[Senate Hearing 114-410]
[From the U.S. Government Publishing Office]








                                                        S. Hrg. 114-410

               HELPING AMERICANS PREPARE FOR RETIREMENT:
                 INCREASING ACCESS, PARTICIPATION, AND
                  COVERAGE IN RETIREMENT SAVINGS PLANS

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            JANUARY 28, 2016

                               __________

                
                
                
                
                
                
                
                
                
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                          COMMITTEE ON FINANCE

                     ORRIN G. HATCH, Utah, Chairman

CHUCK GRASSLEY, Iowa                 RON WYDEN, Oregon
MIKE CRAPO, Idaho                    CHARLES E. SCHUMER, New York
PAT ROBERTS, Kansas                  DEBBIE STABENOW, Michigan
MICHAEL B. ENZI, Wyoming             MARIA CANTWELL, Washington
JOHN CORNYN, Texas                   BILL NELSON, Florida
JOHN THUNE, South Dakota             ROBERT MENENDEZ, New Jersey
RICHARD BURR, North Carolina         THOMAS R. CARPER, Delaware
JOHNNY ISAKSON, Georgia              BENJAMIN L. CARDIN, Maryland
ROB PORTMAN, Ohio                    SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania      MICHAEL F. BENNET, Colorado
DANIEL COATS, Indiana                ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina

                     Chris Campbell, Staff Director

              Joshua Sheinkman, Democratic Staff Director

                                 (ii)

















                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

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

                               WITNESSES

Munnell, Alicia H., Ph.D., Peter F. Drucker professor of 
  management sciences, Carroll School of Management, and 
  director, Center for Retirement Research, Boston College, 
  Chestnut Hill, MA..............................................     7
Kalamarides, John J., head of institutional investment solutions, 
  Prudential Financial, Hartford, CT.............................     8
Barthold, Thomas A., Chief of Staff, Joint Committee on Taxation, 
  Washington, DC.................................................    10

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Barthold, Thomas A.:
    Testimony....................................................    10
    Prepared statement...........................................    27
    Responses to questions from committee members................    34
Enzi, Hon. Michael B.:
    Prepared statement...........................................    38
Grassley, Hon. Chuck:
    Prepared statement...........................................    39
Hatch, Hon. Orrin G.:
    Opening statement............................................     1
    Prepared statement...........................................    39
Kalamarides, John J.:
    Testimony....................................................     8
    Prepared statement with attachment...........................    41
    Responses to questions from committee members................    56
Munnell, Alicia H., Ph.D.:
    Testimony....................................................     7
    Prepared statement...........................................    65
    Responses to questions from committee members................    74
Wyden, Hon. Ron:
    Opening statement............................................     3
    Prepared statement...........................................    77

                             Communications

ERISA Industry Committee (ERIC)..................................    79
ESOP Association.................................................    83
Insured Retirement Institute (IRI)...............................    87
National Center for Policy Analysis (NCPA).......................    92
Women's Institute for a Secure Retirement (WISER)................    94


                                 (iii)
 
                     HELPING AMERICANS PREPARE FOR
                     RETIREMENT: INCREASING ACCESS,
                      PARTICIPATION, AND COVERAGE
                      IN RETIREMENT SAVINGS PLANS

                              ----------                              


                       THURSDAY, JANUARY 28, 2016

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 9:30 a.m., 
in room SD-215, Dirksen Senate Office Building, Hon. Orrin G. 
Hatch (chairman of the committee) presiding.
    Present: Senators Grassley, Crapo, Cornyn, Thune, Burr, 
Portman, Heller, Scott, Wyden, Carper, Cardin, Brown, Bennet, 
Casey, and Warner.
    Also present: Republican Staff: Sam Beaver, Professional 
Staff Member; Preston Rutledge, Tax and Benefits Counsel; Jeff 
Wrase, Chief Economist; and Marc Ness, Detailee. Democratic 
Staff: Joshua Sheinkman, Staff Director; Michael Evans, General 
Counsel; Kara Getz, Senior Tax Counsel; and Eric Slack, 
Detailee.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
              UTAH, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will come to order. I would 
like to welcome everyone to this morning's hearing on the 
ongoing effort to increase access, participation, and coverage 
of retirement savings plans. Financial security and retirement 
policy, in particular, have never been more important. Today, 
we will discuss policies designed to incentivize employers to 
set up retirement plans and to help employees save more for 
their retirement and make those savings last a lifetime.
    When we talk about the status quo of retirement policy, 
there is both good news and bad news. The good news is that the 
private employer-based retirement savings system--particularly 
401(k) plans and Individual Retirement Accounts, or IRAs--has 
become the greatest wealth creator for the middle class in 
history.
    Under the current system, millions of Americans have 
managed to save trillions of dollars for retirement. In 
specific terms, thanks in large part to policies Congress has 
enacted over the years, American workers have saved more than 
$4.7 trillion in 401(k) plans and more than $7.6 trillion in 
IRAs.
    Now, that is more than $12 trillion in total, more than 
double the amount workers had saved in 2000, despite the Great 
Recession, the market downturn in 2008, and historically low 
interest rates since that time. Once again, that is really good 
news. But the bad news is that with the retirement of the baby 
boom generation, the fiscal pressure on public programs 
positioned to benefit retirees--programs like Social Security 
and Medicare--is growing exponentially, putting enormous strain 
on the Federal budget and driving the expansion of our long-
term debt and deficits.
    As this pressure mounts, participation in private 
retirement plans will be more and more important. Yet at the 
same time, as part of the constant drumbeat here on Capitol 
Hill for more revenue to pay for increased spending, some have 
proposed reducing the allowed contributions to 401(k) plans and 
IRAs. That, in my view, would be both shortsighted and 
counterproductive.
    Over the years, we have learned that, for most American 
workers, successful retirement saving largely depends on 
participation in a retirement plan at work. Unfortunately, many 
employers, mostly small businesses, do not sponsor plans for 
their employees.
    There are a number of reasons why an employer might opt to 
not offer a retirement plan, including cost, complexity, or 
administrative hassle. But whatever the reason, the result is 
the same. Fewer American workers are likely to save for 
retirement than would otherwise be the case.
    As everyone will recall, last year, the committee 
established bipartisan tax reform working groups to examine all 
major areas of U.S. tax policy and identify opportunities for 
reform. One of those working groups focused specifically on tax 
policies relating to savings and investment. Today, the full 
committee will hear more about the various legislative 
proposals the Savings and Investment Working Group looked at as 
they considered options and produced their report.
    I want to thank the two chairs of this particular working 
group, Senator Crapo and Senator Brown, for their efforts and 
their leadership on these issues. They looked extensively at a 
number of more recent proposals, and, like all of our working 
groups, they produced an excellent report. I look forward to 
delving more deeply into these issues here today.
    Simply put, we need to do more to encourage employers who 
do not sponsor retirement plans to set them up. Toward that 
end, one of the first proposals described in the working group 
report would allow unrelated small employers to pool their 
assets in a single 401(k) plan to achieve better investment 
outcomes, lower costs, and easier administration.
    This proposal for a multiple-employer plan, what some have 
called the, quote, ``Open MEP,'' already enjoys bipartisan 
support here in Congress. Many of our colleagues have worked 
hard to develop and advance Open MEP proposals.
    While I run the risk of missing some of my colleagues, I 
want to acknowledge the efforts of Ranking Member Wyden, 
Senator Brown, Senator Nelson--who has worked on this issue 
with Senator Collins on the Aging Committee--Senator Scott, and 
Senator Enzi, who held hearings on this MEP idea in the HELP 
Committee. And, as if that was not enough, just this week the 
Obama administration announced its support for the Open MEP 
idea.
    Clearly, there is a lot of momentum for this proposal, 
which, in my view, is a good thing. Indeed, this is an idea 
whose time has come. And while it is important to pursue 
policies to encourage greater retirement savings and 
investment, we must provide workers with the tools to ensure 
that their savings do not run out before the end of their 
lives. That is why I have put forward proposals to encourage 
individuals to purchase annuity contracts to provide secure, 
lifelong retirement income.
    Today, there are obstacles in the law that discourage 
employers from adding annuity purchase options to their 401(k) 
plans and employees from purchasing annuities. We should do all 
we can to remove these obstacles, particularly given the 
decline of defined benefit pension plans in recent years.
    Retirement policy has been an especially important topic 
here on the Finance Committee, and it has always been 
bipartisan. Indeed, most of the retirement legislation that 
Congress has passed in recent decades has been named for 
Senators from the Finance Committee, usually one from each 
party. I hope this will continue even during this election 
year, when attacks and accusations relating to retirement 
security, unfortunately, tend to gain a lot of traction.
    I plan to do my part to ensure that the committee focuses 
on advancing policies that unite both parties. If we can do 
that, I think we can make progress.
    I want to thank Senator Wyden for his great efforts that he 
has made since I have been chairman, and even before, to try to 
bring us together and have us do bipartisan work through this 
committee.
    Before I conclude, I want to acknowledge that there is some 
interest in the committee in discussing the challenges facing 
multi-employer defined benefit pension plans and their 
beneficiaries. These are important topics that affect 
employers, workers, unions, plant managers, the Pension Benefit 
Guaranty Corporation, and, of course, current retirees who may 
be facing hardships.
    They also highlight the challenge of delivering on the 
promise of lifetime retirement income and the stakes for 
retirees if the system fails. We certainly need to have a 
robust discussion of these matters in the committee, and I plan 
to convene a hearing on multi-employer plans in the next work 
period.
    Today, however, I am hoping we can focus on bipartisan 
proposals to increase access to retirement savings plans. I am 
grateful to have Senator Wyden as co-leader of this committee. 
I am going to turn to him for his opening remarks at this time.
    [The prepared statement of Chairman Hatch appears in the 
appendix.]

             OPENING STATEMENT OF HON. RON WYDEN, 
                   A U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you very much, Mr. Chairman, and I 
very much appreciate your desire to take this important area, 
once again, in the best tradition of the Finance Committee, 
which is to work in a bipartisan way. So I look forward to 
working with you and all our colleagues on it.
    Over the last decade, policy experts and lawmakers have 
gathered in rooms like this to dissect the country's retirement 
savings crises again and again and again, and that includes a 
hearing held by this committee about a year and a half ago.
    The numbers that underlie this crisis are jarring every 
single time I hear them, and our job is to make it different 
this time with meaningful legislation. Barely more than half of 
American workers have access to retirement savings plans 
through their employer. A middle-of-the-pack retirement account 
today is enough saved up to pay a 64-year-old retiree just a 
bit more than $300 a month. Half of accounts belonging to 25- 
to 64-year-olds have even less, and millions of American 
workers have no pension and nothing at all saved.
    Despite those dire statistics, the nonpartisan Joint 
Committee on Taxation tells us that over the next 5 years, 
American taxpayers, the people we represent, are going to see 
more than 1 trillion of their dollars put into subsidies for 
retirement accounts. This is the second-biggest tax subsidy on 
the books.
    The Congressional Budget Office, however, says that these 
benefits are disproportionately skewed to those who need the 
assistance the least. Less than 1 in 5 of those dollars goes to 
households with incomes in the bottom 60 percent of earners.
    Minority Americans have it even worse. For young workers or 
people seeking jobs in restaurants, hotels, or construction, it 
may be nearly impossible to find an employer who sponsors a 
retirement plan with a matching contribution. And obviously, 
there are going to be great challenges with what is known as 
the ``gig economy,'' which grows every year.
    It is obvious that working families and the middle class 
need more opportunities to save, and, first and foremost, those 
are opportunities that ought to be available at work. Then the 
options that Americans have for saving need to better reflect 
the way people work and live in retirement. That means 
retirement savings built up at work have to be portable and 
provide meaningful lifetime income.
    The good news is that steps are being taken now to create 
several new opportunities. In my home State of Oregon, we are 
one of three States that has passed what is called an ``auto-
IRA'' law to cover those without employer-based options.
    The bottom line for Oregon workers is going to be, when you 
get a job, you are going to get a retirement account, and you 
can begin to save. It will not be mandatory because workers can 
opt out, but it is going to relieve headaches and kick saving 
into a higher gear.
    It was an important step for my State to take, because back 
in 2013, an AARP survey found that one in six middle-aged 
Oregon workers had less than $5,000 saved. A new report 
released this month from the Pew Charitable Trusts found that 
less than two-thirds of Oregon workers have access to 
retirement plans through their employers, and barely more than 
half have participated. But Oregon's auto-IRA plan, in my view, 
represents nothing less than a sea change in retirement saving.
    I hope this trend leads Federal lawmakers to pass the 
President's national auto-IRA proposal. The administration has 
opened up what it calls ``My-RA'' plans to help workers 
nationwide get started with saving.
    These smart new plans are aimed squarely at Americans with 
limited means who have been shut out of retirement. There are 
not any fees to eat into your savings, no minimum balances or 
contribution requirements. You do not lose a penny that is put 
in. A very good way to build a nest egg.
    Additionally, there are more proposals in the works that 
can make a big difference for a lot of Americans. Today, I am 
introducing a bill to strengthen the saver's credit so it does 
more for the people who need the most help. I note our friend, 
Senator Cardin, is here, and he has done important work on the 
saver's credit.
    At a time when taxpayers are putting more cash into savings 
incentives that are skewed disproportionately to those who are 
best off, this proposal is a step that Congress can take to put 
a little more balance in Federal policy to ensure that all 
Americans have the opportunity to save and to get ahead.
    As Senator Hatch noted, we have been working with a very 
large coalition of Senators, and particularly Senators Brown 
and Nelson on this committee, to expand retirement plans that 
bring together multiple-employers. Our proposal is aimed at 
getting the old rules out of the way, lowering costs, and 
easing the burden on employers.
    So in addition to big progress with auto-IRAs and My-RAs, 
these are important pieces of legislation that will be coming 
up. Moving forward, we have an opportunity to address these 
issues in a bipartisan way.
    Comprehensive tax reform, which we talk about in this 
committee and have for many months, has another opportunity for 
all of us. Bills designed to grow wages can make an enormous 
difference. And the recent turmoil in the financial markets is 
a keen reminder of why it is important to keep Social Security 
strong and reject calls to privatize that program.
    One last point about the multi-employer pension crisis. 
This needs to be solved and soon. Congress passed a bad law 
over 1 year ago, a law that I opposed, and some retirees are 
looking at harsh cuts to the pension benefits they have earned. 
We must not let that come to pass, and we ought to be 
addressing that too in a bipartisan way.
    Our challenge is to enact legislation as soon as possible, 
as well, to help the many coal miners in this country--and I 
appreciate Senator Brown's leadership on this issue. He has 
spoken about this repeatedly. Senator Warner cares about this 
as well. They deserve health and pension benefits that they 
earned over decades of backbreaking work.
    The situation for mine workers gets worse with every 
passing day, and this, Mr. Chairman and colleagues, is another 
public policy emergency.
    Mr. Chairman, thank you. We have a lot of colleagues who 
are interested in these issues and look forward to this 
hearing.
    [The prepared statement of Senator Wyden appears in the 
appendix.]
    The Chairman. Thank you, Senator.
    Now, I would like to take a few minutes to introduce 
today's witnesses, starting with Dr. Alicia Munnell. Dr. 
Munnell is the Peter F. Drucker professor of management 
sciences at Boston College's Carroll School of Management, 
where she has taught for more than 18 years.
    Before joining Boston College in 1997, Dr. Munnell was a 
member of the President's Council of Economic Advisers and also 
served as the Assistant Secretary of the Treasury for Economic 
Policy.
    For the preceding 20 years, she worked at the Federal 
Reserve Bank of Boston, where she became senior vice president 
and director of research. She has received many awards, 
including the International INA Prize for Insurance Sciences 
and the Robert M. Ball Award for Outstanding Achievements in 
Insurance.
    Dr. Munnell earned her B.A. from Wellesley College, her 
M.A. from Boston University, and her Ph.D. from Harvard 
University.
    Our second witness will be Mr. John Kalamarides, who is 
currently serving as the head of institutional investment 
solutions and CEO of Prudential Bank and Trust. In his role, 
Mr. Kalamarides runs the Stable Value Institutional Retirement 
Income Institutional Fund and Prudential Bank and Trust, 
overseeing more than $260 billion in account values.
    Prior to joining Prudential, Mr. Kalamarides was senior 
vice president of marketing and strategy for Cigna's retirement 
business. He has also held roles and led strategy projects for 
Accenture and Greenwich Associates.
    Mr. Kalamarides is a graduate of Colgate University and 
earned a master's in business administration from the Amos Tuck 
School of Business Administration at Dartmouth College.
    Finally, we will hear from Mr. Thomas Barthold, who is 
currently serving as Chief of Staff for our Joint Committee on 
Taxation. Mr. Barthold is no stranger here and is an 
indispensable asset on Capitol Hill. We all appreciate him on 
both sides of the floor.
    He joined the Joint Committee staff nearly 30 years ago 
when he started as a staff economist in 1987. Over time, he 
worked his way to becoming Senior Economist, Deputy Chief of 
Staff, and Acting Chief of Staff until he assumed his current 
role in May 2009.
    Prior to his arrival in Washington, Mr. Barthold was a 
member of the economic faculty of Dartmouth College. Mr. 
Barthold is a graduate of Northwestern University and received 
his doctorate in economics from Harvard University.
    Also, I have asked Mr. Barthold to take a little more time 
during his opening than is customary to review some PowerPoint 
slides that outline several of the proposals analyzed last year 
by the Savings and Investment Tax Reform Working Group.
    I want to thank all three of you for coming. This is a very 
important hearing.
    I have to say that I have a number of commitments that I 
have to keep. I have two bills up in Judiciary. So I am going 
to have to go between here and the Judiciary Committee. So I 
hope it will not offend anybody, and we will keep this hearing 
going.
    But I want to thank you all for coming. It means a lot to 
us. We will now hear witness testimonies in the order that they 
were introduced.
    Dr. Munnell, please proceed with your opening statement.

    STATEMENT OF ALICIA H. MUNNELL, Ph.D., PETER F. DRUCKER 
PROFESSOR OF MANAGEMENT SCIENCES, CARROLL SCHOOL OF MANAGEMENT, 
 AND DIRECTOR, CENTER FOR RETIREMENT RESEARCH, BOSTON COLLEGE, 
                       CHESTNUT HILL, MA

    Dr. Munnell. Thank you, Chairman Hatch, Ranking Member 
Wyden, and members of the committee. Thank you very much for 
the opportunity to testify today about helping Americans save 
for retirement and to talk about the Savings and Investment 
Bipartisan Tax Working Group report.
    I would like to submit my written testimony for the record 
and then use my time to do two things. First, I would like to 
underline the importance of the issues that the working group 
addressed, and, second, I would like to argue that we are 
facing an enormous retirement income challenge and, therefore, 
we need even bolder changes.
    Let me start by describing the retirement landscape to 
emphasize why this hearing is so important. My view is that the 
landscape is rocky, really rocky. We are facing a retirement 
income crisis. The center that I direct constructs a national 
retirement risk index which assesses the retirement readiness 
of today's working-age households. The index shows that about 
half of today's households are at risk of not being able to 
maintain their standard of living once they stop working.
    The reason for this shortfall is twofold. We are going to 
need more money in the future for retirement, and, two, the 
traditional sources of income are providing less support than 
they have in the past. On the needs side, the major drivers are 
longer life expectancies coupled with relatively early 
retirement ages, high and rising health-care costs, and very 
low interest rates. On the income side, Social Security will 
provide less relative to pre-retirement earnings because of the 
rise in the full retirement age. In addition, high Medicare 
premiums and taxation of benefits under the personal income tax 
will reduce the net Social Security benefit.
    The other major source of retirement income, the private 
pension system, is not working well. The typical working 
household with a 401(k) plan approaching retirement, somebody 
55 to 64, has combined assets in their IRA and their 401(k) of 
$111,000. That may sound like a lot of money, but it produces 
only $400 a month in income. And those with coverage are the 
lucky ones. As the working group points out, about half of 
private-sector workers do not participate in any employer-
sponsored plan at a given moment of time, and people simply do 
not save if they do not have an 
employer-provided plan.
    The working group's report is aimed at primarily reducing 
the coverage gap and encouraging saving among lower-paid 
workers. The report discusses four main types of proposals.
    First, several proposals would broaden access to 
potentially low-cost, multiple-employer plans by getting rid of 
the nexus requirement and the one ``bad apple'' provision. My 
view is that Open MEPs would be a useful vehicle for retirement 
saving provided that small employers are protected against high 
fees and unscrupulous actors.
    Second, a group of proposals is aimed at small businesses, 
offering increased financial incentives to start new plans, 
additional incentives for auto-enrollment, and credits for 
contributions. My sense is that these proposals are positive, 
but I think they would have a relatively modest impact.
    The third idea of providing coverage for long-term part-
time employees seems to me like a great idea.
    Finally, a proposal to enhance the saver's credit by 
increasing eligibility and making the credit refundable to 
retirement accounts could be extremely important. We have been 
doing a lot of work at the State level, and an expanded saver's 
credit could be a very helpful component of State auto-IRA 
proposals.
    The working group should be commended for its proposals to 
expand retirement saving, and anything done in this day and age 
on a bipartisan basis is a wonderful thing.
    That said, the return-on-income challenge is enormous, and 
the proposals, while positive, I think are modest. I think we 
need bold changes to solve this problem. Putting aside the 
issue of fixing Social Security, the two most important things 
that I think should be done are to make the 401(k) system work 
better and to enact Federal auto-IRA legislation.
    Let me just say a word about each. 401(k) plans should be 
required to automatically enroll all workers, not just new 
hires, and the default contribution rate should be set at a 
meaningful level and then increased until the combined 
employee/employer contribution rate reaches at least 12 percent 
of wages. In addition, we need a more comprehensive approach to 
limiting leakages, and these changes would go a long way to 
making 401(k)s work better.
    Automatic coverage. The working group recognizes the 
importance of the coverage gap, but I do not think financial 
incentives alone will solve the problem. We need to 
automatically enroll uncovered employees into a retirement 
savings program. As I have noted, many States are setting up 
their own auto-IRA programs, but 50 separate programs seems 
like a crazy idea to me. I think it makes much more sense to 
have such legislation passed at the national level.
    In short, we have a really big problem, and, while the 
working group report is a step in the right direction, I think 
we need much bigger changes to fix the whole system.
    Thank you.
    [The prepared statement of Dr. Munnell appears in the 
appendix.]
    The Chairman. Thank you.
    Mr. Kalamarides, we will take your testimony now.

