisanship on these issues 
can and will continue.
    Mr. Chairman, during the recent Highway Bill markup, we 
agreed to work together on multiemployer pension reform. That 
was done in the spirit of bipartisanship. And I have a pension 
reform bill for the modern economy that just last week received 
high marks from the Urban Institute, and I hope you will work 
with me on that as well. In fact, it received the highest 
marks. It is my sincere hope that the tradition of 
bipartisanship in retirement policy will continue and that the 
next retirement bill that comes out of this committee and 
becomes law will be known as Wyden/Hatch.
    We have always had incentives in the tax code to encourage 
saving for retirement. As the late Chairman Roth was known for 
saying, ``There are no bad savings.''
    Congress has revisited saving incentives on occasion with 
an eye toward improving the incentives and increasing savings. 
For example, in 2001 Congress increased the limits for 
contributions to 401(k) plans so that today a worker may 
contribute $17,500 to a 401(k) and $5,000 to an IRA. Congress 
also added a ``catch-up'' contribution feature to the code to 
allow workers to contribute several thousands of dollars more 
beginning in their 50s, an age when many workers finally get 
serious about saving and when workers, including spouses, 
primarily women, who might have left the workforce for a time, 
finally have the opportunity to save again.
    As reported in the Bluebook published at the time by the 
Joint Committee on Taxation, Congress believed it was important 
to increase the amount of employee elective deferrals allowed 
under such plans, and other plans that allow deferrals, to 
better enable plan participants to save for their retirement.
    Well, it worked. Since 2000, retirement assets in defined 
contribution plans have grown from $3 trillion to nearly $6 
trillion, despite the market downturn in 2008. Assets in IRAs 
have grown from $2.6 trillion to $6.5 trillion. In fact, 
increased contribution limits worked so well that, in 2006, 
Congress made those provisions permanent, and the vote to make 
them permanent was overwhelming: 93 to 5.
    The retirement policies we have pursued have always been 
about helping Americans to help themselves save more of their 
hard-earned money, not less. In the last 25 years, Democrats 
and Republicans have worked together to respond to a mutually 
shared goal: expanding savings among workers. Republicans 
agreed to proposals targeted to lower-income workers, like the 
savers credit. Democrats agreed that small business owners and 
managers needed to have some tax benefit skin in the game to 
take on the burdens of adopting and maintaining retirement 
plans.
    In these areas, members from both parties have resisted 
partisan impulses, and, as a result, we have been able to craft 
good policy. Lately, however, I have become concerned that 
there is a political strategy by some in Congress to turn 
pension policy into just another partisan battleground. They 
would turn retirement policy into another front in the class 
warfare that consumes so much energy on some of the other 
committees in Congress. I am worried that some want to 
disregard the bipartisan good will of the last 25 years. That 
would be unfortunate. I especially hope it does not happen in 
our hearing today.
    Mr. Chairman, what I hope to hear today from the witnesses 
are facts that can inform our policy considerations. We need to 
know how much income Americans are projected to need in 
retirement, how much are they projected to have, and, if there 
is a shortfall, what policies they recommend we enact to help 
Americans close the gap.
    What I hope to not hear today are poll-tested slogans like 
``Upside Down Tax Incentives,'' ``Bang for the Buck,'' 
``Pension Stripping,'' or ``The System is Rigged'' without 
substantiating data. We need to hear facts and serious policy 
proposals, not political slogans.
    I want to thank you again, Mr. Chairman, for holding this 
hearing.
    Let me just say I would like to personally extend a special 
welcome to my fellow Utahan, Mr. Scott Betts. Scott and his 
company have done excellent work for many years helping Utahans 
save for retirement. I am especially grateful that you would 
travel all the way from Utah to be here today to help us make 
this a useful hearing. So thank you, Scott, for being here.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Hatch.
    [The prepared statement of Senator Hatch appears in the 
appendix.]
    The Chairman. I think you are very right to stress, number 
one, the bipartisan tradition in this committee for focusing on 
these kinds of savings incentives, particularly to create 
opportunity for folks in the middle class. I look forward to 
pursuing that with you in an approach that is really fact-
driven. That is why we asked the Government Accountability 
Office to help us get an assessment of the most recent 
developments in savings.
    At that point, I think one way or the other, whatever the 
bills are called, you and I are going to be able to lead the 
committee in a bipartisan way. I look forward to pursuing that.
    Now, we have six witnesses. We have a very talented 
journalist, Ms. Ellen Schultz, who is still battling Amtrak 
delays. So we are hoping that she will be with us.
    John Bogle has figured, as usual, a way to navigate through 
that, and so we are glad that he is here. He is, of course, the 
founder and former CEO of Vanguard.
    Our next witness will be Dr. Brian Reid, chief economist, 
the Investment Company Institute.
    Our third witness will be Mr. Scott Betts, who is the 
senior vice president of National Benefit Services.
    Our fourth witness will be Dr. Brigitte Madrian, the Aetna 
professor of public policy and corporate management at the John 
F. Kennedy School of Government at Harvard. She was, I believe, 
the first academic to do research on automatic enrollment in 
401(k) plans. I know a number of our colleagues are interested 
in discussing that.
    Our fifth witness is Dr. Andrew Biggs, a resident scholar 
at the American Enterprise Institute. He also lives in Oregon. 
I told Senator Stabenow that I was wearing my Ducks tie today, 
and I did not wear it for 2 weeks out of respect to Senator 
Stabenow and the State of Michigan after the Ducks triumphed 
over Michigan State, but, Dr. Biggs, I could not hold off any 
longer.
    Senator Stabenow. There will be another day.
    The Chairman. There will be another day.
    Senator Hatch. I am glad the fight is between two Democrats 
this time. [Laughter.]
    The Chairman. We will await Ms. Schultz. Mr. Bogle, 
welcome, and we look forward to your presentation.
    Senator Brown has a very tight schedule this morning, so, 
when all of you are done, Senator Brown will begin the 
questioning for our side, and then we will turn to Senator 
Hatch.
    Mr. Bogle?

    STATEMENT OF JOHN C. BOGLE, FOUNDER AND FORMER CEO, THE 
             VANGUARD GROUP, INC., VALLEY FORGE, PA

    Mr. Bogle. Good morning, Chairman Wyden, Ranking Member 
Hatch, and other members of the committee. I am honored by your 
invitation to be with you.
    My career in the financial services field began more than 
63 years ago--a long time. In 1974, I founded the Vanguard 
Group, a new company on the mutual fund scene, and we now 
manage $3 trillion worth of other people's money and have 
become the largest mutual fund firm in the world.
    The principal reason for that success--and success is a 
fair description--is that, since 2008, this single firm has 
accounted for almost one-half of the mutual fund industry's 
entire cash flow. It is simple. We were founded with a single 
focus: to serve mutual fund investors.
    Our management company--and this is important--the Vanguard 
Group, is owned not by its managers, nor by the public, nor by 
a U.S. or foreign insurance company or financial conglomerate--
today, unfortunately, the industry's most prevalent corporate 
structure. We are owned by our mutual funds, which in turn are 
owned by our 20 million mutual fund shareholders. We are 
uniquely a mutual mutual fund complex.
    We operate the funds on an at-cost basis. The substantial 
profits we might otherwise make, which came to $19 billion in 
2013 alone, were, in effect, rebated to our shareholders in the 
form of lower costs.
    I am also the founder of the world's first index mutual 
fund, the Vanguard 500 Index Portfolio. As you all know, the 
index fund simply mimics the portfolio or particular index of 
prices of stocks or bonds. Largely because it pays no 
investment advisory fee--because it does not require any 
advice--it carries a rock-bottom expense ratio, as low as 0.02 
percent or 0.05 percent. That is what we call 2 to 5 basis 
points, compared to other fund groups charging maybe 200 basis 
points.
    Index funds have accounted for more than 350 percent of 
U.S. equity mutual fund net cash flow since 2007, taking in 
$750 billion while other managed funds were losing $550 
billion--the picture is pretty clear--and now constitute 33 
percent of U.S. equity mutual fund assets. At Vanguard, a 
trillion dollars more than that is owned by investors building 
their own retirement nest eggs or retirement plans for 
corporations large and small, among them employees of State and 
local governments as well.
    Among all defined contribution retirement and thrift plans, 
we are now the largest provider of mutual fund assets. So we 
have a huge business stake in assuring our Nation's retirement 
plans are structurally efficient and fiscally sound. Fund 
shareholders also have a huge stake in minimizing the 
management costs of their investment. Outside of Vanguard, 
those costs are grossly excessive.
    Unfortunately, our retirement system today is neither 
structurally efficient nor fiscally sound. For different 
reasons, each one of the three legs, as we call them, of our 
retirement system stool--Social Security, pension plans, and 
savings plans--is headed for a serious train wreck. Other 
witnesses seem to assume that Social Security and pension funds 
are soundly financed. Unequivocally, they are not.
    Leg one, Social Security, can be fixed with relatively few 
small changes from its imperfections today to moderate the 
growth of benefits and increase contributions.
    Leg two, defined benefit plans, now most deeply under water 
by $4 trillion or more, will require much more realistic 
assumptions of future investment returns than the 8 percent 
they are using--that just is not in the cards--as well as (a) 
higher employer contributions, and (b) lower employee 
benefits--tough medicine.
    Leg three, defined contribution plans--the largest and 
fastest-growing component of our retirement system--cry out for 
structural efficiency and cost reductions. The retirement funds 
investors accumulate are slashed when DC plans incur vastly 
excessive costs. Simply, if they invest in low-cost mutual 
funds, rather than the high-cost actively managed fund, an 
investor's return--as I show in Exhibit Two, I think it is page 
10 of my submission--an investor's long-term wealth could be 
increased by 65 percent, in that example, from $561,000 to 
$927,000, a $366,000 advantage, just by taking the cost of the 
system down to where it ought to be.
    We need larger contributions from employees in defined 
contribution plans. We need to reduce the ability to withdraw 
savings almost on demand. We need to have some requirement that 
employers maintain their contributions. We need to expand 
access to the plan--employee participation--and we need to 
limit the participation of high-cost purveyors in DC plans and 
the IRAs.
    We also need a Federal standard of fiduciary duty for 
institutional money managers now, including fund managers, 
which so far have been virtually ignored by policymakers, 
regulators, and legislators. I will explain these more fully in 
my prepared testimony.
    Forgive me for going a little bit over my time. Thank you 
for hearing me out.
    The Chairman. That was very helpful. Thank you. I know we 
will have questions.
    [The prepared statement of Mr. Bogle appears in the 
appendix.]
    The Chairman. Dr. Reid, you are next.

  STATEMENT OF BRIAN REID, Ph.D., CHIEF ECONOMIST, INVESTMENT 
               COMPANY INSTITUTE, WASHINGTON, DC

    Dr. Reid. Thank you, Chairman Wyden and Ranking Member 
Hatch, for the opportunity to testify. I am Brian Reid, chief 
economist of the Investment Company Institute, the world's 
leading association of regulated funds. ICI's U.S. members 
manage assets of more than $17 trillion and serve more than 90 
million shareholders.
