[Senate Hearing 114-773]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 114-773

                    SMALL BUSINESS RETIREMENT POOLING: 
                 EXAMINING OPEN MULTIPLE EMPLOYER PLANS

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

                                 HEARING

                                 BEFORE

       THE SUBCOMMITTEE ON PRIMARY HEALTH AND RETIREMENT SECURITY

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                                   ON

EXAMINING SMALL BUSINESS RETIREMENT POOLING, FOCUSING ON EXAMINING OPEN 
                        MULTIPLE EMPLOYER PLANS

                               __________

                             JUNE 21, 2016

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions
                                
                                
 
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          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                  LAMAR ALEXANDER, Tennessee, Chairman
                  
                  
MICHAEL B. ENZI, Wyoming		PATTY MURRAY, Washington
RICHARD BURR, North Carolina		BARBARA A. MIKULSKI, Maryland
JOHNNY ISAKSON, Georgia			BERNARD SANDERS (I), Vermont
RAND PAUL, Kentucky			ROBERT P. CASEY, JR., Pennsylvania
SUSAN COLLINS, Maine			AL FRANKEN, Minnesota
LISA MURKOWSKI, Alaska			MICHAEL F. BENNET, Colorado
MARK KIRK, Illinois			SHELDON WHITEHOUSE, Rhode Island
TIM SCOTT, South Carolina		TAMMY BALDWIN, Wisconsin
ORRIN G. HATCH, Utah			CHRISTOPHER S. MURPHY, Connecticut
PAT ROBERTS, Kansas			ELIZABETH WARREN, Massachusetts
BILL CASSIDY, M.D., Louisiana                  
                                         

               David P. Cleary, Republican Staff Director

         Lindsey Ward Seidman, Republican Deputy Staff Director

                  Evan Schatz, Minority Staff Director

              John Righter, Minority Deputy Staff Director

                                 ______

         Subcommittee on Primary Health and Retirement Security

                        MICHAEL B. ENZI, Wyoming

RICHARD BURR, North Carolina         BERNARD SANDERS, Vermont, Ranking 
SUSAN M. COLLINS, Maine              Member
MARK KIRK, Illinois                  BARBARA A. MIKULSKI, Maryland
TIM SCOTT, South Carolina            MICHAEL F. BENNET, Colorado
ORRIN G. HATCH, Utah                 SHELDON WHITEHOUSE, Rhode Island
PAT ROBERTS, Kansas                  TAMMY BALDWIN, Wisconsin
BILL CASSIDY, Louisiana              CHRISTOPHER S. MURPHY, Connecticut
LISA MURKOWSKI. Alaska               ELIZABETH WARREN, Massachusetts
LAMAR ALEXANDER, Tennessee (ex       PATTY MURRAY, Washington, (ex 
officio)                             officio)
                                       

                Sophie Kasimow, Minority Staff Director

                                  (ii)

                            C O N T E N T S

                               __________

                               STATEMENTS

                         TUESDAY, JUNE 21, 2016

                                                                   Page

                           Committee Members

Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming, 
  opening statement..............................................     1
Warren, Hon. Elizabeth, a U.S. Senator from the State of 
  Massachusetts..................................................     2
Murray, Hon. Patty, a U.S. Senator from the State of Washington..    23
Scott, Hon. Tim, a U.S. Senator from the State of South Carolina.    33

                               Witnesses

Stacey, Jeffrey, Senior Manager, McGee, Hearne & Paiz, LLP, 
  Cheyenne, WY...................................................     5
    Prepared statement...........................................     6
Favorito, Nicola, Deputy Treasurer, Retirement Services for 
  Massachusetts, Boston, MA......................................    12
    Prepared statement...........................................    14
Kais, James, Senior Vice President and National Retirement 
  Practice Leader, TransAmerica, Miami, FL.......................    18
    Prepared statement...........................................    20
Mason, Kent, Partner, Davis and Harman LLP, Washington, DC.......    24
    Prepared statement...........................................    25
Varnhagen, Michele, Senior Legislative Representative, AARP, 
  Washington, DC.................................................    29
    Prepared statement...........................................    30

                                 (iii)

  

 
  SMALL BUSINESS RETIREMENT POOLING: EXAMINING OPEN MULTIPLE EMPLOYER 
                                 PLANS

                         TUESDAY, JUNE 21, 2016

                                       U.S. Senate,
    Subcommittee on Primary Health and Retirement Security,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:30 p.m., in 
room SH-216, Hart Senate Office Building, Hon. Michael Enzi, 
chairman of the subcommittee, presiding.
    Present: Senators Enzi, Murray, Warren, and Scott.

                   Opening Statement of Senator Enzi

    Senator Enzi. The Senate Committee on Health, Education, 
Labor, and Pensions, the Subcommittee on Retirement Security, 
will come to order.
    I'd like to welcome everyone to this roundtable discussion 
on Small Business Retirement Pooling, which is examining open 
multiple employer plans. I'm not sure that I really like that 
title for it, because it makes it sound like it's only for the 
really big plans out there as opposed to being a cost effective 
tool for small businesses which we can and should be 
encouraging.
    We'll be focusing this discussion on the benefits of small 
business retirement pooling, specifically open MEPs--I think 
I'll call it small business retirement pooling--and how they 
are one of the ways we can help close the retirement gap in 
America. I am very grateful to both Ranking Member Sanders and 
Senator Warren for agreeing to host this roundtable with me.
    I've hosted a number of roundtables. When I was Chairman of 
the HELP Committee, Senator Kennedy and I held many thoughtful 
and productive roundtables. The difference between a roundtable 
and a hearing is we start off with more brief introductory 
remarks and then try to focus a little bit more on questions.
    At a regular hearing, there's a division between the 
majority party and the minority party, and then everybody shows 
up to beat up on witnesses. I never found that to be very 
productive. We're doing a roundtable, and I do truly appreciate 
the bipartisan way this discussion is organized. It's always 
nice to have a discussion on a topic, especially one that we 
all agree needs some work.
    I'm often reminded why legislation on small business 
retirement pooling, especially for small business, can help 
provide additional retirement assets for tens of millions of 
Americans. A critical challenge in enhancing the retirement 
security for all Americans is expanding plan coverage among 
small businesses. To address this, I believe we need to make 
retirement plans less complicated, less intimidating, and less 
expensive for small businesses. One way to do this is by 
allowing the expansion of these employer plans.
    This roundtable is a followup to the terrific and 
bipartisan discussion that Senator Sanders and I hosted on the 
same topic back in October. Since then, the president has said 
that we need to make it easier for employers to create pooled 
401(k) plans to lower costs and burdens. I agree with President 
Obama on this topic and appreciate that he desires to enable 
employers to take advantage of these open plans.
    As a member of the Senate Finance Committee, I've seen 
great bipartisan discussions on small business retirement 
pooling over the last few years. I'd like to thank Chairman 
Hatch for his leadership on this issue in Finance, as well as 
to let him know that I look forward to helping him in this 
effort to allow these to exist.
    My interest in holding this roundtable is based on my view 
that Congress can and should help narrow the retirement 
coverage gap in America. I believe we can do this through 
expanding small business retirement pooling by allowing the 
broadening of diversity among those businesses within such 
plans.
    Finally, I urge committee members to focus on what we can 
agree on with regard to this particular topic. I know there are 
many contentious issues currently being debated that would 
impact retirees and small businesses. There is, however, 
bipartisan support for the expansion of these programs, and 
this is a great opportunity for us to examine the bipartisan 
ideas.
    We were able to accomplish a great amount in the past 
working on pensions. Quite frankly, I'm surprised at how many 
people we have at this. Usually, anything that deals with 
pensions is so technical that we have trouble getting any 
audience to show up for it. If it were one of the really, truly 
contentious issues, we'd have a bunch of TV cameras up here 
too.
    But what we're trying to get to, of course, are solutions. 
When I worked with Senator Kennedy, we were able to accomplish 
a lot by using the 80 percent rule. We focused on the 80 
percent that we could agree on, and we kept working on the 20 
percent after we got the bill finished. I look forward to again 
working with the senior senator from Massachusetts, Senator 
Warren, and I hope that all the committee members and witnesses 
will join me in focusing this discussion on what we can agree 
on.
    I'll have Senator Warren offer her opening remarks at this 
time.

                      Statement of Senator Warren

    Senator Warren. Thank you very much, Senator Enzi, and I 
want to say thank you for holding this roundtable, for putting 
it together, and for your bipartisan efforts in this area. It's 
so important, and, as you say, I think there's a lot that we 
can agree on here.
    I want to thank you all for being here.
    I just want to start by saying that America is in a 
retirement crisis. Years of a middle class squeeze are taking a 
huge tool so that, today, families are hitting their retirement 
years with less savings and more debt than ever before. A third 
of those on the verge of retirement don't have a single dollar 
saved, and another third have not saved even 1 year's worth of 
income. It is a massive problem, and it is long past time to 
explore anything and everything we can do to fix it.
    I believe that part of the solution is to expand Social 
Security. With the disappearance of traditional pensions and a 
$7.7 trillion shortfall between what Americans have saved and 
what they need for retirement, it seems obvious to me that we 
need to augment the modest Social Security benefits that 14 
million Americans already depend on to keep themselves out of 
poverty. After a lifetime of hard work, people are entitled to 
retire with dignity, and Social Security is our baseline for 
that. We need to protect it, and we need to expand it.
    But there is more that we can also do. We can work harder 
to increase private savings for workers. Laws encourage 
employer-based plans, but not all employers provide retirement 
benefits, largely because of the expense and the administrative 
burdens involved. Only about half of all workers are covered.
    Second, not all workers have a single steady employer. Some 
are temps, independent contractors, gig workers, who can't 
access employer-sponsored plans. Third, when workers change 
jobs, their benefits are typically not portable, meaning they 
don't usually follow along to the new employer.
    Until we address these issues, the employer-sponsored 
retirement benefit system just simply won't work for our modern 
workforce. I believe it is time for reform on this.
    One idea is to allow more employers, particularly small 
employers, to outsource the administration and investment 
management of retirement plans to a pooled administrator, 
sharing the operating costs among several different employers. 
Current law allows related employers in the same industry or 
occupation to set up pooled plans. But in order to allow this 
pooling for unrelated employers, we would need a legislative 
fix.
    Now, there are several bipartisan proposals floating around 
to create these so-called open multiple employer plans, or open 
MEPs, as you were describing. These proposals, I think, are a 
good first step. But for these ideas to work, they must address 
both workers who do not have a traditional employer and allow 
for full portability.
    Open MEPs should also allow all workers to have access to 
prudent, low-cost, well protected retirement products that some 
employers in some unions provide today. Any worker should be 
able to enroll in one, regardless of whether their employer has 
chosen to participate and regardless of whether they even have 
a traditional employer.
    In addition, when workers switch jobs, they should be able 
to easily take their retirement account with them. If a worker 
moves from a job that offers a plan through an open MEP to a 
job that doesn't offer such a retirement account, then the 
worker should be able to stay with their current open MEP and 
continue contributing through their individual payroll 
deductions.
    This is good for employees, and it's good for employers who 
do not want to administer these plans. It's good for startups. 
It's good for small businesses. All employers can still 
contribute to their employees' retirement accounts, just 
without being the plan administrator. They can do this by 
paying higher wages, or they can do it by matching employees' 
contributions to the retirement accounts. Such contributions 
would be easier for employers to make if they aren't spending 
as much money on plan administration.
    Finally, any legislation that addresses open MEPs should 
make sure that these plans use best-in-class practices when it 
comes to asset allocation, governance, and fee structure and 
fee transparency. Whether unions, financial services firms, or 
member-driven organizations, such as AARP or the local Chamber 
of Commerce, operate these plans, they should be operated 
solely in the interest of the workers and retirees, and those 
individuals should have a voice in how those plans are 
operated.
    I want to thank the witnesses for being here today.
    I want to say, again, thank you to Senator Enzi, and I'm 
ready to start whenever you are.
    Senator Enzi. Thank you, Senator Warren.
    I'd like to briefly introduce our witnesses and then ask 
them each to give a 3-minute opening statement, and then we'll 
get into an open discussion.
    Our first witness is Mr. Jeffrey Stacey from Cheyenne, WY. 
Mr. Stacey is the Senior Manager of Employee Benefits at McGee, 
Hearne & Paiz, LLP, the largest accounting firm in Wyoming. I 
make the trip home to Wyoming almost every weekend and know how 
long that journey is. I thank you for representing our great 
State in this discussion and coming out here.
    I'll now invite Senator Warren to introduce the witness 
from Massachusetts.
    Senator Warren. Thank you. Yes, we do have a witness here 
today from Massachusetts. Mr. Nick Favorito serves as the 
Deputy Treasurer for Retirement Services for Massachusetts 
Treasurer and Receiver General, Deborah Goldberg. Nick has also 
served as Executive Director of the Massachusetts State 
Employees Retirement System since February 2003, and he 
oversees the Commonwealth's Deferred Compensation Plans Unit.
    He's here today to talk about a new retirement plan that 
Massachusetts has designed for workers in small nonprofits. 
These workers often do not have access to a retirement plan 
from their employer, so this new State plan, we believe, is 
going to fill an important gap, helping tens of thousands of 
workers in Massachusetts build some savings for their 
retirement. I'm looking forward to hearing more about this 
plan, and I welcome Mr. Favorito.
    Senator Enzi. Thank you.
    Our third witness is Mr. James Kais. Mr. Kais is the Senior 
Vice President and the National Retirement Practice Leader at 
TransAmerica Retirement Solutions.
    Our fourth witness is Mr. Kent Mason, a Partner at Davis 
and Harman LLP here in Washington, DC, where he advises clients 
on a number of retirement savings issues.
    Our final witness is Ms. Michele Varnhagen, the Senior 
Legislative Representative with the AARP here in Washington, 
DC. I very much appreciate AARP's participation in the October 
roundtable and look forward to the input on this important 
topic.
    Thank you all again for joining us in this discussion. 
After you've given brief opening statements, we'll pose some 
questions to the witnesses for their discussion. When we're 
doing that, if you want to answer, if you'll just stand your 
name tag up on end, then we'll know that you want to make a 
comment on that.
    Mr. Stacey.

 STATEMENT OF JEFFREY STACEY, SENIOR MANAGER, MCGEE, HEARNE & 
                    PAIZ, LLP, CHEYENNE, WY

    Mr. Stacey. Thank you, Chairman Enzi, Ranking Member 
Warren, and members of the committee, for the opportunity to 
participate in today's discussion. My name is Jeffrey Stacey. 
As Senator Enzi mentioned, I am a Senior Manager for Employee 
Benefits with Cheyenne, WY, based accounting firm, McGee, 
Hearne and Paiz.
    We are the largest accounting firm in the State of Wyoming, 
and among the many accounting services that offer to small 
businesses is third-party administration of retirement plans. I 
personally became involved in the retirement plan industry in 
my hometown of Nashville, TN, 20 years ago, working with one of 
the Baby Bell Telephone companies and administering the 
multiple plans that they had.
    Thirteen years ago, I moved to Wyoming to work with McGee, 
Hearne and Paiz, and while at the accounting firm have worked 
with plans ranging from the solo, sole proprietor, one 
participant plan up to the largest plan we've worked with, 
which has probably about 500 participants. I am an enrolled 
retirement plan agent, allowing me to represent plans before 
the IRS and hold several industry designations.
    Kind of following up on what Senator Warren had to say, 
I've often heard retirement funding in this country compared to 
a three-legged stool--one, Social Security; two, employer 
pensions; and, three, private savings. For many Americans, 
myself included, legs two and three are combined into one. 
Employer pensions and personal savings are one in a 401(k) or 
similar type of plan.
    Most employers no longer offer a defined benefit pension 
plan like my parents and in-laws participate in and benefit 
from. If anything, it's a defined contribution plan, a 401(k) 
plan. Regardless of one's opinion, my own opinion, or anyone's 
opinion of how we got here or why we're here, we are in this 
situation currently. The main issues that I see as far as 
retirement issues are concerned in our country are, first off, 
to encourage Americans to start saving, encourage people to 
increase their contributions over time, and to maintain those 
savings over time.
    Small businesses like those that we serve in Wyoming and 
the surrounding region often don't have the luxury of having a 
separate HR Department. The business owner is the Human 
Resources Department, and attracting and retaining employees is 
difficult in small communities, particularly isolated 
communities like we have in the West. Building a benefits 
package is a key component of being able to attract and recruit 
employees, and while healthcare has consumed much of the debate 
over the last number of years, retirement is just as important, 
even though it's a longer-term issue.
    What I bring to the table today is my firm's and my 
experience with our firm from 2006 to 2010 in sponsoring and 
administering an open MEP. At it's peak, our open MEP had 18 
participating employers, all unrelated, all in different 
industries. Our MEP was a win for the participating employers 
through lower costs. It was a win for the participants through 
lower fees from pooling and economies of scale.
    But for our firm, it was a money-losing business 
proposition, because we could not grow it to the point that we 
thought we needed to in order to make it a self-perpetuating 
piece of our business. The reasons for the losses were time 
costs, plan document costs, and audit costs. While our attempt 
at an open MEP several years ago was not successful, subsequent 
regulations would have made the plan unviable since all of the 
employers were unrelated. The only commonality between them was 
that they were participating in the plan that we offered.
    While I believe that open multiple employer plans can be 
viable for small businesses, that legislation and the 
subsequent regulations, in my opinion, have to make the plans 
easy to understand, inexpensive to operate, and efficient to 
administer.
    Once again, Senators, thank you for the opportunity to be 
here and to participate in our discussion.
    [The prepared statement of Mr. Stacey follows:]