    STATEMENT OF JOHN J. KALAMARIDES, HEAD OF INSTITUTIONAL 
    INVESTMENT SOLUTIONS, PRUDENTIAL FINANCIAL, HARTFORD, CT

    Mr. Kalamarides. Thank you, Chairman Hatch, Ranking Member 
Wyden, and members of the committee, for the opportunity to 
discuss the retirement challenges facing American workers.
    I am Jamie Kalamarides, and I lead the investment 
businesses and trust business for Prudential Retirement. 
Prudential is the 
second-largest U.S. life insurer and a top ten global asset 
manager. We provide retirement plans for all size corporations, 
governments, unions, and not-for-profits.
    The primary focus of my testimony is expanding access to 
and participation in multiple-employer plans, a structure that 
enables small business owners to pool their resources into a 
single plan and thereby enjoy efficiencies typically limited to 
larger plans and to share those benefits with their workers. 
This topic is covered in more detail in my written testimony 
and our white paper, which I am submitting for the record, 
entitled ``Multiple Employer Plans: Expanding Retirement 
Savings Opportunities.''
    [The white paper appears in the appendix on p. 47.]
    Mr. Kalamarides. Retirement plan coverage is the critical 
gap in providing financial security to working Americans. 
According to EBRI, those with access to workplace-based plans 
save 16.4 times more than those without. Retirement plans are 
available at most medium and large employers, and, due to 
automatic enrollment, escalation, and default investments, they 
work, but only 50 percent of the 6.5 million small businesses 
with less than 100 employees offer plans. And this lack of 
coverage is especially acute for the 30 million women, 12 
million Latinos, 6 million African-Americans, and 4 million 
Asian-Americans who work at these small businesses.
    In 2015, Prudential surveyed 850 small businesses without 
plans and found that there are three barriers to adoption of 
plans: cost, administrative hassle, and fiduciary 
responsibilities. In the same survey, we found that demand for 
401(k)s and multiple-employer plans would increase by 250 
percent if we removed these barriers.
    As recognized by the chairman, this committee's Savings and 
Investment Working Group, and most recently by the Obama 
administration, open multiple-employer plans can be an 
important part of the solution.
    So to expand sponsorship and participation in Open MEPs, we 
recommend four changes in Federal law. First, remove the 
``commonality of interest'' requirement and permit unaffiliated 
businesses to pool their purchasing power into a single plan.
    Second, reduce the fiduciary and tax liability of small 
business owners to only those decisions that they make. Do this 
by removing the tax qualification provisions that hold the MEP 
and other participating employers potentially liable for the 
acts of others, and limit the fiduciary responsibility of 
employers to the prudent selection and monitoring of the MEP 
and forwarding timely contributions.
    Third, establish a model MEP plan design that includes 
behavioral finance best practices and eliminates discrimination 
testing. This could be accomplished through legislation or 
direction to Treasury, IRS, and Labor.
    Fourth, ensure that Treasury and Labor have the enforcement 
capability to protect small employers and their employees.
    The benefits of these changes can be substantial. Employees 
without access will be automatically enrolled, save through 
institutional investments, and have the possibility of employer 
matches. Employers will have limited ongoing costs and 
administrative hassle. And with model plan design, competition 
will be based solely on investment, performance, service, and 
price. Small businesses can switch providers easily, and 
enforcement may be easier. Finally, according to an ICI-
Deloitte survey, all-in fees could fall by 80 to 100 basis 
points.
    Open MEPs are supported by the U.S. Chamber of Commerce, 
AARP, the ERISA Advisory Council, the American Benefits 
Council, the Obama administration, and in every retirement 
coverage bill introduced in the 114th and the 113th Congresses, 
including bills by Chairman Hatch; Senators Collins, Nelson, 
and McCaskill; Senators Harkin and Brown; and Senator 
Whitehouse.
    But access to workplace-based savings is not enough. With 
tens of thousands of Americans reaching retirement every day, 
workers are searching for solutions to help them manage 
investment and longevity risks. And by including guaranteed 
retirement income in 401(k) plans, workers can achieve better 
certainty and security. So we fully support proposals 
identified by this committee's Investment and Savings Working 
Group, including the portability of lifetime income, annuity 
safe harbor, and lifetime income disclosure.
    Finally, we support three additional concepts, particularly 
for low- and moderate-income families: expanding the current 
safe harbor for automatic enrollment to 10 percent of pay; 
allowing long-term, part-time employees to contribute to their 
employer-
sponsored retirement plans; and expanding the saver's credit to 
further encourage lower-income families to save for retirement. 
This could be especially powerful if that credit could be 
deposited as a match into an Open MEP.
    Thank you, Chairman Hatch, Ranking Member Wyden, and the 
members of this committee and their staffs, for your focus on 
expanding retirement saving solutions at the workplace, 
especially through MEPs.
    We look forward to working with the committee on these 
important issues. I will be happy to answer any questions you 
have.
    [The prepared statement of Mr. Kalamarides appears in the 
appendix.]
    The Chairman. Thank you. We appreciate your testimony.
    Mr. Barthold, we are very interested in what you have to 
say, naturally.

    STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, JOINT 
             COMMITTEE ON TAXATION, WASHINGTON, DC

    Mr. Barthold. Thank you very much, Mr. Chairman, Senator 
Wyden, members of the committee.
    The chairman asked me to review some of the material from 
the working group's deliberations, and I have done that in a 
series of slides that you have before you in JCX-4-16, and, if 
it is large enough, it is also up here on the screen.
    Just by way of background, the emphasis is on defined 
contribution plans. I think it is important to note that 
``defined contribution plans'' mean individual accounts that 
consist of employer and employee contributions, and the 
employee benefits from the investment returns. But in a defined 
contribution plan, the employee also bears the risk of those 
investments.
    The code provides multiple types of defined contribution 
plans for employees of the private sector, public sector, and 
tax-exempt employers. Again, just by way of review, the defined 
contribution plan consists of elective contributions and 
employer matches.
    On the side of this, outside of an employer plan, taxpayers 
generally, up to certain income limitations, may contribute to 
individual retirement arrangements. This is another form of a 
defined contribution retirement saving plan, and the IRA is 
also the basis of some employer-sponsored retirement plans that 
the Congress has created to try to spur maintenance of such 
plans by small businesses. These are the SEP, the simplified 
employee pension plan, and the SIMPLE IRA plan.
    The reason the working group emphasized looking at these 
sorts of plans is in the next two graphs, where you can see, 
while total coverage of participants in some sort of employer 
plan in the private sector has been growing through time, the 
growth has all been in terms of active participation in defined 
contribution plans. In the second picture, you see the thick 
blue line climbing steeply to the right. The dashed green line 
tailing off is defined benefit plans. So, as Chairman Hatch 
noted in his opening statement, this is a fundamental shift in 
terms of how employers make opportunities for employees to save 
for retirement income.
    A key point, as emphasized by both the co-panelists, has 
been employee participation and access to these plans in the 
private sector. Slightly less than half of employees 
participate in a defined contribution plan in any one year.
    So what are the impediments? The working group identified 
access as a possible impediment; that not all employees may be 
covered; in particular, low participation rates; low 
contribution rates; and then, opportunities for use of savings 
before retirement, so that assets may be dissipated before they 
become available for retirement income, so-called ``leakage.''
    So the policy goals identified by the working group are: 
how to increase access, how to increase participation, how to 
increase contributions, how to discourage leakage, and, to go 
to the point that the chairman noted, how to promote lifetime 
income once those assets have been accumulated.
    I will skip over, for the most part, discussion of 
multiple-
employer plans, the MEP plans. Mr. Kalamarides discussed that 
in quite a bit of detail. I will note that the working group 
reviewed several bills from the 113th Congress that would have 
provided some of the changes advocated by Mr. Kalamarides. As 
an additional note, they would not have provided a model safe 
harbor MEP and would not, at the same time, necessarily have 
included auto-enrollment, although other legislation that the 
working group considered looked at auto-enrollment.
    What were some other problems identified by the working 
group that might contribute to a lack of access? Well, among 
small businesses, by scale, running a lot of employee benefit 
opportunities involves overhead for the business, and that is 
spread across fewer employees. So that means it is more costly 
per employee.
    Under present law, there is a credit for small employer 
pension plan startup costs. There have been proposals put forth 
by members of this committee and elsewhere in the Senate and in 
the President's fiscal year 2016 budget that would increase the 
tax credit available for startup costs, increasing the maximum 
amounts and the duration.
    The President's proposal, as noted on slide 14, would 
provide a credit to an employer with an existing plan that 
added an auto-
enrollment feature to its plan.
    To get to auto-enrollment perhaps in more detail, this 
slide 15 highlights, I think, the key policy point that the 
working group looked at, and that is that the Congress has long 
had multiple policy goals in the retirement area.
    One is to provide incentives to try to accumulate assets 
for retirement income, but to do that in a way that is fair, in 
a way that is, in the jargon of the industry, not top-heavy, a 
plan that does not just benefit the highly compensated 
employees of the employer.
    So there are nondiscrimination tests. So, if you have an 
auto-
enrollment plan with opt-out features, there is always a 
question of, do you fail the top-heavy test, the 
nondiscrimination test?
    Under present law, there is a safe harbor that sets up a 
default rate of not less than 3 percent, but not more than 10 
percent. Some of the proposals reviewed by the working group, 
S. 1270, S. 1970, would increase those default rates that 
qualify for the safe harbor, saying that if you meet these safe 
harbor tests, you do not have a discriminatory plan. Also, 
there is a credit for small employers provided under S. 1270 
and S. 1970, again, to try to encourage startup contributions 
by employees.
    Another factor in terms of nondiscrimination testing that 
may have impeded participation and the offering of plans by 
some employers, is what to do about part-time employees. If 
part-time employees do not contribute, you might run afoul of 
the nondiscrimination rules. For this, among other reasons, the 
code and ERISA, under present law, allow certain employees to 
be excluded.
    With growing use of part-time employees, but part-time 
employees who may be long-term employees, H.R. 2117 and the 
President's fiscal year 2016 budget proposal were reviewed by 
the working group, because these proposals would define a 
concept of a long-term part-time employee and allow a plan to 
include those individuals and not run afoul of 
nondiscrimination tests otherwise applied.
    Under present law, we have also, as Professor Munnell 
noted, a saver's credit. There were several proposals reviewed 
by the working group that would increase the value of the 
saver's credit and make it refundable. By way of review, the 
saver's credit is targeted at trying to generate asset 
accumulation by lower-income taxpayers.
    The last point identified is sources of leakage and 
maintaining lifetime income from assets accumulated. The 
Congress has provided exceptions to the 10-percent penalty for 
early distributions. For example, Congress has provided for 
hardship withdrawals for immediately needed funds.
    While not required, many plans offer loan options. And the 
working group found that the inability to make timely repayment 
of loan balances may diminish retirement funds when the 
employee reaches retirement age or take accumulated funds out 
of retirement solution if the employee changes jobs.
    For that reason, the working group reviewed S. 606, and 
this is a proposal that would extend the time for rollover of 
loan offset amounts to not let accumulated assets fall out of 
retirement solution when an employee either retires or changes 
jobs. It would also limit certain types of loan programs to 
essentially try to discourage what some have viewed as credit 
card-type loan arrangements that are offered by some employer 
plans.
    Looking at slide 22, let me just review the basic 
difference here. The classic defined benefit plan always has to 
provide an annuity option. It is rare for a defined 
contribution plan to provide an annuity option. Some plans do 
provide, within defined contribution plans, annuity vehicles 
that can be purchased, but if you change employment, you may 
not be able to take that vehicle with you to a new plan.
    If the employer changes the plan, it might cancel out the 
annuity plan, and you lose that annuity feature. And so, in 
order to preserve that, the working group, again, looked at 
some proposals that would limit such possibilities, such as S. 
1270 and the President's fiscal year 2016 budget proposals.
    I have taken far more time than is probably warranted. My 
colleagues and I are always happy to answer any questions that 
the members might have.
    I hope this brief run-through of the working group's 
deliberations has been helpful to this hearing.
    [The prepared statement of Mr. Barthold appears in the 
appendix.]
    Senator Scott [presiding]. Thank you, sir.
    Senator Wyden?
    Senator Wyden. Thank you, Senator Scott.
    We have had an excellent panel, three veterans in these 
important issues.
    Mr. Barthold has scored three of my tax reform proposals, I 
believe, over the years, and I think, suffice it to say, my 
view on tax policy is, you want to give everybody in America 
the opportunity to get ahead. That is not penalizing success. 
That is about what makes America great because of our 
inclusiveness. My concern is that we are missing the boat with 
respect to that kind of spirit on savings policy.
    At the last Finance hearing on retirement savings, the 
Government Accountability Office released findings that about 
9,000 taxpayers, some of whom were able to do this with inside 
information, had over $5 million in their IRAs in 2011. More 
recently, there have been press reports of executives with Roth 
IRAs with balances over $30 million and over $90 million. When 
you are talking about Roth IRAs, that money is not going to be 
taxed.
    My concern is, we want everybody to get ahead, but we want 
a policy in the savings area that, in my view, really is not as 
out-of-whack as what we have today. I mean, you have the 
American tax code letting some of the most affluent Americans 
shelter millions of dollars while providing little incentive 
for most Americans to save.
    That is out of whack, and I would like to change it.
    Dr. Munnell, you have done a lot of groundbreaking research 
in this area. What kind of recommendations could you give the 
committee to reform savings policy to give everybody a chance 
to get ahead, for the kind of inclusiveness that I have 
described, particularly when, this spring, the public and this 
country are going to put more than $1 trillion of their money 
into subsidies for these accounts? What can we do to get more 
balance, Dr. Munnell?
    Dr. Munnell. Senator Wyden, my main message is that there 
should be a mandate in this country so that every employer puts 
their employee into some type of retirement plan and that 
employee has the right to opt out.
    So I am very big on the notion of bringing everyone into 
the tent. I am not so sure what I would do with the sort of 
egregious amounts in some of the IRAs and some of the Roth 
IRAs. I do not like to see the tax shelters abused, actually, 
by very wealthy people. I would tread carefully, though, in 
terms of setting limits.
    Senator Wyden. That is why I asked you, because I want you 
to help us tread carefully so that you basically wring the 
maximum value out of this enormous sum of money.
    Dr. Munnell. So I would bring everybody in. I would look 
very carefully at these people who have the huge balances and 
try to figure out exactly how they got there.
    I would move slowly before I just impose caps on----
    Senator Wyden. We have been moving slowly on this now for a 
couple years. And I did not use the word ``cap'' either. I want 
to ensure that everybody has a chance to get ahead.
    Dr. Munnell. Yes.
    Senator Wyden. Mr. Kalamarides, if I could, the new 
economy--and Senator Warner has done a lot of good work in this 
area--what it comes down to, for me, is that ERISA just really 
has not kept up with this very different world.
    In the 2016 economy, we have workers carrying more of the 
load in the shift from defined benefit to defined contribution. 
We have a much more diverse workforce, more part-time workers. 
Gone are the days of the gold watch at the end of a 40-year 
career with one company.
    I would be interested, because you all do a lot of work in 
these precincts, what kind of ideas do you think would be most 
attractive to, in effect, update our retirement policies from 
an ERISA law that is 40 years old?
    Mr. Kalamarides. Thank you, Senator Wyden.
    I want to acknowledge the importance of expanding access 
and availability for long-term part-time workers. Many of the 
workers in the gig economy derive some of their income from 
long-term part-time work, and, if we can expand that 
availability and participation at their workplace, they will 
have a place to save.
    In addition, many of these workers work at small businesses 
that do not offer retirement plans. Let us offer open multiple-
employer plans and reduce the barriers that I addressed 
earlier, allowing unaffiliated businesses to pool their 
purchasing power; transferring the liability from small 
business owners to professionals, not eliminating the 
liability, so we still protect those workers; removing the one 
bad apple rule; and adopting a model plan design.
    This is especially important for workers who move between 
employers. If they happen to be working in that same group of 
employers that all participate in that employer plan, they do 
not have to transfer their assets. We do not have the leakage 
that we have talked about earlier from rollovers.
    Then finally, for those who are entirely dependent on the 
gig economy, those who are self-employed, IRAs and HRAs are an 
effective way to help them save. We do not want to have the 
unintended consequence of making them employers along the way. 
Let us expand Open MEPs, let us expand long-term part-time 
workers.
    Senator Wyden. I want to ask you to answer something in 
writing, Mr. Kalamarides. Senator Scott and I were just 
whispering that we are both interested in the portability 
question. So I will wait for Senator Scott's question.
    But we have really tried in the health care area to also 
drive something that reflects a modern economy. We created a 
health care system after World War II that was completely 
tethered to the employer, and that was because we had to.
    Now, we are going to have more options. Yes, employer-based 
coverage, but also other options to do what you have to do to 
have some additional opportunities for portability.
    So Senator Scott and I will work with our colleagues on a 
bipartisan basis on that one.
    Thank you, Mr. Chairman.
    Senator Scott. Senator Brown?
    Senator Brown. Thank you, Mr. Chairman. Thank you to 
Senators Hatch and Wyden for their work on this for this 
hearing.
    I am grateful particularly to Mr. Barthold for his patience 
and his wonderful explanations during some of these working 
groups. I think the idea that Senator Hatch had of these 
working groups makes so much sense. I think it demonstrates 
that if the committee focuses on discrete areas of the tax 
code, we can achieve bipartisan agreement on narrow, concrete 
proposals. That is what we were able to do with tax extenders. 
It is what Senator Crapo and I, I believe, achieved in this 
working group.
    The comments that all three of you made speak to the 
seriousness of how hardworking Americans face such an uncertain 
future. It is beginning to be understood increasingly by people 
here what people at home have understood for years, that 
whatever they have in savings--and the fact that they do not 
have a defined pension benefit--is almost always very, very 
inadequate and that that is going to matter.
    We have seen, particularly, as union membership has 
declined, so has access to these plans. We have a defined 
contribution system that works well for higher-income workers 
but too often leaves behind low-income workers who have 
suffered from stagnant wages for most of the last 20 years to 
begin with--nothing new, given the expertise that the three of 
you have.
    The Federal Reserve's Survey of Consumer Finances reports 
that the median retirement account balance among households on 
the verge of retirement is $14,500. Imagine that. I mean, we 
sit here with good-paying jobs around this table, we sit here 
with a good defined pension benefit, we sit here, most of us, 
with adequate or way more than adequate savings, and we do not, 
as President Lincoln said, get our public opinion baths often 
enough to hear that that number is very real to so many people, 
that $14,500.
    There are three things we can do. I want to say a few words 
and then ask you a question, Mr. Kalamarides.
    We must address the retirement emergencies poised to 
devastate far too many workers. I will talk about that in a 
second. Second, we should implement a number of the common-
sense bipartisan reforms that Senator Crapo and I recommended, 
including one our working group discussed and came to some 
bipartisan agreement on, with legislation to make it more 
attractive to convert to employee stock ownership plans. These 
companies help all workers at a company build wealth and enjoy 
a much more secure retirement.
    Just this week, I talked to people from Messer, a major 
construction company that has been an ESOP for 30 years in 
southwest Ohio. Much beyond that, I have been to visit a 
company called Lifetouch in Galion, about 10 miles from where I 
grew up, Galion, OH, that does school pictures, and they are 
growing and growing and growing. It has been an extraordinarily 
successful ESOP.
    I also met with someone from Amsted Industries out of 
Chicago which does manufacturing, including in my State, heavy 
manufacturing, and has helped a lot of their workers not just 
to have 
middle-class standards of living now, but well into the future.
    Finally, we need to expand Social Security--I know you are 
doing some work on that in Boston--and reform our system with 
tax incentives for retirement to ensure that workers have 
access to tax-preferred retirement savings and annuitized 
lifetime income.
    Before the committee addresses any of these issues, though, 
I want to talk about something that I know matters to Senator 
Warner, Senator Casey, Senator Cardin, and Senator Portman, at 
least us. Senator Wyden has been very outspoken on it. Senator 
Hatch has supported it. That is, what we do about these pension 
systems. Starting with Central States, Senators of both parties 
have mentioned this legislation that is well-intentioned but 
cannot realistically pass this Congress. I am willing to work 
with any colleagues interested in putting together a bipartisan 
comprehensive effort.
    Second, this committee must immediately address--and that 
is what Senator Wyden talked about earlier, and I know the 
interest of Senator Warner in this--the emergency confronting 
125,000 coal miners and their families. Through no fault of 
their own, these workers are at risk of spending their 
retirement in poverty if the retirement plan fails, as it is 
projected to do by 2017.
    Senator Hatch has made supportive comments, as have others 
on this committee. If the plan fails, it will be taken over by 
PBGC, and, unfortunately, PBGC is already stretched, in 
terribly dire condition, with a total deficit of some $62 
billion. If the mine workers' pension fails and the plan is 
taken over by PBGC, you have to think the future of PBGC is not 
so good.
    That is why we should not go down that road. This committee 
should act on the bipartisan legislation coming from the two 
West Virginia Senators.
    So my question--and sorry for the early comments about 
other things--but my question, Mr. Kalamarides, is, our working 
group recommended a number of important issues that we came 
together on, and I think there is real potential for Congress 
moving on this and this committee moving on this, including the 
open multiple-employer plans, as you know.
    Tell us about the population that would be affected by 
this. How many workers? What do their demographics look like? 
How much do they make? Where do they live? What kinds of 
businesses and business owners would be able to offer plans? 
Talk that through. That is my only question.
    Thank you.
    Mr. Kalamarides. Thank you, Senator Brown, for both your 
leadership on the Investment and Savings Working Group and your 
advocacy for open multiple-employer plans.
    Open multiple-employer plans can serve small businesses, in 
particular. There are 5.6 million small businesses that employ 
fewer than 100 employees. They employ 55 million American 
workers. Of those 55 million American workers, 30 million are 
women, 12 million are Hispanic-Americans, 6 million are 
African-Americans, and 4 million are Asian-Americans.
    They tend to earn less than those who are at medium and 
large employers. Fifty percent of these small businesses do not 
offer plans. An open multiple-employer plan, by allowing small 
businesses to pool their purchasing power, removing the one bad 
apple rule, and transferring that fiduciary responsibility to 
professionals, will allow those small businesses to offer 
retirement plans.
    We see the take-up rate increasing by 250 percent if we can 
pass these changes, and, therefor, we believe that all these 
working Americans can improve their savings and take advantage 
of the ERISA environment that we have described that gives good 
protections. And with automatic enrollment, automatic 
escalation, and lifetime income, they can enjoy financial 
security.
    Senator Scott. Senator Thune?
    Senator Thune. Thank you, Mr. Chairman. And thank you to 
members of our panel for being here. This is an opportunity, I 
think, to explore numerous proposals that have been advanced to 
expand opportunities for Americans to save for retirement. It 
is something that really ought to have, I hope, broad 
bipartisan support.
    I want to commend Senators Brown and Crapo for their 
efforts as co-chairs of the Savings and Investment Working 
Group last year, and I hope that this committee will provide an 
opportunity to further examine many of the proposals that were 
discussed in their report.
    I would also recognize and thank Mr. Barthold, for he and 
his staff did a lot of the heavy lifting on all those working 
groups. So we appreciate what came out of that. I think there 
is a lot of food for thought and hopefully, ultimately, more 
than that, but also action when it comes to making a lot of 
reforms to our tax code that will generate more growth in our 
economy and, hopefully, with regard to this specific issue, 
encourage people to save more for their retirement.
    I know this question has sort of been touched on already, 
but there has been a proposal to increase the amount of the 
existing credit offered to small employers who start a 
qualified retirement plan. Both Chairman Hatch and President 
Obama have suggested that the credit should be substantially 
increased beyond the current $500 amount. Now, unfortunately, 
the use of this credit has been very, very weak.
    So my question is for anyone on the panel. Do you believe 
that increasing the amount of this credit would also increase 
the number of small businesses that take advantage of it, and 
is this something that Congress should consider if and when 
there is a retirement tax package?
    Dr. Munnell?
    Dr. Munnell. In this nice collegial environment, I hate to 
be negative, but my gut is that increasing that credit from 
$500 to $1,500 is really not going to have a very big effect. 
So it is not going to hurt anybody, but I do not think you will 
see that much more take-up.
    There are just a lot of barriers standing in front of small 
businesses in terms of their ability to set up plans.
    Senator Thune. That is not one of them.
    Dr. Munnell. Yes.
    Senator Thune. Mr. Kalamarides?
    Mr. Kalamarides. I think that an expanded tax credit for 
small businesses in conjunction with the changes that we have 
talked about for open multiple-employer plans will increase the 
take-up rate among small business owners.
    For small business owners, three barriers that have been 
identified by the Savings and Investment Working Group, the 
GAO, and our studies suggest that cost, administrative hassle, 
and fiduciary responsibility are the big challenges.
    The proposals that the Savings and Investment Working Group 
suggested around Open MEPs help on the ongoing administration 
of the plan. Getting small businesses interested in adopting an 
expanded tax saver's credit would assist in setting up payroll 
changes and lowering some of the fixed costs that cannot be 
shared with other employers.
    Senator Thune. One area that has not received as much 
attention--and I know it has been touched on already here 
today--deals with part-time employees in the retirement area. 
We know that more and more Americans are employed part-time. 
People are taking part-time work either by choice or by 
circumstance, and typically these employees do not have access 
to retirement plans at work.
    In your experience, what are the challenges to getting 
part-time workers covered? I think Senator Wyden already 
touched on this a little bit. But is there anything that can be 
done to expand access to retirement plans to put more part-time 
employees in those plans?
    Mr. Kalamarides. The Savings and Investment Working Group 
made the proposals, and we support them, to help expand long-
term part-time workers' access to and participation in defined 
contribution plans.
    Currently, only 30 percent of part-time workers have access 
to defined contribution plans, and the situation is worse at 
small businesses: less than half of them even offer a 
retirement plan to all workers. So long-term part-time workers, 
often with two jobs, in low- to moderate-income families, can 
and do save, but what they are managing is income volatility, 
and they lack access to lower-cost investment solutions.
    Open multiple-employer plans, in conjunction with changing 
the rules and allowing long-term part-time workers to save at 
their place of employment, will help them save and achieve 
financial security.
    Senator Thune. Mr. Barthold, as we encourage more Americans 
to save for retirement, that certainly applies when you have 
more low-income earners who may find it more difficult to save.
    There has been a proposal to make the existing small 
saver's credit refundable. As you know, refundable credits, 
such as the EITC, historically have had a much higher rate of 
fraud and error than nonrefundable credits, and it is generally 
understood that when Uncle Sam is sending out checks, it has 
the unfortunate effect of encouraging bad actors.
    Would you agree with that general point regarding 
refundable credits, and if so, before Congress considers making 
the small saver's credit refundable, are the prospects for 
increased fraud and error something that we need to take into 
consideration?
    Mr. Barthold. Senator Thune, the members are always 
concerned about the ability of the IRS to administer and 
taxpayers to comply. As you note, there is evidence that 
existing credits and refundable credits have been a source of 
compliance issues, but beyond that, really any sort of refund--
it does not have to be refundable credit-generated--is the 
target of fraudsters.
    The refundable credit may magnify that. But yes, certainly, 
our staff would work with the Finance Committee in terms of 
design to ensure that you are comfortable with the ability of 
the IRS to administer it and with compliance rates with any new 
provision that you might consider.
    Senator Thune. Thank you, Mr. Chairman.
    Senator Scott. Yes, sir.
    Mr. Kalamarides, a couple questions for you. Number one, in 
South Carolina, the average person around the age of 65 has 
less than $50,000 in liquid savings and less than $100,000 in 
their retirement account. This is pretty consistent, I am sure, 
throughout the country, but South Carolina seems to be in a 
particularly poor position for retirement.
    My question is, as you think about that group of retirees 
who are very close to looking for alternatives and, at the same 
time, the new workers who are coming into the workforce, many 
of those folks will have seven different jobs during their 
lifetime of work. Therefore, the Open MEPs may be an 
opportunity to discuss portability, and, Mr. Barthold, I would 
love to hear your comments on how we make portability easier 
for the average person to understand and appreciate.
    My final question is, when we are thinking about small 
business owners, having run a business for the last 15 years 
before I was elected to Congress, one of the things that is not 
necessarily on the top of our list is expanding benefits when 
we are seeing a contraction in the economy. So how do we make 
the conversation more important, and, frankly, how do we make 
the information more readily available, because I think that is 
a major part of the conversation that seems to be lacking?
    Mr. Kalamarides. Thank you, Senator Scott.
    I would agree with your concern about access to liquid 
assets and retirement, the concern that employees and citizens 
have about retirement savings. This week, the Center for 
Enterprise Development, CFED, published their annual report and 
said that 43.5 percent of Americans do not have 3 months' worth 
of salary available to cover emergency expenses.
    So savings at the workplace and for retirement is 
absolutely critical. And with portability, the first issue you 
raised, Open MEPs can help. When multiple-employer plans are 
organized on a geographic basis and an employee moves from one 
employer to another, even for those employers who may not be 
affiliated, they do not need to switch their plan. They do not 
need to roll over their plan. They can stay enrolled.
    Moreover, if there is a model plan design at the Federal 
level, all the plan designs will be similar between any 
multiple-employer plans. Individuals switching from one to 
another will not have to worry about undue changes in the 
rules. Service, investments, and price may differ and service 
providers may differ, but that will help on portability.
    One other important thing about portability that the 
Savings and Investment Working Group specifically addressed was 
around lifetime income solutions, and we agree with the 
Investment and Savings Working Group's proposal to make changes 
to allow lifetime income solutions to have more portability if 
an employer or if a provider decides not to offer it anymore, 
to allow a rollover out. We agree with the Investment and 
Savings Group recommendation on that.
    Senator Scott. Mr. Barthold, do you want to comment on the 
portability? And frankly, could you comment on the leakage as 
well, while you are starting your comments on portability?
    This 59-day window, how much does that play into the 
leakage concerns that we have? If you would talk first about 
portability, that would be great.
    Mr. Barthold. Thank you, Senator Scott.
    I think it is important to remember that a lot of the 
growth in defined contribution plans and popularity with 
employees of defined contribution plans is because they are 
portable. The problem with defined benefit plans, from an 
employee's perspective, is that you could have left one 
employer at age 30, and the benefits would have been locked in 
at the nominal dollar value of 5 years of service at age 30 and 
you did not have the benefit of growth in that through time.
    With a defined contribution plan, you can roll it into an 
IRA, you can often roll it into another employer's plan, and 
you can continue to participate in the growth of the economy 
through your investment.
    So defined contribution plans inherently offer portability.
    Employees' elective deferrals are always vested, always 
portable. The same is true of an employee's after-tax 
contributions, if there are after-tax contributions. Members 
may have a question about vesting requirements of an employer's 
match in terms of portability in defined contribution plans. 
That might be an area that members might want to explore.
    Again, remember also, since an IRA is a defined 
contribution-type plan, it is ultimately portable. So, for a 
self-employed person who contributes to an IRA, everything is 
always portable as they move from opportunity to opportunity.
    The working group, as you alluded to, had noted that there 
are possibilities for leakage. Sometimes human nature perhaps 
takes over and people say, ``Oh, I am cashing out of my DC 
plan.'' Rather than rolling it over, I do not know, maybe they 
want to buy a sailboat to use Charleston Harbor because that 
looks good at the time.
    Senator Scott. There are a lot of sailboats there, that is 
for sure.
    Mr. Barthold. We do have the penalties for early 
withdrawal. That is to discourage that sort of behavior. But 
the working group did examine other possible penalty-free 
withdrawals and the loss of assets to retirement solution at 
rollover opportunities.
    But inherently, the defined contribution plan is sort of 
the ultimate portable vehicle in terms of accumulating 
retirement assets.
    Senator Scott. It does not appear that the leakage can be 
stopped by the penalty. I think the penalty is 10 percent plus 
ordinary income, and looking at the number of folks who have 
made distributions from those qualified plans, perhaps they do 
not understand and appreciate the impact of ordinary income on 
the dollars that they take out.
    Thank you very much.
    Dr. Munnell. Could I just say a word about leakages, 
generally, because that is a very important problem in the 
whole retirement system?
    Senator Scott. Yes.
    Dr. Munnell. We estimate that 1.5 percent of assets leak 
out each year. That does not sound like a very big number, but 
that means that assets at retirement are 25-percent lower than 
they would have been anyway, and when people do not roll over 
their accounts, they leak out through hardship referrals.
    They leak out a little bit through loans, and they leak out 
because people can have access to their money at 59\1/2\. But 
fixing this inability to take your money when you move from one 
job to another would be enormously helpful.
    Senator Scott. Thank you very much.
    Senator Warner?
    Senator Warner. Thank you, Mr. Chairman. I want to thank 
Senator Hatch and Senator Wyden for holding this hearing. Great 
presentations by the panel.
    Mr. Barthold, thank you again for, in these complex areas, 
helping us understand them in a rational way.
    I want to make a comment first, adding to what Senator 
Brown spoke to, and Senator Casey I know is interested as well. 
We have 125,000 Americans, miners, many of them dependent upon 
the UMWA 1974 Pension Fund. That fund is about to go into 
dramatic arrears, and, as Senator Brown said, simply turning 
this over to PBGC is not going to be the right option.
    We all have human cases on this. We had recently Mr. James 
McCoy, a miner from Wise County, 26 years worked in a coal 
company, retired. He already had a heart attack. He has 
esophageal cancer right now. He and his family are terrified 
about what happens when this pension fund, in effect, goes away 
or the benefits get cut dramatically.
    I appreciate Senator Wyden and Senator Hatch and others 
saying there is a way that we can come in and fix this. The 
sooner we get at it, the better for a whole lot of mine workers 
who, through no fault of their own, are about to lose a set of 
benefits that they are completely dependent upon.
    I also want to take a moment--and Senator Wyden has raised 
this issue. It is one that I have spent the last 10 months 
working on outside the day-to-day notion, and that is the kind 
of evolution of work as broadly based.
    More and more, work is no longer based upon employment in 
an individual firm--and Senator Scott mentioned you are going 
to change jobs seven times. I think it will actually be 
exponentially higher, and, in effect, work is being broken into 
more and more discrete tasks and being bid out on a regular 
basis in terms of taskers, the gig or on-demand economy.
    But if we step back a bit, we have already seen freelancers 
or contingent workers up about 35 to 40 percent of the 
workforce. We have just seen some recent data on the on-demand 
economy. That shows that literally 22 percent of Americans have 
offered an on-
demand service. Now, these are folks who responded to an online 
survey, so there was some self-screening. And 44 percent of 
Americans have utilized an on-demand service.
    I can tell you, this is only going to be an area that is 
going to exponentially grow. While there is great flexibility 
and freedom for folks who are working in this sector, there is 
no social insurance at all. And we are kind of caught up, I 
think, in a 20th-century conversation where we have this binary 
choice between 1099 and 
W-2.
    We will have that debate, but in many ways, that legal 
distinction between an employee and any kind of contractor, I 
think, is precluding some of the new platform companies, who, I 
think, in many cases, may choose to do the right thing, but 
cannot do the right thing because of this legal battle on 1099/
W-2.
    Increasingly, I think you are going to see workers not just 
have multiple jobs over their careers or provide multiple 
services, but have multiple streams of income coming in at the 
same time as they patch together a series of work. We have 
talked about small employer plans, but we are going to see more 
and more often the individual as, be it he or she, in some 
notion, an independent entity on their own.
    We have the IRA-type accounts. How do we think more 
expansively? I would like to hear the whole panel here--
obviously, we need to be bolder. We think, in a sense, of the 
social contract for the gig economy in terms of retirement 
savings. How do we allow firms, without getting into the 1099/
W-2 battle, to make contributions?
    Is there an hour bank concept that can be dusted off and 
made relevant in the 21st century? How do we build further on 
portability? And I would love each of the panelists to address 
this issue.
    Dr. Munnell. For people to have any sense of a secure 
retirement, they need to have a Social Security benefit as 
their base, which means that the earnings that they earn over 
their work time have to somehow be credited to Social Security 
through a payroll tax on that. If you do not have that, then 
you are really starting out behind the eight ball.
    In addition, people absolutely do not save on their own. 
They really do not. The only way they save is if they have an 
automatic savings mechanism that forces them to put some money 
aside each month. They also do save through their home by 
paying down their mortgage.
    So everybody has to both have a way to get their earnings 
counted toward Social Security credits, and everybody who is 
working needs to have some automatic savings mechanism so that 
they have some supplement to Social Security going forward.
    Senator Warner. And that needs to be regardless of how many 
income streams they have going.
    Dr. Munnell. That is right.
    Senator Warner. Please, very briefly, the last two.
    Mr. Kalamarides. Senator Warner, I would agree with Dr. 
Munnell that Social Security has to be the base for our social 
safety net system and that payroll-based deductions are the 
most effective way for individuals to save.
    I would categorize those working in this new economy in two 
categories: those who are entirely dependent on the new 
economy, entirely dependent on being an independent contractor, 
self-
employed, and those who do that part-time and work maybe part-
time long-term in another workplace. For those who work in that 
latter category who have part-time long-term employment at 
another workplace, I would like to agree with the Investment 
and Savings Working Group proposal to expand access to those 
workers to be able to participate in retirement plans at small 
businesses and Open MEPs to allow them to save at the workplace 
and get all the benefits that we have been talking about.
    For those who do not, which I think is a smaller amount 
now, who are 100-percent dependent on the gig economy, there 
are two significant tax-deferred ways to save: an individual 
retirement account and a health savings account.
    A single worker making less than $117,000 could save $5,500 
per year in an IRA and $3,350 in an HSA. If the worker is over 
55, they could save $6,500 and $4,350, respectively, even more 
if they have a family. Moreover, the saver's credit applicable 
for an IRA can be applicable to them as well.
    These solutions can be solutions. I think that we do need 
to think about them specifically for the gig economy.
    Senator Scott. Senator Casey?
    Senator Casey. Thank you very much.
    I wanted to, first, start with the premise which I think is 
probably self-evident, but we need to remind ourselves of a 
couple of what I consider realities for the middle class and a 
huge segment of the American people.
    Number one is, we have this strange disconnect between the 
data on the business page looking a lot better, unemployment 
cut in half in the last couple of years, by one estimate, 14 
million jobs created, the stock market, despite some 
difficulties this year, way up from where it was. So all the 
economic data, or most of it, looks pretty good, and yet all 
the other information about people's sense of the future, their 
belief that their children will do better than they will do, is 
way down.
    So all of those indicators are bad. There are a lot of 
reasons for that, but lack of wage growth is one of them. We 
have had horrific wage growth over 40 years; we know that. But 
one of the drivers of this--call it what you will: pessimism or 
a sense of insecurity or anxiety--one of the driver's, of 
course, is what we are here to talk about today.
    It is a crisis. The sense that people have--they do not 
have retirement security, they do not have the kind of security 
they would like--one of the ways to address that is by having 
this hearing and focusing on these broad issues, but at the 
same time, we have to work on issues that are right in front of 
us.
    Senator Warner, Senator Brown, and others have focused on 
something that is an issue we can deal with right away, and 
that is the 120,000 to 125,000 coal miners, retirees, I should 
say, who are depending on us to get the job done to pass the 
Miners Protection Act.
    So that is both a preventable problem, as well as a problem 
that would have a devastating effect on those families if we do 
not get it done. So we can prevent that horrific outcome if we 
work together. I do want to thank Senator Wyden and his staff 
for their continued work and interest in these issues. The 
issue of retired miners is something that I have worked on with 
the ranking member and a number of our colleagues for several 
years.
    So that is something we can do right away.
    Doctor, I think I will start with you, and I may only have 
time for one or two questions. The basic question I have is, 
can you itemize for me--itemize for us--a list of the best 
tools available to give families the best opportunities to 
save?
    I outline that question, because as you testified to, less 
than 50 percent of private-sector workers participate in 
retirement plans. That is a stark number. And you also said 53 
percent of households as of 2013 may be unable to maintain 
their standard of living in retirement, and this is an increase 
of more than 20 percentage points from a little more than 30 
years ago.
    So with that data, can you itemize for us the best tools? 
And some of this, I know, is by way of reiteration, but I think 
it is important to remind us what that list is and what the 
best tools are.
    Dr. Munnell. I think the thing to keep in mind is that 
people, left on their own, are not going to save. That is why 
we have the Social Security system, and that is why we have 
employer-based retirement plans.
    So to me, it is very simple: we need to fix Social 
Security. We are not going to do that today. People need that 
as a base for retirement income.
    Then everybody needs access to a retirement plan through 
their workplace, and they need to be automatically enrolled in 
that plan, always with a right to opt out. But nobody goes out 
and sets up an IRA. There are trillions of dollars in IRA 
accounts, but most of that comes from rolling over money from 
401(k)s and some from DBs. So people just need to be put where 
they should be and then given the freedom to move from there.
    So for the uncovered, we need to put them into something, 
and that is what the States are doing. They are going ahead and 
doing it. And then we need the 401(k) system to work really 
well, because it is here to stay. We are not going back to DBs. 
And there we need to have automatic enrollment.
    I know that the Pension Protection Act encouraged automatic 
enrollment, but it is not as pervasive as you think. If I were 
you, I would pass a law that says if you want to be a 401(k) 
plan, you have to automatically enroll all your employees in it 
every year and have the default contribution level be at 6 
percent and automatically increase that level over time, and, 
of course, people can opt out of that.
    But everything needs to be automatic if people are really 
going to end up with significant amounts of money at 
retirement.
    Senator Casey. In the interest of time, I will have our 
witnesses submit something for the record, if that is okay.
    Thank you, Mr. Chairman.
    Senator Scott. Yes, sir.
    Senator Grassley?
    Senator Grassley. My first question will be to Mr. 
Barthold. By the way, I did not hear the testimony of any of 
you because I was chairing the Judiciary Committee. So please 
forgive me.
    One policy goal identified by our Investment Working Group 
is preventing leakage, which refers to individuals depleting 
their nest egg prior to retirement. That is a real concern and 
something the committee has long sought to limit. However, as 
noted by the Joint Committee on Taxation, quote, ``Restrictions 
on access to tax-
favored savings before retirement may discourage individuals 
from making contributions.''
    So to you, sir. Are there any insights that you could 
provide for this tradeoff that may be helpful for the committee 
in evaluating policy proposals in the area of leakage?
    Mr. Barthold. Well, thank you, Senator Grassley. You quoted 
material that my colleagues put together, and the quote that 
you read was to flag the design issue that you and your 
colleagues always face: that we offer an encouragement to do a 
certain type of saving. We can make that more attractive if we 
make it more flexible.
    One of the ways that Congress has chosen to make it 
flexible has been to allow certain exceptions for hardship 
withdrawals or reductions in penalties for certain favored 
uses. That can be attractive in leading to ultimately greater 
accumulated retirement savings, if people never exercise those 
options but contribute money with the knowledge that, yes, 
maybe I can tap into it if needed. It does have the downside 
of, when they draw on it--the point that Professor Munnell made 
just a few moments ago--you can have substantial loss of 
retirement assets.
    I do not think that there is present a lot of good, 
empirical research that would allow us to pick and choose and 
say that certain existing exceptions from the penalties for 
early withdrawal should be repealed--that accumulation would 
benefit from eliminating those exceptions or not. It is an area 
where perhaps Professor Munnell might have some more insight 
from some of her recent work.
    Senator Grassley. Any one or all of you, I have a question 
about part-time employees. One policy option has been 
discussed: increasing employee coverage and mandating employers 
to allow long-term part-time workers to participate in 
employer-sponsored retirement plans. Before this committee 
considers such a proposal, I would like to better understand 
the barriers that currently stand in the way of more employers 
voluntarily offering such a benefit.
    So my question is kind of a wonderment around three 
different parts. Are there currently rules governing employer-
sponsored plans that make it difficult for employers to allow 
part-time employees to participate? Is it costly for employers 
to include part-time workers? Is it a combination of these, or 
are there yet other concerns that I have not considered? Any 
one or all of you.
    Dr. Munnell. I think that Jamie is probably the expert 
here, but my understanding is that ERISA allows companies not 
to include part-time employees, and so there is a temptation 
not to do that.
    I think that if you were going to just do part-time 
employees generally, there would be a lot of coming and going 
that would make it expensive. But when you add this 
requirement, that it is the long-term part-time employee, 3 
years or so, I think that is a very sensible criterion for 
including that kind of person in the plan.
    Mr. Kalamarides. Long-term part-time employees can be 
excluded from 401(k) plans, and there are a number of reasons, 
from a cost perspective, that businesses do not include them.
    By expanding the definition to allow them to participate 
and allowing those workers to be included, you can dramatically 
increase access to workplace-based retirement plans.
    It is important, also, to couple this with passing reforms 
to open multiple-employer plans to allow those long-term part-
time employees at small businesses without access to be able to 
save there.
    By doing that, long-term part-time employees who might move 
from employer to employer can reduce the portability 
challenges, because they might be in one geographic area and 
participate in one multiple-employer plan.
    Senator Grassley. My last question I will submit for answer 
in writing. Thank you.
    Senator Scott. Thank you, Senator Grassley.
    I would like to thank my colleagues, the witnesses, and all 
of the staff who have worked very hard to prepare for this 
hearing.
    We have had a good discussion here today. My hope is that 
we continue these discussions offline and keep working toward 
enacting legislative proposals that can benefit as many 
Americans as possible to plan and prepare for retirement.
    I look forward to working with my colleagues on this effort 
and hope that they will continue to reach out to the chairman 
with any ideas they might have in this regard.
    As for today's hearing, if any member wishes to submit 
written questions for the record, please get them to us by the 
close of business on Friday, February 12th.
    Thank you. With that, this hearing is adjourned.
    [Whereupon, at 11 a.m., the hearing was concluded.]
    
