[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
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
______
U.S. GOVERNMENT PUBLISHING OFFICE
96-091 PDF WASHINGTON : 2015
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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
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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.]
A P P E N D I X
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