                  Prepared Statement of Jeffrey Stacey

                              introduction
    Thank you Chairman Enzi, Ranking Member Warren, and members of the 
committee for the opportunity to participate in today's retirement plan 
discussion. My name is Jeffrey Stacey. I am the Senior Manager for 
Employee Benefits with the Cheyenne, WY based accounting firm McGee, 
Hearne & Paiz, LLP. We are the largest accounting firm in Wyoming. 
Among the many services we offer to our clients is Third Party 
Administration (TPA) of employer sponsored retirement plans.
    I first started working in the retirement plan industry in my 
hometown of Nashville, TN 20 years ago administering the retirement 
plans for one of the Baby Bell telephone companies which had thousands 
of participants in several different plans. Thirteen years ago I moved 
to Wyoming to work for McGee, Hearne & Paiz, LLP and have worked with 
retirement plans ranging from one-participant sole-proprietor plans to 
a 500-participant retirement plan. During my two decades of experience 
I have worked with profit sharing plans, 401(k) plans, traditional 
defined benefit pension plans, cash balance pension plans, executive 
deferred compensation plans, and cafeteria plans. I am an Enrolled 
Retirement Plan Agent (ERPA) allowing me to represent clients before 
the IRS on retirement plan matters. I also hold the following industry 
designations: Certified Employee Benefits Specialist (CEBS) from the 
International Foundation of Employee Benefit Plans, Accredited Pension 
Administrator (APA) and Accredited Pension Representative (APR) from 
the National Institute of Pension Administrators.
    I have often heard retirement funding compared to a three-legged 
stool: (1) Social Security, (2) employer pension, and (3) personal 
savings. For the vast majority of today's workforce including me, legs 
2 and 3, employer pension and personal savings, are combined. Most 
employers no longer offer defined benefit pension plans but instead 
offer defined contribution plans such as a 401(k) plan. Regardless of 
whether one thinks the slow shift during the last 40 years away from 
defined benefit plans to defined contribution plans was a good thing 
for individual Americans and the country as a whole, it is the reality 
where we find ourselves today. The issue now is how can we encourage 
Americans to start saving for retirement, maintain their retirement 
savings when transferring jobs, and increase their retirement savings 
rate over time.
            retirement savings options for small businesses
    Small businesses such as the ones we serve in Wyoming and the 
surrounding region often do not have the luxury of a Human Resources 
Department. The business owner is the HR Department. The owner is an 
expert at providing their chosen goods and services to their customers. 
Attracting and retaining employees is often difficult, especially in 
small communities. This makes a benefits package very important. In 
addition to running day-to-day operations, the small business person 
must shop for and build a benefits package. While health insurance has 
dominated the headlines for many years, saving for retirement is just 
as important.
    Being an accounting firm, our clients will often seek our advice 
about their savings options for retirement. Some small business owners 
look at their business itself as their retirement account meaning that 
they intend to sell the business in the future and use the proceeds to 
fund their retirement. Others see the need to save in a retirement 
vehicle where it is protected from bankruptcy. Some see the need for a 
retirement plan as a necessary employee benefit to not only attract 
good employees but also to assist their employees with achieving their 
own retirement goals. Regardless of what prompts our client's questions 
or what prompts us to bring up the subject with them during a tax 
planning meeting, a small business owner is almost always interested in 
a defined contribution plan such as a:

     401(k) plan
     Profit sharing plan
     SIMPLE IRA
     SEP IRA
                   complexity of plan administration
    I have yet to meet a small business owner who during our initial 
discussions had any idea of the complexities, paperwork, and liability 
of an employer sponsored retirement plan. They just want to save money 
and taxes as well as offer the same opportunity to their employees. One 
thing the Nation's long health insurance discussion has taught us is 
that larger businesses usually get better per-person pricing than 
smaller businesses. This is often true in retirement plans since 
investment companies usually consider three key factors when pricing 
their services for a retirement plan:

    1. Number of participants.
    2. Current plan asset value.
    3. Expected total annual contributions.

    A small business that is starting a plan with no assets will 
usually pay higher fees than a plan with an existing asset base. It may 
take many years before the assets reach a price breakpoint where fees 
will decrease. Higher fees translates into a lower annual rate of 
return and therefore a lower account balance. In addition to fees 
within the investments themselves, the small business has the expense 
of accounting fees. Outside of the plan, we charge the plan sponsor for 
TPA services such as the preparation of an IRS pre-approved plan 
document and plan compliance services which include discrimination 
testing, contribution calculations, participant account reconciliation, 
participant loans and distributions, Form 5500 and potentially numerous 
other tax forms depending on the plans design and activity during the 
past year. Most small businesses pay for our TPA services directly as a 
business expense rather than pay from plan assets which would further 
reduce the plan's rate of return. Where TPA services are bundled with 
the recordkeeping services provided by the investment company, the cost 
is often built into the plan's overall fee structure.
    In addition to the difficulty of understanding plan design and 
compliance, small business owners are bombarded with an ever-growing 
number of required notifications and disclosures they need to 
distribute to plan participants. Whether they must distribute notices 
on paper or can distribute to employees by e-mail, it is another small 
burden on their time.
     our experience with an open multiple-employer retirement plan
    In 2005, our firm was approached by MassMutual with whom we had 
several mutual retirement plan clients and was asked to consider 
sponsoring an open multiple-employer 401(k) plan or MEP for our small 
business clients who could not afford to have a plan of their own. 
After much consideration and discussion with MassMutual's local 
investment advisors, we decided to proceed with the opportunity. We 
viewed it as a simpler option for some of our small business clients 
and a potentially profitable business opportunity for our firm.
    McGee, Hearne & Paiz, LLP is formerly a satellite office of RSM 
McGladrey, now RSM US LLP. Since becoming independent in 2000, we have 
maintained a network affiliation with them. As we considered 
establishing a MEP, we sought RSM's advice on how to proceed. They 
drafted an individually designed plan document for us and recommended 
that our firm also have participants in the plan so we would have 
``skin in the game'', so to speak. One of our partners and I became 
participants in the new MEP, so I have personal experience being a 
participant in a MEP as well.
    Working with the local investment advisors and mining our own 
extensive client database for appropriate prospects, we marketed the 
MEP to small businesses in our area. All parties involved expected 
great results, but ultimately we were only able to add 18 employers to 
the plan. Listed below are the types of small businesses that joined 
our MEP:

     Agriculture association
     Bookkeeping
     Commercial printing
     Construction
         Earthwork
         Home building (2)
         General contracting
     Land surveying
     Law firm
     Lobbying
     Plumbing
     Property management
     Retailing
         Carpet & tile
         Furniture
         Pharmacy
         Photocopier distribution
         Tires
         Windows & glass

    At its peak, our open MEP covered approximately 150 participants 
from 18 different unrelated employers. The range of participants is 
detailed below.


   Sole-proprietors with no other employees                   2
   2 to 10 participants                                       9
   11-20 Participants                                         5
   20-30 Participants                                         2
 


    Two features that we did not include in our open MEP and I often do 
not recommend to clients were automatic enrollment and automatic 
escalation. While I have seen the statistics demonstrating the benefits 
of both features, I have also seen the pitfalls that small employers 
can fall into. Inaction often leads automatically enrolled participants 
to continue contributing which is a good thing; however many of our 
small business owners have been concerned about having to deal with the 
additional work to refund the few participants who might want to opt-
out of deferring. Additionally, many of our small business clients want 
their employees to take some responsibility for making an informed 
affirmative election. Furthermore, some plan sponsors whose plans may 
be close to the annual audit participant count could see the plan 
easily pushed over that threshold by people terminating employment and 
leaving balances in excess of $5,000 in the plan. Finally, businesses 
with high turnover can have numerous small account balances that can 
produce a great deal of additional work for numerous parties.
    Automatic escalation of deferrals can be particularly difficult for 
small businesses to manage. Many small businesses process their payroll 
in-house. Without a sophisticated system in place, it is very easy to 
overlook required increases or to override a participant's affirmative 
election or their previous choice to opt-out of deferring. Such errors 
result in an additional expense to the small business due to required 
corrections.
    Our MEP was cost-effective for participating employers. We charged 
the participating employer a one-time setup fee. After that, the 
participating employers bore no additional direct cost of having a 
401(k) plan other than paying employer contributions. Additionally, 
participating employers had our professional oversight of the plan's 
operations. Participating employers had an employee benefit that would 
assist them in attracting and retaining employees. Participants 
received the benefit of having a retirement plan for the first time 
with their current employer. Since MassMutual based their charges on 
total assets, participants experienced lower fees than they would have 
experienced had their employer sponsored their own stand-alone 401(k) 
plan. The MEP was a ``win'' for the participating employers and a 
``win'' for participants, but it was a money losing business for McGee, 
Hearne & Paiz, LLP.
    It was our expectation that the plan assets would grow to be large 
enough so that the revenue sharing we received would cover our 
expenses. We expected that having plan assets of at least $10,000,000 
would generate sufficient revenue sharing. That growth did not 
materialize, and plan assets never exceeded $3,000,000. Our firm 
experienced losses from beginning to end since the time, document, and 
audit costs far surpassed the revenue sharing we received. With those 
losses in mind and with the concern that pending regulations at that 
time could be unfavorable toward open MEPs, we made the decision to 
terminate the plan in 2010. The investment advisors worked with each 
participating employer regarding establishing a SIMPLE IRA or stand-
alone 401(k) plan for their business. Listed below are the choices made 
by our MEP participating employers:

     Adopt 401(k) Plan--6
     Adopt SIMPLE IRA--11
     No retirement plan--0 (one employer went out of business 
while participating)

    Once the plan terminated, the account balance for the two McGee, 
Hearne & Paiz, LLP participants was transferred to our firms regular 
401(k) plan which we still sponsor.
    Although our attempt at an open MEP was not successful, subsequent 
regulations would have made the plan unviable since the participating 
employers were all unrelated. I believe that open multiple-employer 
retirement plans can be a viable option for small employers provided 
that legislation and regulations are such that the plans are easy to 
understand, inexpensive, and efficient to administer.
                       state sponsored open meps
    The last several years has seen increasing interest in State 
capitols in the topic of retirement savings. Specifically, State 
leaders are interested in ensuring that employees in small businesses 
have a retirement savings option if their employer does not already 
offer a retirement plan. Many States are studying their options, and a 
handful have passed legislation mandating coverage. Many of the 
proposals I have read about support payroll-deduction IRAs. The current 
IRA contribution level is $5,500 annually plus a $1,000 annual catch-up 
contribution for those age 50 and over. Furthermore, recent DOL 
guidance is tilting the playing field in favor of State-sponsored 
retirement plans vs. those offered only by the private sector. My 
personal opinion is that the State mandates will prompt covered small 
businesses to research their options and move to adopt their own plan 
instead of participating in their State's plan. This is where an open 
MEP alternative can be a valuable option for small businesses.
               suggestions for a private sector solution
    There are numerous things that can be done to make open multiple-
employer 401(k) plans a viable option for small businesses. Many of 
these recommendations could be applied to stand-alone 401(k) plans to 
improve them as well.

    1. Allow Open MEPs--The current opinion of the Department of Labor 
is that an employment based common nexus or other organizational 
relationship must be present in order for a true multiple-employer plan 
to exist. This prohibits nonrelated small businesses from enjoying the 
benefits of an open MEP. I recommend that employers with fewer than 100 
employees be eligible to join an open MEP which is the same employee 
limit for SIMPLE IRAs. An employer that grows too large for a MEP would 
have a transition period to transfer out of the MEP to their own stand-
alone 401(k) plan. Additionally, a MEP 401(k) would offer participants 
a higher contribution ceiling (currently $18,000 + $6,000 catch-up) vs. 
the above referenced IRA limits or the SIMPLE IRA limits of $12,500 + 
$3,000 catch-up.
    2. ``One Bad Apple Rule''--This was an ongoing concern for our 
firm's open MEP that the actions or inactions of one participating 
employer could have negative repercussions on the entire plan and other 
innocent participating employers. Each participating employer should be 
responsible for only its own participants as well as actions and 
decisions under its control. We had two major concerns in the day-to-
day administration of our MEP: timely enrollment of newly eligible 
participants and timely submission of employee deferrals and loan 
payments. To address the enrollment concern, we required the 
participating employers to provide us with current census data as each 
enrollment date approached. To address the timely deposit concern, our 
office submitted the contribution files to the investment company each 
pay period for each participating employer so we always knew deposits 
were timely. MassMutual had a sub-plan setup in the MEP for each 
participating employer. The sub-plan included the business bank account 
number and routing number for each participating employer. We would 
submit the contribution file on the plan website and MassMutual would 
process the debit ACH against the appropriate bank account. Continually 
contacting employers for their payroll reports as well as preparing and 
submitting the online contribution files consumed a lot of our time 
each week.
    3. Model Document--In order to promote the creation of open MEPs, a 
model plan document should be created so that service providers can 
either use the model document or use it as a template for the creation 
of their own MEP plan document. This could provide certainty and 
consistency to the service provider community regarding open MEPs.
    4. Higher Annual Plan Audit Participant Count--Currently, plans 
that exceed 120 participants as of the first day of the plan year are 
required to have an audit of the plan for each plan year until the 
beginning of the year participant count is below 100. A growing MEP 
will quickly pass that threshold. Our MEP required an audit for 3 of 
the 5 plan years in which it existed. The cost of the first audit was 
paid by the plan. The cost of the audit for the last full plan year and 
the short final year of the plan were paid by McGee, Hearne & Paiz, LLP 
which added to our firm's losses from offering the MEP. I recommend 
that an audit not be required until there are at least 1,000 
participants. While I previously recommended that employer eligibility 
be limited to businesses with fewer than 100 employees, a participating 
employer's sub-plan may over time have more than 100 participants due 
to terminated participants keeping their account in the plan. I propose 
that participating employers with more than 100 participants have a 
transition period to transfer out of the MEP to their own stand-alone 
401(k) plan.
    5. Electronic Delivery of Notices and Disclosures as the Default 
Delivery Method--Due to the widespread availability of mobile devices 
capable of accessing the Internet, electronic delivery of required 
notices and disclosures either via posting on a website or by email 
should be the default vs. the current default being paper delivery. A 
participant can be given the option to opt out of electronic delivery 
in favor of paper delivery.
    6. Modification to Top Heavy Rules--Current top heavy rules can 
discourage the initial adoption of a plan, prohibit participation by 
family members of the business owner(s), and produce a windfall for 
participants due to an accidental contribution. A 3-percent top heavy 
contribution can be due to a non-safe harbor 401(k) plan if anyone who 
is a key employee either by direct ownership of the business or by 
family attribution contributes during a top heavy plan year. I recall a 
plan many years ago where the son of the owner deferred 5 percent to 
the plan since he did not know of the top heavy issues. That 5 percent 
contribution of approximately $1,300 cost the employer more than 
$80,000 in unexpected top heavy contributions. In a non-safe harbor 
plan, the ADP and ACP Tests already restrict contributions by highly 
compensated employees who in a small business are usually also the key 
employees or owners. Loosening or eliminating top heavy contributions 
in an open MEP would encourage more small business participation. It 
could do the same in a stand-alone 401(k) plan as well.
    7. Expand and Promote the Retirement Savings Contributions Credit--
The comment I most often hear from either newly eligible participants 
or eligible participants who do not contribute is ``I can't afford 
it.'' It is my opinion that few know of the credit available for making 
retirement plan contributions, and it is also my opinion that the 
credit should be increased from its current phaseout levels. A worker 
filing as single gets a 50 percent credit if the Adjusted Gross Income 
(AGI) is below $18,250, and the credit phases out once AGI surpasses 
$30,500. For a married couple filing jointly, the 50 percent credit is 
on AGI up to $36,500 and phases out once AGI surpasses $61,000. 
Essentially, a person working full-time at an hourly pay rate of about 
$15 is no longer eligible for the credit. While the credit results in 
lower current income tax revenue, the revenue is not lost. It is 
deferred until the participant taxes a taxable distribution, hopefully 
in retirement.
    8. Simplicity--Perhaps one of the most important requirements is 
simplicity. As mentioned previously, most small business owners are not 
benefits professionals. They seek advice from others and want to feel 
like they understand what they are signing up for vs. having no 
understanding at all. There have been many times when prospective 
401(k) plan clients that I have met with have chosen to adopt a SIMPLE 
IRA instead of a 401(k) plan because there is no plan document to 
maintain, no annual Form 5500 to file, and the rules are easier to 
understand. I believe that an open MEP needs to be easy to understand 
in order for many small businesses to be willing to consider it as an 
alternative to meet their needs.
    Small businesses hire a TPA like me to help keep them out of 
trouble. The regulations are too complex for most small business owners 
to understand while also trying to run their day-to-day operations. 
Many investment advisors and large recordkeepers like to work with TPAs 
because people like me help them retain their retirement plan business. 
In the case of McGee, Hearne & Paiz, LLP, we are a local presence in 
our community. Many small business people like doing business with 
other small businesses. In addition to our expertise, we can often have 
a face-to-face conversation with our clients and can take the time to 
personally help them deal with situations as they arise. We are not 
simply a voice on the telephone that they will never meet. Our clients 
know us, and we know them. I recommend that open MEP legislation 
preserve a role for local TPAs who can work with small business owners 
in their community.
     other suggestions to streamline retirement plan administration
    Many of the suggestions above can be applied to stand-alone 
qualified retirement plans in addition to being applicable to open 
MEPs. Listed below are additional suggestions that can be applicable to 
all qualified retirement plans.
    1. Expanded Self-Correction Opportunities--Due to the complexity of 
the regulations and simple human error, administrative errors occur in 
retirement plans. One of the most common is the late deposit of 
employee deferrals and loan payments. The Form 5500 requires plan 
sponsors to report the amount of employee deferrals and loan payments 
that were deposited late during the plan year. In my experience, this 
issue more than any other prompts a Department of Labor investigation 
of a retirement plan. These investigations are lengthy and expensive in 
terms of both time and money. I recommend that the question be removed 
from the Form 5500 and that employers be required to self-correct and 
retain documentation of the correction. Small businesses are often 
reluctant to make a filing with the DOL and/or IRS when an error occurs 
due to (1) fear of the agencies, (2) accounting and/or legal fees, and 
(3) agency filing fees. Many other administrative errors are not 
required to be reported on the Form 5500, and employers act to make 
corrections when errors are identified. Removing the reporting 
requirement for late deposits would be a step toward simplifying 
compliance.
    2. Seven Business Day Safe Harbor Deposit Window for All Plans--
Plans with less than 100 participants have a 7 business day safe harbor 
period to timely deposit employee deferrals and loan payments. For 
larger employers, timely deposit is a facts and circumstances 
determination based upon the earliest date that the funds can be 
segregated from the employer's general assets. In reality, the standard 
for a large employer is the shortest length of time from payday to the 
deposit date that is identified during the period being examined. For 
example, if a 2-year timeframe is analyzed and the 401(k) deposit was 
made on payday even once, the employer is deemed to have demonstrated 
that it can make the deposit on payday and everything deposited later 
than payday is deemed late. Large employers should have the same 7 
business day safe harbor deposit window as granted to small employers.
    3. Limit 401(k) Loans--Many employers that I have worked with 
dislike participant loans due to the extra work they represent and the 
potential for administrative errors. Despite this, many plans allow 
loans as an ``incentive'' for participants so they know they can access 
funds in a time a need. While a participant's immediate financial need 
can be satisfied by taking a retirement plan loan, the loan can have 
unexpected consequences. The opportunity cost of the lost rate of 
return can be large. Terminating participants often have a short period 
of time to repay the loan before the unpaid balance becomes taxable 
income. Some employers can, in my opinion, be too generous by not 
limiting the number of participant loans. Some employers simply limit 
the overall dollar amount in order to comply with the IRS limits, but 
otherwise allow participants to take as many loans as they like. I 
recommend limiting loans to 1 at a time with no refinancing option 
available.
    4. Remove the 6-month Deferral Suspension Following Hardship 
Distributions--Currently, participants experience a 6-month suspension 
from making 401(k) deferrals following a hardship distribution. As the 
term implies, a ``hardship'' distribution is taken because the 
participant lacks funds to cover a certain major expense. Many 
participants face a double penalty since in addition to the missed 
deferral opportunity they also miss 6 months of employer match in plans 
that provide a match contribution. Participants who cannot afford to 
defer for a period of time are free to lower or suspend their 
deferrals. Those who can afford to continue should be given the 
opportunity to do so.
    5. Encourage Portability of Accounts--Although we inform 
participants of the 10 percent excise tax on most distributions prior 
to age 59\1/2\, many participants cash-out from their former employer's 
retirement plan when they transition to another job. A distribution 
from a SIMPLE IRA within the first 2 years of participation results in 
a 25 percent unless an exception applies. In my experience, account 
balances under $10,000 seem to be at the most risk of being cashed-out. 
I talked to one such participant within the last month who was fired 
from his job and desperate to have his $1,200 account balance 
distributed in order to make the next rent payment. While a lengthy 
discussion can be had about how a person comes to be in that financial 
situation, I most often see balances under $10,000 used to pay debts, 
living expenses, or moving expenses. The 10 percent excise tax acts to 
discourage premature distributions but people don't have a reward for 
rollovers. A small refundable tax credit might assist.
                               conclusion
    Employer sponsored retirement plans are an effective tool for 
Americans to save for their retirement. Some people I talk with do not 
expect Social Security to still be there for younger generations. My 
response to such statements is that I personally expect Social Security 
to be there when I reach my full retirement age in 21 years; however, I 
expect there to be reforms to the program to address its long-term 
financial health and the increasing life expectancy of Americans. Such 
reforms will probably include an increase in payroll taxes and the 
Taxable Wage Base as well as increases to the eligibility ages for 
partial and full benefits. Despite the possibility of future changes to 
the program, I believe that Social Security will for the foreseeable 
future maintain its role as the retirement cornerstone of most 
Americans, but it is not enough. Americans must also save for their own 
retirement.
    A variety of retirement savings vehicles are available. Individuals 
can save in an IRA. Businesses and non-profits can sponsor a SIMPLE 
IRA, SEP, or 401(k) plan. Governments can sponsor a 457 plan. 
Educational institutions and some non-profits can sponsor a 403(b) 
plan. Additionally, all of these employers can sponsor a defined 
benefit pension plan if they can afford to do so, but fewer and fewer 
actively employed private sector employees are covered by such a 
benefit.
    Numerous State governments see a retirement plan coverage gap and 
are either studying the available alternatives or are actively taking 
steps to fill the gap. Our Federal Government should take steps to 
promote saving through employer sponsored retirement plans. The DOL and 
IRS provide important oversight and enforcement of the retirement plan 
sector, but can be inefficient and heavy-handed with well-intentioned 
small businesses when minor mistakes occur. The intent of regulation 
and enforcement should be to provide a level playing field and consumer 
protections for everyone involved in the industry from service 
providers, to employers, to participants benefiting under a plan. The 
ever-increasing volume of regulations make compliance difficult and 
more costly. When I recently provided information to several newly 
eligible participants in our own accounting firm's 401(k) plan, I 
provided the following documents.