    
    
    
    
    
    
    
    
    
    
    

                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              


       Prepared Statement of Thomas A. Barthold, Chief of Staff, 
                    Joint Committee on Taxation \1\
---------------------------------------------------------------------------
    \1\ This document may be cited as follows: Joint Committee on 
Taxation, ``Testimony of the Staff of the Joint Committee on Taxation 
Before the Senate Committee on Finance Hearing on Helping Americans 
Prepare for Retirement: Increasing Access, Participation, and Coverage 
in Retirement Savings Plans'' (JCX-4-16), January 28, 2016. This 
document can also be found on the Joint Committee on Taxation website 
at www.jct.gov.
---------------------------------------------------------------------------
    My name is Thomas A. Barthold. I am Chief of Staff of the Joint 
Committee on Taxation. It is my pleasure to present the testimony of 
the staff of the Joint Committee on Taxation today concerning 
retirement saving.

    Tax subsidies for retirement savings are designed to encourage 
employers to offer retirement plans to their employees and to encourage 
individuals to contribute to plans available in the workplace, as well 
as to IRAs. These subsidies have led to the widespread availability of 
employer-sponsored retirement plans and to the accumulation of 
significant amounts in those plans and in IRAs.

    Nonetheless, concern about the adequacy of savings to provide 
income security during retirement is a frequent topic of public 
discussion and of congressional attention. Costs associated with 
sponsoring a retirement plan may discourage some employers, 
particularly small employers, from establishing a plan. In addition, 
even employees with access to a workplace plan may not take full 
advantage of it, and savings intended for retirement may be used for 
other purposes (referred to as ``leakage'') and not replaced.

    The Joint Committee staff has prepared a detailed review \2\ of--
---------------------------------------------------------------------------
    \2\ Joint Committee on Taxation, ``Present Law and Background 
Relating to Tax-Favored Retirement Saving and Certain Related 
Legislative Proposals'' (JCX-3-16), January 26, 2016.

        Present law related to employer-sponsored tax-favored 
---------------------------------------------------------------------------
retirement plans and individual retirement arrangements;

        Economic issues relating to retirement plans;

        Data relating to retirement savings; and

        Summaries of selected legislative proposals relating to tax-
favored retirement savings.

    In connection with the work last year of the bipartisan Finance 
Committee Tax Working Groups, the report issued by the Savings and 
Investment Working Group focused on the area of private retirement 
savings and identified three key goals for policy makers: (1) 
increasing access to tax-deferred retirement savings; (2) increasing 
participation and levels of savings; and (3) discouraging leakage while 
promoting lifetime income.\3\
---------------------------------------------------------------------------
    \3\ The Working Group report is available at http://
www.finance.senate.gov/imo/media/doc
/
The%20Savings%20&%20Investment%20Bipartisan%20Tax%20Working%20Group%20Re
port.
pdf.

    In the slides that follow I review those goals identified by the 
Working Group report and review various legislative proposals relating 
to each of those goals.

                           Employer-Sponsored

                 Tax-Favored Defined Contribution Plans

_______________________________________________________________________

q Defined Contribution Plans

  v  Benefits based on individual accounts for employees, consisting of 
employer and employee contributions and earnings

  v  Employee benefits from investment gain and bears risk of 
investment loss

q Types of Defined Contribution Plans

  v  Qualified retirement plans, including section 401(k) plans

  v  Section 403(b) plans for charities and public schools

  v  Section 457(b) plans for State and local governments

q Types of contributions to defined contribution plans

  v  Employee elective deferrals

    n  Employee elects plan contribution in lieu of taxable current pay

    n  ``Automatic enrollment''--deferrals begin automatically at a 
specified default rate unless the employee elects out or elects a 
different rate

    n  Employee deferrals may be pretax (``traditional'') or after-tax 
Roth

  v  Matching employer contributions

    n  Contribution must be conditioned on employee making an elective 
deferral (traditional or Roth) or can be conditioned on after-tax 
employee contributions

  v  Nonelective employer contributions

    n  Employer decides the amount of the contribution, not based on 
employee contribution

  v  After-tax employee contributions--generally elective, not a common 
plan feature

                   Individual Retirement Arrangements

                                 (IRAs)

_______________________________________________________________________

q  Individual savings vehicles rather than employer-sponsored

q  Account-based arrangements, like defined contribution plans

q  Individual benefits from investment gain and bears risk of 
investment loss

q  Some employer-sponsored plans funded using IRAs

  v  Simplified employee pension (``SEP'') plan

  v  SIMPLE IRA plan

       Private Sector Plan Participants by Type of Plan 1975-2013

                              (thousands)

_______________________________________________________________________




[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


Private Sector Plan Participants by Active or Inactive Status

                       and Type of Plan 1975-2013

                              (thousands)

_______________________________________________________________________


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

     Access, Employee Participation, and Take-up Rates for Defined

                Contribution Plans in the Private Sector

                              (percentage)

_______________________________________________________________________

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                    Impediments to Retirement Saving

_______________________________________________________________________

q  Lack of access to workplace plans; costs associated with sponsoring 
a retirement plan may discourage some employers, particularly small 
employers, from establishing a plan

q  Plan may cover only some employees and low participation rates (no 
contributions or insufficient contributions) by employees who are 
covered

q  Use of savings before retirement without replacement by rollovers or 
additional contributions (``leakage'') and lack of ``lifetime income'' 
options

           Tax-Favored Retirement Savings--Key Policy Goals *
---------------------------------------------------------------------------

    * These policy goals and the legislative proposals herein were 
discussed in the report issued in July 2015 by the bipartisan Finance 
Committee Tax Working Group on Savings and Investment, available at 
http://www.finance.senate.gov/imo/media/doc/The%20Savings%20&%20
Investment%20Bipartisan%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
_______________________________________________________________________

q  Increasing access to retirement plans

q  Increasing participation and contribution levels

q  Discouraging leakage and promoting lifetime income

                      Increasing Access to Plans:

                        Multiple-Employer Plans

_______________________________________________________________________

q  Present-law multiple-employer plans

  v  A multiple-employer plan is a single plan maintained for employees 
of unrelated employers; offers opportunity for centralized 
administration and lower costs

  v  Common interest requirement

    n  DOL indicates participating employers must share some connection 
(sometimes referred to as a common interest). Otherwise, the 
arrangement is treated as a collection of plans, each covering the 
employees of a particular employer

    n  The common interests are ``genuine economic or representational 
interests unrelated to the provision of benefits . . .''

  v  Violation with respect to one employer (``one bad apple'')

    n  A violation of Code requirements with respect to one employer 
(such as failure to cover a nondiscriminatory group of that employer's 
employees) may cause disqualification of entire plan

    n  ERISA violation with respect to part of plan could create ERISA 
liability for all employers

q  Proposals on multiple-employer (or ``pooled employer'') plans--S. 
1270, sec. 207; S. 1970, secs. 2-3; S. 1979, secs. 201-202

  v  No common interest among participating employers required; limited 
to defined contribution plans

  v  ``Designated plan provider'' (S. 1270) or ``pooled plan provider'' 
(S. 1979)

    n  Professional service provider designated under the terms of the 
plan to perform all administrative duties reasonably necessary to 
ensure that plan meets qualification requirements and each 
participating employer meets its responsibilities

    n  Provider required to register with IRS or DOL and subject to 
credentialing/oversight

    n  May have fiduciary liability to the extent not delegated under 
the proposal to a participating employer

  v  Solution for ``one bad apple''

    n  Each employer bears fiduciary responsibility for the selection 
and monitoring of the pooled plan provider and for the investment of 
assets attributable to the employer's employees if not delegated to 
another fiduciary, but not for plan assets as a whole

    n  The failure of a Code requirement with respect to the portion of 
the plan covering employees of a particular employer causes 
disqualification of only that portion of the plan, which may be spun 
off from the plan

                      Increasing Access to Plans:

                             Start-up Costs

_______________________________________________________________________

q  Present-law credit for small employer pension plan start-up costs

  v  Nonrefundable tax credit for administrative costs of a small 
employer for adopting/administering a new qualified retirement plan, 
SIMPLE IRA plan, or SEP

  v  Credit limited to lesser of $500 per year or 50 percent of 
qualified start-up costs and only allowed for 3 years

  v  Plan must cover at least one lower-paid employee

  v  Small employer--no more than 100 employees

  v  No requirement to continue plan (or continue at same level) in 
post-credit period

  v  To date, take up for this credit has been very weak. Total value 
of the credit is often in the range of half a million dollars annually.

q  Proposals to expand the present-law credit for plan start-up costs

  v  S. 1270, sec. 202--Retains credit as 50 percent of costs, but 
increases maximum credit to the greater of $500 or lesser of (1) $250 x 
number of nonhigh participants or (2) $5,000

  v  President's FY 2016 budget proposal--Qualified costs are expanded 
to include employer contributions and maximum credit is increased to 
$1,500 ($2,000 if new plan includes automatic enrollment); credit of 
$500 for existing plan that adds automatic enrollment

                      Increasing Access to Plans:

    New 401(k) Automatic Enrollment Safe Harbors and Related Credit

_______________________________________________________________________

q  Existing automatic enrollment safe harbor for nondiscrimination 
testing

  v  Present-law safe harbor requires default rate of not less than 3 
percent but not more than 10 percent for first year, then requires 
escalation of minimum default rate to 4 percent, 5 percent, and 6 
percent in subsequent years but not above 10 percent; 6 percent 
deferral needed for full required safe harbor employer match

  v  Related safe harbor for matching contributions limits matches to 6 
percent

q  S. 1270, sec. 220; S. 1970, sec. 4--Secure deferral arrangements

  v  Requires automatic enrollment with higher default percentages 
(minimum default rate of between 6 percent and 10 percent for first 
year, increasing to 8 percent and 10 percent in subsequent years, with 
no maximum rate); 10 percent deferral needed for full required safe 
harbor employer match

  v  Related safe harbor for matching contributions allows matches up 
to 10 percent (rather than 6 percent maximum under present law)

q  Credit for small employer (up to 100 employees) maintaining a secure 
deferral arrangement

  v  S. 1270, sec. 220--Credit for 3 years of 10 percent of the 
matching and nonelective contributions made for nonhighs, subject to an 
annual credit cap of $10,000

  v  S. 1970, sec. 5--Credit for a nonhigh employee's first 5 years of 
participation for matching contributions up to 2 percent of 
compensation, with no annual credit cap

           Increasing Participation and Contribution Levels:

               Coverage for Long-Term, Part-Time Workers

_______________________________________________________________________

q  Present-law minimum participation rules under the Code and ERISA 
allow employees to be excluded until earning a ``year of service,'' 
generally 1,000 hours worked in a 12-month period, and reaching age 21. 
A parallel rule applies under section 401(k).

q  Proposals require a 401(k) plan to allow ``long-term part-time'' 
employees to contribute to the plan--H.R. 2117, sec. 103; President's 
FY 2016 Budget Proposal

  v  Long-term part-time defined as at least 500 hours of service 
annually for 3 years

  v  Age 21 exclusion still permitted

  v  Employer contributions not required, but, if made, years of 
service with at least 500 hours count towards vesting

  v  Flexibility provided on how long-term part-time employees treated 
in nondiscrimination testing

           Increasing Participation and Contribution Levels:

                       Present-Law Saver's Credit

_______________________________________________________________________

q  A nonrefundable tax credit for eligible taxpayers who make elective 
deferrals (or voluntary after-tax contributions) to tax-favored 
retirement plans or contributions to IRAs

q  Only contributions up to $2,000 taken into account

q  Tax credit limited to a specified percentage (50 percent, 20 
percent, or 10 percent) of contributions, depending on taxpayer's 
adjusted gross income (for 2016, ranging from $37,000 to $61,500 for 
joint filers; $18,500 to $30,750 for single)

q  Tax credit is in addition to any deduction or exclusion for 
contributions

q  Credit is available to individuals who are 18 or older, other than 
full-time students or individuals claimed as a dependent on another 
taxpayer's return

q  Credit reduced for distributions from plans or IRAs during a 
specified period

           Increasing Participation and Contribution Levels:

                      Expansion of Saver's Credit

_______________________________________________________________________

q  H.R. 2117, sec. 105

  v  Credit is 50 percent of eligible contributions up to $500 for each 
eligible individual with AGI not exceeding an indexed dollar amount 
(initially $65,000 for joint filers ($32,500 for single) with phase-out 
over next $20,000 ($10,000 single))

  v  Credit refundable

  v  Doubled (100 percent of contributions) if taxpayer agrees to have 
entire credit amount contributed directly to a tax-favored retirement 
plan

  v  $500 contribution amount increases to $1,500 by 2023, indexed 
thereafter

  v  Treated as a pretax contribution (taxable upon distribution), but 
does not count against contribution limits; treated as employer 
contribution for nondiscrimination purposes

                        Discouraging Leakage and

                       Promoting Lifetime Income

_______________________________________________________________________

q  Sources of leakage

  v  Exceptions to 10 percent early distribution tax for withdrawals 
for special purposes

  v Hardship withdrawals for immediate need for funds

  v Plan loans and inability to repay loan balance may diminish 
retirement funds

    n  On termination of employment, plan terms may accelerate loan 
repayment and provide for offset of unpaid loan balance against 
employee's plan account (which includes loan note)

    n  Regular 60-day rollover period may not provide sufficient time 
to restore funds

                        Discouraging Leakage and

            Promoting Lifetime Income: Plan Loan Not Repaid

q  S. 606, secs. 2 and 4

q  Proposal extends the time for rollover of plan loan offset amount 
until the due date for the return for the year in which the offset 
occurs

  v  Plan loan offset amount--Account balance offset after acceleration 
of loan repayment under plan terms results in actual rather than deemed 
distribution

  v  As an actual distribution, a plan loan offset amount can be an 
eligible rollover distribution

    n  Under present law, only 60-day rollover available

    n  Participant may not know loan offset date or be able to find 
money within 60 days to rollover

q  No debit/credit card-type loans from plans

  v  Prevents participant from using plan loans for daily regular 
purchases and the risk of incurring revolving debt that may not be 
fully repaid

                        Discouraging Leakage and

           Promoting Lifetime Income: Hardship Distributions

_______________________________________________________________________

q  S. 606, sec. 3; S. 1270, sec. 214

q  No suspension of deferrals after hardship withdrawal

    n  Present law requires a 6-month suspension of new elective 
deferrals following a hardship distribution

          Discouraging Leakage and Promoting Lifetime Income:

               Portability of Lifetime Income Investment

_______________________________________________________________________

q  Lifetime Income

  v  Concept--benefits withdrawn in a form that provides payments for 
entire lifetime, regardless of longevity; includes annuities and other 
forms, such as structured installment payments

  v Defined benefit plans--must offer annuity benefits

  v  Defined contribution plans and IRAs--annuity and other lifetime 
income options not common; when offered, a lifetime income product may 
be an investment option under the plan or lifetime income may be a 
distribution option when benefits commence

q  In order to preserve retirement savings for retirement, present law 
limits plan distributions before termination of employment (``in-
service'' distributions)

q  If a lifetime income product is discontinued as an investment option 
under a plan, restrictions on in-service distributions may prevent 
transfer of the investment to another plan or IRA.

q  Participant may be required to liquidate investment and reinvest in 
different option, losing benefit of lifetime income feature.

q  S.1270, sec. 221; President's FY 2016 Budget

  v  Allows in-service transfer to another retirement plan or IRA of 
lifetime income investment when investment options under a plan are 
changed

                                 ______
                                 
        Questions Submitted for the Record to Thomas A. Barthold
               Question Submitted by Hon. Orrin G. Hatch
    Question. Mr. Barthold, you mentioned part-time workers in your 
testimony. The working group identified proposals that would target 
``long-term'' part time workers, so-called ``career part-time'' workers 
who spend 3 or more years in part-time status working for the same 
employer. As more workers spend lengthy portions of their careers in 
part-time employment, this seems like an issue that needs to be 
explored. What are the obstacles to such coverage today, and are they 
primarily legal or economic in nature?

    Answer. For 2015, the percentage of part-time workers participating 
in a retirement plan is less than one-third of the percentage for full-
time workers, 19 percent versus 59 percent.\1\ This difference in 
participation is partially explained by a lack of access. The 
percentage of part-time workers with access is close to one-half the 
percentage of full-time employees with access (37 percent versus 76 
percent). The difference in the rate of participation is also explained 
by the relatively low take-up rates of part-time employees who are 
offered access: 51 percent of part-time employees with access choose to 
participate in a retirement plan versus 78 percent for full-time 
workers. This lower take-up rate may reflect a rational choice by part-
time employees to value current cash compensation over deferred 
compensation under a retirement plan. Part-time employees tend to be 
lower income. These employees may require a greater portion of their 
current earnings to obtain basic necessities, leaving a smaller portion 
available for other purposes, which include retirement savings.
---------------------------------------------------------------------------
    \1\ See Figure 4 on page 58 in Joint Committee on Taxation, 
``Present Law and Background Relating to Tax-Favored Retirement Saving 
and Certain Related Legislative Proposals'' (JCX-3-16), January 26, 
2016, which provides a chart comparing access, participation, and take-
up rates between full-time and part-time employees in qualified 
retirement plans for 2015.

    This reduced take-up rate may, in turn, partly explain the lower 
access rate. The requirements under Internal Code Revenue (``Code'') 
and the Employee Retirement Income Security Act of 1974 for retirement 
plans allow employers to exclude employees who have not completed 1,000 
hours of service in a year.\2\ When take-up rates are low, employers 
may conclude that part-time employees place a lower value on access to 
retirement benefits than do full-time employees or than part-time 
employees place on other forms of compensation, and thus may decide not 
to cover them.
---------------------------------------------------------------------------
    \2\ These rules are explained in more detail in JCX-3-16 at page 
11.

    Other factors may also influence an employer's decision on whether 
to cover part-time employees under its retirement plan. Offering 
coverage to part-time workers may result in greater administrative 
costs to employers, such as costs associated with additional employee 
notices and record keeping costs associated with small account 
balances.\3\
---------------------------------------------------------------------------
    \3\ Rules prohibiting qualified retirement plans from 
discriminating in favor of highly compensated employees (as defined in 
the code) allow employees who have not completed 1,000 hours of service 
in a year (and employees under age 21 who may also be excluded) to be 
tested separately for nondiscrimination. However, for an employer that 
allows participation by these employees, this separate testing results 
in some additional administrative cost. The nondiscrimination 
requirements are described in more detail in JCX-3-16, pages 12 to 15.

                                 ______
                                 
                Questions Submitted by Hon. Dean Heller
    Question. What is the most important thing lawmakers can do right 
now to help small businesses offer a workplace savings plan to their 
employees?

    Answer. As explained below, a combination of measures, such as 
those considered by the Senate Finance Committee's Savings and 
Investment Working Group, may be needed to help small businesses offer 
retirement plans to their employees.

    According to economic theory, the amount and forms of compensation 
provided by an employer to its workforce are based on its business 
assessment of the compensation needed to hire and retain the workforce 
necessary for the firm's success. One basic factor in an employer's 
decision whether to offer a retirement plan is the perceived value of 
the plan to the employees.

    Plan contributions (whether made at the election of the employee or 
employer matching or nonelective contributions), and the administrative 
costs associated with a retirement plan, form a part of employees' 
compensation. The value of the plan to employees therefore depends on 
their preference for compensation in the form of retirement plan 
contributions, rather than other forms, particularly current wages. 
Depending on a particular employee's circumstances, competing uses for 
current wages (rather than retirement plan contributions) may consist 
of basic living expenses (for example, for very low-earning employees), 
paying off debt (for example, student loans, mortgage, credit cards), 
and saving for other, generally nearer-term purposes (for example, 
emergencies, buying a home, children's education). If employees place a 
lower value on the retirement plan than it costs the employer to 
provide the plan, the employer may not retain the employee's services 
or the employer may not provide the retirement benefit.

    Employers may have an incentive to offer a retirement plan if the 
cost is subsidized by the government. This would make it more likely 
the value the employee places on the retirement benefit exceeds the 
employer's cost of providing the benefit. For example, a tax subsidy of 
25 percent on the costs of the plan means an employer can offer its 
employees $1 of compensation at $0.75 cost. This is attractive to the 
employer, even if the employee values the $1 of compensation at exactly 
$1 and no more.

    The reasons why not all employers offer plans--as well as why not 
all employees who are offered plans choose to participate--therefore 
depend on the characteristics of a particular employer and its 
employees. As a result, effective incentives to expand retirement plan 
access and participation are likely to vary across employers and their 
employees, so a combination of legislative changes may be needed.

    Question. As you know, current law provides a tax credit of up to 
$500 per year, for 3 years, for start-up costs related to qualified 
small employer plans. However, the uptake rate for this credit has been 
historically weak. Why do you think the uptake has been so low?

    Answer. As noted above, the administrative costs associated with a 
plan, as well as plan contributions, form part of employees' 
compensation. As previously suggested, a likely reason for an employer 
not to offer a plan is an assessment that employees prefer to receive 
compensation in other forms. By reducing the administrative cost of a 
plan, the start-up credit frees up funds to be provided to employees in 
other, preferred forms of compensation. However, the reduction in cost 
may not be sufficient to change the value of the plan to employees, as 
the ``cost'' to the employees is the difference in value they place on 
retirement plan benefits compared to their preferred form of 
compensation (or how much less they value increased future consumption 
at the expense of current consumption). In addition, because the start-
up credit is part of the general business credit, an employer that is 
eligible for other credits may not be able to benefit from the start-up 
credit for the taxable year in which the plan costs are incurred.

    Question. If we were to expand the start-up credit, as other 
legislative proposals have suggested, including the President, what is 
the fiscal impact?