    The point of today's hearing is, mutual funds manage about 
half of the defined contribution plan and the individual 
retirement account assets. ICI has devoted years of research 
and considerable resources to making and communicating an 
accurate assessment of America's retirement system.
    Today such an assessment must recognize three key facts. 
First, America's retirement system is working to build 
retirement security for the majority of Americans. Second, the 
tax incentives for retirement saving based in deferral of 
taxes, not in tax exclusion or tax deduction, are key to the 
successes and strengths of that system. Third, while there are 
opportunities to improve our retirement system, changes should 
build upon our current structure and not put today's retirement 
system at risk.
    Those statements may contradict much of what you often 
hear, so let me explain. Not only does Social Security cover 
nearly all working Americans, but 80 percent of near-retiring 
households in 2013 had accrued pension benefits. And a wide 
range of government, academic, and industry research 
demonstrates that the American retirement system has become 
stronger in the past half-century.
    The poverty rate among the elderly has fallen since 1966 
from nearly 30 percent to 9 percent, the lowest among all age 
groups. Since 1975, the amount of assets that is earmarked for 
retirement per household in the United States has increased 
sevenfold after adjusting for inflation. The share of retirees 
receiving private-
sector pension income has increased by more than 60 percent, 
and the median private-sector income that retirees receive 
after adjusting for inflation has increased by 40 percent. 
These statistics speak to the impact of Congress's bipartisan 
efforts that transformed Social Security into a strong 
foundation for America's retirement system and created a 
framework of laws and tax incentives on which voluntary private 
employer plans and IRAs have grown and thrived.
    As important as the tax incentives are in encouraging 
employers to offer plans and employees to participate in them, 
the nature and role of these incentives is often misunderstood. 
The tax incentives take the form of tax deferrals, because 
contributions and earnings to traditional retirement plans are 
taxed when a retiree withdraws the income.
    This is fundamentally different from a tax deduction or 
exclusion where the initial tax reduction is never recovered. 
In economic terms, it is the after-tax rate of return that is 
incentive to save. Tax deferral effectively taxes investment 
income at a zero tax rate for retirement savers in all income 
groups. Thus, rather than creating a so-called upside-down 
incentive for saving, tax deferral equalizes the incentive to 
save across all retirement savers in all income groups and 
encourages support for employer-sponsored pension plans among a 
wide range of workers.
    The American people overwhelmingly support today's defined 
contribution retirement plans, including the tax incentives. In 
a fall 2013 survey, 86 percent disagreed with the idea of 
eliminating the tax advantages of defined contribution plans, 
and 83 percent opposed any reduction in employee contribution 
limits.
    Now, despite the strengths and successes of our system, it 
can be improved, but changes to the current system should build 
upon the existing system, not put it at risk. ICI supports 
measures to promote retirement savings, put Social Security on 
a sound financial footing as a universal employment-based and 
progressive plan for all Americans, foster innovation and 
growth in the voluntary retirement savings system, help smaller 
employers by offering simpler plan features and easier access 
to multiple-employer plans, and provide flexible approaches to 
retirement income.
    What is central to these ideas is that they build upon and 
do not undermine or replace our current retirement system. This 
system depends critically on the tax incentives Congress has 
provided for retirement savings. Proposals to reduce the tax 
benefits of 
employer-sponsored retirement plans would not merely affect 
upper-income workers and reduce their desire to participate in 
such plans, but they also would, undoubtedly, reduce the number 
of employers that sponsor a retirement plan and deprive workers 
of all ages and incomes of the many benefits of plan 
participation.
    In short, our retirement system has many strengths and 
successes, and building upon our strong voluntary system will 
enhance Americans' retirement security for generations to come.
    Thank you, and I look forward to your questions.
    The Chairman. Thank you.
    [The prepared statement of Dr. Reid appears in the 
appendix.]
    The Chairman. Our next witness will be Mr. Scott Betts.

 STATEMENT OF SCOTT F. BETTS, SENIOR VICE PRESIDENT, NATIONAL 
             BENEFIT SERVICES, LLC, WEST JORDAN, UT

    Mr. Betts. Thank you, Chairman Wyden, Ranking Member Hatch, 
and members of the Finance Committee, for the opportunity to 
talk with you about our private employer-sponsored retirement 
system. My name is Scott Betts. I am senior vice president of 
National Benefit Services.
    NBS is a fee-for-service third-party administrator 
specializing in the design and administration of all types of 
employer-sponsored retirement plans. NBS has more than 225 
employees located in West Jordan, UT and supports more than 
7,500 retirement and benefit plans in 46 states. Our goal is to 
give every working American the ability to save for a 
comfortable retirement.
    I have been working with employers on their retirement 
plans for almost 20 years and can tell you firsthand that 
qualified retirement plans like 401(k) plans are proving 
successful for millions of American workers. What I see every 
day is borne out by some important statistics. Middle-class 
families represent the overwhelming majority of 401(k) 
participants, 80 percent of participants in 401(k) plans make 
less than $100,000 per year, and 43 percent of participants in 
these plans make less than $50,000 per year.
    An analysis by the nonpartisan Employee Benefit Research 
Institute found that over 70 percent of workers earning between 
$30,000 and $50,000 participated in employer-sponsored 
retirement plans when a plan was available, whereas less than 5 
percent of those middle-income earners without access to 
employer-sponsored plans contributed to an IRA. In other words, 
workers in this group were 15 times more likely to save for 
their family's retirement at work than on their own.
    If increasing retirement and financial security is the 
goal, increasing the availability of workplace plans is the way 
to get there. That is why it is so important that no harm be 
done to the current structure of tax incentives that motivate 
employers to voluntarily sponsor and contribute, along with the 
employees themselves, to those retirement plans.
    The tax incentive for retirement savings is unique: a tax 
deferral, not a permanent write-off. Contributions made this 
year are not taxed this year. Every dollar not taxed today will 
be taxed in the future when the individual starts taking 
withdrawals from retirement savings.
    Also, the tax incentive for employer-sponsored plans, 
unlike exclusions such as the home mortgage interest deduction, 
comes with nondiscrimination rules and limits to ensure that 
contributions do not discriminate in favor of more highly 
compensated employees. The result is a tax incentive that is 
more progressive than our progressive income tax system. For 
example, in Chart 3 of my written testimony, you will see that 
families earning under $50,000 pay 9 percent of income taxes 
but receive 27 percent of the benefit of a tax deferral in 
401(K) plans.
    The good news is that over 60 million working Americans 
currently benefit from these tax incentives through 
participation in 
employer-sponsored retirement plans. The Bureau of Labor 
Statistics reports that 78 percent of full-time civilian 
workers had access to retirement benefits at work, and 81 
percent of those workers participated in these arrangements.
    In spite of these positive numbers, there are still 
millions of workers who do not have plans available at their 
workplace. More can and should be done to encourage and help 
employers, especially small business owners, to set up and 
operate these plans in a cost-effective manner so their 
employees can save for their retirement.
    There are some changes that can and should be made to 
streamline plan operations and eliminate pitfalls and penalties 
for those employers that already have a plan. Senator Hatch, 
your SAFE Retirement Act has the right focus and strikes the 
right balance. For instance, the Starter 401(k) plan proposal 
would allow business owners--who may be reluctant to commit 
employer contributions--a way to offer employees a chance to 
save in their workplace plan.
    Another important change proposed by Senator Hatch's bill 
would allow employers to adopt a qualified retirement plan 
after the end of the year when the final results of the 
business for the prior year are available. This common-sense 
change would literally open the window for more plans to be 
adopted and more employer dollars to be contributed.
    Senator Hatch's bill would also permit small employers to 
band together in multiple-employer plan arrangements, so-called 
open MEPs, while providing critical safeguards for adopting 
employers through creating a new designated MEP service 
provider.
    Finally, Senator Hatch's bill also addresses many of the 
inefficiencies and traps for the unwary employer that increase 
costs and can discourage employers from continuing to sponsor a 
plan.
    In conclusion, the current retirement system works well for 
tens of millions of Americans who have access to it, but we 
need to do more. The key to continued and expanding success is 
enacting reforms that will further incent employers to provide 
a retirement savings vehicle for their employees.
    Senator Hatch, your bill is a big step in the right 
direction toward removing complexities from the system and 
expanding the availability of workplace plans so more business 
owners will be able to provide a better retirement plan for 
American workers.
    Thank you, and I would be happy to answer any further 
questions.
    The Chairman. Mr. Betts, thank you, and thank you for being 
here.
    [The prepared statement of Mr. Betts appears in the 
appendix.]
    The Chairman. Dr. Madrian?

  STATEMENT OF BRIGITTE C. MADRIAN, Ph.D., AETNA PROFESSOR OF 
PUBLIC POLICY AND CORPORATE MANAGEMENT, JOHN F. KENNEDY SCHOOL 
        OF GOVERNMENT, HARVARD UNIVERSITY, CAMBRIDGE, MA

    Dr. Madrian. Chairman Wyden, Senator Hatch, and other 
members of the committee, thank you for the opportunity to 
speak to you today and share my thoughts on how we can 
strengthen America's retirement savings system.
    Public policy has historically promoted saving for 
retirement using financial incentives. In the United States, 
the primary inducement to save is the exemption of retirement 
savings plan contributions--up to a limit--from taxable income.
    The Joint Committee on Taxation places the magnitude of 
this tax expenditure in 2014 at $127 billion annually. Lower-
income taxpayers are also eligible for the saver's credit, as a 
further enticement to save. In addition, public policy 
encourages employers who sponsor a retirement savings plan to 
provide their own financial inducements for employees to save, 
namely the provision of an employer match.
    A large body of academic literature has examined the 
responsiveness of savings to financial incentives. A rather 
consistent finding from this literature is that the behavioral 
response to changes in incentives is not particularly large. In 
a recent paper, I surveyed the academic literature on the 
impact of one kind of financial incentive, matching, on savings 
plan participation and contributions. The studies using the 
most credible empirical methods find strikingly similar results 
in a variety of different contexts using a variety of different 
data sources. A matching contribution of 25 percent increases 
savings plan participation by roughly 5 percentage points. This 
is a modest effect at best.
    Conditional on participating in a savings plan, financial 
incentives can impact how much individuals save. But this 
effect does not come from the magnitude of the financial 
incentive so much as from the fact that at some point the 
incentive expires. For example, in many 401(k) plans, the 
employer provides a match, but only up to a certain fraction of 
pay--say 6 percent. The saver's credit gives eligible low- and 
moderate-income households a financial incentive to save for 
retirement, but only for the first $2,000 contributed to an IRA 
or workplace savings plan. When financial incentives to save 
are limited to savings below a certain threshold, this 
threshold becomes a focal point as individuals decide how much 
to save. For example, data from 401(k) plans show that savings 
plan participants overwhelmingly choose contribution rates that 
are either multiples of 5--5 percent, 10 percent, 15 percent--
or the match threshold. This finding suggests that the match 
threshold may be a much more important parameter in a matching 
scheme than the match rate.