1. Summary Plan Description                                    24 pages
2. Investment Company Enrollment Booklet                       50 pages
3. Section 404(a)(5) Participant Fee Disclosure                 9 pages
4. Safe Harbor Notice                                           3 pages
5. Qualified Default Investment Alternative Notice              2 pages
6. Contribution Election Form                                    1 page
                                                           -------------
                                                               89 pages
 

    Fortunately, everyone in our company uses a computer and email as 
part of their daily duties, so I could deliver these documents via 
email instead of printing 6 documents totaling 89 pages for each 
person. Electronic delivery is not an option for many businesses both 
small and large.
    I believe that the vast majority of small business owners across 
America are just like the ones we serve in Wyoming in that they would 
like to offer a retirement plan benefit to attract and retain good 
employees. More importantly, an employer-sponsored retirement plan can 
assist the business owner and the employees to prepare for their 
future. Open MEPs can be another option to help Americans achieve their 
retirement goals.
    Once again, I appreciate the opportunity be a part of this 
discussion.

    Senator Enzi. Thank you.
    Mr. Favorito.

  STATEMENT OF NICOLA FAVORITO, DEPUTY TREASURER, RETIREMENT 
             SERVICES FOR MASSACHUSETTS, BOSTON, MA

    Mr. Favorito. On behalf of Treasurer Goldberg, we'd like to 
thank you, Chairman Enzi, Senator Warren, of course, and 
members of the committee and staff for providing us the 
opportunity to be here today to discuss open multiple employer 
plans. The goal of my remarks is to highlight to the committee 
another example of how the MEP approach may prove beneficial in 
improving retirement access, specifically through a State 
sponsored plan being developed for Massachusetts nonprofit 
organizations.
    By way of background, the Commonwealth has a long history 
in sponsoring benefits for its own employees. The State defined 
benefit plan has been in existence since 1911, the teacher 
system since 1914, and its optional 457(b) plan since 1976. 
Collectively, this accounts for more than 250,000 active 
members, participants, and beneficiaries, many of whom are 
without Social Security coverage, and it also accounts for more 
than $67 billion in assets.
    These and other factors afford our office economies of 
scale, as we'll discuss later on, around plan design and costs, 
which will benefit plan participants and taxpayers in the 
proposal that I'll outline for you.
    The specific challenge that we're trying to address in the 
Commonwealth with regard to nonprofits has to do with the fact 
that they represent nearly 17 percent of the Massachusetts 
economy, employing over half a million people, making it 
almost, I think, the sixth largest in the country. As with 
other small businesses, nonprofit organizations simply--as has 
been stated in October and will be again today, small 
organizations simply lack the resources sometimes to administer 
affordable retirement plans, resulting in countless employees 
being isolated from any benefits other than Social Security.
    According to a study by the Boston Foundation, some 56 
percent of nonprofit organizations with budgets less than 
$250,000 do not offer any retirement plans to their employees 
in the Commonwealth, making it challenging for the nonprofit 
sector to attract high-quality talent. Importantly, there are 
some unique characteristics with regard to the nonprofit 
employer in the Commonwealth.
    It is characterized by dedicated employees who tend to 
remain in the industry when they do change employers. It is a 
sector that heavily employs women, who typically face shorter 
working careers, improving longevity relative to their male 
counterparts, and, unfortunately, lower rates of compensation, 
all factors which make retirement security more challenging for 
them. We are exploring the feasibility in the Commonwealth of 
trying to improve retirement access in this sector by way of a 
401(k) model using the MEP approach.
    The committee and its staff is very familiar through 
previous testimony with regard to the overall structure of 
MEPs, in terms of permitting individual employers that meet 
eligibility criteria to collectively join a plan. The plan, as 
we are proposing, would be considered a single plan and trust 
under ERISA. The plan document would provide that the plan 
would be subject to Title I and would be intended to comply 
with the relevant IRS tax qualification requirements. There 
would be a single trust holding contributions made by 
employers, employees, or both, and only a single Form 5500 
annual return report would be filed for the whole arrangement.
    Under this structure, participating employers would have 
limited fiduciary and administrative responsibilities. 
Administrative costs would be kept low by aggregating assets 
and leveraging economies of scale as the plan grows.
    The plan design that the Commonwealth is contemplating 
would allow us to incorporate all the consumer protections 
inherent in an ERISA type plan, as well as all the best 
practice design features found in both DB and DC plans. This 
would include auto enrollment, auto escalation of employee 
contributions, professionally managed diversified investment 
options, and portability, just to name a few. Additional 
protections we would emphasize are secured through the public 
procurement process that we undergo that would be required to 
engage recordkeepers, auditors, investment managers, and 
consultants.
    Additional benefits would be found through the investment 
design, which would combine target date funds, objective-based 
portfolios, and managed account services, depending on the 
expertise of the individual employee.
    As with many other small businesses, we think the greatest 
barrier for nonprofit organizations is not the willingness to 
offer retirement benefits, but the cost and the other 
responsibilities that go along with it. The MEP structure would 
directly address some of the key challenges small nonprofits 
face when deciding whether it's feasible to offer a plan to 
their employees. We see an increasing receptiveness and 
activity around the country that has been reported and is being 
generated from all corners of the retirement industry in terms 
of using the open MEP, and we would like to take advantage of 
that opportunity.
    On behalf of the Treasurer and the Commonwealth, we would 
encourage the committee and Congress to continue its efforts 
toward expanding accessibility to well-run retirement programs 
for those who don't have it now. We'd also urge the continued 
consideration of MEPs in this regard.
    Thank you for the opportunity to submit our views and for 
your consideration.
    [The prepared statement of Mr. Favorito follows:]

                 Prepared Statement of Nicola Favorito

                              introduction
    On behalf of Massachusetts Treasurer & Receiver General Deborah 
Goldberg, we would like to thank you Chairman Enzi, Senator Warren and 
members of the committee for the opportunity to participate in today's 
discussion regarding Open Multiple Employer Plans. We will outline our 
efforts in this regard at the State level as we develop a retirement 
plan for Massachusetts nonprofit organizations. We hope you will concur 
that the information we provide you will be consistent with many of the 
themes previously expressed to this committee and those who have 
testified in support of expanding retirement plan accessibility and the 
use of MEPs.
    The Commonwealth has a long history in sponsoring retirement 
benefits for its own employees. Its State defined benefit plan was 
established in 1911; its teacher system in 1914; and its optional  
457(b) plan in 1976. These plans collectively account for more than 
250,000 active members/participants, retirees, and more than $67b in 
assets. As we will describe further, these and other factors afford our 
office economies of scale around plan design and costs which benefit 
plan participants and the taxpayers.
    As chair of the Massachusetts State Employees Retirement System, 
and having prior extensive experience with private sector business 
management, Treasurer Goldberg recognizes the importance of providing 
workers with quality retirement benefits, especially to those who may 
not have them readily accessible. In an effort to leverage its 
experience providing retirement benefits, the Commonwealth has embarked 
to make retirement benefits accessible to private sector employees.
                             the challenge
    As illustrated in the graph below, the nonprofit business sector 
represents nearly 17 percent of the Massachusetts State economy 
employing over 500,000 individuals making it the sixth largest in the 
Nation.\1\ In many cases nonprofit organizations simply lack the 
resources to administer an affordable retirement plan, resulting in 
countless employees being isolated from any retirement benefits outside 
of Social Security. According to the Boston Foundation, a full 56 
percent of grassroots organizations with budgets of less than $250,000 
do not offer any retirement plans to their employees making it 
challenging for the nonprofit sector to attract high quality talent.
---------------------------------------------------------------------------
    \1\ Bureau of Labor Statistics.
    
    
    Importantly, this sector is characterized by dedicated employees 
who tend to remain in the non-profit world even when they do change 
employment. It is a sector that employs women predominantly, who 
typically face shorter working careers, improving longevity relative to 
their male counterparts, and unfortunately lower rates of compensation: 
Factors which make retirement security more challenging.
    Chapter 60 of the Acts of 2012, signed into law on March 22, 2012, 
authorized the Treasurer and Receiver General to establish a defined 
contribution retirement plan for not-for-profit employers of the 
Commonwealth of Massachusetts incorporated under section 501(c) of the 
Internal Revenue Code, that are established, organized or chartered 
under the laws of the Commonwealth and doing business in the 
Commonwealth. The Legislation limited the size of participating 
employers to those with not more than 20 persons.
               volume submitter vs multiple employer plan
    With the foregoing as background, we would like to highlight how 
this committee's focus on MEP's has bearing on our efforts at the State 
level. In 2012 establishing our program as a volume submitter plan 
represented the most practical plan design at the time. Volume 
submitter plans allow multiple employers to adopt their own separate 
plan via an adoption agreement with the State as the plan sponsor. As a 
general matter for a volume submitter all employers would have their 
own autonomous plans and would be responsible for maintaining their own 
documents, trust agreement, IRS form 5500 filings and plan records. 
However, each employer would also need to adopt amendments to the plan 
documents as needed, such as for changes in law, changes in plan 
design, and fee changes. Adopting employers under a volume submitter 
plan assume fiduciary and administrative responsibilities in the 
oversight of their individual plan to ensure compliance with ERISA. 
This structure also presents cost challenges to prospective employers.
    By comparison, as has been detailed to this committee previously, a 
multiple employer plan structure (``MEP'') would permit employers (that 
meet specified eligibility criteria) to join the plan. The MEP would be 
considered a single Plan and trust under ERISA. The plan document would 
provide that the plan is subject to Title I of ERISA and is intended to 
comply with Internal Revenue Code tax qualification requirements. The 
MEP would have a single separate trust holding contributions made by 
the participating employers, the employer's employees, or both. Only a 
single Form 5500 annual return report would be filed for the whole 
arrangement.
    Under this structure participating employers would have limited 
fiduciary and administrative responsibilities. Administrative costs 
could be kept low by aggregating assets and leveraging economies of 
scale as the plan grows. The Treasury is in the process of exploring 
the feasibility and advantages of offering the nonprofit 401k plan as a 
MEP.
                              plan design
    The Treasurer's office is developing the nonprofit plan as a 
401(k). Offering the program as a 401(k) would allow us to incorporate 
all of the consumer protections inherent in ERISA-type-plans as well as 
best practice design features found in both defined benefit and defined 
contribution plans. These features would include:

     Auto-enrollment of employees at a rate equal to 6 percent 
of pay with employees eligible to opt out or select an alternate 
savings rate;
     Auto-escalation of employee contributions to 10 percent of 
pay in annual 1 percent increments;
     Professionally managed diversified investment options; and
     Portability.

    Additional protections are secured through the public procurement 
process we are required to utilize in engaging recordkeepers, auditors 
and consultants.
    Key demographic data for the nonprofit sector as well as behavioral 
science observed in our own experience and in the defined contribution 
industry support the need for automatic features within the plan 
design. The higher ratio of female to male employees with a large 
percentage of those employees earning salaries less than $30,000.00 
support this conclusion. The following charts from Vanguard's How 
America Saves 2015--A report on Vanguard 2014 defined contribution plan 
data; illustrate the dangers of participant inertia for these employees 
in the absence of auto features:


                Participation Rates by Plan Design, 2015
    (Vanguard defined contribution plans permitting employee-elective
                               deferrals)
------------------------------------------------------------------------
                                    Voluntary    Automatic
                                    Enrollment   Enrollment    All (In
                                       (In          (In        percent)
                                     percent)     percent)
------------------------------------------------------------------------
All..............................           58           88           66
------------------------------------------------------------------------
Income
------------------------------------------------------------------------
<$30,000.........................           29           82           42
$30,000-$49,999..................           53           90           64
$50,000-$49,999..................           62           92           69
$75,000-$99,999..................           69           94           74
$100,000+........................           85           96           87
------------------------------------------------------------------------
Age
------------------------------------------------------------------------
<25..............................           25           81           37
25-34............................           51           88           62
35-44............................           61           88           68
45/54............................           65           90           71
55-64............................           69           91           74
65+..............................           64           87           69
------------------------------------------------------------------------
Gender
------------------------------------------------------------------------
Male.............................           56           89           65
Female...........................           63           88           71
------------------------------------------------------------------------
Job Tenure (years)
------------------------------------------------------------------------
0-1..............................           33           82           48
2-3..............................           56           92           67
4-6..............................           63           92           71
7-9..............................           68           92           73
10+..............................           73           93           77
------------------------------------------------------------------------
Source: Vanguard, 2016.