    Answer. An expansion of the tax credit results in a revenue loss. 
In the case of the start-up credit, the potential loss consists of both 
employer income taxes due to the credit and employee income taxes (and, 
generally, payroll taxes) as part of employees' compensation shifts 
from taxable wages to excludable retirement plan benefits. The fiscal 
impact of a particular proposal will depend on the details of the 
proposal. Moreover, the more effective incentive a particular proposal 
provides for employers to offer plans, the greater the revenue loss as 
more currently taxable employee wages shift to retirement plan 
contributions.

    Question. I am deeply concerned with leakage. In my home state, we 
have felt the pressures of the recession and many of the constituents 
have had to dip into their retirement funds to make ends meet. In your 
opinion, what is the single best way we as lawmakers can make it easier 
for workers to return assets for retirement accounts after they have 
been withdrawn?

    Answer. There is no single best solution for retirement plan 
leakage. One challenge for increasing retirement savings for lower- and 
middle-income workers is that these workers may be reluctant to save 
for retirement if there is no opportunity to access these funds for 
purposes other than retirement, such as in the event of financial 
hardship or for other nonrecurring unexpected expenses. Elements of the 
current statutory structure reflect these competing aspects of 
retirement savings by imposing an additional income tax on withdrawals 
of retirement savings before age 59\1/2\ but including a number of 
exceptions for withdrawals for particular purposes. Further, present 
law provides rules that limit withdrawals of elective retirement 
savings from 401(k) plans during employment but allow withdrawal in the 
event of financial hardship. However, to the extent that an individual 
views retirement savings as an available resource for other needs, the 
savings become general savings rather than retirement savings, serving 
an important need for individuals, but not entirely fulfilling the 
purpose for which the tax subsidy is provided. Once these amounts are 
withdrawn and consumed, it is often very difficult for these workers to 
replace (or return) this withdrawn retirement savings. Further, 
returning withdrawn savings may be particularly difficult to combine 
with continuing the same prior level of ongoing retirement saving. On 
the other hand, reducing opportunities for workers to access retirement 
funds for other critical uses may also result in decreased retirement 
savings as individuals opt for more accessible means of savings. Thus, 
allowing some access to retirement savings may increase aggregate 
retirement savings even though, in a number of individual cases, 
retirement savings may decline.

    In addition to a concern that individuals may simply be unable to 
return withdrawn amounts, allowing individuals to withdraw from 
retirement savings and return these withdrawn funds creates a number of 
compliance issues (as well as complexity and recordkeeping issues) for 
both the individual and the Internal Revenue Service. These issues are 
particularly problematic when the withdrawal and the return of assets 
occur in different tax years. Recognizing these issues, present law 
limits the situations to 60-day rollovers for actual withdrawals and 
return of funds, with the opportunity for extension in limited 
circumstances.

    Plan loans through employer-sponsored retirement plans are one 
means by which plan participants can gain access to plan funds for 
nonretirement purposes and then repay the funds over time, generally 
through payroll deduction. The Code allows this without income tax 
inclusion of the loaned amount if certain requirements are satisfied. 
These include charging a market rate of interest on the loan and that 
the loan generally be repaid in equal amortized installments over 5 
years.

    One maxim that may be particularly appropriate in this area is to 
be careful to avoid unintended consequences. For example, any proposal 
intended to make it easier for individuals to access retirement savings 
for other uses and return the funds tax-free may have the result of 
encouraging such withdrawals that individuals cannot realistically 
return, resulting in decreased rather than increased retirement 
savings. On the other hand, reducing opportunities for workers to 
access employer-sponsored retirement funds for other critical uses may 
also result in decreased employer-sponsored retirement savings as 
workers opt for more accessible means of savings. However, it is 
important to note that savings for retirement may take forms outside 
employer-sponsored plans or even IRAs. Any individual asset 
accumulation before retirement is potentially available for retirement.

    Question. I strongly believe that tax reform, done the right way, 
can improve our fiscal picture. What steps can we as lawmakers take to 
improve our retirement savings in a fiscally responsible way?

    Answer. Any changes in tax law, including tax reform, involve 
balancing competing goals and interests. As discussed above in 
connection with the start-up credit, the more effective incentive a 
particular proposal provides employers to offer plans and employees to 
contribute, the greater the revenue loss associated with the proposal. 
It may be appropriate to consider offsetting the effects of expanded 
retirement savings with other reforms, either in the retirement savings 
area or in other parts of the tax system.

    Question. I understand the President is expected to propose an Open 
MEP plan in his FY17 budget. I would imagine a significant amount of 
implementing guidance would be needed. If Open MEPs were expanded, what 
role, if any, would the IRS play in this additional guidance?

    Answer. An open multiple-employer plan, or Open MEP, is a single 
plan maintained by unrelated employers. A proposal relating to Open 
MEPs is contained in General Explanations of the Administration's 
Fiscal Year 2017 Revenue Proposals, pages 147-149, Department of the 
Treasury, February 2016, available at https://www.treasury.gov/
resource-center/tax-policy/Documents/General-Explanations-FY2017.pdf. 
In addition to changes under the Employee Retirement Income Security 
Act of 1974 (``ERISA''), the proposal involves responsibilities both 
for the service provider promoting and administering an Open MEP, and 
for participating employers, with respect to establishing and 
maintaining the tax-favored status of the plan. The proposal refers to 
guidance to be issued by the Secretary of the Treasury; however, as a 
practical matter, guidance with respect to code provisions is developed 
and issued by the IRS, subject to Treasury review and approval. In 
addition, the Open MEP proposal provides for guidance by the Department 
of Labor and requires Treasury and Labor guidance to be coordinated and 
consistent.

    Question. Like many Nevadans, I am a strong supporter of ways to 
help our vulnerable populations save long-term for our retirement. What 
is the single most important thing lawmakers can do right now to help 
low-income and moderate-income families prepare for retirement?

    Answer. As discussed above, in light of the variety of 
circumstances among employers and employees, a combination of measures 
is likely to be needed, rather than any single measure.

                                 ______
                                 
               Question Submitted by Robert P. Casey, Jr.
    Question. In your opinion, what are the most efficient policy 
options available to make it easier for businesses to help their 
employees save, or individuals save on their own, and for whom will 
that most improve retirement and savings outcomes?

    Answer. As discussed in other responses, an employer provides 
employees with the amount and forms of compensation that it determines 
are needed to hire and retain the workforce necessary for the firm's 
success. Plan contributions, and the administrative costs associated 
with a retirement plan, form a part of employees' compensation. Thus, a 
basic factor in an employer's decision whether to offer a retirement 
plan is the perceived value of the plan to the employees.

    The value of the plan to employees depends in turn on their 
preference for compensation in the form of retirement plan 
contributions, rather than other forms, particularly current wages. 
Depending on a particular employee's circumstances, competing uses for 
current wages (rather than retirement plan contributions) may consist 
of basic living expenses (for example, for very low-earning employees), 
paying off debt (for example, student loans, mortgage, credit cards), 
and saving for other, generally nearer-term purposes (for example, 
emergencies, buying a home, children's education).

    Individuals also have the option of saving for retirement by 
contributing to IRAs. This again involves an individual's decision to 
favor retirement saving over competing uses for the same funds, such as 
basic living expenses, paying off debt, or saving for other purposes, 
as described above.

    Employers may have an incentive to offer a retirement plan if the 
cost is subsidized by the government. This would make it more likely 
the value employees place on the retirement benefit exceeds the 
employer's cost of providing the benefit. For example, a tax subsidy of 
25 percent on the costs of the plan means an employer can offer its 
employees $1 of compensation at $0.75 cost. This is attractive to the 
employer, even if the employee values the $1 of compensation at exactly 
$1 and no more.

    Tax incentives may therefore play a role in encouraging employers 
to offer retirement plans and in encouraging individuals to save for 
retirement. However, the reasons why not all employers offer plans, as 
well as why not all individuals choose to contribute, depend on the 
particular characteristics of an employer and of each individual. As a 
result, a combination of policy options may be warranted to make it 
easier for businesses to help their employees save or individuals save 
on their own.

                                 ______
                                 
              Prepared Statement of Hon. Michael B. Enzi, 
                      a U.S. Senator From Wyoming
    Mr. Chairman, I would like to thank you for organizing this hearing 
and for your consistent support of retirement plan options, 
specifically Multiple Employer Plans. I would also like to thank the 
expert witnesses here today who will speak further as to how we can 
make it easier for small businesses to provide retirement benefits for 
their employees. I would like to extend a special welcome to Mr. 
Kalamarides, who has been willing to testify at now three Senate 
hearings on this topic, including a hearing I held in the HELP 
Retirement Security Subcommittee in October.

    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, 
intimidating, and expensive for small businesses. One way to do this is 
by allowing the expansion of Multiple Employer Plans.

    Multiple Employer Plans (MEPs), which have been permitted under 
ERISA and Federal tax law for decades, allow small businesses to join 
together to make retirement plans much easier to manage and 
significantly less expensive to provide for owners of those businesses, 
all while maintaining the highest levels of quality. Under current law, 
Multiple Employer Plans must consist only of employees that are joined 
together by significant interests unrelated to the provision of 
benefits. It seems to me that access to Multiple Employer Plans can and 
should be broadened to provide small businesses with administrative 
simplicity with regard to retirement benefits.

    This past year, the bipartisan Senate Finance Committee Savings and 
Investment report included a recommendation to allow employers to join 
together to open Multiple Employer Plans. The report notes, however, 
that current law ``hinders the formation of Multiple Employer Plans.'' 
I believe this committee has a great opportunity to remedy those 
hindrances.

    My interest in MEPs is based on my experience as a former small 
business owner and view that Congress can help narrow the retirement 
coverage gap in America. I believe we can do this by helping the 
expansion of plan options for small businesses, including Multiple 
Employer Plans, specifically by allowing the broadening of diversity 
among those businesses within such plans.

    We have a retirement coverage gap in America. I think one of the 
best ways to close that gap is to make it easier for small businesses 
to enter into a MEP by relaxing regulations and creating a more 
flexible environment. I commend the chairman and many of my colleagues 
on this committee for their work to advance legislation that fixes many 
of the issues preventing businesses from entering into such plans. I 
look forward to working in a bipartisan way to finalize legislation 
that will, once and for all, ensure that small businesses have the 
flexibility necessary to help close the retirement gap.

                                 ______
                                 
              Prepared Statement of Hon. Chuck Grassley, 
                        a U.S. Senator From Iowa
    Mr. Chairman, I would like to start by thanking you for holding 
this important hearing focused on enhancing retirement savings options. 
This committee has made great strides over the years in enacting bi-
partisan policies aimed at encouraging individuals to save and 
employers to offer retirement plans.

    I am proud to have been part of enacting some of the most sweeping 
retirement savings reforms in the past decade as part of the Pension 
Protection Act of 2006. These reforms included increasing contribution 
limits, encouraging greater participation in retirement savings through 
auto enrollment, making permanent the savers credit and allowing for 
catch-up contributions. It also made permanent a tax credit to help 
small businesses with plan start-up costs. These reforms were all good 
steps, but there is always room for improvement.

    The Savings and Investment tax reform working group did a good job 
of identifying several areas where there is bipartisan overlap. One 
proposal that appears promising is removing barriers that stand in the 
way of small businesses joining together to offer retirement plans 
through a multiple employer plan.

    I look forward to working with my colleagues on this committee to 
improve and expand upon current retirement savings options.

                                 ______
                                 
              Prepared Statement of Hon. Orrin G. Hatch, 
                        a U.S. Senator From Utah
WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah) 
today delivered the following opening statement at a hearing examining 
ways to empower job creators to offer and increase access to retirement 
savings plans for their employees:

    I'd like to welcome everyone to this morning's hearing on the 
ongoing effort to increase access, participation, and coverage in 
retirement savings plans.

    Financial security, and retirement policy in particular, have never 
been more important. Today we will discuss policies designed to 
incentivize employers to set up retirement plans and to help employees 
save more for their retirement and make those savings last a lifetime.

    When we talk about the status quo of retirement policy, there is 
both good news and bad news.

    The good news is that the private employer-based retirement savings 
system--particularly 401(k) plans and Individual Retirement Accounts, 
or IRAs--has become the greatest wealth creator for the middle class in 
history.

    Under the current system, millions of Americans have managed to 
save trillions of dollars for retirement. In specific terms, thanks in 
large part to policies Congress has enacted over the years, American 
workers have saved more than $4.7 trillion in 401(k) plans and more 
than $7.6 trillion in IRAs. That's more than $12 trillion in total, 
more than double the amount workers had saved in 2000, despite the 
Great Recession, the market downturn in 2008, and historically low 
interest rates since that time.

    Once again, that's the good news.

    The bad news is that, with the retirement of the Baby Boom 
generation, the fiscal pressure on public programs designed to benefit 
retirees--programs like Social Security and Medicare--is growing 
exponentially, putting enormous strain on the Federal budget and 
driving the expansion of our long-term debt and deficits. As this 
pressure mounts, participation in private retirement plans will be more 
and more important.

    Yet, at the same time, as part of the constant drumbeat here on 
Capitol Hill for more revenue to pay for increased spending, some have 
proposed reducing the allowed contributions to 401(k) plans and IRAs. 
That, in my view, would be both short-sighted and counterproductive.

    Over the years we've learned that, for most American workers, 
successful retirement saving largely depends on participation in a 
retirement plan at work. Unfortunately, many employers, mostly small 
businesses, don't sponsor plans for their employees.

    There are a number of reasons why an employer might opt to not 
offer a retirement plan, including cost, complexity, or administrative 
hassle. But, whatever the reason, the result is the same: fewer 
American workers are likely to save for retirement than would otherwise 
be the case.

    As everyone will recall, last year, the committee established 
bipartisan Tax Reform Working Groups to examine all major areas of U.S. 
tax policy and identify opportunities for reform. One of those working 
groups focused specifically on tax policies relating to savings and 
investment. Today, the full committee will hear more about the various 
legislative proposals the Savings and Investment Working Group looked 
at as they considered options and produced their report.

    I want to thank the two chairs of this particular Working Group--
Senator Crapo and Senator Brown--for their efforts and their leadership 
on these issues. They looked extensively at a number of more recent 
proposals and, like all of our working groups, they produced an 
excellent report. I look forward to delving more deeply into these 
issues here today.

    Simply put, we need to do more to encourage employers who don't 
sponsor retirement plans to set them up. Toward that end, one the first 
proposals described in the working group report would allow unrelated 
small employers to pool their assets in a single 401(k) plan to achieve 
better investment outcomes, lower costs, and easier administration. 
This proposal for a multiple employer plan, what some have called the 
``Open MEP,'' already enjoys bipartisan support here in Congress.

    Many of our colleagues have worked hard to develop and advance Open 
MEP proposals, and, while I run the risk of missing some of my 
colleagues, I want to acknowledge the efforts of Ranking Member Wyden 
and Senator Brown, plus Senator Nelson, who has worked on this issue 
with Senator Collins on the Aging Committee, Senator Scott, and Senator 
Enzi, who held hearings on the Open MEP idea in the HELP Committee. 
And, as if that wasn't enough, just this week the Obama administration 
announced its support for the Open MEP idea.

    Clearly, there is a lot of momentum for this proposal, which, in my 
view, is a good thing. Indeed, this is an idea whose time has come.

    While it is important to pursue policies to encourage greater 
retirement savings and investment, we must also provide workers with 
tools to ensure that their savings do not run out before the end of 
their lives. That's why I have put forward proposals to encourage 
individuals to purchase annuity contracts to provide secure, lifelong 
retirement income.

    Today there are obstacles in the law that discourage employers from 
adding annuity purchase options to their 401(k) plans and employees 
from purchasing annuities. We should do all we can to remove those 
obstacles, particularly given the decline of defined benefit pension 
plans in recent years.

    Retirement policy has always been an especially important topic 
here on the Finance Committee, and it has always been bipartisan. 
Indeed, most of the retirement legislation that Congress has passed in 
recent decades has been named for Senators from the Finance Committee--
usually one from each party.

    I hope this will continue even during this election year when 
attacks and accusations relating to retirement security unfortunately 
tend to gain a lot of traction. I plan to do my part to ensure that the 
committee focuses on advancing policies that unite both parties. If we 
can do that, I think we can make progress.

    Before I conclude, I want to acknowledge that there is some 
interest on the committee in discussing the challenges facing multi-
employer defined-benefit pension plans and their beneficiaries. These 
are important topics that affect employers, workers, unions, plan 
managers, the Pension Benefit Guaranty Corporation and, of course, 
current retirees who may be facing hardships. They also highlight the 
challenge of delivering on the promise of lifetime retirement income 
and the stakes for retirees if the system fails.

    We certainly need to have a robust discussion of these matters in 
the committee and I plan to convene a hearing on multi-employer plans 
in the next work period. Today, however, I'm hoping we can focus on 
bipartisan proposals to increase access to retirement savings plans.

                                 ______
                                 
   Prepared Statement of John J. Kalamarides, Head of Institutional 
               Investment Solutions, Prudential Financial
                              introduction
    Thank you, Chairman Hatch and Ranking Member Wyden and members of 
the committee, for the opportunity to participate in today's discussion 
of helping Americans prepare for a secure retirement.

    I am Jamie Kalamarides, Head of Institutional Investment Solutions, 
Prudential Retirement. Prudential is the second largest life insurer 
and a top ten global asset manager with over $1.1 trillion in assets 
under management. Prudential provides workplace based retirement 
solutions to all sizes of corporations, governments, unions and 
consumer groups.

    While the current workplace-based retirement system has worked well 
for many, we at Prudential--like members of this committee--recognize 
that more can and should be done to enhance retirement savings 
opportunities for working Americans. We know that:

        Far too many working Americans do not have access to 
retirement savings programs in their workplace;

        Far too many working Americans are not participating in their 
plan or saving enough for a secure retirement; and

        Far too many working Americans do not have access to 
guaranteed lifetime income solutions through their retirement plans--
solutions that relieve retirees from the challenges attendant to 
managing both investment and longevity risks throughout their 
retirement years.

    We believe that the policy proposals identified by this committee's 
Savings and Investment Working Group, in their July 7, 2015 report, 
represent bipartisan opportunities to address these problems. Using the 
Working Group's Report as a guide, my testimony today will focus on 
expanding retirement coverage through the use of ``open'' multiple 
employer plans, enhancing retirement savings through an expanded 
saver's credit, and expanding access to guaranteed lifetime income 
solutions.
                     expanding retirement coverage
Open Multiple Employer Plans \1\
---------------------------------------------------------------------------
    \1\ For purposes of this testimony, references to Open MEPs and 
MEPs are not intended to encompass those multiple employer plans that 
are sponsored by bona fide employer organizations, long permitted under 
the U.S. Department of Labor's interpretations. Our focus is on MEPs 
that have not been, but should be, permitted and encouraged in the 
absence of a commonality of participating employer interests.

    Prudential has long been concerned about what is often referred to 
as the ``retirement coverage gap,'' that is, the absence of workplace 
based retirement savings opportunities for employees in many of today's 
small businesses. It is well established that employer-sponsored 
retirement savings plans have become a critical component of the 
private retirement system in the U.S., and a proven tool for helping 
working Americans prepare for life after work. According to 
calculations by the nonprofit Employee Benefit Research Institute, 
workers earning between $30,000 and $50,000 per year are 16.4 times 
more likely to save for retirement if they have access to a workplace 
---------------------------------------------------------------------------
plan.

    Unfortunately, tens of millions of working Americans don't have 
access to a plan on the job, leaving many ill-prepared to meet their 
financial needs after they stop working. With 10,000 individuals 
reaching retirement age each day, this is a large and growing problem. 
We know that a comprehensive retirement plan requires a three-legged 
stool--Social Security, personal savings, and pensions. While Social 
Security is a critical program, for median income earners, it replaces 
only 47 percent of pre-retirement income, leaving those without a 
workplace retirement plan with a potentially significant income gap in 
retirement.

    The workplace retirement system works very well for employees of 
medium and large companies. Employees of small companies, however, are 
far less likely to have access to savings opportunities. According to 
data from the Bureau of Labor Statistics, only 50 percent of workers in 
firms with fewer than 100 employees have access to retirement plans at 
work. This compares to 89 percent for workers at larger firms.

    This retirement coverage gap is especially problematic given that 
small employers provide jobs for a large and diverse section of the 
American population. Small businesses in the private sector provide 
over 30 million jobs for women. Small businesses employ over 12 million 
Latino Americans, 6 million African Americans, and 4 million Asian 
Americans--and yet, only 50 percent of employees of small businesses 
have access to a workplace retirement plan.

    The retirement coverage gap can and should be narrowed. While a 
variety of solutions are possible, there is a growing consensus among 
financial institutions, consumer groups and Members of Congress \2\ 
that one of the broadest and most expedient ways to close the gap is to 
expand access to multiple employer plans, or MEPs, for small employers 
and their employees. MEPs--single plans utilized by two or more 
employers--have been utilized successfully for years by trade 
associations and professional employee organizations. Unfortunately, 
tax laws and regulations discourage or prevent most small employers 
from taking advantage of them.
---------------------------------------------------------------------------
    \2\ Legislation relating to addressing MEP issues has been 
introduced in the 113th Congress by Senator Hatch (S. 1270), Senators 
Collins and Nelson (S. 1970), and Senators Harkin and Brown (S. 1979); 
and in the 114th Congress by Representative Neal (H.R. 506), Senator 
Whitehouse (S. 245), Senators Collins, Nelson, and McCaskill (S. 266), 
and Representatives Buchanan and Kind (H.R. 557).

    Addressing the constraints on multiple employer plans has 
bipartisan support in both the U.S. Senate and U.S. House of 
Representatives, as well as support from the U.S. Chamber of Commerce, 
AARP, many affinity groups, and the financial services industry. In 
this regard, we would also like to acknowledge the leadership role 
Chairman Hatch has played in recognizing the significance of expanding 
MEP participation and sponsorship, as well the work of the Savings and 
Investment Working Group, convened by the Chairman and Ranking 
Member.\3\
---------------------------------------------------------------------------
    \3\ The Savings and Retirement Bipartisan Work Group Report, July 
2015, at page 6, indicates that ``[t]o enable small employers to 
sponsor high quality, low cost plans, the working group recommends that 
the committee consider proposals that allow employers to join open 
multiple employer plans.''

    For the small employer market, multiple employer plans would enable 
small businesses to participate in a single, professionally 
administered plan that affords them economies of scale and minimal 
fiduciary responsibility. The plans would provide employees of those 
organizations the same opportunities to invest for retirement that 
employees of large companies already enjoy on a near universal basis 
via 401(k)s and similar defined contribution plans.