    The relatively small impact of financial incentives on 
savings plan participation suggests that a failure to save is 
not primarily the result of inadequate financial incentives. 
Rather, there are other barriers to saving not addressed by 
traditional policy solutions. The literature on behavioral 
economics and savings outcomes points to a myriad of frictions 
that impede successful savings: procrastination, a lack of 
financial literacy coupled with the complexity of determining 
how much to save and how best to invest for retirement, 
inattention, and the temptation to spend. In many cases, 
countering these frictions leads to increases in savings plan 
participation and asset accumulation that surpass the effects 
of financial incentives.
    Before discussing policy alternatives to financial 
incentives that are informed by behavioral economics, let me 
note that, from a behavioral economics standpoint, the tax code 
is particularly ill-
suited to generating financial incentives to save.
    First, the tax code is complicated. It is difficult for the 
average taxpayer to even assess the financial incentives he or 
she faces through the tax code. For example, in a research 
project that I am working on, my coauthors and I have found 
that most individuals do not accurately understand the tax 
implications of saving in a Roth versus a regular 401(k) or 
IRA. For low- or moderate-income taxpayers, assessing the 
incentives of the saver's credit without the help of a tax 
professional would likely be a daunting task. Indeed, I 
attempted to do so in preparing these remarks and quickly gave 
up.
    Second, individuals are more responsive to immediate than 
to delayed financial incentives, but many of the financial 
incentives to save that operate through the tax code are 
delayed. The benefits of tax-deferred compounding are delayed, 
as are the benefits of tax deductions or credits that are not 
processed through payroll deduction or that do not reduce tax 
withholding throughout the year. Ironically, what could perhaps 
be a very effective financial incentive to encourage 
individuals to enroll in a workplace savings plan--a small but 
immediate financial reward--is actually not allowed in savings 
plans under current law.
    If financial incentives are not a savings panacea, what is? 
By far the most effective method to increase savings plan 
participation is automatic enrollment. The impact of automatic 
enrollment on participation rates can be sizable and is 
greatest for groups with the lowest savings rates initially: 
younger and lower-income workers.
    Expanding the reach of automatic enrollment is the most 
promising policy step we can take to increase the fraction of 
Americans who are saving for retirement. This means continuing 
to increase the number of employers with savings plans who use 
automatic enrollment, increasing the number of employers who 
offer savings plans, and providing simple savings alternatives 
for individuals who are self-employed or whose employers do not 
and are unlikely to ever sponsor a savings plan. Policy 
initiatives that support these measures include auto-IRA 
proposals and legislation to facilitate the creation of 
multiple-employer plans with limited fiduciary liability.
    Paradoxically, we have a savings system that, in the 
absence of automatic enrollment, makes saving complicated 
while, at the same time, makes it very easy for individuals to 
tap into their retirement savings before retirement. Another 
policy response that is needed to encourage retirement wealth 
accumulation is to reduce the leakage from our retirement 
savings system.
    In conclusion, the lessons from behavioral economics 
research are clear: if you want individuals to save, make it 
easy. If you want individuals to save more, make it easy. If 
you want employers to help their workers save, make it easy. 
And if you want individuals to spend less, make it hard.
    The Chairman. I got the drift that it was all about easy. 
[Laughter.]
    I just want to make sure everybody understands one point 
with respect to auto-enrollment--because you have been a 
leading scholar in this. When you talk about auto-enrollment, 
you still give the individual the last word? The individual can 
choose not to enroll, in effect, to opt out?
    Dr. Madrian. Yes, the individual can choose to opt out.
    The Chairman. All right.
    [The prepared statement of Dr. Madrian appears in the 
appendix.]
    The Chairman. Dr. Biggs?

STATEMENT OF ANDREW G. BIGGS, Ph.D., RESIDENT SCHOLAR, AMERICAN 
              ENTERPRISE INSTITUTE, WASHINGTON, DC

    Dr. Biggs. Thank you. Chairman Wyden, Ranking Member Hatch, 
and members of the committee, thank you for the opportunity to 
testify today with regard to retirement saving and security in 
America.
    The word ``crisis'' is often overused. Generally, this is 
harmless, but in public policy the perception of a crisis 
sometimes causes people to leap before they look. This is the 
case today when it comes to retirement security. One well-known 
study claims that more than 50 percent of Americans are at risk 
of insufficient retirement income. Another study claims that 85 
percent of Americans are falling short, and the total 
retirement savings gap may reach $14 trillion. Yet another 
study claims that Americans collect only a pittance from their 
IRA and 401(k) plans.
    In response, some are proposing expensive expansions of 
Social Security benefits. Others are arguing that IRAs and 
401(k)s are not working and should, effectively, be scrapped. 
In fact, these claims are overblown, and the policies being 
proposed are non-solutions to a non-crisis.
    While this kind of analysis is necessarily complex, I might 
simplify it with two sets of facts. First, the majority of 
today's retirees are doing well: 75 percent of current retirees 
tell pollsters they have enough money to live comfortably. Data 
on poverty and other measures of retirement security show that 
most retirees today are able to match their pre-retirement 
standard of living.
    Second, the best research out there--from a model developed 
by the Social Security Administration's Office of Policy, using 
inputs from the best retirement experts in and outside of the 
government--projects that future generations of retirees will 
have about the same level of retirement security as today's 
retires. Specifically, SSA projects that, in retirement, the 
GenXers will have the same replacement rates as individuals 
born during the Depression, who supposedly enjoyed a golden age 
of retirement security.
    This model from Social Security incorporates some of the 
same data from the Federal Reserve study that you were 
referencing earlier, Senator Wyden. The Employee Benefit 
Research Institute also projects that retirement security for 
future generations will roughly hold steady with today's 
retirees. Put those two facts together and you come to this 
conclusion: if we do not have a crisis today, it does not 
appear we will have one in the future. Yes, some Americans are 
under-prepared for retirement--around 25 percent according to 
some studies--with relatively modest savings shortfalls among 
those who are fully insured. But these shortfalls are targeted. 
For instance, one study finds that single, less-educated women 
are roughly twice as likely to fall short in retirement as 
pretty much any other demographic group. So, while we do not 
need to reinvent the wheel, we do need to do something.
    I am fully in favor of auto-enrollment pension plans, but 
less-educated workers are less likely to be offered pensions on 
the job. Senator Marco Rubio has a proposal to allow workers 
who are not offered a pension by their employer the chance to 
participate in the Federal Thrift Savings Plan. Similarly, 
others have proposed a so-called ``Super Simple'' pension. It 
is designed to reduce administrative and compliance costs for 
small employers who are least likely to offer pensions.
    Senator Wyden, you have referenced today State-based plans 
to enhance pension offerings for workers who are not offered 
plans on the job. Senator Hatch, your own legislation has 
provisions designed to encourage the offering of pensions to 
low-wage workers who might not otherwise be offered one.
    Still, though, this may not be enough. For instance, many 
single women without a high school education are likely to have 
only sporadic attachment to the labor force, so personal 
savings can only go so far for these individuals. At the same 
time, though, Social Security treats single women far less well 
than it does married women. So they are not getting much help 
from that end of things either.
    That is one reason that I and others have proposed 
reforming Social Security to include a flat, universal benefit 
set at the poverty level that would go to all retirees 
regardless of income or labor force participation. On top of 
that, individuals would save in supplemental retirement 
accounts provided either through their employer or, if not 
available, through the government.
    This approach is qualitatively similar to that of the U.K., 
Australia, Canada, and New Zealand. In the U.S. context, it 
could affordably reduce the elderly poverty rate from today's 
level of roughly 9 percent to approximately zero percent, while 
increasing real retirement savings among the middle- and high-
income workers who truly should be saving more.
    The lesson of all of this is that there are no simple 
problems and no simple solutions, but a small, if more complex, 
problem is better than a retirement crisis.
    Thank you very much.
    The Chairman. Thank you.
    [The prepared statement of Dr. Biggs appears in the 
appendix.]
    The Chairman. Senator Brown has a hearing in a few minutes. 
Let us start with him.
    Senator Brown. Thank you, Mr. Chairman. I know all of my 
colleagues, as Senator Cardin pointed out too, have busy 
schedules. I have to chair Banking, and thank you for the 
special dispensation here.
    In 1970, a political scientist named Ben Wattenberg decided 
to try to find out what person represented America best, who 
was the prototypical American. He settled on a white woman in 
Dayton, OH, married to a union machinist--retired--who had a 
pension plan, a defined benefit pension plan. In those days, 
her family income was about $60,000. She was right in the 
middle. Half of America was poorer than she. Half of America 
was wealthier than she.
    Today, that machinist's wife in Dayton probably would not 
have a union plan. She certainly would not have a defined 
pension benefit. She and her husband would probably have less 
equity in their home. Depending on the estimates, if she is in 
her mid-50s, she would have savings of somewhere in the 
vicinity--I know scholars differ on this--of as little as 
$11,000. If you look at Fed numbers, she could have up to maybe 
$50,000. Take the middle. Whatever that number is, she will 
have to rely on Social Security for most of her income when she 
retires.
    In fact, today in my State--Ohio is not much different from 
other States--the majority of people on Social Security rely on 
Social Security for more than half of their income. The person 
in the middle will get no more than $1,300 or $1,400 a month. 
So we know that, for an enormous percentage of American 
workers--again, she is right in the middle; half are poorer 
than she is--retirement security is in doubt.
    Mr. Bogle, in your testimony, you make a number of 
important points about adequacy. One very important point is 
that high-cost funds and too many choices can rob 
unsophisticated investors, those in the broad middle or 
slightly lower, of the ability to adequately save. Dr. Madrian 
said, ``Make it easy.''
    My question to you, Mr. Bogle, is, should Congress make it 
mandatory to auto-enroll and auto-escalate into low-cost index 
funds? Should Congress make it mandatory to auto-enroll and 
auto-
escalate?
    Mr. Bogle. Well, with auto-enroll it is pretty easy to say, 
why not have it mandated? I, for one, would be the champion for 
mandating index funds. For heaven's sake, just look at it this 
way, Senator: all of the investors in America, all of the 
retirement plan investors, own the total stock market together. 
They are a giant index fund, so they can go to an index fund 
and own that total share of the stock market for 2 to 5 basis 
points. And, if they want to fight among themselves to see who 
is best and get managers to try to outguess the others, they 
are going to get the market return, less 200 basis points.
    So, it is mathematically correct, but alas--I probably 
should not get into this here--it is probably politically 
undoable. But it should be made a more important qualification 
for entry into the system.
    Senator Brown. And the auto-escalate?
    Mr. Bogle. Auto-escalate is good.
    Senator Brown. As people's income goes up, a slightly 
higher percentage will go into that fund?