             Participant deferral rates by plan design, 2015
    (Vanguard defined contribution plans permitting employee-elective
                               deferrals)
------------------------------------------------------------------------
                                    Voluntary    Automatic
                                    Enrollment   Enrollment    All (In
                                       (In          (In        percent)
                                     percent)     percent)
------------------------------------------------------------------------
All..............................          7.2          6.1          6.8
------------------------------------------------------------------------
Income
------------------------------------------------------------------------
<$30,000.........................          5.1          3.6          4.4
$30,000-$49,999..................          5.9          5.0          5.5
$50,000-$49,999..................          6.9          6.5          6.8
$75,000-$99,999..................          7.7          7.8          7.7
$100,000+........................          8.4          8.1          8.3
------------------------------------------------------------------------
Age
------------------------------------------------------------------------
<25..............................          5.1          3.8          4.5
25-34............................          5.8          4.9          5.5
35-44............................          6.5          5.7          6.3
45/54............................          7.4          6.8          7.2
55-64............................          8.9          8.1          8.7
65+..............................         10.4          9.0         10.0
------------------------------------------------------------------------
Gender
------------------------------------------------------------------------
Male.............................          7.0          6.3          6.8
Female...........................          7.4          6.0          6.9
------------------------------------------------------------------------
Job Tenure (years)
------------------------------------------------------------------------
0-1..............................          5.4          4.1          4.7
2-3..............................          6.5          5.9          6.2
4-6..............................          6.9          6.8          6.8
7-9..............................          7.3          7.1          7.3
10+..............................          8.0          8.1          8.0
------------------------------------------------------------------------
Account Balance
------------------------------------------------------------------------
1. <10K..........................          4.0          3.5          3.8
2. <25K..........................          6.2          6.3          6.3
3. <50K..........................          7.3          7.2          7.3
4. <100K.........................          8.5          7.9          8.3
5. <250K.........................          9.8          9.2          9.6
6. 250K+.........................         10.8         10.7         10.7
------------------------------------------------------------------------
Source: Vanguard, 2016.

    As illustrated in the above tables, plans with automatic enrollment 
have higher participation rates across all demographic data points as 
compared to voluntary plans. While automatic enrollment will lead to 
increased participation rates it may, in some circumstances have an 
unintended negative effect on participant deferral rates. For example 
if the default participant deferral rate is set too low (3 percent or 
lower) and/or in the absence of an auto-escalation feature, employees 
could face shortfalls in their retirement savings.
                           investment design
    The Plan's investment structure is being designed to permit all 
Plan participants, regardless of their previous knowledge or 
experience, to construct an investment plan appropriate to their 
financial circumstances, goals, time horizons and risk tolerances. All 
investment options will be ``white label'' to help participants focus 
on each option's investment strategy. The nonprofit 401(k) Plan 
investment structure would have three tiers; Plan participants may 
allocate and transfer their assets among investments in each tier. A 
description of each tier follows:
    Tier 1--Custom Target Date Funds--For Plan participants lacking the 
knowledge, experience or time to construct a unique asset allocation 
plan: a series of low cost custom target-date retirement funds 
constructed, managed and monitored by the Plan's investment consultant 
acting as a 3(38) fiduciary.
    Tier 2--Objective Based Portfolios--The objective based funds offer 
four diversified investment options in four classes of the defined 
contribution objectives menu (Growth, Income, Capital Preservation and 
Inflation Protection). Each fund offers participants a professionally 
managed efficient portfolio constructed and monitored by the Plan's 
investment consultant acting as a 3(38) fiduciary.
    Tier 3--Managed Account Service--This would be an advice service 
offered through the Plan's recordkeeper.
                               conclusion
    As with many other small businesses, the greatest barrier for 
nonprofit organizations is not the willingness or desire to offer 
retirement benefits to their employees but the cost. Because a 
nonprofit organization's ability to fundraise is often tied to overall 
operating expenses it is critical to keep administrative costs to an 
absolute minimum. This has a direct effect on the organization's 
ability to cover the administrative oversight and expenses associated 
with the sponsorship of a quality retirement plan.
    The MEP structure would directly address some of the key challenges 
nonprofit employers face when deciding whether it is feasible to offer 
a retirement plan to their employees. Employers must also assess plan 
administration and their fiduciary responsibilities and liabilities.
    As contemplated by our office, the State (either directly or 
through one or more contract agents) would be an ERISA fiduciary and 
assume administrative responsibilities for the program. Administrative 
costs could be kept low by aggregating assets and leveraging economies 
of scale as the plan grows.
    On behalf of Treasurer Goldberg and the Commonwealth we would 
encourage this committee and Congress to continue its efforts toward 
expanding accessibility to well-run retirement programs for those who 
may not have it now. We would also urge the continued consideration of 
MEPs in this regard.
    Thank you for the opportunity to submit our views and for your 
consideration.

    Senator Enzi. Thank you.
    Mr. Kais.

  STATEMENT OF JAMES KAIS, SENIOR VICE PRESIDENT AND NATIONAL 
      RETIREMENT PRACTICE LEADER, TRANSAMERICA, MIAMI, FL

    Mr. Kais. Thank you for having TransAmerica at the 
committee meeting today. We really appreciate your work on this 
topic.
    I'm Jim Kais. I'm Senior Vice President and Retirement 
Practice Leader for TransAmerica. TransAmerica is focused on 
helping customers achieve a lifetime of financial security.
    Senator Enzi. Can you pull the microphone a little closer 
to you?
    Mr. Kais. There we go. Apologies. TransAmerica is focused 
on helping customers achieve a lifetime of financial security. 
Of the 27,000 plans that we service today, 280 of those are 
multiple employer plans, or MEPs, which have been adopted by 
11,000 adopting employers and nearly 600,000 participants. It's 
been a focus of our business since 1998.
    I will focus my remarks on two of the three main points in 
my written testimony. No. 1, we need to encourage small 
employers to provide plans through reforms that address the 
primary reasons they do not offer plans in the first place: 
cost, complexity, and concerns about fiduciary liability. Under 
a MEP, many small businesses can join together to achieve 
economies of scale and avoid the administrative burden and most 
of the liability in running the plan. Adopting employers 
delegate fiduciary and administrative services, such as the 
selection of the investment fund lineup for the plan, and share 
in the cost of such services.
    In order to facilitate the adoption of MEPs, TransAmerica 
actively supports two essential reforms. First, compliant 
employers in the MEP should be protected from liability for the 
noncompliant acts and omissions of other employers in the MEP 
and the resulting disqualification of the said plan, the so-
called one-bad-apple rule. Second, the requirement that only 
employers with a nexus can join in a MEP should be eliminated. 
Permitting all open MEPs will increase the number of small 
employers that provide a retirement plan for their employees.
    These reforms have long been advocated by both Republican 
and Democratic Members of Congress. We especially thank the 
chairman of the subcommittee and Senator Hatch for their 
leadership on MEP reform. The administration has also called 
for open MEPs for the private sector, however, with additional 
conditions that should be weighed against the need and increase 
cost.
    It should be noted that efficiencies in other pooled 
arrangements can also be achieved. Employers that want to 
retain their own standalone plan but wish to address the cost, 
complexity, and liability concerns may adopt a plan that shares 
a common trustee, named fiduciary, and plan administrator with 
other employer plans. Further efficiencies can be gained by 
permitting the shared administrator to file a consolidated Form 
5500. A combined Form 5500 would eliminate the wasteful 
duplication that occurs today without giving up any valuable 
information.
    No. 2, in seeking solutions to the coverage problem, we 
must take care to do no harm to the current system. According 
to research from nonprofit TransAmerica Center for Retirement 
Studies, 90 percent of workers who are offered a 401(k) or 
similar plan are saving for retirement, compared to just 48 
percent of workers who are not offered such a plan. Similarly, 
innovations in coverage should complement the current system 
and not unfairly compete with it.
    We recognize the efforts of States to provide retirement 
savings opportunities to workers not covered by an employer 
plan. TransAmerica urges this Congress and the Department of 
Labor to ensure that private sector open MEPs can be offered to 
private sector workers on the same terms as State or other 
governmental open MEP plans.
    TransAmerica commends Chairman Enzi, Ranking Member Warren, 
and other members of the subcommittee on their consideration of 
this important issue of multiple employer plans and employer 
plan coverage in general. We appreciate the opportunity to 
present our views today.
    Thank you very much.
    [The prepared statement of Mr. Kais follows:]

                    Prepared Statement of James Kais

    Transamerica appreciates the opportunity to provide this written 
testimony in connection with the Roundtable held by the U.S. Senate 
Committee on Health, Education, Labor, and Pensions (HELP) Subcommittee 
on Primary Health and Retirement Security examining open multiple 
employer plans (``MEPs''). This testimony will discuss the role of 
small business in helping employees save for retirement, the role of 
multiple employer plans and recommendations for further reform.
    Transamerica is focused on helping customers achieve a lifetime of 
financial security. Transamerica products and services help people 
protect against financial risk, build financial security and create 
successful retirements. Transamerica designs customized retirement plan 
solutions for both for profit and non-profit businesses nationwide. 
Transamerica provides services for over 27,000 plans that collectively 
include over 5 million participants and represent over $234 billion in 
plan assets as of December 31, 2015. Multiple employer plans comprise 
280 of these plans adopted by 11,500 employers with nearly 600,000 
participants and $18.23 billion in assets.
    Transamerica services small to large size employer plans but finds 
the lack of coverage of employees in workplace retirement plans to be 
most prevalent in the small employer market.
    We have three main points, which we will discuss in our testimony:

    1. As the number of small businesses continue to grow and become a 
large source of new jobs, expanding retirement plan coverage among 
small businesses is critical to enhancing Americans' retirement 
security. We need to encourage small employers to provide plans through 
reforms that address the primary reasons that employers, especially 
small employers, do not offer plans: cost, complexity, and concern 
about fiduciary liability. In this regard, we encourage both removal of 
restrictions to employers entering into multiple employer plans and 
limitations on liability of participating employers in a multiple 
employer plan from the wrongful acts of another participating employer. 
We also encourage further reform to improve the efficiency of pooled 
arrangements.
    2. Employers play a vital role in helping their employees in their 
retirement planning preparedness by offering retirement savings plans, 
improving plans, and enhancing benefits through innovations designed to 
help their employees. We need to be mindful that the employer plan 
system is voluntary and preserve a central role for employers in the 
private retirement system. Any reforms to or innovation in helping 
workers save for retirement should enhance and not disrupt the 
efficiencies and effectiveness of the current system.
    3. The retirement security of workers can be increased by enacting 
other widely supported bi-partisan proposals long advocated by members 
of this subcommittee and others in Congress.

    Small business facts and employers' role in helping workers save 
for retirement. According to the U.S. Small Business Administration, 
the number of small businesses in the United States has increased 49 
percent since 1982. Since 1990, as big business eliminated 4 million 
jobs, small businesses added 8 million new jobs. Small businesses 
(fewer than 500 employees) represent 99.7 percent of the total firms 
and 48.5 percent of the private sector workforce in the United 
States.\1\ Therefore, expanding retirement plan coverage among small 
businesses is critical to enhancing Americans' retirement security.
---------------------------------------------------------------------------
    \1\ U.S. Small Business Administration, Frequently Asked Questions, 
September 2014, https://www.sba.gov/sites/default/files/
FAQ_March_2014_0.pdf
---------------------------------------------------------------------------
    Employers play a vital role in helping workers save for retirement. 
The workplace retirement savings system has succeeded in serving as the 
preferred method of saving for retirement for millions of workers. With 
the benefits of saving in an employer-sponsored plan governed by the 
Employer Retirement Income Security Act, as amended (``ERISA'') (e.g., 
investment education, the potential for employer contributions, and 
fiduciary oversight), combined with the convenience of automatic 
payroll deduction, Americans are far more likely to save for retirement 
through participating in a company-sponsored retirement plan than 
through alternate savings structures. According to research from 
nonprofit Transamerica Center for Retirement Studies (TCRS), 90 
percent of workers who are offered a 401(k) or similar plan are saving 
for retirement, either through the plan and/or outside of work, 
compared to just 48 percent of workers are not offered such a plan.\2\
---------------------------------------------------------------------------
    \2\ Transamerica Center for Retirement Studies (``TCRS''), 16th 
Annual Retirement Survey of American workers and employers. TCRS is a 
division of Transamerica Institute (``The Institute'') a nonprofit, 
private foundation. The Institute is funded by contributions from 
Transamerica Life Insurance Company and its affiliates may receive 
funds from unaffiliated third parties. For full survey methodologies, 
see www.transamericacenter.org.
---------------------------------------------------------------------------
    Multiple Employer Plans are a powerful solution to increasing 
coverage in the small employer market; however, further reform is 
needed to facilitate their adoption.
    As small businesses continue to employ a greater portion of workers 
than ever before, focus should be placed on obstacles to employers 
establishing retirement plans for their workers. Common reasons 
employers cite for not offering retirement savings plans to their 
employees are: cost, complexity, and fiduciary liability. Under a 
multiple employer plan (``MEP''), many small businesses can join 
together to achieve economies of scale and avoid the administrative 
burden and liability in running the plan by turning over administration 
of the plan to a named plan fiduciary, recordkeeper and plan 
administrator, making the plan both more affordable and effectively 
managed. By joining a MEP, adopting employers delegate fiduciary and 
administrative services, such as the selection of the investment fund 
lineup for the plan, and share in the costs of such services. TCRS' 
research found that 22 percent of small companies (10-499 employees) 
that do not offer a 401(k) or similar plan and are not likely to offer 
one in the next 2 years would be likely to consider joining a MEP.\3\
---------------------------------------------------------------------------
    \3\ Source: Transamerica Center for Retirement Studies, 16th 
Annual Retirement Survey.
---------------------------------------------------------------------------
    In order to facilitate the adoption of MEPs, Transamerica actively 
supports two essential reforms.
    First, compliant employers in a MEP should be protected from 
liability for the non-compliant acts and omissions of other employers 
in the MEP and the resulting disqualification of the entire plan under 
the Internal Revenue Code (the ``One Bad Apple'' rule). Typical reasons 
for non-compliance (jeopardizing the qualified status of the plan) 
include providing insufficient information for discrimination testing 
and reporting purposes. Under existing bi-partisan proposals, the plan 
fiduciary could expel the non-compliant employer from the MEP and 
preserve the MEP's qualified status for the remaining employers in the 
plan.
    Second, employers without any ``common interest'' should be able to 
join together in a MEP (an ``Open MEP''). Current law requires 
``commonality'' or a nexus among employers (e.g., in the same line of 
business) to join in a MEP. Elimination of the commonality requirement 
will increase the number of small employers that provide a retirement 
plan for their employees by joining in a MEP.
    The above reforms have long been advocated by both Republican and 
Democrat Members in both Houses of Congress, including in bills 
sponsored by Senators Hatch, Collins, Nelson and in the last Congress 
by Senator Brown and former Senator Harkin, as well as by 
Representatives Buchanan, Reichert and Kind in the House. The Senate 
Finance Committee, in its Savings & Investment Bi-Partisan Working 
Group (``Senate Finance Committee Working Group'') co-chaired by 
Senators Crapo and Brown at the beginning of this Congress also 
endorsed the above proposed reforms. We also thank the Administration, 
in its fiscal year 2017 budget, for calling for open MEPs for the 
private sector; however, additional conditions called for by the 
Administration in its proposal need to be weighed against the added 
cost and complexity, as well as the nature of risks against which the 
additional conditions are designed to protect.
    We especially thank the Chairman of this subcommittee and Senator 
Hatch for their leadership on MEP reform.
    Although the specifics of the various proposals vary to some 
extent, there is a very substantial amount of common ground, as 
recognized by the Senate Finance Committee Working Group.
    Facilitate other efficiencies in pooled arrangements. Employers 
that want to retain their own stand-alone 401(k) plan but wish to 
address the cost, liability and administrative complexity concerns, may 
adopt a plan that shares with other employer plans a common trustee, a 
common named fiduciary, a common plan administrator, a common set of 
investment options, and a common recordkeeper. Further efficiencies can 
be gained in these pooled arrangements by permitting the administrator 
of plans sharing this same administrative framework to file a 
consolidated Form 5500. The consolidated Form 5500 may contain such 
information about the separate plans as is necessary or appropriate to 
ensure that DOL and Treasury do not fail to receive needed information. 
In short, a combined Form 5500 would eliminate the wasteful duplication 
that occurs today but without giving up any valuable information.
    Acknowledge and preserve the vital role of employers in retirement 
savings; do no harm to the current system.
    We must acknowledge the vital role employers of all sizes play in 
providing the structure and opportunity for workers to save for a 
secure retirement. Employer sponsored plans are a well-established and 
preferred system of saving for retirement. They offer fiduciary 
oversight, protection from creditors, more robust contribution levels 
and in many instances, employer matching contributions. Employers 
offering retirement savings plans to their workers also generally 
provide education regarding the need to save for retirement, investing 
and general financial literacy.
    There is no silver bullet to the coverage problem. Innovation and 
solutions should be encouraged to help workers save for retirement when 
not offered an employer plan. The MyRA program is a great example of a 
Federal solution available to workers nationwide to help them save for 
retirement.
    In seeking solutions, however, we must take care to ``do no harm'' 
to the current system. The current employer plan system is a voluntary 
one, and as noted above, is successful in providing workers with the 
ability to save for a secure retirement. Employers establish and 
maintain employer retirement savings plans at a considerable cost and 
administrative burden and with significant concern over liability. 
Solutions should address these concerns and not add to them. Without 
the voluntary maintenance of a plan by companies, we are left with far 
less savings and more pressure on the government to enhance social 
programs to address the needs of seniors.
    Any new legislative or regulatory requirements adding further 
complexity and cost without any significant benefit to the employer 
plan or participant are likely to further tip that balance in favor of 
not offering a plan for many employers. Overly burdensome requirements 
that add to an employer's fiduciary liability and are contrary to 
market demands without any significant benefit to either the employer 
or plan participants would similarly be very counterproductive.
    For this reason, care should be taken to ensure that any new 
requirements that Congress or the Administration imposes upon open MEPs 
as part of their approval do not also apply to the current law MEPs 
(``closed MEPs'') structure. To do so would be to disrupt the closed 
MEP marketplace.
    Similarly, any innovations in providing workers the ability to save 
should complement the current employer based system and not unfairly 
compete with it. Any competition with the current employer based system 
on an unlevel playing field that increase the burden on private 
employers without any significant benefit to either the employer or 
plan participants would be very counterproductive. We recognize the 
efforts of States, including Massachusetts, to provide retirement 
savings opportunities to workers not covered by an employer plan. The 
Department of Labor, in its Guidance issued earlier this year, noted 
that States would be able to establish open MEPs for the benefit of 
residents of its State. Transamerica urges this Congress and the 
Department of Labor to ensure that private sector open MEPs can be 
offered to private sector workers on the same terms as State or other 
governmental open MEP plans.
    Additional Solutions to Coverage. While coverage of workers in 
employer plans is very broad, more can and should be done to encourage 
employers of all sizes to adopt retirement plans and drive up coverage 
of workers in those plans. Many excellent legislative and regulatory 
proposals, including those noted in the Senate Finance Committee 
Working Group Report, have been introduced to address the primary 
challenges that employers, especially small employers, face in 
establishing plans: cost, complexity and concern about fiduciary 
liability. Such proposals would also serve to facilitate employee 
participation in the employer plans as well as their ability to manage 
their savings to last their lifetime. I would like to express my 
appreciation to members of this committee for their leadership in 
developing many of these proposals, and specifically to Chairman Enzi 
for his leadership in calling for electronic delivery of Plan notices 
as the default mechanism. Electronic delivery of notices, with the 
ability of plan participants to retain the right to receive the notices 
by hard copy, will go a long way to decreasing the cost of plans in 
delivering the notices and will enable participants to receive more 
interactive information. For example, rather than including a glossary 
of terms, an electronic plan document may enable a reader to click on a 
term to access the definition. A recent survey found that 84 percent of 
plan participants are agreeable to making electronic delivery the 
default option (with the ability to opt-out at no cost to the 
participant).\4\
---------------------------------------------------------------------------
    \4\ http://www.sparkinstitute.org/content_files/
improving_outcomes_with_electronic_
delivery_of_retirement_plan_documents.pdf. Retrieved June 16, 2016.
---------------------------------------------------------------------------
                               conclusion
    Transamerica commends Chairman Enzi, Ranking Member Warren and 
other members of this subcommittee on their consideration of the 
important issue of multiple employer plans and employer plan coverage 
in general. We appreciate the opportunity to present our views on the 
particular challenges faced by small businesses in offering plans and 
our suggested approach to solutions.