Small Business Retirement Survey by Prudential

    In an effort to better understand why small businesses do not offer 
retirement plans, Prudential Retirement conducted a survey of more than 
850 small employers during the months of March and April, 2015. All the 
survey participants were business owners who do not offer retirement 
plans today, and who have the responsibility for making decisions on 
employee benefits. Included in the survey were small businesses of 
between 3 and 500 employees.

    When asked un-prompted why they don't offer retirement plans for 
their employees, almost 50 percent cited cost as the concern. When 
prompted with a list of reasons, the top reasons why they do not 
sponsor plans include cost, administrative burden and hassle, and 
fiduciary concerns. Importantly 29 percent indicated a lack of 
understanding as to how retirement plans work.

    Reflecting these concerns, baseline interest in offering a 
retirement plan is low. Only 14 percent of small business respondents 
are likely to consider offering a plan over the next 5 years. However, 
if provided an opportunity to offer a plan with little or no cost, most 
responsibility assumed by an independent trustee, and minimal retained 
responsibility beyond forwarding contributions, the rate of interest 
increases by more than 250 percent. Also, almost half indicated support 
for legislation that would make it easier for small businesses to 
provide retirement plans to their employees, with only 17 percent 
saying legislation is not needed.

    Finally, the survey measured employers' attitudes towards offering 
retirement plans. Attitudes varied widely, highlighting the differing 
mindsets of small employers. We found that about \1/3\ of employers had 
the most positive attitudes: That saving for retirement is very 
important; that programs to make it easier are very important; and, 
that they have a key role in the process. For the \1/3\ of employers 
with the most positive attitudes, almost 70 percent were likely to 
consider offering a plan with little or no cost and minimal 
responsibility.

    Given small businesses employ over 55 million workers, capitalizing 
on employer interest by offering plans which have little or no cost to 
employers, and minimal employer responsibility, could be an important 
step towards reducing the retirement coverage gap. At Prudential, we 
believe multiple employer plans can be part of the solution, but there 
are challenges--challenges to expanding MEP sponsorship and challenges 
to expanding MEP participation.

Challenges to Expanding MEP Sponsorship and Participation

    Expanding access to multiple employer plans for small businesses 
and their employees will require Federal legislative and /or regulatory 
action. The challenges, in our view, are concentrated in four areas:

    Tax Law--Section 413(c) of the Internal Revenue Code already 
recognizes plans maintained by more than one unrelated employer. 
However, it imposes a number of requirements on these plans as a 
condition of maintaining their tax-qualified status. As currently 
interpreted, some of these requirements, such as nondiscrimination 
rules, are applied on an employer-by-employer basis rather than a plan 
basis. This means that just one non-compliant employer can jeopardize 
the tax status of the entire plan, putting all employers at risk. This 
barrier is often referred to as the ``one bad apple'' rule.

    ERISA--For purposes of ERISA, the Department of Labor treats as a 
single retirement plan only those multiple employer plans that are 
sponsored by a ``cognizable, bona fide group or association of 
employers'' acting in the interest of its members. It also requires 
that this group of employers have a ``commonality of interest,'' such 
as operating in the same industry, and exercise either direct or 
indirect control over the plan. Taken together these conditions 
significantly limit the ability of other organizations, such as a local 
Chamber of Commerce, to sponsor a MEP for a diverse population of small 
employers.

    Fiduciary Liability--Some employers--particularly small employers--
shy away from offering a plan because they are concerned about the 
responsibilities and liabilities they might assume under ERISA as plan 
fiduciaries. The uptick in retirement plan litigation relating to plan 
fees and other factors has only exacerbated their concerns.

    Enforcement--The Labor Department has expressed concern that 
expanding the number of ``open'' multiple employer plans--those 
sponsored by any entity other than a ``bona fide group or association 
of employer''--could allow promoters of such plans to take advantage of 
small employers and their employees under the guise of offering a low 
cost, no liability plan.\4\
---------------------------------------------------------------------------
    \4\ Letter from Phyllis Borzi to Charles Jezeck, reprinted in 
``Private Sector Pensions, Federal Agencies Should Collect Data and 
Coordinate Oversight of Multiple Employer Plans,'' a GAO report to 
Chairman, Committee on Health, Education, Labor, and Pensions, U.S. 
Senate, September 2012, at page 44.

Facilitating Sponsorship of and Participation in MEPs

    To make multiple employer plans more accessible to small 
businesses, lawmakers and regulators will need to take action on 
several fronts.
Tax Law
    First, Treasury and IRS or Congress needs to clarify tax law so 
that any adverse consequences of not complying with the applicable tax 
qualification requirements for MEPs will be limited to the noncompliant 
employer, rather the entire plan and rest of its participating 
employers.
ERISA
    Second, the Department of Labor or Congress needs to modify the 
ERISA requirements to allow a broader array of entities, organizations 
or associations to sponsor MEPs, subject to conditions that will ensure 
plans comply with ERISA's fiduciary requirements and minimize risk to 
plan sponsors and their employees. These conditions might include the 
following:

        The documents of the plan must identify the person(s) who will 
serve as the named fiduciary of the plan. That person(s) must 
acknowledge in writing joint and several liability for controlling and 
managing the operation and administration of the plan.

        The documents of the plan must identify the trustee(s) of the 
plan responsible for the management and control of the plan's assets 
and for the prudent collection of contributions to the plan.

        The documents of the plan must identify the person(s) who will 
act as the administrator of the plan, responsible for satisfying 
reporting, disclosure, and other statutory obligations.

        The plan and plan officials must maintain a fidelity bond in 
accordance with ERISA section 412.

        The documents of the plan must ensure that participating 
employers will not be subject to unreasonable restrictions, penalties, 
or fees upon ceasing participation in the plan.

        Inasmuch as the retirement coverage gap is most acute among 
smaller employers, participation in these new MEPs should be limited to 
those employers with no more than 500 employees. While it is likely 
that MEPs will appeal principally to employers with 100 or fewer 
employees, establishing the ceiling at 500 employees will give smaller 
employers ample time to grow without having to worry about identifying 
a new retirement savings vehicle for their employees.
Fiduciary Responsibility
    Congress and regulators, in our view, should consider limiting the 
fiduciary responsibility of employers participating in a MEP to the 
prudent selection and monitoring of the MEP sponsor and the timely 
remittance of employee contributions. Similar to the selection of an 
investment manager under ERISA, such a limitation is not intended to 
eliminate or reduce fiduciary responsibility with respect to the 
management and operation of the plan, but rather appropriately 
allocates those responsibilities to professionals best positioned to 
protect the interest of plan participants and beneficiaries.

    With regard to the selection and monitoring of a MEP, we believe 
employers, particularly smaller employers, would benefit from specific 
guidance addressing how they should discharge such responsibilities as 
an ERISA fiduciary. For example, a prudent selection process might 
involve an objective evaluative process that takes into account--the 
qualifications of the parties (fiduciary and non-fiduciary) responsible 
for the MEP; the scope and quality of services offered; the extent to 
which the MEP offers a broad range of investment options; and 
compliance with Federal law. With regard to monitoring 
responsibilities, a prudent process might involve a periodic (or 
annual) review of any changes in the information that served as the 
basis for the initial selection of the MEP.
Enforcement
    The Labor Department has raised concerns about the potential for 
fraud and abuse should Open MEPs be permitted. We believe these 
concerns should be further explored in an effort to determine what, if 
any, additional enforcement or other authority might assist Labor in 
addressing such concerns.
A Safe Harbor MEP
    To facilitate participation in MEPs and reduce compliance risks for 
small employers, the Department of the Treasury and the Internal 
Revenue Service, in coordination with the Department of Labor, should 
develop a safe-harbor model plan that minimizes the administrative 
complexities and costs of MEPs, is not subject to complex tax-
qualification testing requirements, and enhances the ability of MEPs to 
generate positive retirement outcomes for plan participants.

    A template we would recommend for such a model would include the 
following characteristics:

        A single plan, with a centrally administered trust, serving 
all participating employers.
        Plan participation would be limited to employers with no more 
than 500 employees.
        Specifically identified persons to serve as the named 
fiduciary, trustee(s), and administrator.
        Funded by employee contributions, with employer contributions 
permitted, but not required.
        Automatic enrollment of employees at a rate equal to 6 percent 
of pay, with employees eligible to opt out or select an alternative 
contribution rate.
        Automatic escalation of employee contributions to 10 percent 
of pay, in annual 1 percent increments, with employee opportunity to 
opt out.
        Hardship withdrawals in accordance with IRS rules, but no 
participant loans.
        A broad range of diversified investment options.
        In the absence of investment direction, contributions would be 
defaulted in to a preservation of principal investment option for the 
first 4 years and, thereafter, into a qualified default investment 
alternative (QDIA) in accordance with Labor Department standards.
        At least one investment or distribution option that includes a 
lifetime income product.

    We believe that use of a model plan, similar to the above, should 
avoid the need for complex and costly nondiscrimination testing and, 
through reduced administrative costs, increase retirement savings for 
plan participants.

    We--at Prudential--see MEPs as a ``win'' for both employees and 
employers.

    MEPs will afford employees the opportunity for better retirement 
outcomes. A properly designed MEP will promote savings by employees 
through the use of automatic enrollment and automatic escalation of 
their contributions. MEPs may further encourage appropriate investment 
behavior by providing investment options selected by investment 
professionals, better ensuring that plan participants will be able to 
tailor their portfolio to their investment goals and tolerance for 
risk.

    Unlike IRAs, MEPs offer employees the potential for an employer 
match and the opportunity to save for retirement at levels more 
appropriate for meaningful retirement savings ($18,000 per year, as 
compared to $5,500 per year for 2016), as well as access to 
institutionally priced investments. MEP participants would further 
benefit from having their plan's fiduciary and administrative 
responsibilities discharged by plan and investment professionals, 
thereby enhancing the fiduciary and other protections afforded by 
Federal law--the Employee Retirement Income Security Act (ERISA).

    Small businesses will be better positioned to compete for talent. 
For employers, MEPs represent an opportunity to offer employees a 
meaningful opportunity to save for retirement in a tax-advantaged plan, 
without the administrative costs and fiduciary risks attendant to 
maintaining a stand-alone retirement plan. Moreover, surveys 
consistently show that workers consider retirement savings plans a 
valued employee benefit. The offering of a retirement plan, therefore, 
can increase an employer's ability to attract and retain a high quality 
workforce and, thereby, be more competitive.

    While multiple employer plans may not be the only solution to 
closing the retirement coverage gap, we believe it is an important one 
and one that should be available to substantially more employers than 
is the case today. For a more comprehensive discussion of MEPs and our 
proposals, we have attached a copy of our recent white paper, Multiple 
Employer Plans--Expanding Retirement Savings Opportunities, for your 
consideration. (Also available through our website at: http://
research.prudential.com/documents/rp/mep_paper_final_2015.pdf).
State Sponsored Plans for Private Sector Employers
    As members of this committee are aware, an ever increasing number 
of States are pursuing or considering the establishment of a State 
sponsored plan, with respect to which private-sector employers may be 
required to participate to the extent they do not otherwise offer a 
retirement savings program for their employees. Without a Federal 
solution, we are concerned that these efforts may result in complexity 
and confusion for smaller employers whose business and employees are 
not defined by State boundaries. Retirement savings programs based on 
zip codes will not provide a complete solution to the retirement 
coverage gap. A Federal solution, in our view, is an imperative. MEPs 
offer such a solution for employers considering retirement savings 
options and will complement State based solutions.

    As noted above, we believe that MEPs offer small employers and 
their employees the opportunity for more meaningful retirement savings, 
as compared to the IRA-based plans under consideration by many States 
($18,000 per year, as compared to $5,500 per year for 2016), as well as 
access to institutionally priced investments and ERISA protections. We 
believe, if given a choice, employers will opt to participate in an 
ERISA-covered MEP, rather than a State sponsored IRA-based program, but 
Federal legislation is necessary to provide that choice. Federal 
legislation also is necessary to deal with the tax qualification issues 
that expose participating employers, covered employees and the MEP to 
liability as a result of the actions of one noncompliant participating 
employer.\5\
---------------------------------------------------------------------------
    \5\ We note that, while the Department of Labor recently published 
an interpretive bulletin (Sec. 2509.2015-02, 80 Fed. Reg. 71936, 
November 18, 2015) to facilitate State sponsorship of MEPs, that 
guidance does not resolve the referenced tax qualification issues 
presented by one noncompliant participating employer.
---------------------------------------------------------------------------
             enhancing retirement participation and savings
    The Report of the Savings and Investment Working Group identifies a 
number of items that could enhance retirement savings, particularly for 
lower and middle income families. In particular, we note that the 
Working Group supports consideration of expanding the current safe 
harbor for automatic enrollment, under which the employer matching 
contribution might be raised from 6 percent of pay up to 10 percent of 
pay. The Working Group also encourages consideration of proposals that 
allow long-term, part-time employees to contribute to employer 
sponsored retirement plans. And, in addition to other things, the 
Working Group identified a saver's credit as a means by which to 
further encourage lower income earners to save for retirement.

    Prudential agrees with the Working Group that each of the foregoing 
items should be considered as we explore ways to encourage retirement 
savings, particularly for lower and middle-income families.
                       guaranteed lifetime income
    With an estimated 10,000 Americans reaching retirement age every 
day, we know that very few of those individuals are being offered the 
opportunity to consider a guaranteed lifetime income option as part of 
their retirement plan. We also know that few of today's workers are 
able to manage investment and longevity risks in retirement on their 
own. As recognized by the Council of Economic Advisers' February 2, 
2012 Report, Supporting Retirement for American Families, this is a 
particularly significant issue for women, who tend to have lower 
retirement savings rates than men, while also having longer life 
expectancies. Guaranteed lifetime income solutions provide a means by 
which all workers can enjoy both certainty and security during their 
retirement years.

    We are particularly encouraged by and fully support two specific 
proposals identified by this committee's Savings and Investment Working 
Group.
Lifetime Income Portability
    The first is a proposal, included in Chairman Hatch's Secure 
Annuities for Employees (SAFE) Retirement Act, S. 1270 (113th 
Congress), that would address concerns around the portability of 
certain in-plan annuity features. Portability issues are raised when a 
plan sponsor decides to modify or eliminate an investment option with a 
guaranteed lifetime income feature with respect to which some 
participants may have invested. Under the proposal, invested 
participants would, upon the elimination of the investment or feature, 
be permitted to transfer their interest to another employer sponsored 
retirement plan or IRA, without regard to whether a distribution would 
otherwise be permitted. The elimination of issues around portability 
would be very helpful in addressing the concerns on the part of some 
plan sponsors regarding the inclusion of in-plan annuity products and 
the discharge of their fiduciary responsibilities under ERISA.
Annuity Selection Safe Harbor
    The second proposal relates to the rules governing the selection of 
annuity providers. In this regard, the Working Group expresses its 
support for consideration of policies that encourage retirees to be 
knowledgeable about and select distributions that provide a stream of 
income payments over the course of their retirement. We agree with the 
Working Group and fully support such policies. One challenge is 
encouraging employers to offer guaranteed lifetime income products to 
their employees as part of their retirement plan. This challenge is 
exacerbated by the current Department of Labor rules governing the 
selection of annuity providers, rules that require any employer 
considering the inclusion of an annuity product to assess, and assume 
fiduciary liability for, the ability of the annuity provider to satisfy 
its contractual obligations. While we recognize the importance of such 
determinations, we believe the burden of such assessments is 
appropriately the role of state insurance regulators, not plan 
fiduciaries.

    In our experience, while most plan fiduciaries are comfortable 
making determinations relating to the reasonableness of costs in 
relation to benefits and the quality of services (requirements of the 
current Labor Department safe harbor), few are comfortable determining 
the long-term financial viability of an insurer or other financial 
institution. For this reason, we believe the current safe harbor 
standard is having a chilling effect on plan sponsor considerations of 
guaranteed lifetime income products. In this regard, we support 
approaches identified by the Working Group pursuant to which plan 
fiduciaries would, on questions of financial viability, look to 
insurers to confirm they are in good standing with State licensing, 
financial solvency, auditing and reporting requirements; requirements 
established by the States to protect their citizens, including plan 
participants.
                               conclusion
    We thank the chairman, the ranking member and members of the 
committee for the opportunity to share our views. We welcome any 
questions and look forwarding to working with you on these issues of 
critical importance to today's working Americans.

                                 ______
                                 
                               Prudential

                         Bring Your Challenges

                        Multiple Employer Plans

               Expanding Retirement Savings Opportunities


John J. Kalamarides      Robert J. Doyle          Bennett Kleinberg
Senior Vice President    Vice President           Vice President
Institutional            Government Affairs       Institutional
 Investment Solutions    Prudential Financial      Investment Solutions
Prudential Retirement                             Prudential Retirement
 


Executive Summary

Employer-sponsored retirement savings plans have become a critical 
component of the private retirement system in the U.S., and a proven 
tool for helping working Americans prepare for life after work. 
According to calculations by the nonprofit Employee Benefit Research 
Institute, people earning between $30,000 and $50,000 per year are 16.4 
times more likely to save for retirement if they have access to a 
workplace plan.

Unfortunately, tens of millions of Americans don't have access to a 
plan on the job, leaving many ill-prepared to meet their financial 
needs after they stop working. This retirement coverage gap is most 
acute among employees of small companies, many of whom do not sponsor 
plans due to concerns about costs, complexity, and fiduciary liability.

The retirement coverage gap can and should be narrowed. While a variety 
of solutions are possible, there is a growing consensus in Washington 
that one of the broadest and most expedient ways would be to expand 
access to multiple employer plans, or MEPs, for small employers and 
their employees. MEPs--single plans utilized by two or more employers--
have been deployed successfully for years by trade associations and 
professional employee organizations. Unfortunately, tax laws and 
regulations discourage or prevent most small employers from taking 
advantage of them. Removing those constraints is endorsed not only by 
several Washington lawmakers on both sides of the political aisle but 
also by the U.S. Chamber of Commerce, AARP, many affinity groups, and 
the financial services industry.

For the small employer market, multiple employer plans would enable 
small businesses to participate in a single, professionally 
administered plan that affords them economies of scale and minimal 
fiduciary responsibility. The plans would provide employees of those 
organizations the same opportunities to invest for retirement that 
employees of large companies already enjoy on a near universal basis 
via 401(k)s and similar defined contribution plans.

This paper outlines the legislative and regulatory actions that would 
be needed to broaden access to MEPs for small employers. It also 
describes the features that a model MEP might incorporate, including:

      Automatic enrollment of employees and automatic escalation of 
employee contributions.

      Automatic deferral of employee contributions into an investment 
option designed to preserve principal. After 4 years, contributions 
would be made to a qualified default investment alternative, such as a 
target-date fund.

      A lifetime income solution among the plan's investment and/or 
distribution options.

      Streamlined administration through standardized plan design.

      Clear delineation of fiduciary and administrative 
responsibilities, ensuring that each plan is managed in the best 
interests of its participants and beneficiaries, with those 
responsibilities assumed by benefit and investment professionals rather 
than participating employers.

Ignoring the retirement coverage gap would do a disservice to millions 
of hardworking Americans who need help preparing for retirement. Making 
it easier for small employers to participate in MEPs would go a long 
way toward righting that wrong.

The Importance of Workplace Retirement Plans

For millions of working Americans, private retirement plans have become 
the principal means of accumulating the assets they will need, beyond 
Social Security benefits, to sustain themselves once they exit the 
workforce. The good news? Those plans are working.

In 1975, just a year after the Employee Retirement Income Security Act 
(ERISA) was passed, retirement assets per U.S. household, excluding 
Social Security benefits, averaged $27,300 (in constant, or inflation-
adjusted, 2012 dollars).\1\ By June 2013, that figure had ballooned to 
$167,800.\2\
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    \1\ ``The Success of the U.S. Retirement System,'' by Peter Brady, 
Kimberly Burham and Sarah Holden, the Investment Company Institute, 
December 2012, Figure 4, pg. 11.
    \2\ ``Our Strong Retirement System: An American Success Story,'' 
the American Council of Life Insurers, the American Benefits Council 
and the Investment Company Institute, December 2013, pg. 5, updating 
the calculations in ``The Success of the U.S. Retirement System,'' by 
Peter Brady, Kimberly Burham and Sarah Holden, the Investment Company 
Institute, December 2012, Figure 4, pg. 11.

Since then, Americans have continued to bulk up their retirement nest 
eggs. By September 2014, total U.S. retirement assets stood at $24.2 
trillion, up from $469 billion in 1975.\3\ Assets in defined 
contribution retirement savings plans--the type offered by most 
employers--totaled $6.6 trillion, up from $86 million in 1975. A recent 
study shows that, at the end of 2012, near-retirees--those between the 
ages of 60 and 64--had a combined average of nearly $360,000 in their 
workplace savings plans and Individual Retirement Accounts (IRA).\4\
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    \3\ Investment Company Institute, ``The U.S. Retirement Market, 
Third Quarter 2014,'' Table 1.
    \4\ Fidelity Investments analysis of 990,000 investors having both 
IRA and workplace retirement savings plan balances at Fidelity as of 
December 31, 2012. See ``Fidelity Retirement Savings Analysis 
Highlights Higher Balances and Contribution Rates of Investors Saving 
Beyond Workplace Plans,'' press release, February 28, 2013.

For many Americans, an employer-sponsored plan such as a 401(k) is the 
easiest and most economical way to save for retirement. It offers tax 
benefits, professional oversight, the convenience of making 
contributions via payroll deduction, and access to institutional 
pricing for investment products. Access to a workplace plan doesn't 
just offer workers an easier way to save for retirement; it also is 
correlated with better retirement outcomes. Calculations made a few 
years ago by the Employee Benefit Research Institute (EBRI) found that 
workers who were earning between $30,000 and $50,000 per year were 16.4 
times more likely to save for retirement if they had access to a 
workplace plan.\5\
---------------------------------------------------------------------------
    \5\ Employee Benefit Research Institute estimates from the 2004 
Survey of Income and Program Participation Wave 7 Topical Module (2006 
data).

More recently, EBRI has documented that among Americans who participate 
in a retirement plan--a defined contribution plan, a more traditional 
defined benefit pension plan, an IRA, or some combination of the 
three--72 percent are somewhat or very confident they and their spouse 
will have enough money to live comfortably throughout their retirement 
years. By contrast, only 28 percent of those who do not have a plan are 
similarly confident of financial security in retirement.\6\
---------------------------------------------------------------------------
    \6\ Employee Benefit Research Institute, ``The 2014 Retirement 
Confidence Survey,'' March 2014, Figure 3.