    Mr. Bogle. Let me say that these things are right and 
correct as principles. The fact of the matter is, every family 
is different. Should you auto-escalate for a man with six 
children all going to college and a wife who may be ill? In 
other words, when you go from generalities to particulars, it 
is a tough----
    Senator Brown. But that, Mr. Bogle, is why you give the 
option to opt out.
    Mr. Bogle. Yes.
    Senator Brown. You are able to do that. Thank you, Mr. 
Bogle.
    Dr. Madrian, you said you should not already have to be in 
the middle class to get access to tax-preferenced savings 
vehicles. They should be designed to help workers get into the 
middle class. What are the policy changes we need to make to 
ensure that this happens; for instance, raise the minimum wage, 
make the saver's credit refundable--all of the above? What 
policy changes do we make to give people a lift, to be of some 
assistance to get into the middle class and get access to these 
savings vehicles?
    Dr. Madrian. In my mind, the biggest problem with the 
current system is that many workers do not have the ability to 
save for retirement through payroll deduction because their 
employer is not offering a savings plan or they are not 
eligible for the savings plan that their employer is offering, 
so I think we need initiatives to encourage small employers to 
offer a savings plan.
    The small employer is a lot like the individual investor. 
Joe from Joe's Pizza does not have an MBA, does not have a 
dedicated human resources professional, and is no better at 
picking a savings plan for his employees than his employees are 
at picking from 8,000 mutual funds what the best way to save 
for retirement is. Having an option that is easy for Joe's 
Pizza to opt into, and other employers like Joe, would help 
close the access gap.
    So we should allow communities to have the chamber of 
commerce sponsor a multiple-employer pension plan where Joe 
does not have to worry about the fiduciary liability of picking 
the right or wrong investment options, and the employees who 
are in the same workforce in a locality have a similar benefit 
plan--they can talk about it, they can learn about it. Things 
like that would go a long way towards closing the access gap.
    We should provide incentives for companies to open their 
savings plans to all employees. In some companies, part-time 
workers are excluded. These are simple measures that could go a 
long way.
    Another point that I brought up in my testimony is, current 
law right now does not allow for companies to give a small 
financial incentive to sign up for the savings plan in the 
first place. So if you did not have automatic enrollment, or 
even if you did, to encourage employees to opt in rather than 
opt out, you could not, for example, say, sign up before the 
end of the month and you will get a $50 Amazon gift card, or, 
sign up by the end of the month and we will enter you in a 
drawing for an iPad. Things that banks have used in the past to 
get people to sign up for a savings account, that phone 
companies have used to get employees to sign up for a cell 
phone plan, those are not allowed under current law, even 
though the literature on employee behavior suggests that small 
immediate financial rewards are, in fact, very effective types 
of incentives.
    The Chairman. We are going to have to move on at this 
point.
    Senator Brown. Thank you.
    The Chairman. Thank you, Senator Brown.
    Senator Hatch?
    Senator Hatch. Well, thank you, Mr. Chairman. I would just 
as soon you go ahead of me.
    The Chairman. No, please.
    Senator Hatch. All right. Mr. Betts, you have real-life 
experience trying to convince small employers to adopt a 
retirement plan for their workers. Can you explain further: (1) 
what are their motivations when they make a decision to offer a 
plan, and (2) what sort of things convince them to say ``no'' 
to setting up a new plan?
    Mr. Betts. Thank you, Senator Hatch, for the question. 
Working with employers for many years, it has been the 
incentives that the government has included in these plans that 
have incentivized employers to set them up. These incentives 
have motivated the employers to provide this retirement plan 
for their employees, so the effect of the incentive is very 
powerful.
    Now, many employers like to do it because it is the right 
thing. Today many job-seeking employees seek employers that 
have a retirement plan. They will ask, do you have a 401(k) 
plan for me? But that incentive is the key piece. If that were 
changed or removed, many employers would end those plans.
    Also, the incentive is what allows new employers to start 
plans and get benefits in place in these plans. So I think the 
power of it is there and is demonstrated in the numbers of 
Americans who are saving today.
    Senator Hatch. Thank you. Dr. Betts, and, Dr. Reid, maybe 
too, the end result of many of the proposals I read about would 
be to effectively cap employee deferrals. All of these 
proposals seem to rely on the premise of lower contribution 
limits for workers who increase their savings rate. The 
proposals also assume that reduced tax incentives for companies 
will have no effect on the willingness of the business to keep 
its plan in operation or even to start a new plan.
    Well, I do not believe that. I think if we roll back the 
laws Congress has enacted that raised contribution levels and 
increased tax incentives to save, then two very bad things 
would happen at a minimum. First, businesses would stop 
contributing to pension plans because they are too complex and 
expensive to put up without adequate tax incentives. Secondly, 
employees would stop saving so much because the tax incentives 
would be less for most workers. I do not think academics, 
generally, understand either of these points.
    Now, Mr. Betts, what does your real-world experience 
working with business people making these decisions tell you? 
After you finish maybe, Dr. Reid, you might care to comment.
    Mr. Betts. The tax incentive is very powerful in middle-
class America in making these decisions. The tax incentive to 
contribute is very motivational. Now, I agree with a lot of the 
auto-enrollment abilities--that has added to the number of 
Americans participating--but it is really that incentive that 
motivates people to enter those plans.
    Senator Hatch. All right. Dr. Reid?
    Dr. Reid. Senator Hatch, I think there are two points that 
I would like to make here. The first point is about the tax 
incentives and what is the incentive to save. This is really 
the key question. So, as you know, the current system for 
retirement savers is that we defer our taxes. So, when we make 
a contribution, we do not pay income taxes on the money that we 
put in or the earnings as they build up. But when we take money 
out of these traditional retirement plans, a 401(k) or an IRA, 
we pay the income tax when it comes out. It is, therefore, a 
deferral, not a deduction or exclusion.
    What this deferral does is, effectively, it gives a zero 
tax rate on the investment income in that plan. And that is the 
incentive. It removes the tax wedge and allows the return for 
the investor to come up to the point of the market return as 
opposed to a below-
market return after the tax.
    Why is that important? Some of these proposals to cap the 
up-front deduction would actually turn the tax incentive on its 
head. So one example is, for instance, to cap the up-front 
deduction at 28 percent and give you a credit. So anyone in an 
income tax level above 28 percent, let us say 35 percent, would 
have to pay a tax going into the plan, and then they would pay 
their full tax rate coming out of the plan.
    What this, effectively, would do is disincentivize someone 
who is putting money into that plan in that upper-income level, 
and actually make it almost preferential to put money into a 
taxable account. They would have to hold the money in that 
retirement plan for 13 years to catch up from that extra tax 
hit at the beginning.
    So I think these proposals to cap the deduction, make it a 
credit, and put a tax penalty on higher-income savers would be 
very detrimental for higher-income savers. Many of them would 
be better to pull out.
    The second point is that the contribution limits are really 
important. And one reason those contribution levels are 
currently important is because people's ability and willingness 
to save for retirement changes over their lifetimes. So we find 
individuals, as they move into their 50s and 60s, are more 
likely to participate and contribute at the limit. Fifteen 
percent of people in their 50s and 60s are contributing at the 
contribution limits.
    Senator Hatch. Well, thank you.
    Mr. Chairman, if I----
    The Chairman. Senator Hatch, please go ahead.
    Senator Hatch. If I could just ask a question of Dr. 
Madrian--Doctor, while behavioral economics has shown a couple 
of successes, some of us are concerned that the field contains 
some who, rather than providing a nudge to, perhaps, help 
people navigate difficult decision-making, would provide full-
fledged open field tackles of private citizens. It seems as 
though some behaviorists operate from a notion that academic 
and government technocrats are infallible and need to tell 
fallible private citizens of their mistakes and how they should 
lead their lives and allocate their resources.
    As an example, a former Treasury official in the Obama 
administration, along with a Harvard professor, has written 
about ``behaviorally informed financial services regulation.'' 
One of their proposed schemes is to nationalize all late fees 
on credit cards, give card issuers a small amount determined to 
be fair by some government technocrat, and use the nationalized 
pool of funds for financial education and other ways to help 
fallible private citizens.
    Dr. Madrian, how do you feel about such a proposal, and do 
you believe that infallible government technocrats need to, 
effectively, make decisions for private citizens on credit 
cards, or on retirement savings, under the notion that those 
citizens are not doing what the technocrats want them to do?
    Dr. Madrian. So, I will have to confess that I was not 
prepared to answer that question when I walked into the room. I 
know whom you are talking about, and I have read the article 
that you refer to more than once.
    I guess I would say----
    Senator Hatch. Take a swing at it. [Laughter.]
    Dr. Madrian. How about if I answer a slightly different 
question?
    Senator Hatch. That would be fine.
    Dr. Madrian. I guess my view of behavioral economics is 
that what it does is try to expand the scope of understanding 
of what is actually driving behavior and what are the tools 
that you could use to influence behavior. Whether you want to 
take a light-handed approach or a heavy-handed approach, that 
is a matter of personal preference. So I disagree with painting 
all behavioral economists with the same brush. I think you are 
going to find people along an entire spectrum, but I would be 
happy to go back and look at that article and send you a 
response to your questions----
    Senator Hatch. I would like to have that.
    Dr. Madrian [continuing]. When I have had more time to 
think about it.
    Senator Hatch. I would like to have that.
    Mr. Chairman, I have to leave, but I just want to mention 
that this is an excellent panel. I have questions for each one 
of you. I apologize that we have run out of time, but forgive 
me for having to leave at this point.
    The Chairman. Well, thank you, Senator Hatch. As you and I 
have talked about in the past, this is going to be a focus of 
bipartisan tax reform. Thank you very much. I look forward to 
working with you.
    Senator Hatch. Vice versa.
    The Chairman. Senator Stabenow?
    Senator Stabenow. Thank you very much, Mr. Chairman, to you 
and our distinguished ranking member. This is a very, very 
important issue, and I appreciate the focus now and look 
forward to working with you.
    Let me just start by saying that I am a little surprised at 
what feels like an optimistic view that most people are saving 
and somehow people are going to have enough, and they are doing 
well. I would just throw out a couple of different numbers. 
Boston College Center for Retirement Research said in 2010 that 
we would have at least a $6.6-trillion deficit in terms of what 
people needed and what they were saving. Last year, 2013, the 
National Institute on Retirement Security said that 92 percent 
of working households did not meet the targets they needed for 
savings, somewhere between $6.8 trillion and $14 trillion.
    So I am concerned about the differences there, but I want 
to ask specifically about a group of folks I think we have not 
talked about this morning. As we look at what happened in the 
Great Recession with people losing their jobs and their homes--
and they lost the equity in their homes, which was a major way 
that people saved, middle-class families, for retirement--and 
we look at what has happened to so many folks, we know that a 
lot of people took hardship withdrawals from their retirement 
accounts. We are told that they increased as much as 40 
percent. So folks were saving, and then they had to take a 
hardship withdrawal because of what was happening to them, on 
top of losing the equity in their home. So, I am very concerned 
about folks who are now in a deficit position, who were doing 
the right thing and were caught up short because of something 
that happened that was way beyond their control in all of this.