    Senator Enzi. Thank you.
    I want to mention that the Ranking Member, Patty Murray, is 
here, and if she wants to make a few comments--I know that 
you've got multiple things happening today.

                  Opening Statement of Senator Murray

    Senator Murray. I appreciate it, Senator Enzi. I wanted to 
come by and thank you for hosting this roundtable today and 
Senator Warren for participating with you on this. I really 
appreciate the focus on retirement security for our seniors 
across the country and your persistence in raising these issues 
in the HELP Committee, and I really appreciate both of your 
hard work to really spotlight these issues each and every day.
    I believe strongly that after a lifetime of hard work, all 
seniors should have the chance to live out their golden years 
on firm financial footing and with peace of mind. A secure 
retirement is also important to strengthening our Nation's 
middle class and making sure our country works for all 
Americans, not just the wealthiest few.
    But today, too many of our seniors are spending their 
golden years scraping to make ends meet, and too many Americans 
nearing the age of 65 want to retire but are financially unable 
to stop working, and far too few of our younger Americans have 
the ability or the tools to secure their future. In short, our 
country really is facing a retirement crisis.
    Last year, I asked the GAO to study this critical issue, 
and they determined that an astonishing 29 percent of 
households age 55 and older do not have any retirement savings 
at all. This is largely in part because they lack access to a 
retirement plan, and, in fact, nearly half of all private 
sector workers don't have a workplace retirement plan. The 
majority of those are, of course, lower-income, part-time, and 
work for small employers.
    In other words, the challenge isn't that people didn't 
choose to save through a workplace plan. It's about that half 
of all of our workers don't even have the option to put away 
money for retirement through their employer. The promising 
finding in the GAO report was that when offered the chance to 
save in a plan, a majority of those workers would participate 
regardless of their income.
    It's clear that in order to solve the retirement crisis, 
we've got to do more to ensure that every single person, 
including those who work part-time, workers in our gig economy, 
and those who work for small employers have the opportunity to 
participate in a retirement plan. Multiple employer plans make 
it easier for employers to offer those retirement plans, and 
they allow groups of small employers to reduce cost, 
complexity, and risk by joining together to offer a single 
retirement plan as their crucial part in closing that gap.
    I am committed to clearing a path through the current legal 
roadblocks preventing MEPs from becoming more accessible. 
Additionally, I am equally committed to making sure of adequate 
protection for participants in those plans. I also think it's 
vitally important that as we talk about any new retirement plan 
designs and options, we ensure that stakeholders and advocates 
are fully engaged as we do this.
    The stakes are too high to rush through these issues 
without really thorough feedback. I'm really glad that we're 
having this discussion today, and I think if we can continue to 
work through this in a bipartisan manner to solve the 
retirement crisis, we will have gone a long way in making sure 
that we can help grow our economy from the middle out, not from 
the top down, which is a goal of mine.
    Thank you very much.
    Senator Enzi. Thank you for your comments and your 
leadership on getting something done in this area.
    If the Chairman comes by, we'll have him make some comments 
as well.
    Mr. Mason.

    STATEMENT OF KENT MASON, PARTNER, DAVIS AND HARMAN LLP, 
                         WASHINGTON, DC

    Mr. Mason. Thank you.
    I just want to thank Chairman Enzi, Ranking Member Warren, 
and the subcommittee for holding this roundtable and for 
inviting me to participate.
    I think there are really two core issues here. One is 
expanding the availability of multiple employer plans, MEPs, 
and second is removing a significant obstacle to small 
businesses adopting a MEP. Let's go through those two issues.
    The first--and both of these have been discussed by others 
here--is expanding the availability of MEPs. Under the current 
rules--I think Senator Warren talked about this--the Department 
of Labor requires all employers in a multiple employer plan to 
share a very close relationship, a nexus, other than 
participating in the same plan. What this does is really limit 
the number of small employers that can join together because 
not that many have very many employers with whom they share 
such a close relationship.
    This deprives small employers across the country of the 
ability to band together to achieve the economies of scale that 
large employers have. Like others here, and like the Chair and 
Ranking Member, I would be strongly in favor of eliminating the 
nexus requirement in the context of defined contribution MEPs, 
and that is--and, again, as referenced before--a point that has 
been made on a very bipartisan basis in both the House and the 
Senate.
    The second issue--I think Jim Kais referenced--is 
eliminating what is often referred to as the one-bad-apple 
rule. Under the tax qualification rules, if there are 1,000 
employers in a multiple employer plan, and if one of those 
employers violates the tax qualification rules, the entire plan 
can be disqualified with adverse tax consequences for all 
1,000.
    This can be a very severe obstacle to small, risk-averse 
employers adopting a MEP, because you say to them, ``This has 
some advantages in terms of cost savings,'' and they say, 
``Well, gee, if I do everything right, but somebody out there 
makes a mistake, could I be penalized?'' The answer is, ``Yes, 
very severely.'' That can be a real obstacle for them adopting 
a plan.
    There's no real rationale for this rule. The rule should 
be--and, again, reflected in bipartisan bills--the rule should 
be the person that violates the rule gets hit with the 
sanctions. The innocent employers do not.
    I'm just going to close because I want to--we very much all 
want to get to the interactive portion of this--but by talking 
very briefly about some very interesting research that came to 
fore last week. The TransAmerica Center for Retirement Studies 
president, Catherine Collinson, testified last week, and she 
had done a survey and looked at the employers who do not 
maintain a plan, and she said that of those employers that do 
not maintain a plan, 27 percent are actually considering 
strongly adopting a plan in the next 2 years. But that leaves 
73 percent not considering it.
    She went to those 73 percent, the most reluctant employers, 
and said, ``If you had a low-cost multiple employer plan 
available, would that change your mind?'' Over a fifth of those 
employers said, ``That could very well change our minds. That 
could make a difference.''
    To me, that really resonated in a sense that this one 
change could address more than a fifth of those uncovered 
employers. That would be a wonderful, wonderful start. We have 
a long way to go, and there's no reason to stop there. But if 
we can take that step, it would make an enormous difference.
    [The prepared statement of Mr. Mason follows:]

                    Prepared Statement of Kent Mason

    My name is Kent Mason. I am a partner with the law firm of Davis & 
Harman LLP, and have worked in the retirement savings area for 34 
years. I thank Chairman Enzi, Ranking Member Warren, and this 
subcommittee for examining the important topic of open multiple 
employer plans. I appreciate the opportunity to participate in this 
roundtable and to provide this written statement. I am providing this 
testimony on my own behalf based on extensive discussions and work on 
these issues over the years.
    The core issues before us today are (1) expanding the availability 
of multiple employer plans (``MEPs''), and (2) removing a significant 
impediment to the adoption of MEPs.
                                summary
    Expanding the availability of MEPs. Under Department of Labor 
guidance, all employers participating in a MEP must have a close 
relationship with each other--a nexus--other than participating in the 
same plan. This has severely limited the universe of small employers 
that are able to participate in a MEP because so many employers do not 
have a sufficient nexus with other employers.
    The limited availability of MEPs deprives most small employers of 
the opportunity to band together in a common plan to achieve many of 
the economies of scale enjoyed by larger companies. As discussed in 
more detail below, I believe that the nexus requirement should be 
eliminated in the case of defined contribution plans, as reflected in 
several leading bills, including multiple bipartisan bills. This would 
permit what is often referred to as an ``open MEP,'' i.e., a defined 
contribution MEP that includes unrelated employers.
    Removing an impediment to adoption of MEPs. Under current law, if 
there is a failure to satisfy the tax qualification rules with respect 
to any employer participating in a MEP, the entire MEP is considered to 
have failed to satisfy such rules, triggering extremely adverse tax 
consequences for all the participating employers. This is often 
referred to as the ``one bad apple'' rule.
    One of the main reasons that small businesses are hesitant about 
joining a MEP is this one bad apple rule, i.e., the possibility that 
they could incur substantial tax liabilities due to the actions of 
another participating employer. The possibility of such a result causes 
great concern among small risk-averse businesses that cannot afford new 
and unexpected costs, and do not want to risk their future based on the 
actions of numerous other companies.
    As discussed in more detail below, I believe that the one bad apple 
rule should be substantially repealed, again as reflected in several 
leading bills, including multiple bipartisan bills.
                       beneficial effects of meps
    Data supporting the beneficial effects of MEPs. There is various 
data regarding the extent to which small businesses sponsor retirement 
plans for their employees. But there is widespread agreement on one 
critical point: small business coverage rates are far too low, which is 
jeopardizing the retirement security of millions of employees who work 
for small businesses. The challenge is how to raise this coverage rate.
    In written testimony provided last week before the Senate Special 
Committee on Aging, Catherine Collinson, President of the Transamerica 
Center for Retirement Studies, offered the following insights, based on 
survey data:

          Only 27 percent of companies that do not offer a plan say 
        they are likely to begin offering one in the next 2 years. 
        Among the 73 percent who are not likely to offer a plan, the 
        two most frequently cited reasons are that their company is not 
        big enough (58 percent) and concerns about cost (50 percent). 
        However, in contrast, one in five of them (22 percent) did say 
        they would be likely to consider joining a multiple employer 
        plan offered by a vendor who handles many of the fiduciary and 
        administrative duties at a reasonable cost.

    This data provides powerful evidence that this subcommittee is on 
exactly the right track in focusing on open MEPs. By making MEPs more 
available and more workable, it may be possible to cause as many as 22 
percent of the most reluctant employers to adopt a plan.
                               open meps
    Strong support for the bipartisan approaches to open MEPs. There 
has been substantial discussion of the need to permit open MEPs in 
order to broaden retirement plan coverage. In this regard, the key 
policy discussion has revolved around how to include sufficient 
safeguards to protect employers and participants in open MEPs without 
imposing unnecessary burdens that eliminate the only advantage of MEPs: 
the cost savings achieved by economies of scale. In this regard, I 
strongly support the following bills, which are very similar and are 
generally bipartisan:

     Section 207 of the SAFE Retirement Act of 2013 (S. 1270 
from the 113th Congress), introduced by Senate Finance Chairman Hatch 
(R-UT).
     Section 3 of the Retirement Security Act of 2015 (S. 266), 
introduced by Senators Collins (R-ME) and Nelson (D-FL).
     Section 201 of the USA Retirement Funds Act (S. 1979 from 
the 113th Congress) introduced by then Senator Harkin (D-IA) and 
Senator Brown (D-OH).
     Section 3 of the Retirement Security Act of 2015 (H.R. 
557), introduced by Representatives Buchanan (R-FL) and Kind (D-WI) 
(companion bill to the Collins/Nelson bill).
     Section 17 of the SAVE Act of 2015 (H.R. 4067), introduced 
by Representatives Kind (D-WI) and Reichert (R-WA).

    I was also very pleased that the Administration's budget contained 
a proposal supporting open MEPs. That proposal did, however, impose far 
more burdens on open MEPs than any of the bipartisan bills referenced 
above, and some of the burdens would render open MEPs unusable. 
However, the point of my statement is to emphasize the widespread 
bipartisan agreement and to urge all parties to continue to work 
together to enact a workable bipartisan solution with respect to open 
MEPs.
    In this regard, I offer my views below on the policy background 
that should be taken into account in framing the bipartisan approach.
    Why elimination of the nexus requirement will not create 
opportunities for abuse. The nexus requirement makes great sense in the 
health plan area, but does not make policy sense in the context of a 
defined contribution MEP, as discussed below.
    In the health plan area, a critical concern is the possibility that 
there will be insufficient funds to pay claims. If, for example, a 
multiple employer health plan is underpriced (either inadvertently or 
intentionally in abuse cases), the plan will likely have insufficient 
funds to pay promised claims, which obviously can lead to very adverse 
results. If a plan is marketed to unrelated employers by an 
inexperienced or unscrupulous promoter, the potential for this type of 
result is significant. An inexperienced promoter may price the plan too 
low out of ignorance; an unscrupulous promoter may price the plan too 
low to ``make a fast dollar,'' without regard to the long range 
viability of the plan.
    On the other hand, where a group of closely related employers join 
forces to form and control their own health plan, the potential for 
these adverse effects is far less, since they have every incentive to 
price the plan appropriately or even conservatively. A group of closely 
related employers controlling their own plan is very similar to a 
single employer maintaining a plan; their sole interest is in a viable, 
sound plan. Hence, the nexus requirement makes great sense in the 
health plan area, since it excludes the situations where additional 
oversight is needed.
    In the defined contribution plan area, there is no reason for the 
nexus requirement because the above adverse results cannot happen. In a 
defined contribution plan, no participant has any claim to any assets 
other than the assets actually in his or her account. So by definition 
in a defined contribution plan, the plan's assets generally cannot be 
insufficient to pay promised benefits. Without this potential for 
adverse results, there is no policy justification for the nexus 
requirement.
    One might argue in response that in the defined contribution plan 
area, there is still potential for the plan to be unable to pay 
promised benefits, i.e., in the case of fraud or embezzlement of funds. 
That is certainly true. But it is equally true in the case of a single 
employer plans. In other words, compare the following two situations. 
In case A, 1,000 employers join together in a defined contribution MEP. 
In case B, 1,000 employers maintain single employer plans, and the 
assets of such plan are held in a group trust administered by the same 
fiduciary and recordkeeper. In both cases, the money is held in one 
trust overseen by one fiduciary. The potential for fraud or 
embezzlement is identical.
    In short, there are some who argue that we need to create extensive 
anti-abuse rules for open MEPs to protect against the problems that 
have occurred in the health plan area. The two types of plans are not 
comparable at all, so these arguments cannot withstand scrutiny.
    Why not adopt strict requirements on open MEPs to be sure to 
prevent abuse? If burdensome requirements are applied to open MEPs, 
this will simply defeat the purpose of the open MEP legislation. In 
other words, the point of permitting open MEPs is to facilitate a means 
for small employers to band together to achieve economies of scale and 
thus reduce the cost of maintaining a plan. If numerous new burdens are 
added to open MEPs, the cost savings can be more than offset by the 
extra expense of the new burdens. The result would be open MEP 
legislation that virtually no one would use.
    As noted, in my view, the numerous bills referenced above apply 
appropriate protections and do not include unnecessary burdens that 
would make open MEPs unusable.
    Preserve ``closed'' MEPs. All of the bills cited above share 
another key feature. The additional safeguards applicable to open MEPs 
do not apply to ``closed MEPs,'' i.e., MEPs that satisfy the nexus 
requirement. These MEPs exist today, are serving a critical function 
for their participating employers, and have a great track record of 
success. Accordingly, the bills preserve the law applicable to closed 
MEPs without adding any additional requirements that would only add 
costs and burdens to a system that is working well. This is a very much 
needed element of any legislation with respect to open MEPs.
    Level playing field. The Department of Labor has issued guidance--
without public notice and comment--permitting States to maintain open 
MEPs in which private employers may participate. It is important for 
Congress to restore a level playing field here by permitting both State 
and privately sponsored open MEPs under a uniform set of rules. Without 
a level playing field, a segment of the market could move away from 
private providers to a single government provider, thus undercutting 
price and quality competition and innovation.
                           one bad apple rule
    The one bad apple rule is an overly punitive rule that inhibits 
adoption of MEPs. If one noncompliant participating employer in a MEP 
can trigger enormous tax liabilities for all other participating 
employers, that can understandably prevent employers from participating 
in a MEP, even if the risk of actual disqualification of the MEP is 
remote as a practical matter. Fortunately, there is widespread 
bipartisan agreement that this problem needs to be fixed, as evidenced 
by the fact that the following bills would prevent the adverse 
application of the one bad apple rule:

     Section 207 of the SAFE Retirement Act of 2013 (S. 1270 
from the 113th Congress), introduced by Senate Finance Chairman Hatch 
(R-UT).
     Section 3 of the Retirement Security Act of 2015 (S.  
266), introduced by Senators Collins (R-ME) and Nelson (D-FL).
     Section 3 of the Retirement Security Act of 2015 (H.R. 
557), introduced by Representatives Buchanan (R-FL) and Kind (D-WI) 
(companion bill to the Collins/Nelson bill).
     Section 16 of the SAVE Act of 2015 (H.R. 4067), introduced 
by Representatives Kind (D-WI) and Reichert (R-WA).
     Section 202 of the Retirement Plan Simplification and 
Enhancement Act of 2013 (H.R. 2117 from the 113th Congress), introduced 
by Representative Neal (D-MA).