Explanations for why people with access to workplace plans enjoy better 
outcomes are relatively easy to infer. Workplace plans promote saving 
---------------------------------------------------------------------------
and investment by virtue of:

      The employer's endorsement, which may heighten the value of the 
plan in the eyes of employees.

      The employer's promotion of the plan's benefits, including 
matching contributions, which can boost plan participation.

      Automatic enrollment and auto-escalation of contributions in the 
plan, where employers have embraced those design features.

      The ease of making contributions via payroll deduction.

Employees recognize the value these plans offer. In a recent survey of 
1,000 401(k) plan participants, nearly 90 percent said a 401(k) is a 
``must have'' benefit.\7\
---------------------------------------------------------------------------
    \7\ Online survey of 1,000 401(k) plan participants by Koski 
Research for Schwab Retirement Plan Services between May 27 and June 4, 
2014. See ``Schwab Survey Finds Workers Highly Value Their 401(k) but 
Are More Likely to Get Help Changing Their Oil than Managing their 
Investments,'' Schwab Retirement Plan Services press release, August 
19, 2014.
---------------------------------------------------------------------------

The Retirement Coverage Gap

The bad news is that while workplace retirement plans are helping tens 
of millions of working Americans save and invest for retirement, tens 
of millions more do not have access to a plan at work. This is 
particularly problematic for workers who are employed by one of the 
country's many small employers who do not sponsor a plan due to 
concerns about costs, administrative complexities, and fiduciary 
liability. The resulting retirement coverage gap is reflected in data 
compiled by the Bureau of Labor Statistics:

      Eighty-nine percent of workers employed by firms with more than 
500 employees, and 78 percent at firms with 100 to 499 employees, have 
access to retirement plans on the job.\8\
---------------------------------------------------------------------------
    \8\ ``Employee Benefits in the United States--March 2014,'' Bureau 
of Labor Statistics news release of July 25, 2014, pg. 1.

      Only 50 percent of those employed by firms with fewer than 100 
workers have access to a workplace retirement plan.\9\
---------------------------------------------------------------------------
    \9\ ``Employee Benefits in the United States--March 2014,'' Bureau 
of Labor Statistics news release of July 25, 2014, pg. 1.

The coverage gap's concentration among small employers is critical 
because small employers provide jobs for a vast swath of the American 
populace, particularly among women and multi-ethnic groups. In 2011, 
private sector organizations with no more than 500 workers employed a 
total of 65.4 million people, while larger organizations employed 51.5 
million. The smaller employers also provided more jobs for women--30.3 
million versus 25 million--and for Asian American, American Indian, and 
Hispanic workers.\10\
---------------------------------------------------------------------------
    \10\ United States Census Bureau, Statistics of U.S. Businesses, 
2011 data.

The retirement coverage gap has persisted despite a variety of 
legislative and administrative initiatives that have sought to close it 
via simplified retirement savings vehicles such as Simplified Employee 
Pension plans (SEPs), Savings Incentive Match Plans for Employees 
---------------------------------------------------------------------------
(SIMPLEs), and voluntary payroll-deduction IRAs.

            Social Security: A Partial Backstop
        Social Security is a critical retirement income backstop for 
        those without a workplace retirement plan. It replaces nearly 
        all of the preretirement income for the lowest quintile of 
        earners after they stop working--87 percent on average--based 
        on inflation-indexed earnings. But for many Americans, Social 
        Security will provide a much smaller fraction of what they need 
        to maintain their standard of living in retirement. Based on an 
        average of their highest 35 years of earnings, earners in the 
        top quintile receiving their first Social Security benefit at 
        age 65 this year can expect it to replace, on average, just 31 
        percent of their pre-retirement income. Even for medium 
        earners, it will replace only 47 percent.\11\
---------------------------------------------------------------------------
    \11\ ``Why American Workers' Retirement Income Security Prospects 
Look so Bleak: A Review of Recent Assessments,'' Gabo Pang and 
Sylvester J. Schieber, May 2014, Exhibit 3.

Multiple Employer Plans: A Potential Solution to the Coverage Gap

Multiple employer plans, or MEPs, offer a promising means of narrowing 
the retirement coverage gap. A MEP is a type of employee benefit plan 
that can be maintained as a single plan in which two or more unrelated 
employers participate. For purposes of this paper, it is a tax-
qualified retirement plan.

The MEP concept is not new. MEPs have been allowable under federal tax 
law and ERISA for decades. However changes are necessary to address 
impediments limiting the use of MEPs. Current tax law and ERISA rules 
limit MEP sponsorship primarily to trade associations whose members 
share a commonality of interest; professional employee organizations 
(PEOs) that share a co-employer relationship with their clients; and 
certain large employers who wind up sponsoring MEPs as the result of a 
corporate restructuring or similar transaction.

As envisioned by a number of members of Congress on both sides of the 
political aisle, access to MEPs could be broadened, and the plans 
themselves enhanced, to provide small employers with the economies of 
scale, administrative simplicity, and limited fiduciary liability they 
need to be comfortable offering a retirement savings plan to their 
employees. This idea has been endorsed by the Chamber of Commerce,\12\ 
AARP,\13\ numerous affinity organizations, and a number of financial 
services industry groups, including, among others, the SPARK Institute. 
In November 2014, the Advisory Council on Employee Welfare and Pension 
Plans weighed in on MEPs by endorsing Department of Labor action to 
facilitate MEP formation in its recommendations to the Secretary of 
Labor.\14\
---------------------------------------------------------------------------
    \12\ ``Private Retirement Benefits in the 21st Century: A Path 
Forward,'' U.S. Chamber of Commerce, page 9.
    \13\ In ``The Policy Book: AARP Public Policies 2013-2014,'' 
Revised 2014, AARP states in Chapter 4, page 18, ``AARP supports the 
development of model plans that would enable groups of unrelated small 
employers to pool resources in plans administered and marketed by 
financial institutions.''
    \14\ See http://www.dol.gov/ebsa/publications/2014ACreport3.html.

This paper describes how federal legislators and regulators can help 
narrow the retirement coverage gap by expanding opportunities for MEP 
sponsorship and creating a model plan designed specifically for the 
small business community. In brief, this new breed of MEPs would be 
open to a diverse universe of smaller employers, managed by 
identifiable and accountable plan fiduciaries and professionals. The 
plans would be designed to broaden retirement plan coverage and 
increase worker savings through the use of automatic enrollment of 
employees and automatic escalation of their contributions to their 
plans. Small employers would enjoy the same economies of scale 
currently enjoyed by larger employers, as well as limited fiduciary 
liability like those participating in collectively bargained 
multiemployer plans and association-sponsored multiple employer plans.
            Why MEPs, and Why Now?
        There is growing recognition at federal and state levels that 
        far too many Americans may not be prepared financially for 
        retirement, that workplace-based retirement savings programs 
        can play a significant role in addressing this problem, and 
        that the need for greater access to workplace retirement 
        programs is greatest among those working for small employers. 
        Legislators have introduced a variety of bills, at both the 
        state and federal levels, that would encourage and/or mandate 
        the offering of a retirement savings program by employers who 
        don't currently sponsor one.

        State initiatives have primarily focused on the possibility of 
        offering state-sponsored retirement plans for employees of 
        private-sector employers. Typically, these plans would require 
        employers who do not otherwise offer a plan to automatically 
        enroll their workers in the state-sponsored plan, under which 
        employee contributions would be invested through an IRA. 
        California was an early mover with the enactment in 2012 of the 
        California Secure Choice Retirement Savings Trust Act. 
        California Secure Choice will require California businesses 
        with five or more employees to defer between 2 and 4 percent of 
        their workers' wages into accounts supervised by a state 
        board.\15\ In January 2015, Illinois enacted legislation that 
        will require employers with at least 25 workers in that state 
        to enroll employees into a new state plan if no other type of 
        plan is being offered.\16\ Elsewhere, in 2014, the states of 
        Connecticut, Maryland, Minnesota, Oregon, Vermont, and West 
        Virginia began studying the issue of sponsoring retirement 
        plans.
---------------------------------------------------------------------------
    \15\ See California Secure Choice Retirement Savings Trust Act, 
California Senate Bill 1234 at http://leginfo.legislature.ca.gov/faces/
billNavClient.xhtml?bill_id=201120120SB1234.
    \16\ See Illinois Secure Choice Savings Program, Public Act 098-
1150 (signed January 5, 2015, effective June 1, 2015) at http://
www.ilga.gov/legislation/publicacts/fulltext.asp?Name=098-1150.

        In Washington, DC, federal legislators have introduced bills 
        that would encourage the use of payroll deduction IRAs, with 
        automatic enrollment, by employers not offering other 
        retirement savings opportunities to their employees.\17\ In 
        addition, the Department of Treasury has been encouraging 
        employers to offer employees access to a new type of Roth IRA, 
        the myRA.
---------------------------------------------------------------------------
    \17\ For example, H.R. 5875--SAVE Act of 2014 (113th Congress), 
H.R. 506 and S. 245--Automatic IRA Act of 2015 (114th Congress).

        myRAs are designed to function as low-cost starter retirement 
        savings plans for Americans who may not have access to any 
        other type of retirement program where they work. They will be 
        funded by individual participants, in small increments, through 
        payroll deduction. The sole investment option will be a 
        Treasury savings bond offering the same variable rate of return 
        that federal employees receive when they participate in the 
        Thrift Savings Plan Government Securities Investment Fund, a 
        low-risk vehicle that invests exclusively in a non-marketable 
        short-term U.S. Treasury security. The Treasury Department has 
        created a Web page where individuals can sign up to participate 
        in the myRA program.\18\
---------------------------------------------------------------------------
    \18\ https://myra.treasury.gov/individuals.

        While these proposals represent important efforts to make 
        retirement savings programs accessible to more Americans, 
        expanding the role for multiple employer plans would afford 
        employees of small businesses additional, and in some cases 
        more flexible, opportunities to save and invest for retirement 
        no matter where they are located. In contrast to the myRA, for 
        example, small-business MEPs would offer multiple investment 
        options that give participants the flexibility to invest their 
        retirement portfolio in accordance with their own time horizon 
        and tolerance for risk. MEPs also would offer higher 
        contribution limits.\19\
---------------------------------------------------------------------------
    \19\ As envisioned by this paper, contribution limits for MEPs 
would be the same as those applicable to 401(k) plans (i.e., $18,000 
per employee in 2015). The contribution limit in 2015 for myRAs, like 
traditional IRAs, is $5,500.

        The growing enthusiasm for expanding the role of MEPs reflects 
        a recognition that multiple employer plans would offer small-
        business employees meaningful opportunities to save and invest 
        for retirement, while minimizing administrative burdens and 
---------------------------------------------------------------------------
        fiduciary liability for their employers.

Challenges to Expanding MEP Sponsorship and Participation

Expanding access to multiple employer plans for small businesses and 
their employees will require legislative and regulatory action in 
Washington. The challenges are concentrated in four areas:

     Tax law. Section 413(c) of the Internal Revenue Code already 
recognizes plans maintained by more than one unrelated employer. 
However, it imposes a number of requirements on these plans as a 
condition of maintaining their tax-qualified status. As currently 
interpreted, some of these requirements, such as nondiscrimination 
rules, are applied on an employer-by-employer basis rather than a plan 
basis. This means that just one non-compliant employer can jeopardize 
the tax status of the entire plan, putting all other employers at risk.

     ERISA. For purposes of ERISA, the Department of Labor treats as a 
single retirement plan only those multiple employer plans that are 
sponsored by a ``cognizable, bona fide group or association of 
employers'' acting in the interest of its members. It also requires 
that this group of employers have a ``commonality of interest,'' such 
as operating in the same industry, and exercise either direct or 
indirect control over the plan. Taken together, these conditions 
significantly limit the ability of other organizations, such as a local 
Chamber of Commerce, to sponsor a MEP for a diverse population of 
smaller employers.

     Fiduciary liability. Some employers--particularly small 
employers--shy away from offering a retirement savings plan because 
they are concerned about the responsibilities and liabilities they 
might assume, under ERISA, as plan fiduciaries. The recent uptick in 
retirement-plan litigation relating to plan fees and other factors has 
only exacerbated their concerns.

     Enforcement. The Labor Department has expressed concern that 
expanding the number of ``open'' multiple employer plans--those 
sponsored by any entity other than ``a bona fide group or association 
of employers''--would allow the promoters of such plans to take 
advantage of small employers and their employees under the guise of 
offering a low-cost, no-liability plan.\20\
---------------------------------------------------------------------------
    \20\ Letter from Phyllis Borzi to Charles Jeszeck, reprinted in 
``Private Sector Pensions: Federal Agencies Should Collect Data and 
Coordinate Oversight of Multiple Employer Plans,'' a GAO Report to the 
Chairman, Committee on Health, Education, Labor, and Pensions, U.S. 
Senate, September 2012, pg. 44.

In the next section of this paper, we'll explore the legislative and 
regulatory changes needed to make multiple employer plans workable for 
the small business community, and for the tens of millions of American 
workers who could benefit from access to them.

The Path to Facilitating Sponsorship and Use of MEPs

To make multiple employer plans accessible to small businesses, 
lawmakers and regulators will need to take action on several fronts:

Tax law

The IRS or Congress needs to clarify tax law so that any adverse 
consequences of not complying with the applicable tax-qualification 
requirements of MEPs will be limited to the noncompliant employer, 
rather than the entire plan and the rest of its participating 
employers.\21\
---------------------------------------------------------------------------
    \21\ On November 17, 2014, Senators Wyden, Nelson, Brown, Stabenow 
and Cardin wrote Secretary of the Treasury Jacob Lew urging Treasury to 
revisit their regulatory position, which discourages multiple employer 
plans.
---------------------------------------------------------------------------

ERISA

Congress and the Department of Labor need to modify ERISA requirements 
to allow a broader array of entities, organizations, and associations 
to sponsor MEPs, subject to conditions that will ensure the plans 
comply with ERISA's fiduciary requirements and minimize risk to plan 
sponsors and their employees. These conditions might include the 
following:

      The sponsor must exist for bona fide purposes unrelated to the 
sponsoring of a retirement plan.

      The documents of the plan must identify the person, or persons, 
who will serve as the named fiduciary of the plan. That person, or 
persons, must acknowledge in writing joint and several liability for 
controlling and managing the operation and administration of the plan.

      The documents of the plan must identify the trustee(s) of the 
plan responsible for the management and control of the plan's assets, 
and for the prudent collection of contributions to the plan.

      The documents of the plan must identify the person or persons 
who will serve as the administrator of the plan, responsible for 
satisfying reporting, disclosure, and other statutory obligations.

      The plan and plan officials must maintain a fidelity bond, in 
accordance with ERISA section 412, as well as fiduciary insurance, to 
safeguard the plan and its participants.

      The documents of the plan must ensure that participating 
employers will not be subject to unreasonable restrictions, penalties, 
or fees upon ceasing participation in the plan.

      Inasmuch as the retirement coverage gap is most acute among 
smaller employers, participation in these new MEPs should be limited to 
those employers with no more than 500 employees. While it is likely 
that MEPs will appeal principally to employers with 100 or fewer 
employees, establishing the ceiling at 500 will give small employers 
ample time to grow without having to worry about identifying a new 
retirement savings vehicle.

Fiduciary Responsibility

Congress and regulators should consider limiting the fiduciary 
responsibility of employersparticipating in a MEP to the prudent 
selection of the MEP sponsor. Similar to the selection of an investment 
manager under ERISA, such a limitation is not intended to eliminate or 
reduce fiduciary responsibility with respect to the management and 
operation of the plan, but rather appropriately allocate those 
responsibilities to professionals best positioned to protect the 
interests of plan participants and beneficiaries.

Enforcement

Lawmakers and regulators can help ensure the integrity of MEPs in the 
marketplace by strengthening the protections afforded plan sponsors and 
their employees. They can do this by establishing accountability for, 
and meaningful oversight of, MEPs. Appropriate measures could include:

      A requirement that MEP sponsors file a registration statement 
with the Department of Labor in advance of offering a retirement plan 
to employers. The statement could include, among other things, the name 
of the sponsor; the scope of its intended offering in terms of its 
geographic area; representations that all applicable conditions, such 
as those enumerated above, have been satisfied; and copies of the plan 
documents.

      A requirement that the MEP file an annual report including, in 
addition to any other information required in its Form 5500 annual 
report, an audit and a listing of participating employers.\22\
---------------------------------------------------------------------------
    \22\ Congress and the Department of Labor have taken steps to 
require, for plan years beginning after December 31, 2013, that most 
multiple employer plans include, as part of the Form 5500 Annual 
Return/Report, a list of participating employers and a good faith 
estimate of the percentage of total contributions made by such 
employers during the plan year. See section 104(c) of the Cooperative 
and Small Employer Charity Pension Flexibility Act (Public Law 113-97, 
April 7, 2014) adding a new section 103(g) to ERISA. Also see, interim 
final rule amending instructions to the Form 5500 Annual Return/Report 
at 79 FR 66617 (November 10, 2014).

      An amendment to ERISA giving the Department of Labor authority 
to issue ex parte cease and desist orders as well as summary seizure 
orders, similar to the authority it already enjoys in overseeing 
multiple employer welfare arrangements.

A Safe-Harbor Model

To facilitate participation in MEPs and reduce compliance risks for 
small employers, the Department of the Treasury and the Internal 
Revenue Service should develop a safe-harbor model plan that minimizes 
the administrative complexities and costs of MEPs, is not subject to 
complex tax-qualification testing requirements, and enhances the 
ability of MEPs to generate positive retirement outcomes for plan 
participants.

A Model MEP

A model multiple employer plan developed by the Department of Treasury 
would provide small businesses with a roadmap for plan design and 
implementation. It would likely incorporate the following features and 
restrictions:

                       FEATURES AND CHARACTERISTICS
Segment served             Small employers. Limit to employers with no
                           more than 500 employees.
------------------------------------------------------------------------
Plan structure             A single plan, with a centrally administered
                           trust, serving all participating employers.
                           Specifically identified persons who will
                           serve as the named fiduciary, trustee(s), and
                           administrator.
------------------------------------------------------------------------
Features                   Funded by employee contributions.
                           Employer contributions permitted but not
                           mandated.
                           Subject to contribution limits applicable to
                           401(k) plans (i.e., $18,000 per employee,
                           plus permissible catch-up contributions, in
                           2015).
                           Automatic enrollment of employees at a
                           contribution rate equal to 6 percent of pay,
                           with employees eligible to opt out or select
                           an alternate contribution rate.
                           Automatic escalation of employee
                           contributions to 10 percent of pay, in annual
                           1 percent increments, with the opportunity
                           for employees to opt out.
                           Participant loans not permitted.
                           Hardship withdrawals permitted only under
                           IRS safe harbor conditions.
------------------------------------------------------------------------
Investment and             Participants will be offered a broad range
 Pdistribution Poptions    of diversified investment options.
                           In the absence of investment direction,
                           participants initially will be defaulted into
                           an investment option designed to preserve
                           principal, and after 4 years into a qualified
                           default investment alternative such as a
                           target-date fund or balanced fund.
                           Investment and/or distribution options will
                           include at least one lifetime income product.
                           Participant accounts may be rolled into an
                           IRA or other qualified retirement plan upon
                           participant's separation from employer.
------------------------------------------------------------------------
Fiduciary and              Administrative responsibilities centralized
 Padministrative           to reduce costs.
 Presponsibilities         Participating employers have limited
                           fiduciary responsibility.
                           Participants benefit from the applicability
                           of ERISA's fiduciary standards and duties to
                           those responsible for the management of the
                           plan.
                           Non-discrimination testing not required.
------------------------------------------------------------------------


Multiple Employer Plans Will Meet Small Business Objectives

Multiple employer plans designed for the small business community will 
meet the objectives of small employers who want to help their employees 
prepare for retirement. As re-envisioned for the small business 
community, MEPs will:

Reduce costs and administrative burdens. Centralized plan 
administration and management, along with economies of scale, reduce 
both administrative burdens and costs--costs that often are borne by 
the plan's participants and beneficiaries and serve to reduce 
retirement savings. Exhibit 1 shows how dramatically retirement plan 
fees fall, as a percentage of plan assets, as the number of 
participants ina plan increases.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Reduce fiduciary responsibilities for small employers sponsoring 
retirement plans. Fiduciary and administrative responsibilities will be 
discharged by plan and investment professionals, thereby enhancing the 
fiduciary and other protections afforded to employees.

Provide better retirement outcomes for employees. A properly designed 
MEP will promote saving by employees through the use of automatic 
enrollment and automatic escalation of their contributions. MEPs may 
further encourage appropriate investment behavior by providing a choice 
of investment options selected by investment professionals, better 
ensuring that plan participants will be able to tailor their portfolios 
to their investment goals and tolerance for risk. They also will 
provide enhanced opportunities for cost-effective participant education 
programs through pooling of resources with other employers. Finally, 
they will drive positive outcomes by providing participants with access 
to lifetime income solutions within their plans. Because the ultimate 
goal of a retirement plan is to allow participants to generate the 
income they need once they have retired, lifetime income solutions are 
a critical component of plan design.

Help small businesses compete with larger companies for talent. By 
giving small businesses a way to help their employees save and invest 
for retirement in a tax-advantaged plan, small employers will be better 
equipped to compete with larger employers for talent. Surveys 
consistently show that workers consider retirement savings plans a 
valued employee benefit.

Conclusion

Access to a cost-effective, easy-to-use workplace retirement savings 
program is an important tool for building retirement security. Yet tens 
of millions of Americans lack access to such a tool. Most in that group 
are employed by enterprises with 100 or fewer people on their payroll.

Revamping the rules and regulations around multiple employer plans to 
allow for MEPs that meet the needs and concerns of small employers 
would help to close the retirement coverage gap and improve the 
retirement outlook for millions of working Americans. It would give 
those workers access to professionally managed, institutionally priced 
retirement programs funded via convenient payroll deduction. And it 
would help make small employers more competitive with larger employers 
who can more easily assume the costs and responsibilities associated 
with sponsoring a retirement plan.

Importantly, incorporating retirement income solutions into MEPs will 
be crucial to delivering maximum benefits to working Americans. As has 
become increasingly clear over the past decade as the first wave of 
Baby Boomers has begun to exit the workforce, retirement savings plans 
must function not merely as vehicles for accumulating assets but also 
as vehicles for converting those assets to income once plan 
participants have stopped working.