    Mr. Bogle, I would ask you first: are there options that 
you would suggest to us that would help these workers rebuild a 
secure retirement who got put behind the eight ball because of 
the recession?
    Mr. Bogle. Well, that is not an easy problem to solve, 
Senator, to say the least.
    Senator Stabenow. Right.
    Mr. Bogle. I do think that we have to face up--as we look 
at our whole retirement system--to the fact that, according to 
the ICI, 33 percent of our population households have no 
retirement plans at all. The Federal Reserve says--and a very 
reliable source they are--only about a quarter of our 
households are preparing for retirement.
    I look at those kinds of data as more important than all of 
the tail data you see about how many dollars are here and how 
many dollars are there. Here is a case where I think common 
sense and the superficial data should override the complex data 
which concludes, as you now have all found out, just about any 
answer you want.
    So how to help somebody who is in real trouble is not easy. 
We should face the fact that the lower quintile of American 
income is $20,000 a year before taxes, unchanged on a real 
basis, cost of living adjusted, since 1979. And those people 
are not able to save. If we want to help them, there is simply 
no recourse than to increase benefits at the lower end of 
Social Security. It is complex, but the money has to come from 
somewhere. And that would be, I think, the best answer I can 
give to your question. We have to look elsewhere than the 
private retirement system.
    Senator Stabenow. Well, to add to that--and I would ask 
each of you if you could briefly respond--right now it is 
costing us about $800 billion over the next 5 years alone as we 
look at retirement account pension contributions. I certainly 
support this as a major area where we are focusing tax policy, 
but we also do know that, according to the CBO, the top 20 
percent of households receive nearly twice as much of the tax 
benefits for retirement savings as the bottom 80 percent 
combined. Now we understand why that is, but the problem is, as 
we are looking at tax reform, the households that need the 
least help in saving for retirement are getting the biggest 
help, and the people who need the most are getting the least 
help.
    How would you suggest, or would you suggest that we do 
anything to improve the targeting of the tax incentives for 
retirement? Also, if anybody has a thought on how we could help 
the folks who got put in a hole here in the recession, we would 
appreciate that.
    Mr. Bogle. Well first, looking at the high end of that, 
this is something--I will actually stand in for Ellen Schultz, 
because I read her book.
    Senator Stabenow. So did I. Yes.
    Mr. Bogle. People at the high end of the income scale have 
so many retirement plans, such as deferred compensation, 
reimbursements for taxes paid, things that are in my opinion 
socially outrageous--if you can handle an opinion that strong--
and get all kinds of benefits that are above and beyond what we 
can do and what we even think about in our retirement system. I 
would say that was the place to begin reform, and if those 
savings from making retirement so easy for our wealthiest 
citizens can somehow be transferred to those lower on the 
income scale, I think that would be desirable. But, alas, I 
cannot tell you how to do it today.
    Senator Stabenow. Well, thank you very much. I will ask 
everybody briefly, but, Dr. Reid?
    Dr. Reid. Senator, I think there are a couple of things at 
issue here. The first is that, if you think about the entire 
retirement system, putting employer plans together with Social 
Security, it still is a progressive system. And it really is 
the combination of those two that creates joint incentives to 
save.
    The second point is--and I think this is where we have 
provided some caution--there will be consequences if you begin 
to scale back contribution limits. Really, right now, the 
contribution limits are pretty modest relative to where they 
were historically, when ERISA was first set up, and individuals 
who take advantage of them tend to be in their peak earning 
years. If you begin to carve that back or begin to tinker with 
how those tax incentives are created, you could have higher-
income employees not interested in participating anymore. 
Employers may then decide that it is just better to give them 
current compensation and not offer a retirement plan, and we 
could actually end up reducing overall participation.
    I think an example of that is, in 1986 we removed the 
ability of high-income workers to participate in an IRA. The 
following year, not only did high-income workers no longer 
participate in IRAs, but even low-income workers stopped 
participating in IRAs. And it is complex why that happened, but 
I think it is a cautionary tale.
    The Chairman. Senator Stabenow is asking a very good 
question. If you all can give short answers, that would be 
good.
    Senator Stabenow. I guess what I would say, in the interest 
of time, Mr. Chairman, is, does anybody think we ought to 
target incentives, and if so, how?
    Mr. Betts. I would increase incentives or remove the 
disincentives out of these retirement plans that can be put in 
by employers so that we can expand the access.
    Senator Stabenow. And you would do that for everyone?
    Mr. Betts. There are disincentives already built into the 
system that make it difficult for the small employer to start 
these plans. Senator Hatch's bill has a number of things that 
remove some of those disincentives and make it easier for small 
employers to start a plan so more Americans could be saving.
    Senator Stabenow. Thank you.
    Dr. Madrian. If you were worried about low-income and 
vulnerable taxpayers, another characteristic that would 
describe many of those individuals is, they are not 
particularly financially literate. You can create all sorts of 
complicated tax incentives, and you are not going to get a lot 
of traction, because the tax incentives are not solving the 
problem. The reason those households are not saving is not 
because they are facing small tax incentives, it is because 
they do not know what to do or their employers do not offer a 
plan.
    So, a far more sensible margin for spending public dollars 
would be to create the incentives for employers to offer 
savings plans and automatically enroll their low-income 
workers, because that solves the problem of inaction and 
individuals not really knowing what to do.
    The Chairman. Is there anything you would like to add, Dr. 
Reid?
    Dr. Reid. I would just briefly reiterate a point from my 
testimony, which is that folks who end up in retirement without 
a lot of savings, without a lot of wealth, are often people 
with very sporadic attachment to the labor force during their 
working years. These are folks for whom employer-based savings 
plans are not going to do very much. But they are also folks 
who often fall through the safety net--Social Security. Social 
Security serves a lot of these folks not particularly well, 
because it is an earnings-based program, and because it has 
very odd distributions of benefits even among low-income 
people.
    So I think we do need some rethinking of who is falling 
short. What do we need to do for them? For some it is more 
individual----
    The Chairman. That is important. I am going to have to stop 
you at this point.
    Senator Stabenow. Thank you.
    The Chairman. Senator Grassley?
    Senator Grassley. I am going to start with Mr. Betts. In 
your testimony, you state that our current tax savings system 
is ``more progressive than our progressive income tax.'' Now 
that is an important point from my standpoint, because critics 
of current savings incentives frequently argue just the 
opposite. So I am going to give you a chance to elaborate on 
how the current savings incentives are actually progressive.
    Mr. Betts. Thank you, Senator Grassley. Yes, in my 
testimony I provide a chart that demonstrates that Americans 
who earn less than $100,000 basically represent 28 percent of 
the tax collection. But the same group of Americans receives 49 
percent of the benefit through the employer-sponsored 
retirement plans. That seems quite a bit more progressive.
    In addition, what is not noted in that is the many 
employers that actually provide employer contributions into 
these plans because of the way they are designed. The 
nondiscrimination rules and opportunities and incentives for 
employers permit them to put in more employer dollars that are 
not even covered in this chart.
    Senator Grassley. All right. For Dr. Reid: as you know, 
there are currently several proposals that would limit the 
ability of upper-income individuals to deduct retirement 
contributions. That 28 percent limitation is an example.
    Now you discussed this with Senator Hatch from the employee 
standpoint. I would ask you: how does your research suggest 
employers offering defined contribution plans would respond to 
proposals such as the President's?
    Dr. Reid. So, it is important to keep in mind, Senator, 
that a 401(k) plan is an employee benefit. It is something 
that, when an employer is looking to attract employees, they 
know that to attract high-quality employees, they want to offer 
this benefit like they would any other benefit.
    If you have something in place that makes participating in 
that defined contribution plan unattractive for a group of 
potential or existing employees, the employer is going to say, 
well, I am going to use my resources elsewhere. I may just 
simply increase wages or something else and not offer a plan.
    The example that I gave was, by putting a cap or a credit 
in place, what will happen is that certain individuals, 
employees, will have to pay a tax goinginto the 401(k), and 
then they would have to pay the full tax rate coming out. 
Actually then, for some of these employees, they would be 
better off simply putting their savings in a taxable account 
outside of their employer's plan.
    The employer then, if that begins to happen, is going to 
say, well, this is not a benefit that a substantial number of 
my employees want. I am just not going to offer that anymore. I 
think, as many of the other panelists have pointed out, the 
benefit is having that employer plan there and in place. And 
being able to, in many cases, auto-enroll people actually 
increases participation.
    I think, with the President's proposals, we would be taking 
significant steps backwards from the actions that Congress has 
taken over the last 50 years, and we would actually potentially 
reduce plan participation.
    Senator Grassley. I am going to go back to Mr. Betts. 
Employer-sponsored retirement plans are an important component 
of any retirement plan. While 80 percent of the full-time 
workers have access to a retirement plan, this number is only 
around 50 percent for employees working for small employers 
with fewer than 100 workers.
    Mr. Betts, as someone who worked with businesses in the 
administration of their retirement plans, what do you see as 
the biggest barrier to employers, particularly small employers, 
offering retirement plans? Probably a more important question 
would be the second one, so spend more time on this: what 
single reform, if implemented, do you believe would do the most 
to increase the number of small businesses offering retirement 
plans?
    Mr. Betts. Thank you. Yes, there are several older rules in 
the nondiscrimination rules that were put in place early on in 
these plans. Newer rules have done better at managing the 
nondiscrimination requirements in these plans. One of the ones 
that could be removed would be the top-heavy requirement. That 
has disincentivized many small employers from starting a plan 
because of the risk of how much employer money they may have to 
put into a plan to satisfy that rule.
    Another big step in the right direction would be Senator 
Hatch's Starter 401(k), being able to provide an employer plan 
so employees can start contributing where there is no risk of 
an employer contribution until such time as that an employer 
becomes financially stable and can benefit from a larger plan.
    Senator Grassley. All right. My last question would be both 
to Dr. Biggs and Dr. Reid. What are your thoughts on the reform 
proposals, such as Chairman Camp's, that would generally push 
more retirement savings into Roth-style 401(k)s and IRAs? 
Should Congress consider consolidating the types of retirement 
accounts in order to reduce confusion for savers, or is it 
important for individuals to have more options?
    Dr. Reid. Senator, I think we are always in favor of 
simplification. I think one of the concerns that we would have 
in terms of potential consolidation is that, unlike some of the 
proposals like Senator Hatch's and others that are trying to 
find ways to make it simpler for small employers to offer a 
plan, consolidation could actually then narrow the options, 
making it more difficult for small employers to offer a plan. 
So that is why we have been in favor of concepts such as 
Starter 401(k), to enhance and broaden the scope of employer 
offerings of retirement plans.
    Senator Grassley. Mr. Betts, do you have anything to add?
    Mr. Betts. No, thank you.
    Senator Grassley. All right. I am done, Mr. Chairman.
    The Chairman. Thank you, Senator Grassley.
    Senator Cardin?