    These bills do vary in one respect. They vary on whether the one 
bad apple rule should be modified legislatively or administratively 
through a legislative direction to Treasury to fix the problem. Both 
approaches are reasonable, and I would support both. However, based on 
recent discussions with the government and private sector, I would 
recommend resolving this issue legislatively. The Hatch bill provides 
an excellent framework for this approach, as it carefully delineates 
where the one bad apple should and should not apply. Specifically, if 
the violation of the qualification rules is triggered by the actions or 
inactions of one or more participating employers, the one bad apple 
rule should not apply. But if the violation is attributable to the 
actions of the plan administrator, the one bad apple rule should 
continue to apply as an incentive for compliance. We believe that this 
approach properly balances the need for incentives to comply with the 
need to avoid punitive sanctions that discourage employers from 
participating in a MEP.
    This relief with respect to the one bad apple rule should apply to 
both open and closed MEPs, as under the bills referenced above.
                        additional related issue
    New and innovative ideas are being developed to facilitate the 
adoption of retirement plans by small businesses. Under one new 
approach, service providers have developed a way to streamline plan 
administration by establishing a common administrative framework for 
small business retirement plans. This is achieved by offering 
retirement plans to small businesses across the country with a common 
trustee, a common named fiduciary, a common plan administrator, a 
common set of investment options, and a common recordkeeper. So any 
small employer participating in this arrangement would have its own 
plan, but the administrative framework would be the same as the 
framework for potentially thousands of other small business plans.
    Under current law, each of these small business plans must file a 
separate Form 5500, even though much of the information in every one of 
the Form 5500's is identical. This is an unnecessary expense, and 
unfortunately a material expense.
    The problem can be easily solved. The Department of Labor and the 
Treasury Department could be directed to revise the rules regarding 
Form 5500's to permit a single Form 5500 to be filed by the common plan 
administrator of defined contribution plans that also have a common 
named fiduciary, recordkeeper, investment menu, and trustee. DOL and 
Treasury would be authorized to require such single Form 5500 to 
contain such information about the separate plans as is necessary or 
appropriate to ensure that DOL and Treasury do not fail to receive 
needed information. In short, DOL and Treasury would be directed to 
eliminate the wasteful duplication that occurs today but without giving 
up any valuable information.
    This proposal is not intended to replace or undermine the above 
proposals to facilitate wider usage of MEPs. On the contrary, 
experience with small employers indicates that different small 
employers may be drawn to different approaches--MEPs or similarly 
structured single employer plans. Accordingly, this proposal would 
supplement the MEP proposals by eliminating an unnecessary expense for 
small employers that pursue the latter approach.
                               conclusion
    I applaud this subcommittee for holding this roundtable. We have 
broad bipartisan agreement on MEP reforms that will materially increase 
retirement plan coverage among small employers, as evidenced by the 
survey by the Transamerica Center for Retirement Studies. Several of my 
clients and I stand ready to do whatever we can to help turn this 
agreement into enacted legislation. Thank you for the opportunity to 
present this statement.

    Senator Enzi. Thank you.
    Ms. Varnhagen.

      STATEMENT OF MICHELE VARNHAGEN, SENIOR LEGISLATIVE 
              REPRESENTATIVE, AARP, WASHINGTON, DC

    Ms. Varnhagen. Thank you for inviting me to testify on 
behalf of AARP. AARP for a long time has supported encouraging 
or requiring employers to sponsor a retirement plan. It's been 
a longstanding challenge to make it easy and affordable for 
small employers to offer retirement savings plans. But, 
fortunately, because of technology advances and emerging ideas 
like multiple employer plans, we are close to devising an easy 
and effective retirement option for small employers and their 
employees.
    In the absence of congressional action, though, AARP has 
been working at the State level with State and local leaders to 
consider what can be done at the State level. You may know that 
several States have enacted statewide retirement reforms, 
including Connecticut, Illinois, Maryland, Oregon, and 
Washington State, and over a dozen other States are considering 
similar types of laws or are undergoing feasibility studies to 
see what is possible. Federal open MEPs have many elements in 
common with what is going on at the State level, and we believe 
that both activities can complement each other.
    For consumers and employers, the key is to make sure that 
there is a licensed and qualified entity that is acting in 
their interest to offer high-performing, low-cost investment 
options. Actually, I want to address for a second--we all agree 
that rules like the commonality rule and the one-bad-apple rule 
can be eliminated.
    But it probably would be helpful to understand why those 
rules exist in current law. The reason why the law has always 
required some commonality in a multiple plan has been because 
if the employers don't have some shared interest, then when 
something goes bad, there's nobody to look out and make sure 
that the plan is acting in everybody's best interest. So if 
Congress is going to eliminate those rules, some additional 
protections will be needed to offset them.
    From the employees' point of view, employees want automatic 
payroll deduction. They want appropriate investment choices and 
default investments. They want low and transparent fees, and 
they want safe access to their money.
    Several bills have been introduced at the Federal level 
that would eliminate some of the rules that have existed for a 
long time, as we mentioned. But most of the bills that have 
been introduced require small employers to continue to 
prudently select and monitor the MEP and the providing firms. 
In addition, some of the industry folks have also proposed 
creating a model MEP that would lessen the burden on small 
employers.
    AARP believes that Congress or the Department of Labor has 
to determine what the key features of a MEP should be, 
including the type of entity that can sponsor a MEP. Basically, 
there are two main choices. In option one, an unbiased entity 
would sponsor the MEP. It could be a not-for-profit 
organization, a professional association, an independent 
financial advisor, or a State or local government.
    A second option would be to let financial service firms 
sponsor MEPs. But if Congress is going to permit financial 
service firms to sponsor these entities, then you do need 
additional consumer protections to ensure that the financial 
service firms are both serving as fiduciaries, offering a 
prudent selection of retirement investments, and charging 
reasonable fees.
    Once you let financial service firms sponsor MEPs, it just 
opens a lot of doors to conflicts of interest, and then it puts 
the burden back on the small employer to have to determine 
whether the MEP is acting in their interest and in the 
interests of their employees, and you're back in the situation 
where we are in current law.
    AARP believes that any MEP should agree to act in a 
fiduciary capacity and comply with ERISA's longstanding 
consumer protections. If Congress doesn't require the MEP to 
act as a fiduciary, then there need to be some limits on the 
types of investments that can be offered through the MEP and 
the types of fees that can be charged.
    Most retirement experts would primarily limit investments 
to target date funds, balance funds. There are some experts for 
short-term investments that would limit it to also include 
money market funds. Actually, there is an article in today's 
New York Times. There's an op-ed that might be interesting to 
the committee, where Steve Rattner, who is a well known 
financial expert, recommended many of the things that we're 
talking about here today.
    Finally, if there's not going to be a fiduciary that's 
acting in the MEP, Congress would need to establish limits on 
administrative and investment fees. Most of the States that 
have started to enact these laws have set total fees limits at 
either .75 percent of 1 percent or 1 percent. In the market 
today, you can find retirement investments that have fees as 
little as .02 percent or as high as 4 percent. There's a very 
wide range of charges.
    But, increasingly, fees are coming down, and I think most 
experts nowadays agree that being somewhere between .75 percent 
and 1 percent is a reasonable total fee. Usually, most 
financial firms will negotiate on fees, but only if there's an 
employer or some entity that is going to ask them to negotiate. 
If Congress doesn't set limits on the types of investments and 
the fees, then each multiple employer plan or each small 
employer is going to have to negotiate what fee levels, what 
investments, which just adds to the program complexity and its 
success.
    Finally, we hope that all the different consumer 
protections that have always existed in ERISA, that Congress 
will make clear which ones the MEP has to undertake versus 
which ones the small employer would still carry out. But we do 
think that the more Congress can create a MEP that will act in 
the best interest of the employers and the employees, it can be 
a successful model, and we look forward to working with the 
committee to try to find that balance.
    Thank you.
    [The prepared statement of Ms. Varnhagen follows:]

                Prepared Statement of Michelle Varnhagen

    AARP, with its nearly 38 million members in all 50 States and the 
District of Columbia, Puerto Rico, and U.S. Virgin Islands, is a 
nonpartisan, nonprofit, nationwide organization that helps people turn 
their goals and dreams into real possibilities, strengthens communities 
and fights for the issues that matter most to families such as 
healthcare, employment and income security, retirement planning, 
affordable utilities and protection from financial abuse. We have been 
working for decades, at both the Federal and State levels, to expand 
and improve coverage under the private retirement system. While 50 
percent of the workforce is fortunate to have access to a retirement 
plan, 50 percent do not have a retirement plan at work.
    AARP has long supported encouraging or requiring employer 
sponsorship of retirement savings vehicles. We need a strong and 
adequate retirement system to accumulate sufficient income to live in 
retirement. Social Security provides a strong base of income, but 
Social Security was never intended to be the sole source of retirement 
income. Workplace retirement plans have the greatest potential to 
provide additional income through regular paycheck withholding and 
investment in an appropriate retirement vehicle.
    Having access to a workplace retirement plan makes workers 15 times 
more likely to save. When employees are offered a plan, about 70 
percent voluntarily participate. Even better, when workers are 
automatically enrolled in a plan, with the option to opt out, 
participation jumps to about 90 percent. The growing body of behavioral 
research also has demonstrated the importance of professionally 
managed, diversified, and low cost investment portfolios to overcome 
our personal biases, including tendencies to buy high and sell low, 
failure to rebalance and lack of portfolio diversification, and even 
the inability to make decisions if presented with too many choices.
    Large employers have largely understood and adopted such savings 
plans for their workers though even large employers could do more to 
include less than full-time workers. As 401(k) type plans have become 
the main source of workers' retirement income, large employers have 
learned how to offer a mix of different appropriate retirement 
investments with low total fees.
    It has been a longstanding challenge to make it easy and affordable 
for small employers to offer retirement savings vehicles to their 
employees. Although there are many available options, including defined 
benefit, 401(k), SEPs, Simples, payroll deduction IRAs, etc--the 
choices can be confusing and lead to inertia among employers. Small 
employers often do not have human resource departments or access to 
trusted experts. Fortunately, through technology advances and emerging 
ideas like private and State and local government open multiple 
employer plans (MEPs), we are close to devising an easy and effective 
retirement option for small employers and their employees.
    AARP has supported a variety of Federal legislative proposals to 
expand retirement savings options such as Automatic Individual 
Retirement Accounts (IRAs) for employers that do not offer any 
retirement plan. We also have supported tax credits to encourage small 
employers to set up plans, including for administrative costs and 
employer contributions. And we have supported credits to help lower 
income workers save, such as the Savers credit. We also believe that 
proposals such as the President's MyRA initiative, opening retirement 
plans to part-time workers and lifetime income disclosures are worthy 
of legislative support.
    In the absence of Federal action, AARP has been engaging interested 
State and local leaders to consider what can be done at the State 
level. Increasingly, States are realizing that if retired individuals 
do not have adequate income, they are likely to be a burden on State 
resources such as housing, food, and medical care. Several States have 
already enacted statewide legislative reforms, including Connecticut, 
Illinois, Maryland, Oregon and Washington. Massachusetts passed a law 
providing a plan for non-profit organizations. California passed 
legislation to create a program that is under development, with a vote 
on a finalized plan expected in 2016. Over a dozen other States are 
actively considering similar types of laws or feasibility studies.
    AARP has had many conversations with stakeholders and is pleased to 
help develop what is being called an open multiple employer pension 
(MEP) model. Federal open MEPs have many elements in common with 
ongoing State actions, and we believe both efforts have merit and can 
complement each other. With both efforts, we also need to make sure 
that the model works not only for individuals saving for retirement, 
but for employers, private providers and government.
    For consumers and employers, the key is to make sure there is a 
licensed and qualified entity that is acting in their interest to offer 
them high performing low cost investment options. Employees want 
automatic payroll deduction, appropriate investment choices and default 
investments, low and transparent fees, and safe access to their assets. 
At retirement, employees want distribution choices, including lifetime 
income payments such as a fixed annuity, phased withdrawal options, or 
a combination of both.
    The potential advantage of MEPs is the ability to lower costs for 
employers and participants through pooled size and bargaining power. 
However, Congress should establish the framework to ensure that 
participants benefit from the economies of scale derived from pooled 
investments and group pricing, comparable to similar groups in the 
marketplace. Several bills have been introduced that would eliminate 
the commonality requirement among employers in a MEP, but most continue 
to require small employers to prudently select and monitor the MEP and 
providers. Some industry firms have proposed creating a model MEP to 
further lessen the burden on small employers. Either Congress or DOL 
should determine the key features of ``certified'' MEPs in a manner 
that will deliver affordable and appropriate retirement investments and 
benefit employees, employers and financial service firms.
                       key mep feature decisions
    Congress should decide what type of entity may sponsor a MEP. There 
are two main choices. Option #1 would permit unbiased entities to serve 
as MEPs, such as not for profit organizations, professional 
associations, licensed financial advisors, or State or local 
governments. Option #2 would permit financial services firms to 
establish MEPs. None of the introduced bills are definitive on the type 
of entity that may sponsor a MEP. Option #1 would require an unbiased 
entity to shop around for and negotiate a mix of the best financial 
service firms, retirement investment products and affordable fees. 
Under Option #2, Congress or the Department of Labor should adopt 
strict consumer protections to ensure the financial service firms serve 
as fiduciaries, offer only a prudent selection of retirement 
investments and charge reasonable fees. Otherwise, Option #2 could open 
a Pandora's box of conflicts of interest and leave small employers and 
their employees with the burden of determining whether the MEP served 
their retirement interest or not, similar to the problems faced under 
current law.
    In addition, Congress should make clear any MEP entity should:

    1. Timely receive and invest employee and, if permitted, employer 
contributions;
    2. Administratively track contributions, investments, and payments;
    3. Solicit bids and negotiate with appropriate retirement 
investment firms;
    4. Prepare and distribute understandable plan documents to 
employers and employees;
    5. Train staff to answer employer and employee questions and 
resolve disputes; and
    6. Obtain adequate liability insurance and, if required, bonding.

    Any MEP should agree to act in a fiduciary capacity and comply with 
ERISA's longstanding consumer protections. All moneys should be held in 
trust and timely transmitted for investment and to pay benefits to 
participants. Plans should prudently select and monitor all investment 
options. The introduced bills generally permit or require small 
employers to act as the main fiduciary. We know that most small 
employers do not want or cannot effectively carry out this fiduciary 
responsibility.
    If Congress does not require the MEP to act as a fiduciary, then it 
or the Department of Labor should restrict the types of investments and 
limit the maximum fees that may be charged. Most retirement experts 
primarily would limit investment options to target date funds (TDFs) or 
balanced funds.\1\ Although TDFs are more popular, recent research has 
found balanced funds can also provide better returns at lower fees over 
most periods of time. Some experts would include money market funds or 
MyRA for small or short term accounts. An alternative approach would 
provide priority to TDFs and balanced funds, but afford workers the 
option to select additional types of investments if they affirmatively 
choose to do so. Permitting MEPs to offer every type of retirement 
investment without any prioritization is least likely to be effective. 
AARP strongly prefers the first or second option.
---------------------------------------------------------------------------
    \1\ Pensions & Investments, ``2030 target-date strategies continue 
to underperform a 60/40 strategy,'' May 5, 2016.
---------------------------------------------------------------------------
    Similarly, Congress or DOL should establish limits on 
administrative and investment fees. Again, the more government entities 
establish clear and fair rules, the more likely the system will be 
understandable and effective. Most of the States enacting laws have set 
total fee limits, either at .75 percent or 1 percent. In the market 
today, there are retirement investments that include investment charges 
of as little as .02 percent or as much as 4 percent, but increasingly 
fees are dropping and .75-1 percent is considered a reasonable maximum 
total fee for all services (including administration and investment). 
Most financial firms will reduce fees, but only if an employer or 
another party negotiates it. Even a 1 percent fee can reduce retirement 
savings by as much as 30 percent over a 20-30 year period. If Congress 
or DOL does not set fee limits, each MEP or small employer will have to 
negotiate fee levels which will affect program complexity and success. 
Imposing a fee maximum balances the interests of employees, employers 
and the financial service firms.
    AARP also believes any MEP proposal should make the rights and 
responsibilities of each of the parties clear in the following 
suggested ways:
                       employer responsibilities
    Employers should be required to timely transmit payroll 
contributions to the MEP and distribute MEP materials to employees. 
MEPs must be able to timely and effectively receive and collect 
contributions and to provide timely and plain language resource and 
educational materials that aid employees in participation.
    Employers also should be required to continue to comply with 
ERISA's requirements for fair participation of all qualified employees. 
If employer contributions are permitted or required, immediate or 1-
year vesting should be the standard. MEPs also could continue to accept 
after-tax contributions from employees after a change in jobs.
                     dol oversight and enforcement
    All MEPs should be required to register with DOL. There should be 
clear rules as to which entity, the employer or the MEP, will file plan 
documents and annual financial statements with participants and 
necessary government agencies. The MEP should list all participating 
employers so that employees can check their benefit eligibility. The 
Department of Labor should have clear authority to audit any MEP and 
ensure it is in compliance with all legal requirements. The bills 
introduced permit DOL to establish simplified MEP reporting rules, but 
AARP does not believe there should be limited reporting since the MEP 
and not the small employer likely will submit the reporting. Reporting 
should be sufficient so that DOL, employers and employees can 
understand plan operations for the year.
    If the employee or employer has problems with an investment 
provider or the MEP, they should have easy access to DOL for assistance 
and help with resolving problems.
    Most of these consumer protections currently exist in ERISA, but 
Congress needs to specify which functions remains the responsibility of 
the small employer and which will be carried out by the MEP. The easier 
Congress makes it for small employers, the more likely they are to use 
a MEP or similar option.
    We look forward to working with the committee on the ideas 
discussed today and other proposals to expand retirement coverage and 
adequacy to the tens of millions of Americans who need access to 
workplace retirement savings vehicles.
    Thank you for this opportunity to share AARP's views.