    Senator Cardin. Mr. Chairman, first of all, thank you for 
holding this hearing. I agree this is a critically important 
issue. It has been 15 years since then-Congressman Portman and 
I recognized that we had a significant problem in our economy. 
Fifteen years ago, our economy was growing, and our workforce 
was growing, and income was growing. We led the world in just 
about every economic indicator, positive, except one. That was 
savings. Our savings ratios were, in fact, negative during some 
of those years.
    We also recognized that Americans did not have enough money 
for retirement, particularly lower-wage workers and younger 
workers. So we tried to do something about it. We were able to 
get several significant provisions incorporated into our tax 
code. I want to build on that.
    Our first principle was to try to simplify and to increase 
the limits, particularly the catch-up contributions, because of 
the point that some of you have raised that, when you are 
young, you have family, you have homes, you have all of these 
issues, including education expenses, and you do not think 
about retirement until later in life. Then the limits prevent 
you from building up enough in order to provide for retirement 
security.
    Our purpose is pretty simple, and that is what all of you 
have mentioned: access to retirement plans. If an employer does 
not offer a plan, there is going to be limited access. If you 
simplify, and if the limits are high enough to make it 
worthwhile, more employers will provide plans. That has been 
the result of legislation allowing for higher limits and more 
simplified plans.
    We also recognize that when employers put money on the 
table, more people will participate. Look at the Federal 
Government, the Federal Thrift Savings Plan. Our workers 
participate in it. Why? Because they do not want to leave money 
on the table. So, when an employer sets up a plan and provides 
matching contributions, it is much more likely that workers 
will participate. That is one of the things that we try to 
encourage.
    The alternative to that is to try to put some money on the 
table through the government, because, as important as the tax 
deferral benefit in employer-provided plans is, it is not 
enough for lower-wage workers and younger workers to 
participate at the levels we would like them to. So the saver's 
credit was the substitute, and the saver's credit has worked. 
Millions of Americans today are using the saver's credit.
    So we have been able to get more participation. Automatic 
enrollment is important for getting people to enroll, Mr. 
Chairman, but also the default investment option is more 
sensitive to the person's age, which means there are better 
investments made for them, rather than them making decisions 
themselves.
    Lastly, you have mentioned financial literacy and 
investment advice. All of that was a part of what we tried to 
do over a decade ago. As a result, we have made progress. More 
people have retirement plans than would have had retirement 
plans. More money is in retirement options.
    As you know, we have gone through a recession. During a 
recession, you try to encourage people to spend, not save. As a 
result, we have lost ground. There is no question about it. We 
have to do a lot more. We have been on the defense for the last 
4 or 5 years in this Congress trying to preserve the options we 
currently have. That has been our strategy. It is time for us 
to have a strategy to move forward. That is why I am 
particularly pleased about this hearing.
    How can we build on what has worked, and how can we deal 
with the issues that many of you have talked about with low-
wage workers, the younger workers, not putting enough away for 
retirement? Mr. Chairman, there are some easy things we can do.
    Senator Portman and I have introduced legislation called 
the Church Plan Clarification Act. It deals with the practical 
problems that church plans have with ERISA. We should pass 
that. It is another easy thing we can do. We also have the DB-
DC freeze legislation that addresses problems that arise when 
companies move from defined benefit plans to defined 
contribution plans. They are trying to do what is right for 
employees who are in the defined benefit plan by preserving 
those options, but the nondiscrimination testing rules can be 
very challenging. Our bill addresses that.
    I would hope these modest changes could be done quickly, 
because they are affecting retirement options today, and we 
should not wait for comprehensive reform when we can get some 
progress made. We should move forward and improve the saver's 
credit. We should improve the automatic enrollment process. We 
should continue to try to simplify.
    I would like to ask--let me start with Dr. Reid--a 
question. One of the things that has frustrated me is that, 
when we designed these plans, we made it too easy, in my view, 
for people to take retirement money for things other than 
retirement. We also made it easier for them to take lump sums 
out rather than taking out lifetime income. One of our 
objectives is to have retirement security, to have an income 
source that takes the pressure off of Social Security, which 
was never intended to be the sole source of income for people 
who are retired.
    So what can we do to encourage more lifetime income options 
for retirement funds rather than having money taken out too 
early either through a lump-sum distribution or for other 
purposes?
    Dr. Reid. So I think with the current system, certainly if 
you look at what people do within their 401(k)s or IRAs, we 
find that the vast majority of the money that is in 401(k)s is 
rolled over to IRAs. We also find that individuals tend to 
start tapping the money, actually, at age 70\1/2\. It is the 
minority of individuals who do not.
    I think that ideas to help individuals to spread out those 
savings over their lifetime are valuable. I think our concern 
is driving tax incentives to a particular product. For many 
low- and moderate-
income households, they are already heavily annuitized through 
Social Security. They may have that lump-sum nest egg then for 
emergency purposes or for healthcare needs or something like 
that. We would not want to penalize these individuals for 
wanting to keep a lump sum to be able to tap.
    Other types of proposals to help people spread that savings 
over time and to draw on it, I think would be valuable. We just 
want to make sure that these are product-neutral approaches.
    Senator Cardin. One of the proposals is to give an 
exemption for a certain amount of retirement funds from the 
minimum required distribution for the purposes you just said: 
so that you can keep a nest egg. One of the concerns that we 
have is that people just take money out when they should not, 
and we want to provide incentives--and not any one product--but 
incentives for income flows that can help people avoid 
outliving their income, which happens too frequently.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Cardin, and I also want to 
be clear that I am very interested in working with you and 
Senator Portman on the Church Plan Clarification Act. For those 
who are following this, this important legislation does what it 
sounds like. Church plans or retirement plans of churches, they 
generally are not subject to ERISA, and so we have a situation 
where we would have to preempt State law so that you could add 
these auto-
enrollment features that are so popular.
    I want you to know that we have a score request pending. We 
are going to work very closely with you. I think it is a 
sensible suggestion. I do not think it is going to score a lot.
    Senator Cardin. Thank you, Mr. Chairman. I appreciate that.
    The Chairman. Thank you.
    Senator Casey?
    Senator Casey. Mr. Chairman, thank you very much for the 
hearing. I want to thank our panel for your presence today and 
your work on these issues.
    I will start with Mr. Bogle, not only because of his 
Pennsylvania residence and his impact in our State and our 
country, but we are grateful you are here, sir. Thank you very 
much.
    Mr. Bogle. Thank you, Senator.
    Senator Casey. I want to ask you about this, the basic 
dynamic that has played out over a number of decades now: the 
shift from defined benefit plans to defined contribution plans 
and the implications of that. As you noted, there has been a 
transfer of trillions of dollars in savings and risk to 
individual investors and away from corporations.
    Give me a sense, if you can--as we try to design policy 
around the questions of giving those individual investors the 
tools they need to deal with that basic change, the question of 
educating investors--what more can we do? What model works in 
terms of giving them, at least, the opportunity to become 
better educated?
    Mr. Bogle. Well, to begin with, what we have to do is take 
what was designed as the 401(k) was, for example--it was 
designed as a thrift plan system--and turn it into a retirement 
plan system. If you could just think that one through, you 
would get very close to where you want to be.
    In terms of greater utility and greater efficiency for 
investors, there is just no question in my mind that their 
investment returns will be improved if they get the cost, the 
dickens, out of the system. Owning an index fund--let us call 
it owning the stock market, Senator--is such an easy thing to 
conceptualize as compared to picking the right manager here and 
picking the right manager there and, when he does not do well 
or she does not do well, picking another manager. We find that, 
for investors in mutual funds--I think this is in my 
testimony--because of that confusion, the idea that you can 
pick a good manager for a lifetime of investing simply does not 
work.
    So investors lose another 2 percent. They have a cost built 
into our system, about 2 percent a year, a staggering number. 
Making the wrong fund choices is another 2 percent a year, 4 
percent a year, that they lag by. So I think if we would 
simplify the system and at the same time take the cost out of 
it, investors would have a lot of the mystery removed and be 
much more willing to sign up for a plan.
    Senator Casey. Is there any experience, based upon your 
work or based upon the work of Vanguard, as to the age at which 
or the period of time within an individual's life where this 
education could be especially significant? In other words, is 
it starting earlier? I know we have had legislative attempts to 
make sure that even students at a very young age are exposed to 
it. Is there any strategy that Vanguard has or has been 
successful with?
    Mr. Bogle. Well, to give you my own impression, first, the 
way we now introduce young people to investing is to have 
stock-picking contests. That is sending exactly the wrong 
message to them.
    We should start with a compound interest table and show 
them how a percentage point of difference in return mounts up 
over a lifetime to an astonishing, absolutely astonishing 
amount. When you get to a higher level of age, I do not think 
there is a single--well, very, very few, maybe, to be fair--
business school or finance school professor who would not tell 
you exactly what I am telling you: it is an inefficient system 
that is ill-serving mutual fund investors.
    I have in my prepared testimony a statement that is far 
stronger than that about the inadequacies of the mutual fund 
system, given by David Swensen, who manages the Yale Endowment 
with such success and is a person of impeccable integrity. You 
could easily say I have a vested interest in index funds. I 
really do not, because anyone can start one, and I would like 
to have more competition in the index area. It comes down to 
simplification and owning the market, rather than owning a 
bunch of different managers, if you are investing for a 
lifetime.
    Senator Casey. Thank you. I will submit some questions for 
the record for Mr. Bogle and for others.
    In the less than a minute that I have, Dr. Madrian, I 
wanted to ask you--you made a pointed reference to automatic 
enrollment and the benefits of that. If you had to look at this 
purely from the point of view of the tax code, either where we 
are today or, frankly, where we hope to be, would you have any 
recommendations for improvements we could make to the code to 
make it more effective or, I should say, changes to the tax 
code to make savings incentives more effective?
    Dr. Madrian. Yes. I have a one-word answer, and I will 
spell it out: s-i-m-p-l-e.
    Senator Casey. Simplify, yes.
    Dr. Madrian. Yes.
    Senator Casey. Mechanically, what is the best way to do 
that? In other words, when you look at where we are today, the 
code as it stands today, what change would you hope we would 
make?
    Dr. Madrian. That is an excellent question. I think that 
the tax code overall is very complicated. I think for middle- 
and higher-
income tax payers, the Alternative Minimum Tax and how that 
interacts with the rest of the tax code makes it a complete 
mystery. You have no idea what the incentives are that you are 
facing, or the penalties to do one thing or the other.
    On the lower end of the income scale, you then have the 
interactions between the tax code and all of our social welfare 
programs. I think very few individuals accurately understand 
the tax incentives that they are facing. I think the saver's 
credit, the motivation behind that to give low-income families 
an incentive to save, is well-intentioned, but if someone with 
a Ph.D. in economics from MIT cannot sit down and figure it out 
in 10 minutes, it is too complicated. I think the fact that we 
have so many different tax-
favored ways to save, makes it complicated.