    Senator Enzi. Thank you.
    Senator Scott, I appreciate your attendance here, and I 
know you've got some background in this field. If you want to 
address a question, or if you want me to go ahead and see if 
any of them want to rebut anything that anybody's already 
said----

                       Statement of Senator Scott

    Senator Scott. I'll let the rebuttal happen after I ask a 
couple of quick questions with your permission, sir.
    Senator Enzi. OK.
    Senator Scott. Thank you for providing us an opportunity to 
have this conversation around how to create access to 
retirement plans for more employees. Frankly, I think the 
number is 60 percent of employees who work at a firm with 20 or 
fewer employees. The challenges that we face are only going to 
get worse and not better as time moves on.
    As a small business owner for 15 years myself, I think 
about the actual hurdles. Sometimes, the hurdles that we see in 
Washington aren't exactly the same hurdles that you see in the 
rest of the world. From my perspective, the average small 
employer with 20 employees or less doesn't have the time or the 
inclination to invest in this process of understanding and 
appreciating the actual liability exposure and risk. Couple 
that with the fact that most employees of those firms really 
will need to have payroll deduction as the most important 
component for them making the decision to save for their own 
retirement.
    On top of that is the fee structure. Whether it's open MEPs 
or the simplified 401(k), the fee structures have actually gone 
down substantially or significantly, but the marketing 
necessary to inform the small business owner has not gone up. 
What we really have is a vacuum that seems to exist in the real 
world, where the vast majority of small employers are spending 
more time trying to figure out how to make their ends meet and 
perhaps would need more expertise on what's available in the 
marketplace and how do you bring that into your place of 
business.
    Those are the kinds of questions I would love for us to 
address. First, how do we make sure that the average employer 
is aware of the decisions being made on their behalf to open up 
the process? Second, I think a lot of the notion of commonality 
was driven by the health insurance industry when the SIC, the 
SIC codes, were necessary to have a common process of 
understanding the risk associated with making a decision to 
insure someone--very different in a 401(k). I'm not sure that 
we've bifurcated or decoupled that conversation.
    Mr. Mason, I see you shaking your head. I think that's 
really an important part of the consideration.
    Mr. Mason. I second everything you just said. One is you're 
absolutely right--the considerations in the health area. These 
multiple employer arrangements raise all sorts of difficult 
problems in the health area. We are not here to advocate for 
those whatsoever. The issues in the defined contribution world 
are much, much different and----
    Senator Scott. Simple, comparatively speaking.
    Mr. Mason [continuing]. The potential for problems and 
abuses is immensely different. I do want to get back to how can 
we help. I think Michele did a great job in terms of walking 
through some of the issues.
    One of the key problems--and I think it addresses your 
issue, Senator Scott--is that what the MEP can offer is the 
ability--it's true that the small employer is not going to be 
able to monitor very effectively this national financial 
services firm that's offering a plan. In the single employer 
context, that's technically the duty, but it is very hard, and 
it's intimidating.
    But in the multiple employer plan context, under the bills 
and in practice, there is always a third party independent 
fiduciary--and typically a trade association--that's inserted, 
and that makes an enormous difference, because what it does is 
it allows that third party independent fiduciary to effectively 
oversee the financial institution. So you can say to the small 
business owner, ``You don't have the obligation to oversee the 
financial institution. You have the obligation to oversee that 
one third party named fiduciary.'' That's clear under the law. 
It's clear under the bills.
    It accomplishes two things. There's a watchdog for the 
financial institution, which there needs to be, and I agree 
with Michele on that. There needs to be. Second, what it does 
is it relieves the small employer from doing something they're 
not really capable of doing, and it allows them to say, ``I can 
just oversee this one entity, and I can leave the rest to the 
experts, and I can do my business, write the checks, make sure 
I get the right information to people.''
    Hopefully, that's responsive to your question.
    Senator Scott. It certainly is.
    Mr. Mason. That would be a big step forward.
    Senator Scott. Before we hear from you, ma'am, may I just 
ask Mr. Stacey to comment on Mr. Mason's comment as it relates 
to the opportunity to provide that bridge from a fiduciary 
standpoint to a trade association?
    You were talking earlier in your opening comments about the 
number of different organizations that are not necessarily 
related being a part of the MEPs that you've been involved in. 
Is there a bridge where multiple associations or trade 
associations could group together in the plan that you were 
talking about earlier? Or is that what occurred?
    Mr. Stacey. No, that's not what occurred. To maybe take a 
moment to give a little bit of a background on how we even came 
to be dealing with an open MEP, in 2005, our firm--we're an 
accounting firm--was approached by Mass Mutual, by a regional 
representative of Mass Mutual, who we had numerous common 
clients with. In this common give-and-take, back-and-forth 
conversation with that representative, we were talking about 
various services that we offer as an accounting firm to 
clients, and payroll services came up.
    That prompted a discussion about a Mass Mutual client in 
Texas, I believe it was, who was a payroll provider that 
provided an open MEP to their clients. Since we provided 
payroll services to our clients, then the Mass Mutual 
representative thought of, ``Well, this might be a good fit for 
your small business clients.'' That was kind of the genesis of 
getting that started. There wasn't any trade association or 
anyone else that was overseeing it.
    We considered it for a good period of time. Our firm, as a 
little bit of history, used to be a branch office of RSM 
McGladrey, now RSM US, a large national accounting firm. But 
ever since our independence from them in 2000, we've always 
been a network firm of theirs, so we have their expertise to go 
to for certain areas that might be outside of our common day-
to-day practice.
    We went to them, consulted with them, and they put together 
a multiple employer individually designed plan document. Then 
our office, along with the local Mass Mutual representatives in 
our community, really mined our own client database, our 
contacts in the community, to see who might be a good 
opportunity to offer that type of plan to. There wasn't any 
organization that was pushing it for us. We had one of the 
large national providers come to us and say that this might be 
an opportunity for small businesses that don't have anything.
    That's essentially how we got into it, and we had a broad 
array of employers that were in it. When I list a few of these 
off, they have no commonality other than that they were in that 
geographical region, and they were working with us. We had an 
agricultural association, commercial printer, various types of 
construction companies, a small law firm, a small plumbing 
shop, a property manager, and then several retailers, like a 
furniture store, an independent pharmacy, a number of those, 
and there's no commonality.
    Like one of my colleagues up here was talking about, those 
businesses, being part of our small community, had no 
commonality other than they were local entrepreneurs that were 
offered an opportunity for a plan, and they took it. We 
operated it for a number of years.
    Senator Scott. Mr. Chairman, the one thing I would 
suggest--that the common bond that exists perhaps exists 
through different sources. Whether it's a trade organization or 
an accounting firm, providing from a retirement opportunity a 
common bond, to not be necessarily the single definition that 
we see through the Department of Labor, is an important 
ingredient for us to achieve success. If, in fact, Senator 
Warren said that we have one-third of the country close to 
retirement with not a penny in savings and another third 
without 1 year of their annual income in savings, the ability 
to redefine nexus perhaps will be an important part of our 
engagement, and we've made some progress on that already.
    Thank you.
    Did you have any comments, ma'am?
    Ms. Varnhagen. The only thing I was going to add is that, 
even a lot of very small firms have payroll service providers 
these days. Even the smallest firm can use Turbo Tax or ADP or 
Paychecks. There are a lot of firms out there, and they do do a 
lot to educate small firms about what the retirement options 
are, healthcare options--that's another avenue that can be used 
to help educate, so that small employers know what the options 
are.
    Senator Scott. Yes, ma'am. Thank you.
    Thank you, Mr. Chairman.
    Senator Enzi. Thank you.
    I have kind of a tendency as an accountant to go into some 
of the technical things. So if I see people in the back going 
to sleep, I'll change tactics a little bit.
    [Laughter.]
    Senator Enzi. One of the things I had to do was fill out 
the Form 5500 for some employers, and it fascinated me--and I 
don't know whether this has changed or not--but the same 5500 
was used for reporting on 401(k)s and on health insurance, and 
the questions didn't make sense for either of them.
    Are there some difficulties with that Form 5500 still? It's 
been a long time since I filled one out, but I can't imagine 
any small employer having to do that by themselves.
    Mr. Stacey.
    Mr. Stacey. Mr. Chairman, I would invite you to look at the 
most recent version of the Form 5500. Many of our small 
employers are eligible to file a Form 5500-SF, standing for 
Short Form. As with many reporting and disclosure requirements, 
that grows over time. The SF form came out within the last 10 
years and is now growing again. The IRS essentially increased 
the size of that filing by about another additional page, 
initially to be effective for the 2015 reporting year that we 
would be working on right now.
    Because of industry pushback and concerns about some of the 
more invasive nature of the questions being asked on there, 
they've postponed it at least for the 2015 plan year. But I 
would invite the panel to look at that form, and I would 
suggest that revisions be made to that to make it something 
that is essentially doable.
    One of the questions I recall, now that I'm thinking about 
it--I don't remember if this was a proposed question or if this 
is actually on there. But they wanted to know what the tax 
deduction was that was taken on the business' tax return. 
Unless you're an accounting firm like us that is preparing the 
business' tax return, you may not know if the tax return has 
been prepared yet and what that number was that was put on 
there. So that one question alone will delay the filing and 
potentially cause errors on that return.
    That's just one small example of some of the issues on 
there. But I'd invite you to look at the nature of the form 
now.
    Senator Enzi. I will. I'm fascinated by the form.
    Mr. Mason.
    Mr. Mason. There is one area that I think both Jim and I 
highlighted in our testimony, which I think would be a great 
change in the 5500, and that is--again, service providers are 
trying in a lot of different ways to reduce costs and increase 
uniformity and simplicity. One of the ways they're moving is 
to--since they can't have an open MEP today--is trying to make 
the single employer plan much more efficient, have a single 
trustee, single plan document, single recordkeeper, single menu 
of investment options, so that everything is very uniform, and 
so you can bring in one after another small employer, and they 
each have their own plan, but they're on the same document, the 
same trust, and they're all separately record kept--
tremendously efficient.
    But there's one source of significant inefficiency there, 
and that is if you have 1,000 single employers with all these 
commonalities, they file 1,000 5500's, most of it duplicative--
no purpose to that. Actually, it sounds like a nothing, but the 
cost of a 5500 for these small employers is a marginal cost 
that can make a difference between doing a plan and not doing a 
plan.
    That is an area which we would encourage you to--not in 
lieu of the multiple employer stuff, because that can even 
achieve greater efficiencies, but in addition to, so that 
employer that chooses its own plan doesn't have to have all 
these duplicative costs and duplicative 5500's. You have a lot 
of my sympathy for working on 5500's.
    Senator Enzi. If we go to the open MEPs, will that make the 
audit easier, then, too, or more difficult?
    Mr. Mason. It has a tradeoff here. I think in terms of what 
it would do is it would say that there would be an audit with 
respect to the entire plan. In other words, today, if you have 
under 100, and you're a single employer plan, you don't have an 
audit. But if you have a bunch of 50 employee plans getting 
together, and they get well over 100, that MEP would have an 
audit.
    I know that, Jeff, you had some views on the audit issue, 
and I don't want to step on your toes here, because you may 
want to jump in. From a government perspective, there are 
strengths to having the audit, you ensure that the assets are 
there and they're being protected. It also has a cost, and 
that's a tradeoff as to how you might view that. But it does 
have a material effect. Going to an open MEP means the entire 
plan would have an audit.
    Senator Enzi. Thank you.
    Jeff, did you want to comment?
    Mr. Stacey. Just to briefly touch on the audit question, 
for three of the 5-years that our MEP was in existence, we did 
have an outside independent audit done of the plan, because it 
quickly rose above initially the 120 participant threshold, and 
it was never backed down below 100 participants until the plan 
was terminated. The audit, functionally, for us, because we 
were extremely hands-on--which I doubt a larger provider like a 
TransAmerica or another company that has hundreds or thousands 
of individual employers feeding into this--they wouldn't have 
the ability to be as hands-on as we were, because we were very 
concerned over the one-bad-apple issue in the way that we ran 
the plan.
    From an audit perspective, we readily had the information 
available for the independent auditor when that came along, so 
it wasn't that big of an impediment for us. But if the plan had 
continued to grow and had been on the scale of a more regional 
or national plan, I can see where a lot of the information 
that's required would be difficult to provide.
    Senator Enzi. Mr. Kais, did you want to comment on that?
    Mr. Kais. Yes. I don't see the audit necessarily as an 
impediment. Particularly, as the pooled arrangement grows, it 
becomes a fraction of the cost of running the arrangement and I 
think it can provide some useful information.
    I would also say we've scaled our business, and I think our 
body of work is pretty good as it relates to increasing 
coverage to the tune of almost 12,000 businesses today. We 
haven't had any difficulties in our closed multiple-employer-
plan business. The price or the cost of running the collection 
of single employer plans that Kent mentioned is a little bit 
higher than our closed MEP because of those individual 5500's.
    I just wanted to give a little more texture to that 
discussion.
    Senator Enzi. Thank you.
    Senator Warren, did you want to ask a question?
    Senator Warren. Yes, Mr. Chairman. Thank you.
    I wanted to dive in a little bit, if I could, into the 
Massachusetts plan, just because it gives us an example, a very 
concrete example, about a need and at least how we addressed it 
and what you've seen from that. We start with the fact that 
roughly half of all employers offer no plan at all. In 
Massachusetts, we saw this as a problem, and we particularly 
identified the fact that small nonprofits, nonprofits that had 
20 or fewer employees--that the proportion that were offering 
plans was very, very small.
    Maybe I could just start there, Mr. Favorito. You're the 
one responsible for setting this up, so you saw what the lay of 
the land was before Massachusetts stepped in here. What was the 
principal reason that these small nonprofits had no employer-
sponsored plans? It wasn't that they didn't care about their 
employees.
    Mr. Favorito. I think we would echo a lot of the commentary 
from Senator Scott made earlier in terms of--especially when 
you're dealing with nonprofits of that size, who, between being 
engaged in fundraising or grant writing and providing the 
services that they have to provide, whether it's nursing 
services or social services or taking care of elders, they're 
not going to have the resources to dedicate specifically to 
that particular function, per se.
    Then when you add on--whether it's learning about the 
process or the implementation, whether it's about learning 
about the administration and the complications of the filings 
that are required, the audits that might be required if they 
grow in size, the issues around fiduciary obligations they 
might incur going forward. From our conversations with the 
representatives of the nonprofits in the Commonwealth, it's not 
a lack of desire. It's an inability to be able to do what they 
would like to do, execute on a plan, because of the lack of 
resources and the cost, in light of everything else that they 
have to do on a day-to-day basis.
    Senator Warren. They just can't get from here to there in a 
cost-effective way. Let me just ask--we did this with small 
nonprofits. But is there anything special about nonprofits, or 
would this apply to small businesses, generally?
    Mr. Favorito. No, I think the nonprofits that we're looking 
at to implement the plan--we were piloting it because of the 
fact that there was certainly a commonality of interest in 
terms of the nonprofits themselves. They are such a big sector 
in the economy. But I think the same characteristics would 
apply to any small business of that same size.
    Senator Warren. Let me ask about the benefit side of this. 
Massachusetts has set this up and brought all of these small 
employers together, and you go out and negotiate on behalf of 
all of the small employers collectively. Do you get a better 
deal for those employers and their employees than if each of 
those employers had been trying to negotiate on their own?
    Mr. Favorito. The goal as we're developing the plan design 
and as we look to start implementing this is to leverage from 
the experience that we've had, especially with our 457 plan, 
whether it's how we secure the investment managers, whether 
it's the fees associated with the different investment vehicles 
that we have, whether it's having a central source of 
information for purposes of audits and things of that nature. 
We're trying to leverage all that experience over the last 40 
years and apply it and apply the economies of scale to the same 
exercise or the same pilot here with the nonprofits.
    We think we have a model that has worked, that has 
benefited the participants as well as the employers in terms of 
the options that are available to them, whether it's investment 
options and the costs that go along with it, and we want to 
leverage that.
    Senator Warren. By letting them pool, you not only can 
bring down on the cost side, but you can now negotiate for a 
package that is a better package than any one employer could 
do. I just want to ask how much this applies. Compare it for 
me, if you will. Suppose a half dozen employers got together? 
We're talking some about these very small multiemployer plans, 
compared with, say, what we've done in Massachusetts, where 
we've opened it up to a large number of people.
    Are there cost benefits, negotiation benefits that you 
have, even over small multiemployer plans? I'm just trying to 
get the economies and the benefits that come with larger size.
    Mr. Favorito. By way of example, in terms of--with our 457 
plan, the average investment management fee for that is under 
40 basis points. If we can get to that or anywhere near that 
with regard to the nonprofits, I think it would be a success.
    Senator Warren. All right. Good. I really appreciate it. 
That's very helpful.
    Senator Enzi. On the same topic, is there a conflict, or is 
the state-run plan able to coexist peacefully with the private 
sector plans, the small business plans? Are there conflicts 
there?
    Mr. Favorito. That chapter is yet to be written. I think 
we're all pursuing the same goal, the same objective, in terms 
of making the plans accessible. I think there certainly seems 
to be enough space for all the participants involved. I think 
we share a lot of common examples and common history in terms 
of trying to provide these benefits. I think we can work in 
tandem, if given the opportunity to do it.
    Senator Enzi. Mr. Kais.
    Mr. Kais. Yes, we have no issue with the Massachusetts 
State plan. We think any action to increase coverage is a good 
one. The only thing we would say is that there needs to be a 
level playing field in terms of the standards of duty, the 
requirements, so whatever they may be at the State level, we 
would hope that that would be the same case for the private 
sector to promote competition, which will, in turn, promote 
innovation.
    I want to also agree with Senator Warren's statement. We're 
very careful about going too narrow with these pooled 
arrangements. We're coalescing around large State associations, 
cooperatives, affinity groups. We're even talking to 
municipalities now at the State level as they contend with 
moving from DB to DC plans. There is a lot of use in strength 
in numbers and not getting yourself too narrow or down a narrow 
corridor. So we would agree with that comment as well.
    Mr. Mason. I was just going to say--and Jim just said it 
better than I could have.
    Senator Enzi. OK. Thank you.
    We have some Federal requirements about common businesses 
meeting together and making different kinds of rules or 
different competitive advantages or things on sharing. Under 
the present one, where they have to have commonality, are there 
some problems that come from that that would be overcome by 
opening up the pool?
    Mr. Kais.
    Mr. Kais. Yes, absolutely. The biggest problem is 
confusion, because the rules around commonality are 
extraordinarily gray right now. In almost every case, if you 
wanted to be certain, you would have to file for an advisory 
opinion with the Department of Labor, and there would be an 
analysis done, and you would, ideally, get to a point where you 
felt comfortable that you're operating a closed MEP. That, in 
and of itself, will make professional trade associations, co-
ops, where there's a little bit of confusion--it'll stop them 
in their tracks and make them either not consider pooling their 
assets together or doing it in a less efficient model.
    So, yes, it's something I contend with on a daily basis. 
It's a very esoteric topic, and it would be a great benefit by 
expanding and eliminating that.
    Senator Enzi. I'm going to go ahead and assume that we're 
going to expand it.
    Go ahead.
    Ms. Varnhagen. If I could just say, from the employee's 
point of view, sometimes little issues become--an employee may 
know, ``I work for Joe's Grill Shop,'' but they may not 
necessarily know the name of their MEP, if there is one, and 
they won't--if they were to go to the Department of Labor and 
try to look for the 5500, they wouldn't necessarily know--are 
they looking under their employer's name, are they going to 
look under the plan name?
    So everything Congress can do to make that as clear as 
possible so that employees know who exactly is sponsoring their 
retirement savings option, who they look under when they try to 
look for information if they don't have it automatically from 
their employer, and I think even probably some small employers 
don't necessarily know the technical names for things. 
Everything that you can do to make everything as clear and 
transparent and simple as possible would be wonderful.
    Senator Enzi. Mr. Kais.
    Mr. Kais. Just a brief comment. I agree with that. I will 
say that there's a litany of communications that are required 
under law to go out to employees, like a summary plan 
description, summary annual reports. We over-communicate as a 
practice to these employees, and they should know where to go 
for their information. But it's a good point, but I think those 
documents today do a good job of that, by and large.
    Senator Enzi. I used to be a little bit of a clearinghouse 
on some of those myself. I'm kind of curious if you have any 
ideas on how we can promote the open MEPs with a range of 
participants, and, of course, what I'm particularly interested 
in is in rural areas. You know, in cities, there's a little bit 
more communication, but the small employers who are really out 
in the rural areas.
    Mr. Kais.
    Mr. Kais. I'll just make a comment. Like I said before, 
we're coalescing around professional trade associations and 
cooperatives, and from a rural perspective, I think there's a 
great opportunity with dairy co-ops, grocers' co-ops, grain 
elevators, and things like that. We've actually approached a 
lot of associations where you live and east into Minnesota with 
these particular pooled arrangements, and they're very 
receptive to it, and there's usually a tight financial bond, 
particularly in the cooperative market, where there's a lot of 
underwriting that's going on. There's a lot of cooperation that 
exists already, which is a good precursor for having a 
successful MEP or pooled arrangement.
    Senator Enzi. Mr. Stacey.
    Mr. Stacey. Going back just a bit to the disclosure and 
5500 requirements, as far as when we had our own MEP that our 
plan sponsored, the summary annual report was, of course, 
published every year, which is a summary of the 5500 that was 
provided to participants, with the name of the plan, our name, 
the EIN, also directing them to the Department of Labor if they 
have questions. I would think that as long as that summary 
annual report is being distributed, that tells the participants 
where they can get more information.
    Addressing your question, Senator, on trying to communicate 
this in a rural area, I'm just thinking about what we call--and 
I'm sure you've heard the term--windshield time in Wyoming. You 
can drive in this part of the country and it's a continuous 
city. In our part of the country, you look at the windshield 
for a long time before you get from one community to another. 
So communications can be difficult at times.
    With our MEP, it was our office with an associated Mass 
Mutual local insurance and investment office that was doing it. 
For a more geographically diverse and widespread area, I would 
almost think you'd have to have a network of individuals, like 
the TransAmericas and the other investment companies have, that 
are spread out, whether it's one particular investment company 
that's telling all of the advisors in a geographic area, ``Here 
is an open MEP that you can participate in,'' or whether it is 
some other communication that goes out and says, ``This is 
available in your area.''
    But then you could have a pushback from those investment 
advisors that say, ``I may not make as much selling this 
product versus selling a standalone product.'' So there's got 
to be a lot of planning into it, and I couldn't tell you an 
answer today. I'm sure there would be a lot of people that work 
on that. But outside of having a trade organization, where 
you're getting common communications coming from the dairy 
association, from whatever organization you're a part of, I 
would almost think that has to come through the financial 
community to then disperse it out into their local regions.
    Senator Enzi. Mr. Mason.
    Mr. Mason. Just as a broader, bigger picture answer, I 
guess my reaction is there are multiple ways. In other words, 
in a way, I think this roundtable is helping. In other words, 
what you want to do is raise the profile of the open MEP issue, 
get it out there that there's this ability to have a pooled 
arrangement which can provide services at a lower cost.
    Having coverage of this roundtable will get picked up in 
the trade press. More people hear about it, and then as more 
people hear about it in the services industry, they'll see--
they want to sell something that sells. That's their objective.
    If you go to a small business with a lot of complexity and 
cost, you know you're not going to make that sale, and you may 
stop making that extra effort in a situation where you know 
it's not going to work, which is sad. Here, if you can give 
them something more efficient, more effective to sell, they 
will renew those efforts to sell.
    I think this is a wonderful thing today. I think it's a 
wonderful thing that we could pass, and I think that--it's 
almost like we don't need anything artificial, because once you 
have something effective and efficient to sell, you will get 
out there. The business will go out to make that sale, and when 
they go out to make a sale, if it's something that's a good 
product, a good service, that small business will react well. 
I'm more optimistic that good products and good services will 
yield good results.
    Mr. Kais. I wanted to briefly agree with Mr. Stacey. I 
think the financial advisor community is very, very important. 
Just as a proof point of that, prior to the 2012 advisory 
opinion that came out that really put a halt to the expansion 
of the prior open MEPs, we had an arrangement that had 
literally gone from 100 employers in the arrangement to 1,300 
employers in the span of two and a half to 3 years. When the 
advisory opinion hit, that obviously halted that, sort of to a 
screeching halt.
    But even now, to Kent's point about giving some exposure 
here at the hearing or the roundtable, the word is starting to 
get out into the private sector, and folks are starting to warm 
back up to the pooled arrangements again. We're actually seeing 
an uptick in the take rate for these particular plans. I think 
both of those points are well taken.
    Senator Enzi. Mr. Favorito.
    Mr. Favorito. I guess I would just add that on behalf of 
all the States that are entering into this arena, we would hope 
that their efforts won't be overlooked because we, in our own 
individual ways, have been equally as effective if not more 
effective in some respects in terms of getting information out 
there to plan participants. I think the structure and the 
framework already exists for lots of States who are getting 
involved into the private employer portion of the equation. 
They already have the mechanisms to distribute information. 
They have centrally located information.
    I think, if nothing else, the competition that is driving 
with the private sector industry has been healthy in terms of 
helping to generate the conversations that we're having today 
and other conversations. I guess I would in a very small way 
stand up in terms of--for what the States are doing in terms of 
being examples of already exerting the effort to try and get 
the message out that there are options out there for private 
employers.
    Senator Enzi. Do you handle both nonprofit and for profit 
in Massachusetts?
    Mr. Favorito. Right now, the plan we're developing is for 
nonprofit employers, private sector. But our office oversees 
the public sector plans that we currently offer.
    Senator Enzi. Thank you.
    Mr. Stacey, in your opening comments, you made some 
comments about the profitability wasn't quite there, I guess, 
that had been anticipated as possible. Could you go through 
some of those factors that make the difference in whether it'll 
work or not?
    Mr. Stacey. One of the biggest issues for us was the one-
bad-apple situation, and as a result of that, we were extremely 
hands-on with it, which was something we could do with a small 
plan versus a much larger plan. In order to combat that, while 
our firm never touched any of the contributions going in, we 
always made sure that the contributions were being submitted 
timely and correctly because we did it.
    When the plan was set up with Mass Mutual, you had a master 
plan with subplans. Each subplan was a participating employer 
that then had the bank account information for the employer 
there. We submitted the forms or the spreadsheet online for 
each contribution, whether it was weekly, biweekly, semi-
monthly, or monthly. We submitted those contributions each 
time. Some employers were like clockwork sending it in. Others 
we had to beg sometimes, because we knew that we would have a 
bad apple in there if we didn't do that.
    If the bad apple situation was to be able to be removed 
from new open MEP legislation and regulation, that would allow 
for a small organization like us that was trying to sponsor and 
offer this to be a little bit more hands-off and not have to 
have time involved with it on a daily basis, because being an 
accountant, you know that you watch your time, and that's 
billed. The way our plan worked is we had an initial one-time 
signup fee that the employer paid, and then we didn't bill them 
anything else. We were only paid from the meager revenue 
sharing that was generated from the plan, and we covered our 
expenses, or tried to cover our expenses that way.
    Being able to be more hands-off with not having to have 
daily responsibilities in the plan, doing work on it every day, 
would free up some of that time. During that time, our firm 
paid for two plan documents, submitted those to the IRS for a 
favorable letter of determination, and then covered the audit 
cost. The first audit was done while the plan was still an 
ongoing concern, and the plan assets were used to pay for that, 
and the plan expense policy allowed for that. The final two 
audits for the last full year and then the last partial year 
were done after the plan was terminated. So our firm bore the 
cost of that.
    Going forward, as far as the cost of operating a plan, I 
would like for open MEPs to be available for an organization 
like us to have a hand in. I was asked whether or not we would 
consider sponsoring a MEP if this legislation were to pass, and 
my answer to that is I don't know, because based on our prior 
experience with it, I can't tell you yes, one way or the other, 
that we would be open to doing that again, having had the 
experience that we did.
    Does that mean that we wouldn't partner with someone like a 
TransAmerica, someone like a Mass Mutual, or many of the other 
providers out there, for them to have more of an ownership 
stake in the program and then us as a third party administrator 
and having a local presence in communities? I think that might 
be more workable in our situation. But as far as the costs, 
those were--the primary drivers were the time cost, the 
document cost, and the audit cost for us. If the plan had been 
larger, we could have absorbed it, but for a variety of 
reasons, it did not get to the point that we had hoped for.
    Senator Enzi. Thank you.
    Senator Warren. May I ask another question?
    Senator Enzi. Sure.
    Senator Warren. We've been talking a lot about, in effect, 
small employers or any employer being able to outsource the 
administration of the retirement plan, and I'm on board with 
the idea, generally. But before any legislation moves forward 
on this, there's an important question here, and that is in the 
absence of an employer, who is best positioned to sponsor the 
retirement plans?
    I thought maybe you could start that one, Ms. Varnhagen. 
You're at AARP. You are the senior legislative representative 
for Social Security and retirement at AARP. What kind of firms 
or entities or organizations do you think could best sponsor 
these plans?
    Ms. Varnhagen. Much like we've been talking about here, I 
think we're hopeful that trade associations, like the national 
Chamber or local Chambers or other kinds of nonprofits--would 
be able to do it or independent financial advisors. I think 
we're a little nervous if it is a financial advisor who only 
represents one company's products.
    There is a very large community out there of independent 
financial experts. I think we are hopeful that if entities like 
that----
    Senator Warren. Let me just followup, so I get it. One 
option would just be to say it's an unbiased independent 
source, as you say, like a trade association, like an AARP, 
like a union, something like that that could then be 
responsible. If it were either financial services companies or 
representatives of financial services companies doing it, that 
kind of now starts to sound like a conflict of interest 
potentially here.
    What kinds of protections would need to be put in place 
before you would feel comfortable that this is a direction 
permitting financial services companies themselves or their 
agents to set this up?
    Ms. Varnhagen. In our world, the gold standard of financial 
protection--the fiduciary standard, which basically says you 
promise to act prudently and solely in the interest of your 
clients, has generally worked well in the financial markets. 
But in addition--generally, the gold standard is considered 
that you do a request for proposals, that you put something out 
to bid, you ask everyone in the financial markets, this is what 
I'm looking for. I'm looking for a range of retirement 
investments that will cover 1,000 people or 10,000 people, and 
you see what bids you get.
    Usually, you do get a wide variety of firms that will bid 
when you put out a request for proposals. Then it is a 
negotiation of trying to figure out what are the best 
performing investment options, what are the fees that they've 
been offering, and you engage in a negotiation. But you need to 
have an entity that is capable to engage in that negotiation.
    Senator Warren. But that's not the question here. The 
question is will the financial services company--in negotiating 
with itself, I'm sure we'd have a point of view about how that 
works. The question I'm asking is what kind of constraints 
would you want to put on that? I'm not concerned if a trade 
association does it. I understand they would negotiate on 
behalf of their members. If a union did it, they would 
negotiate on behalf of their members, I presume. If AARP did 
it, they would negotiate on behalf of their members.
    But if a financial services company is doing it, I'm not 
sure if they're negotiating on behalf of the people who sign up 
or if they're negotiating on behalf of the financial services 
company. I'm asking what kind of constraints you would want in 
place.
    Mr. Mason, it looks like you'd like to jump in on that.
    Mr. Mason. Yes. I agree with everything that Michele said. 
But I would add one clarification, which is the financial 
services companies do not seek to be the ones setting up the 
plan, and they shouldn't be the ones setting up the plan, 
because they shouldn't be the ones overseeing themselves. I 
think this is one where they look for that independent third 
party, because that's the way the structure works.
    Senator Warren. You say just take them out of the picture 
because it's just not the right structure.
    Mr. Mason. Absolutely, absolutely.
    Senator Warren. Mr. Kais.
    Mr. Kais. Affirmative.
    Senator Warren. OK. You just say take them out.
    Mr. Mason. Right.
    Senator Warren. We won't do things like fee caps so they 
can only offer certain products. Just get them off the table.
    Mr. Mason. Right.
    Senator Warren. OK. It's just very valuable to think about 
this, because I think Republicans and Democrats alike agree 
that the current system is broken, that the current structure 
of Federal law is inhibiting more small businesses from 
offering these plans, offering them in cost-effective ways, 
negotiating to get the best possible plans.
    As we think about how to go forward, I just want to think 
about what the right structure is. We can't just say 
multiemployer and then we're done. It's actually got to have 
some elements so that it's built the right way that works for 
the employees.
    Thank you.
    Senator Enzi. We have to be careful with the rules, too, or 
again we'll discourage the small businesses from looking at it. 
If there are too many requirements there, they'll say, ``My 
employees don't need that.''
    Senator Warren. Yes. I hear you. Thank you.
    Senator Enzi. I've got one more, Mr. Kais. I wanted to talk 
a little bit about the open MEPs that are permitted to exist in 
the private sector and see what benefits you feel are provided 
to the people who participate in that kind of a plan. We've 
talked a little bit about the State plan, but we haven't talked 
about the private plans.
    Mr. Kais. Sure. I think a lot of the same tenets, cost 
reduction through asset pooling; reduction, if not elimination, 
of administrative burden; and eliminating fiduciary risk to the 
fullest extent allowable under the law. Those are the main 
reasons why small businesses do not set up plans today, and 
they're the main reason why they're adopting these arrangements 
in droves in the private sector. We've only hit the tip of the 
iceberg.
    If we develop a system where the State can participate, the 
private sector can participate, that's great. As long as the 
rules are the same, a level playing field, I think we'll all do 
a great job and get our names in the paper for something good.
    Senator Enzi. Do you have another question?
    Senator Warren. No. Thank you very much, Mr. Chairman.
    Senator Enzi. This has been very helpful. I'll have some 
more detailed questions for some of you.
    Senator Enzi. I do know that the Federal Government has the 
TSP, and it apparently doesn't have very many requirements as 
far as individuals are concerned, because there are a lot of 
them involved in it. There's an employer match that gets a lot 
of people interested in it. In fact, they all should be 
interested in it, especially with the match that's done there.
    I think that this can be opened up for small businesses 
without putting a whole lot of requirements in there that will 
discourage them from wanting to participate in it. At the same 
time, I don't want to put so many requirements in there for the 
accountants or the administrators that they don't want to start 
any of these plans, because it has to work for everybody.
    I hope that we can come up with something that will expand 
this dramatically, because we do want people to save for 
retirement, and right now, we don't even have a tax structure 
that encourages them to save. We'll be working on that as well.
    I want to thank all of you for your participation today, 
and if you have any additional statements or suggestions or 
ways that we can set this up that you want to share with us, 
we're open to that, and we'll make that a part of the record as 
well. Anybody who wants to submit questions will have until 5 
o'clock June 28, 2016 to do so. Some of the people who aren't 
here may want to do that, and we may want to, as well.
    Thank you for participating, and thank all of you for 
participating.
    Adjourned.
    [Whereupon, at 4 p.m., the hearing was adjourned.]

                                  
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