    It is not just the retirement system. So, if I am an 
employee and my employer offers an employee stock purchase 
plan, a 401(k) plan, and a health savings account, and I have a 
limited budget for how much I can save, it is very complicated 
to figure out where I should put that money. Plus we have 529 
plans. We have lots of different tax-favored ways to save.
    I think some simplification and some consistency across 
these different plans would be helpful. Why a 403(b) plan has 
to have different rules than a 401(k) versus an IRA--a lot of 
it does not make sense to me. I think there are a lot things to 
do to make things simpler, more straightforward, for both 
employers offering plans and for individuals trying to decide 
how to save for health care, for education, for retirement, for 
a mortgage, things like that.
    Senator Casey. Thanks very much. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Casey.
    Senator Portman, I do not know if you were here, but you 
are already on a roll this morning with your Church Plan 
Clarification Act legislation to promote auto-enrollment and 
preempt State law, so just keep going.
    Senator Portman. Excellent. Well, thank you. Did our 
panelists all say they agreed with it and it was going to get 
enacted into law?
    The Chairman. We are getting a score as quickly as 
possible. I think it a very constructive idea. I am looking 
forward to working with you.
    Senator Portman. Great. Thank you, Mr. Chairman. I 
appreciate your interest in this area and having the hearing 
today. I was here earlier to get to hear some of the great 
testimony, and what a terrific panel. Thanks for what you are 
doing.
    I know Ben Cardin was here earlier, and, as you know, Ben 
and I did a lot of work together in the House on these issues, 
and we have introduced this church plan recently, but also soon 
we are going to introduce another bill on the whole issue of 
the nondiscrimination testing and the hard freeze and soft 
freeze issue. This is something we have actually talked to 
Treasury about in open testimony here, and I think this will be 
another good clarification plan that will help.
    I am excited about what we have been able to do over the 
years. I think it has made a big difference. I am looking at 
some statistics right here, some charts on 401(k)s and IRAs, 
and I know that some are critical of these programs. Here is 
the reality: even with our tough economic times we have had and 
during the financial crisis, we have gone from about $4 to $5 
trillion in assets in 401(k)s and IRAs to about $10 trillion, 
over $10 trillion last year.
    So that is not bad, given, again, what happened during 
2008, 2009, 2010. We have to just keep it up. We have to figure 
out how to get more small businesses to provide these plans, 
and that is the key, to me: encouraging every small business to 
offer something so that every employee has the opportunity.
    As Dr. Madrian just said, keep it simple. We do actually 
have a simple plan now that came out of the Portman-Cardin work 
in the House for small businesses. It is actually called 
``SIMPLE,'' but there is more work to be done in terms of 
taking out some of the complication and the cost, and even the 
liability in it.
    The saver's credit, I think, has worked pretty well. We 
would love to have your views on that going forward, as to how 
we can make that work better.
    On the auto-enrollment issue, when I talk to companies--and 
I know you all talked about this earlier--we go from about 75 
percent participation on average to 95 percent. That is, 
obviously, a great opportunity. There is more opportunity 
there, I believe, obviously, to expand that to more companies.
    Recently, Senator Warren and I actually introduced a bill 
that we hope will get hot-lined soon. We would love your 
support on this bill, which would simply move the default 
option in the Thrift Savings Plan from being government bonds 
to a life cycle plan. I do not know what you all think about 
that, but a life cycle fund, it seems to me, makes a lot more 
sense for Federal employees. If you are interested in that, now 
is the week to weigh in.
    So I ask you that. What do you all think of that for a 
default in the Thrift Savings Plan? Maybe Dr. Reid and Dr. 
Madrian, you could start.
    Dr. Reid. Well, certainly in the private sector, the 
defaults that we have put in place in the rules, that Congress 
put in place around balanced funds and life cycle funds, have 
been extremely popular. I think that they do help get younger 
investors into and saving more heavily in the stock market. 
What we saw is, even while there was talk about younger 
investors pulling out of the stock market, those life cycle 
funds did certainly keep individuals who were in 401(k)s 
contributing.
    I think another point here that we would like to make is 
that, for ways of expansion--going to your broader question--
the MEP concept, I think again, for smaller employers, to help 
them more easily offer a plan, would be a beneficial change to 
our system as well.
    Senator Portman. Thank you. I agree. Dr. Madrian?
    Dr. Madrian. Yes. I completely agree with changing the 
default fund for the TSP. A huge volume of evidence shows that 
the default fund is extremely persistent under automatic 
enrollment. So, if the default fund is a bond fund, most of the 
assets are going to be flowing into the bond fund.
    To harken back to Senator Casey's question earlier--how do 
individuals learn and become more financially literate--the 
best evidence is that they learn through experience. So, if we 
want individuals to understand how the stock market works and 
how diversification works and things like that, having them 
invested in a life cycle fund which contains a better mix of 
assets makes a lot of sense.
    Senator Portman. There are so many things I would love to 
talk to this expert panel about, but one is the minimum 
distribution rules. One idea that is out there that I find 
intriguing, but would love to hear reviews on, particularly if 
anybody disagrees, is, should we eliminate minimum distribution 
rules for plans under a certain amount, say $100,000? A lot of 
people who are 70\1/2\ are still working, as you know.
    I just left the CEO of a major steel company. 
Unfortunately, they are trying to keep their older workers 
there because they have a serious skills gap. So what do you 
all think about that? Who wants to talk about that?
    Dr. Reid. I think any ways in which we can help to 
encourage people to spread out their balances over a longer 
period of time--we certainly find that most people wait and do 
not withdraw until they hit that age of 70\1/2\. Given the fact 
that life expectancies have increased and that the minimum 
distribution age has not changed, it certainly merits looking 
at whether or not that really needs to be adjusted--as long as 
what we do is product-neutral again. I think, again, what we 
want to make sure of is that--no matter how you are invested--
the minimum distribution age is available to everyone.
    Senator Portman. Mr. Bogle?
    Mr. Bogle. I think your conclusion is correct, that there 
ought to be some exemption for minimum distribution 
requirements, say $100,000, that can be taken out without its 
being required to be taken out. I would also say, on the Thrift 
Savings Plan, I do think the Thrift Savings Plan needs an 
option, if you will, where investors can say, I want my money 
safe for the last 2 years before retirement, let us say. I do 
not know what the market is going to do, maybe it is going to 
go down 50 percent all over again. No one knows that, so if 
that investor really wants protection late in the period before 
he retires, he should have a highly safe option.
    Senator Portman. That, as you know, is the theory with 
these life cycle funds: you go to fixed income towards the end 
of the cycle, and I need to look at that more carefully to see 
if it is the last 2 years.
    Let me ask you all a general question, if I might. I am 
over time already. Thanks, Mr. Chairman, for the indulgence.
    There is discussion, as you know, about savings in general 
and our still-low rate of savings in this country and how it 
affects the economy. And Senator Cardin and I believe that it 
does, and I think the chairman does as well. So there is talk 
about a universal savings vehicle. This came up in the Bush 
administration. It has come up again recently with some 
discussion of new ideas about a universal savings vehicle that 
would be available to everyone.
    The analogy has been what they are doing in Canada, for 
instance, if you followed that at all. It is a Roth-type 
vehicle therein terms of tax treatment.
    What do you all think of that as it would relate to 
retirement savings? One of the concerns always is, well, if 
people have the opportunity to save for anything and to pull 
out for anything, you would have even more leakage. You would 
have even less assets for retirement. But is that all right 
because you are increasing savings and financial literacy and 
banking and so on? Maybe those of you who have not talked yet 
could just comment on it.
    The Chairman. Quickly, witnesses, so we can get Senator 
Cantwell in.
    Dr. Biggs. I will pass in the interest of time.
    Dr. Madrian. I do not know the particulars of the type of 
proposal you are talking about, but I do know that it would not 
make sense to have a universal savings plan where you could put 
money in and take it out for anything unless you have much 
stronger incentives to encourage accumulation in that plan.
    If you are going to let people take the money out for 
anything, they have to be putting more money in in the first 
place, if they have to cover everything they are doing. You 
would need higher limits. You would need financial incentives. 
You would need every lever out there.
    We know from behavioral economics that people engage in a 
lot of mental accounting in organizing their financial 
accounts, and one problem with the retirement savings system 
right now is that we do allow people to take the money out. So 
it is not clear whether a 401(k) is a retirement plan, or is it 
a universal savings plan?
    Senator Portman. Yes. What penalty, though?
    I am sorry, Senator Cantwell. I did not know you had yet to 
ask questions. I will let you go now, but I just want to say 
that, if any of you have any thoughts on that, please send them 
to me, including Dr. Biggs. We may do some follow-up questions 
as well. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Portman.
    Senator Cantwell?
    Senator Cantwell. Thank you, Mr. Chairman, and thank you 
for this important hearing. I know, according to a New America 
Foundation study, 92 percent of Americans are not meeting their 
retirement savings goals. I know that as we look at our budget 
for Social Security and Medicare, and programs like SNAP, this 
is going to have an impact on them. So to me, I want to look at 
ways to encourage more savings and certainly offer more of a 
lifetime stream of savings.
    So, Mr. Betts, I was wondering if you could comment on 
programs like a lifetime guaranteed annuity product as a way to 
incent Americans to further save, and a way to help them get 
more efficiency out of their dollars. This is something that 
could be further incented by Congress.
    Mr. Betts. Well, Senator Cantwell, our business is helping 
employers design, implement, and manage employer-based 
retirement plans. We do not get into the products that go into 
them, but we have seen current legislative actions that have 
introduced opportunities into these plans to have annuity-based 
structures, things to help better at retirement with these 
plans.
    Our biggest focus, really, is expanding the access so that 
more dollars are going in. We would like to see less of the 
disincentives that prevent small employers from starting these 
plans, so that more Americans can be contributing. As they 
grow, as these small employers grow, then the employers will 
put more employer dollars in.
    So it is really, from our perspective, getting access and 
contributing sufficiently. We know at retirement there are a 
variety of different situations, and people need the 
flexibility to design the retirement program they need. So the 
right amount of tools for an American person inside their 
retirement plan is important.
    Senator Cantwell. Do you like the annuities that businesses 
are offering? Do you think they are successful?
    Mr. Betts. They have a place for the right person who needs 
that type of structure, but that is not something we work on in 
our business.
    Senator Cantwell. Mr. Bogle, do you have any input about 
annuities?
    Mr. Bogle. The problem with annuities today, like any 
investments with a fixed-income portfolio, is that the rates 
are just so terribly low. I have always thought there was a 
place for an annuity--because it eliminates longevity risk--and 
a place for bonds. But those returns are so unattractive today 
that I think investors, and I think their advisors, have to at 
least vaguely think about whether they are attractive 
investments.
    When you think about a savings plan, a universal savings 
plan, we really know from history that, because of inflation, 
putting money into savings over the long term is a loser's 
game. It probably has a negative return of about 1 percent a 
year after the cost of living is adjusted.
    So I think we have to think differently about short-term 
investments, and long-term investments. I think annuities have 
a place, but I think they have to come out of the commercial 
system and go into more of a public system where the annuitant 
gets a fair return.
    Senator Cantwell. And how would you do that?
    Mr. Bogle. Well, TIAA-CREF does a pretty good job of it 
themselves. It has to be an annuity that is run for the 
investors and not run for the salesmen. It really comes down to 
that. The costs are horrendous in annuities and life insurance 
products, if you will forgive my expression. I do not think 
anybody would disagree with that. If you take the cost out, the 
rates that you get paid are still going to be low, but for a 
certain type of investor who wants to assure the longevity risk 
and has no other assets, I think they are an attractive option 
if fixed.
    Senator Cantwell. But don't you think, given the crisis 
that we are facing, that it is important to have that 
opportunity fixed?
    Mr. Bogle. Yes, we should have that opportunity.
    Senator Cantwell. Thank you. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Cantwell.
    Let me tell you, first of all, this has been very helpful. 
Obviously, there are a whole host of issues to be examined. It 
is not a topic for today, but I feel very strongly about 
getting people to start saving very early in life. That is why 
we have been talking about child savings accounts. Here again, 
there are some common-sense approaches you can take.
    One of the things that struck me very early on is, when you 
are talking about people of modest means, their eligibility for 
various programs can be damaged because somebody sets aside 
some money, and they set it aside early on. And we may need to 
waive those kinds of rules so as to start building a savings 
ethic early.
    Today, I think you have to be troubled by where this debate 
has gone. The Government Accountability Office has told us that 
well-off taxpayers, more than 9,000 of them, had over $5 
million in their IRA accounts in 2011. We have also seen press 
reports of executives in the high-tech sector with Roth IRAs 
with balances over $30 million and over $90 million. So you 
contrast that with what you all have been talking about for the 
last 2 hours, with the median IRA account balance in 2012 being 
about $21,000, and it is pretty clear there is some important 
work to be done.
    So I think what I would like to do, just in terms of 
wrapping up, is to have you all almost pretend that the roles 
are reversed here, and you are up on this side of the dais. And 
Senator Hatch and I, and all of our colleagues, are going to 
try on a bipartisan basis to encourage retirement saving.
    And the way the debate is going to start, when we get to it 
as part of tax reform, is, right now the American taxpayer is 
putting up about $140 billion each year to subsidize retirement 
savings accounts. This is the second-biggest tax expenditure in 
the code. You take that and you juxtapose it next to what the 
Government Accountability Office has told us about those mega-
IRAs and the $21,000 that people have--a median amount in their 
account--and it is pretty clear this committee is going to have 
some tough choices to make.
    What I would like to do is go down the row and ask each one 
of you for just one suggestion of where, as part of that 
effort--with the $140 billion that is used to assist these 
accounts--where would you make a change to get a bigger bang 
for the taxpayer buck? You get to make one choice because that 
is going to be fairly similar to what the debate will be here 
in the committee as part of tax reform--making the choice along 
those lines.
    Mr. Bogle?
    Mr. Bogle. Well, the first thing you would obviously do----
    The Chairman. You get one. You do not get a first. 
[Laughter.]
    Mr. Bogle. All right. Thank you. One thing that we would do 
is eliminate the larger deductions or have a tax credit instead 
of a tax deduction, which would impact large investors the 
most. I would not do that, but that is a choice.
    The Chairman. Very good.
    Dr. Reid?
    Dr. Reid. I would try to expand the system to make sure 
that more small employers could more easily offer plans, so 
something like Starter (401)k or MEP.
    The Chairman. All Right.
    Mr. Betts. Similar answer--remove the disincentives and 
increase the incentives for small employers to start those 
plans.
    The Chairman. And what is one way you would like to do 
that?
    Mr. Betts. Starter (401)k and the multiple-employer plan.
    The Chairman. All right.
    Dr. Madrian?
    Dr. Madrian. Well, you do not get to $5 million in your 
401(k) or your IRA by investing up to the limits we currently 
have and putting it into well-diversified mutual funds. You get 
there by putting it into employer stock and getting really, 
really lucky. For every winner with employer stock, there are 
lots of losers whose companies go bankrupt. So I do not think 
it makes sense to encourage gambling through the tax code by 
allowing employers' stock as an investment option in tax-
favored savings plans.
    The Chairman. So you would support a change in that area?
    Dr. Madrian. Yes.
    The Chairman. All right.
    Dr. Biggs?
    Dr. Biggs. I would echo the other witnesses' call to 
simplify plan offerings for smaller employers to get at the 
low-income workers and improve the incentives for them to offer 
those plans.
    The Chairman. All right. At this point, we have Senator 
Nelson on his way. I think what I would like to do is ask our 
guests, can you all stay a few more minutes?
    Mr. Bogle. Yes.
    Dr. Reid. Yes.
    Mr. Betts. Yes
    Dr. Madrian. Yes.
    Dr. Biggs. Yes
    The Chairman. All right. What we will do is, when Senator 
Nelson returns, he will ask his questions, and then the Finance 
Committee will be adjourned. So we will suspend here for a few 
minutes, and Senator Nelson will be here to wrap up. Thank you 
all for your professionalism and for your patience with us on a 
hectic day.
    Poor Ms. Schultz must still be stranded somewhere in Amtrak 
land.
    Mr. Bogle. I tried to help her.
    [Whereupon, at 11:54 a.m., the hearing was recessed, 
reconvening at 11:55 a.m.]
    The Chairman. Senator Nelson has arrived, and he has had a 
hectic day. Senator Nelson, it is our plan that you will ask 
the questions that are important to you and, at that point, you 
will adjourn the committee. Is that acceptable?
    Senator Nelson. All right, Mr. Chairman--and questions that 
are important to you because you are a member of the Committee 
on Aging as well.
    We had a hearing about theextraordinary debt that is 
carried by seniors, and would you believe--of all things--
student loan debt? Then, if they cannot pay, lo and behold, 
their Social Security is garnished, and that brings them below 
the poverty level, because you can garnish down to $750, down 
to that level. And $750 a month for a senior citizen today is 
below the poverty level.
    The Chairman. Senator Nelson, you are doing very important 
work here. I am sorry that I am going to have to go, but the 
fact that so many seniors have racked up these eye-popping 
debts that, in effect, are going to color so many of their 
retirement decisions in the future, is especially important. I 
look forward to working with you.
    Senator Nelson. What I wanted to ask the panel is, what 
impact does debt have on workers trying to put money aside for 
retirement. Anyone?
    Mr. Bogle. It puts them in an impossible position. The 
student loan debt is enormous, selective but enormous. I do not 
see how you can save beyond that when you are still trying to 
pay it off, Senator.
    Senator Nelson. That is right. Now we recently had somebody 
talking about our Thrift Savings Plan. The Senate has a very 
successful Thrift Savings Plan. If you were in a company, they 
would call it a profit-sharing plan. Here it is called a Thrift 
Savings Plan.
    The question was, propose an idea of opening up a Thrift 
Savings Plan-type entity to everyone. Do you want to give us 
any thoughts on the concept?
    Yes, sir?
    Dr. Biggs. Senator, I mentioned this in my written 
testimony. I referenced your colleague from Florida who has 
advocated this idea.
    There are obviously practical issues that need to be 
overcome, in the sense that the Thrift Savings Plan is a plan 
for government employees. They have streamlined bookkeeping. So 
it is in that sense a very easy plan to administer and handle.
    I do favor the idea of giving savings options to low-income 
workers, in particular, who are not offered pensions by their 
employers. So, whether it is explicitly through the TSP or 
whether it is through a structure that looks very much like the 
TSP, I think that is a very good idea. It is an extremely well-
run plan. It is simple. It is low-cost. It offers annuities so 
you can convert your balance into a lifetime income.
    So, when you look at the TSP, it answers a lot of the 
questions we have about retirement security. We can design a 
good plan. The key is, we just actually have to go out and do 
it.
    Senator Nelson. How would you go about setting up, 
administratively, a plan like that for anyone who wanted to buy 
into it?
    Dr. Biggs. The question is, do you have it run through 
those individuals' employers, where they would not run the 
plan, but they would deduct the money and send it to the TSP, 
or do you run it something like an IRA, where the individuals 
themselves would have to do it? Having their employers do it 
puts an administrative burden on the employers and may make it 
less attractive to them, but it is easier for the employee.
    If you run it in an IRA setup, the employee makes the 
decision. That puts no burden on the employers. It is very easy 
on that end. On the other hand, many employees will fail to do 
it.
    So the question is, how do you make it cheap and easy? The 
problem for small employers--if you are a large employer who 
does electronic bookkeeping, electronic wage records, that is a 
fairly easy thing to do. Your computer does it for you. It is 
the small employers who are most likely to be writing out the 
check by hand each month, and the difficulty is, how do you 
make it work for them?
    I think that goes back to one of the points we all made at 
the end: a key for encouraging retirement savings is making it 
easier for small employers to offer these sorts of plans.
    Mr. Bogle. Senator, the Thrift Savings Plan is 
essentially--with all of the long-term money in it, except for 
the short-term reserves--100 percent index funds. They charge, 
I believe the number is about 0.025 percent a year, 2.5 basis 
points for it, which you could argue is even better than the 
Vanguard 500 Index Fund, which charges a shocking 5 basis 
points, twice as much. However, the Thrift Savings Plan has 
their portfolio accounting, the accounting for their 
participants and beneficiaries, paid in a different source. So 
they are probably about the same.
    I would answer, essentially a Thrift Savings Plan in a 
different guise is already available to any employer of any 
size in the Nation.
    Dr. Reid. Senator, I think, to echo both points, if you 
would open up the Thrift Savings Plan to potentially millions 
of employers, you would not have the Thrift Savings Plan 
anymore, in part because the administrative savings that the 
TSP gets from one employer with long-tenured employees with 
very large accounts, those efficiencies would, obviously, go 
away. As Mr. Bogle says, there are low-cost options within the 
private sector through mutual funds. You can be in index funds 
if you choose. You can be in low-cost actively managed funds as 
well. You can call up any one of the fund companies or a 
discount broker and open up an IRA or a plan, or a small 
employer can work with one of them to open up a payroll 
deduction plan through an IRA as well. So the private market 
actually does have something that actually is working very 
well.
    Mr. Betts. I am not able to speak to the TSP, but I can say 
that--like my colleagues--expanding the accessibility of these 
savings plans is very important. In fact, I think you have in 
one of your bills the suggestion to expand multiple-employer 
plans, which would allow more small employers to offer these 
retirement plans, savings plans, with some of these types of 
investments that may be similar to a TSP.
    Senator Nelson. Yes, ma'am?
    Dr. Madrian. I agree with what the other panelists have 
said.
    Senator Nelson. Well, thank you all for participating in 
this. Anything further?
    [No response.]
    Senator Nelson. All right. The hearing is adjourned.
    [Whereupon, at 12:02 p.m., the hearing was concluded.]
    
    
    
    
    
    
    
    
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