The climate is right for expanding the use of multiple employer plans. 
This idea is supported by members of Congress in both parties and has 
won the endorsement of significant interest groups such as the U.S. 
Chamber of Commerce and AARP.

If you'd like to be part of the effort to expand the role of MEPs for 
small businesses, or simply learn more about how MEPs can be adapted 
for the small business marketplace, please contact:

John J. Kalamarides      Robert J. Doyle          Bennett Kleinberg
Senior Vice President    Vice President           Vice President
Institutional            Government Affairs       Institutional
 Investment Solutions    Prudential Financial      Investment Solutions
Prudential Retirement    202-327-5244             Prudential Retirement
860-534-3241             robert.j.doyle@prudenti  860-534-2002
john.kalamarides@pruden   al.com                  bennett.kleinberg@prud
 tial.com                                          ential.com
 

Additional Resources:

For additional information about improving the private retirement 
system in the U.S. and retirement outcomes for retirement plan 
participants, please see these other Prudential white papers:

     Guaranteed Lifetime Income and the Importance of Plan Design 
http://research.prudential.com/documents/rp/Guaranteed-Lifetime-Income-
and-the-Im
portance-of-Plan-
Design.pdf?doc=GuaranteedLifetimeIncome&bu=ret&ref=PDF&
cid=MEP

     Overcoming Participant Inertia: Automatic Features that Improve 
Outcomes While Improving Your Plan's Bottom Line http://
research.prudential.com/documents/rp/Automated_Solutions_Paper-
RSWP008.pdf?
doc=OvercomingParticipantInertia&bu=ret&ref=PDF&cid=MEP

     Innovative Strategies to Help Maximize Social Security Benefits 
http://research.prudential.com/documents/rp/
InnovativeSocialSecurityNov2012.pdf?doc=
innovativestrategies1112&bu=ret&ref=PDF&cid=MEP

     Planning for Retirement: The Importance of Workplace Retirement 
Plans and Guaranteed Lifetime Income http://research.prudential.com/
documents/rp/nrri-december-
2014.pdf?doc=NRRIDec2014PDF&bu=ret&ref=PDF&cid=MEP

                                 ______
                                 
       Questions Submitted for the Record to John J. Kalamarides
               Questions Submitted by Hon. Orrin G. Hatch
    Question. Mr. Kalamarides, you mentioned part-time workers in your 
testimony. The working group identified proposals that would target 
``long-term'' part-time workers, so-called ``career part-time'' workers 
who spend 3 or more years in part-time status working for the same 
employer. As more workers spend lengthy portions of their careers in 
part-time employment, this seems like an issue that needs to be 
explored. What are the obstacles to such coverage today, and are they 
primarily legal or economic in nature?

    Answer. We agree with the recommendations of the Savings and 
Investment Working Group that more needs to be done to extend 
retirement savings opportunities to the so-called ``career part-time'' 
worker, as well as self-employed ``Gig Economy'' workers. The Savings 
and Investment Working Group estimates that 37 percent of part-time 
workers do not have access to a retirement plan. Alan Kruger and the 
Brookings Institute estimate 600 thousand workers are solely employed 
by the new gig economy. While extending participation opportunities in 
employer-
sponsored retirement plans may be the most viable option for some part-
time workers, we believe further dialogue with the plan sponsor 
community is needed to better understand potential administrative and 
cost impediments of including such workers in existing plans. We also 
believe that, with respect to both part-time and self-employed workers, 
consideration should be given whether an Open MEP-like plan, offering a 
401(k) savings rates along with low administrative fees and 
institutional investments represents a potentially viable retirement 
saving opportunity for non-traditional workers outside the ERISA-
coverage framework.

    We welcome the opportunity to further explore these issues with the 
committee.

    Question. Mr. Kalamarides, you mentioned in your testimony that the 
Department of Labor recently published guidance to facilitate State 
sponsorship of MEPs. The guidance does not resolve the tax 
qualification issues you discussed, which, of course, are in the 
jurisdiction of this committee. Despite the shortcomings of the 
guidance in this regard, and without asking you to comment on the 
wisdom of State-sponsored MEPS, do you believe that the Open MEP can 
co-exist alongside state-sponsored MEPS in those States that choose to 
set up MEPS?

    Answer. We believe that both state-sponsored and private sector-
sponsored Open MEPs can co-exist, if--and only if--there is a level 
playing field; that is, rules and regulations governing MEPs do not tip 
the scales in favor of state-sponsored arrangements. A level playing 
field, in our view, would require that a State opting to sponsor a MEP 
would act as both the name fiduciary and the administrator of the MEP. 
In addition, the State, consistent with ERISA's ``prudence'' and 
``solely in the interest'' requirements would be responsible for the 
selection and monitoring of plan investments and service providers to 
the MEP. In addition, a state-sponsored MEP would be required, 
consistent with ERISA, to be trusteed and, the trustee, would be 
responsible for monitoring and timely collection of participant 
contributions. A level playing field, in our view, would ensure a 
robust marketplace in which a state-sponsored MEP could complement 
private sector MEP coverage opportunities, all to the benefit of the 
small employer community.

    Question. Mr. Kalamarides, in your testimony you said that you 
support the Open MEP to encourage businesses to set up 401(k) plans. 
You also point out that 401(k) MEPs offer greater opportunities for 
workers to save for retirement than workplace IRA programs because of 
the higher contribution levels available in 401(k) plans. The 
administration announced this week that it supports Open MEPs as well 
as workplace-based IRA programs. We're still waiting for all the 
details, but the administration seems to want workplace IRA programs to 
be mandatory for employers that do not already sponsor a plan. It would 
be quite a challenge, to say the least, to pass a new employer mandate 
in Congress. What do you think of voluntary workplace IRA programs, and 
do you think a voluntary workplace IRA program also could be organized 
as an Open MEP?

    Answer. Pursuant to Department of Labor regulations \1\ and 
interpretive guidance,\2\ employers have long been able to offer their 
employees the opportunity to save at the workplace through a payroll 
deduction IRA program, without implicating the compliance burdens and 
costs imposed on ERISA-covered plans; however, few have opted to do so. 
A number of States have focused on IRA-based programs primarily in an 
effort to avoid ERISA coverage. We believe that Open MEPs represent the 
most viable and most effective means by which to extend meaningful 
savings opportunities to the millions of workers without access to 
workplace based savings programs. As noted in my testimony, an Open MEP 
401(k) plan would permit employees to save at a rate of up to $18,000 
per year, as compared to the maximum contribution rate of $5,500 for a 
traditional IRA in 2015. An Open MEP, in addition to lower 
administrative and investment costs, could permit matching employer 
contributions further enhancing retirement savings opportunities for 
employees. And, unlike IRAs, employees participating in an Open MEP 
would enjoy the Federal protections accorded by ERISA. As efforts 
continue at both the State and Federal level to move IRA-based 
arrangements forward, we believe working Americans deserve access to 
more meaningful retirement savings opportunities, namely access to an 
Open MEP with traditional 401(k) benefits. For that reason, we 
encourage members of Congress to move quickly to provide a meaningful 
Federal solution and enact legislation that will foster and promote MEP 
sponsorship and participation.
---------------------------------------------------------------------------
    \1\ See 29 CFR Sec. 2510.3-2(d).
    \2\ See 29 CFR Sec. 2509.99-1.

    Question. Mr. Kalamarides, in your testimony you recommended that, 
in framing legislation that would expand MEP sponsorship and 
participation, consideration should be given to setting forth a model 
Open MEP plan or directing Treasury, IRS and Labor to work together to 
develop such a model. What provisions, in your view, should be included 
---------------------------------------------------------------------------
in such a model plan?

    Answer. First, we believe that a model plan--a plan that would not 
be subject to the burdensome and costly discrimination and other 
testing currently applicable to retirement plans--will encourage 
employer participation through reduced costs and risks and will enhance 
employee retirement preparedness through increased participation and 
savings rates. A model plan that is widely adopted may also reduce 
costs for employers moving from one MEP to another and may reduce 
barriers for employee portability. To accomplish these objectives, we 
believe a model plan should provide for:

        Specific identification, in plan documents, of the person or 
persons who will serve as the plan's named fiduciary, as well as the 
trustee or trustees responsible for the management of the plan's assets 
and the prudent collection of employee contributions to the plan.

        Specific identification, in the plan documents, the person or 
persons who will serve as the plan's administrator, responsible for 
compliance with ERISA's reporting and disclosure requirements.

        Automatic enrollment of employees at a contribution rate equal 
to 6%, with a right to opt out of the plan or elect a different 
contribution rate.

        Automatic escalation of employee contributions up to 10 
percent of pay.

        A broad range of investment alternatives, consistent with the 
standards set forth in the Department of Labor's regulations under 
section 404(c) at 29 CFR Sec. 2550.404c-1.

        At least one investment alternative or distribution option 
that includes a lifetime income product--far too few employees 
currently have access to lifetime income through their retirement plan.

        A default investment alternative that, for the first 4 years 
of participation, is designed to preserve principal. After 4 years, and 
in the absence of a participant's direction to the contrary, 
contributions would be transmitted to a Qualified Default Investment 
Alternative (QDIA), consistent with the Department of Labor's 
regulation at 29 CFR Sec. 2550.404c-5. By utilizing a preservation of 
principal investment as the initial default investment, newer 
participants are largely protected from market volatility that could 
discourage continued participation or reduce savings rates during the 
early savings years.

        Hardship withdrawals, but not participant loans; thereby 
reducing the likelihood of leakage from the system.

    While we believe most Open MEPs would gravitate to a model, we 
believe that, in the interest of not discouraging innovation and 
creativity, use of a model plan structure should be voluntary and not a 
mandate for all Open MEPs.

    Thank you and we look forward to working with the committee on this 
important issue.

                                 ______
                                 
                Questions Submitted by Hon. Dean Heller
    Question. What is the most important thing lawmakers can do right 
now to help small businesses offer a workplace savings plan to their 
employees?

    Answer. We believe removing the current ERISA and tax impediments 
to MEP sponsorship and participation would represent an important first 
step in helping small employers offer workplace savings to their 
employees. We also believe that, given the bipartisan support for MEPs 
in both the Senate and the House, as well as support from consumer 
advocates and the administration, an Open MEP legislative fix is 
achievable in the short-term. Lack of access to retirement savings 
opportunities in the workplace is an immediate problem for millions of 
working Americans. Today there is widespread, bipartisan support for a 
solution--Open MEPs; we believe the time is now for Congress and the 
administration to act on this critical issue. We look forward to 
working with you and your staff to make this happen.

    Question. As you know, current law provides a tax credit of up to 
$500 per year, for 3 years, for start-up costs related to qualified 
small employer plans. However, the uptake rate for this credit has been 
historically weak. Why do you think the uptake has been so low?

    Answer. While a tax credit may help mitigate some of the initial 
start up cost concerns for some employers, we believe that the 
administrative, fiduciary, and tax qualification responsibilities and 
liabilities attendant to sponsoring a standalone retirement plan, may 
be too daunting for far too many small employers; employers who are 
otherwise committed to doing the right thing for their employees. In 
2015, Prudential surveyed 850 small businesses without plans and found 
there are three barriers to adoption--cost, administrative hassle and 
fiduciary responsibilities. In the same survey, we found demand for 
401(k) plans would increase by 250 percent by removing these barriers. 
As indicated in my testimony, we believe that Open MEPs offer a low 
cost, low risk means by which today's smaller employers can offer their 
employees a meaningful opportunity to save for retirement. An Open MEP 
401(k) would permit employees to save a rate of up to $18,000 per year, 
as compared to the maximum contribution rate of $5,500 for a 
traditional IRA in 2015. An Open MEP also enables smaller employers to 
enjoy economies of scale, resulting in lower administrative and 
investment costs. An Open MEP also affords smaller employers the 
opportunity to reduce their fiduciary responsibilities and liabilities 
by transferring--not eliminating--those responsibilities and 
liabilities to benefits professionals who are best positioned to 
operate the plan in a manner consistent with ERISA and the interests of 
the employees.

    Question. I am deeply concerned with leakage. In my home State, we 
have felt the pressures of the recession and many of the constituents 
have had to dip into their retirement funds to make ends meet. In your 
opinion, what is the single best way we as lawmakers can make it easier 
for workers to return assets for retirement accounts after they have 
been withdrawn?

    Answer. Studies have suggested that ``leakage''--any preretirement 
withdrawal that permanently removes money from a retirement saving 
program--can dramatically reduce a person's retirement readiness. One 
the major causes of leakage is participant loans. About 90 percent of 
participants in 401(k) plans can borrow from their plan account. 
However, borrowed amounts reduce potential investment gains and have to 
repaid with after tax dollars. Moreover, failures to repay loans in a 
timely manner can result in taxation on the outstanding balance, as 
well as early withdrawal penalties. For these reasons, we have 
recommended that, in connection with the development of an Open MEP 
model plan that loans not be permitted. Loan programs can be expensive 
to administer and, as noted, can place retirement savings at risk. 
However, recognizing that limited access to retirement savings may be 
necessary for some employees, a model Open MEP plan could permit 
``hardship'' withdrawals, but preferably only those permitted under the 
IRS safe harbor conditions (such as, payment of medical expenses, 
payments to prevent eviction, funeral expenses, repair of principal 
residence, etc.).

    Question. I strongly believe that tax reform, done the right way, 
can improve our fiscal picture. What steps can we as lawmakers take to 
improve our retirement savings in a fiscally responsible way?

    Answer. As has become clear through recent efforts, tax reform is a 
complex undertaking which often leads to unintended consequences. As 
Congress continues to grapple with how to make our tax system a driver 
for domestic economic growth and more competitive globally, there are 
both opportunities and risks. A number of tax reform proposals have 
focused on reducing or capping retirement-related expenditures. Without 
addressing or recommending any particular proposal, we do encourage 
lawmakers to reallocate, in part, any tax reform savings attributable 
to reductions in retirement-related expenditures to expanding 
retirement coverage and savings opportunities for lower and middle 
income earners. But we also caution against inadvertently raising 
retirement product affordability by indirectly raising the costs on 
retirement product providers through inappropriate company taxation.

    Question. I understand the President is expected to propose an 
Open-MEP plan in his FY17 budget. I would imagine a significant amount 
of implementing guidance would be needed. If open-MEPs were expanded, 
what role, if any, would the IRS play in this additional guidance?

    Answer. We do not believe that the legislative proposals introduced 
to date, or the administration's proposal, relating to Open MEPs, 
necessarily require implementing regulatory or other guidance from the 
Agencies (Treasury, IRS or Labor) and we would encourage members, as 
they consider legislation to promote Open MEPs, to keep the need for 
regulatory guidance to a minimum. In this regard, we are concerned that 
the need for implementation guidance will, given the protracted nature 
of the regulatory process and the potential for competing agency 
priorities, unnecessarily delay the offering of Open MEPs for several 
years.

    With regard to your specific question, we have two suggestions. 
First, to the extent not specifically addressed in legislation, 
Treasury and the IRS will need to provide guidance addressing the tax 
qualification issues that put both a MEP and other participating 
employers potentially at risk due to the acts of one noncompliant 
participating employer--often referred to as the ``one bad apple'' 
rule.

    Second, we believe that Treasury and IRS, working in coordination 
with the Department of Labor, should be directed to develop a model 
Open MEP plan--a plan that would not be subject to the burdensome and 
costly discrimination and other testing currently applicable to 
retirement plans and that will encourage employer participation through 
reduced costs and risks. A properly designed model plan will also 
encourage increased participation and savings rates for employees 
through the use auto-features. A model plan that is widely adopted may 
also reduce costs for employers moving from one MEP to another and may 
reduce barriers for employee portability. In our view, these objectives 
could be accomplished through a model plan that provides for:

        Specific identification, in plan documents, of the person or 
persons who will serve as the plan's named fiduciary, as well as the 
trustee or trustees responsible for the management of the plan's assets 
and the prudent collection of employee contributions to the plan.

        Specific identification, in the plan documents, the person or 
persons who will serve as the plan's administrator, responsible for 
compliance with ERISA's reporting and disclosure requirements.

        Automatic enrollment of employees at a contribution rate equal 
to 6%, with a right to opt out of the plan or elect a different 
contribution rate.

        Automatic escalation of employee contributions up to 10 
percent of pay.

        A broad range of investment alternatives, consistent with the 
standards set forth in the Department of Labor's regulations under 
section 404(c) at 29 CFR Sec. 2550.404c-1.

        At least one investment alternative or distribution option 
that includes a lifetime income product--far too few employees 
currently have access to lifetime income through their retirement plan.

        A default investment alternative that, for the first 4 years 
of participation, is designed to preserve principal. After 4 years, and 
in the absence of a participant's direction to the contrary, 
contributions would be transmitted to a Qualified Default Investment 
Alternative (QDIA), consistent with the Department of Labor's 
regulation at 29 CFR Sec. 2550.404c-5. By utilizing a preservation of 
principal investment as the initial default investment, newer 
participants are largely protected from market volatility that could 
discourage continued participation or reduce savings rates during the 
early savings years.

        Hardship withdrawals, but not participant loans; thereby 
reducing the likelihood of leakage from the system.

    While we believe most Open MEPs would gravitate to a model, we 
believe that, in the interest of not discouraging innovation and 
creativity, use of a model plan structure should be voluntary and not a 
mandate for all Open MEPs.

    Thank you, and we look forward to working with the committee on 
this important issue.

    Question. Like many Nevadans, I am a strong supporter of ways to 
help our vulnerable populations save long-term for our retirement. What 
is the single most important thing lawmakers can do right now to help 
low-income and moderate-income families prepare for retirement?

    Answer. As with your Question 1, we believe removing the current 
ERISA and tax impediments to MEP sponsorship and participation would 
represent an important first step in helping low and moderate income 
families prepare for retirement. According to data from the nonprofit, 
Employee Benefit Research Institute, people earning between $30,000 and 
$50,000 per year are 16.4 times more likely to save for retirement if 
they have access to a workplace retirement plan. Unfortunately, tens of 
millions of working Americans do not have access to a plan on the job, 
leaving far too many unprepared to meet their financial needs after 
they stop working. This retirement coverage gap is most acute among 
employees of small companies, many of whom do not sponsor plans due to 
concerns about costs, complexity and fiduciary liability. The lack of 
coverage is especially problematic for the 30 million women, 12 million 
Latinos, 6 million African Americans and 4 million Asian Americans that 
work at small business. Open MEPs represent a bipartisan solution to 
addressing this critical retirement coverage issue.

    We look forward to working with you on this issue so critical to 
millions of working Americans.

                                 ______
                                 
               Questions Submitted by Hon. Maria Cantwell
    Question. I have long been a proponent that we should encourage 
guaranteed lifetime income options, including annuity products, as a 
part of our retirement security agenda. Prudential, in its written 
testimony, recommended that a safe-harbor model plan be developed by 
Treasury, the IRS and the Department of Labor to encourage 
participation in open multi-employer plans. It is also recommend that 
this model plan include an investment or distribution option that 
includes a lifetime income plan.

    Why do you believe including a guaranteed lifetime income option in 
this mix is so important?

    Answer. With an estimated 10,000 Americans reaching retirement age 
every day, we know that very few of those individuals are being 
afforded the opportunity to consider a guaranteed lifetime income 
option as part of their retirement plan. We also know that few of 
today's workers are able to manage investment and longevity risks in 
retirement on their own. As recognized by the Council of Economic 
Advisers' February 2, 2012 report, Supporting Retirement for American 
Families, this is a particularly significant issue for women, who tend 
to have lower retirement saving rates than men, while having longer 
life expectancies. Guaranteed lifetime income products provide a means 
by which all workers can enjoy both certainty and security during their 
retirement years. We believe a model Open MEP plan with at least one 
investment or distribution option that includes a lifetime income 
solution would be a promising start to introducing both employers and 
their employees to the benefits of a guaranteed lifetime income option.

    Question. Do you believe Congress should provide more direction 
regarding the composition of a model plan?

    Answer. Yes. We believe the Department of the Treasury, Internal 
Revenue Service and the Department of Labor would benefit from 
Congressional direction regarding the composition of a model Open MEP 
plan. In this regard, we believe such direction should the required 
development of a model plan that provides for:

        Specific identification, in plan documents, of the person or 
persons who will serve as the plan's named fiduciary, as well as the 
trustee or trustees responsible for the management of the plan's assets 
and the prudent collection of employee contributions to the plan.

        Specific identification, in the plan documents, the person or 
persons who will serve as the plan's administrator, responsible for 
compliance with ERISA's reporting and disclosure requirements.

        Automatic enrollment of employees at a contribution rate equal 
to 6%, with a right to opt out of the plan or elect a different 
contribution rate.

        Automatic escalation of employee contributions up to 10 
percent of pay.

        A broad range of investment alternatives, consistent with the 
standards set forth in the Department of Labor's regulations under 
section 404(c) at 29 CFR Sec. 2550.404c-1.

        At least one investment alternative or distribution option 
that includes a lifetime income product--far too few employees 
currently have access to lifetime income through their retirement plan.

        A default investment alternative that, for the first 4 years 
of participation, is designed to preserve principal. After 4 years, and 
in the absence of a participant's direction to the contrary, 
contributions would be transmitted to a Qualified Default Investment 
Alternative (QDIA), consistent with the Department of Labor's 
regulation at 29 CFR Sec. 2550.404c-5. By utilizing a preservation of 
principal investment as the initial default investment, newer 
participants are largely protected from market volatility that could 
discourage continued participation or reduce savings rates during the 
early savings years.

        Hardship withdrawals, but not participant loans; thereby 
reducing the likelihood of leakage from the system.

    While we believe most Open MEPs would gravitate to a model, we 
believe that, in the interest of not discouraging innovation and 
creativity, use of a model plan structure should be voluntary and not a 
mandate for all Open MEPs.

    Question. Another important lifetime income issue we've looked at 
concerns portability of lifetime income products. Younger and lower-
income workers actively saving for their retirements have to worry 
about transferring those balances to new plans when changing jobs. The 
issue of leakage and lost accounts for these workers during the 
transfer--often because of their smaller dollar balances--results in a 
disproportionate impact when lost. These are Americans who need more 
retirement savings than most. This issue has been highlighted by the 
President, the Department of Labor, and here in Congress. What 
partnerships exist in making sure that the technology and support also 
exists in ensuring that we eliminate this ongoing problem?

    Answer. We recognize that the combination of plan terminations and 
a highly mobile workplace can create challenges for both workers and 
employers in terms of tracking benefit entitlements. With the enactment 
of the Pension Protection Act of 2006, the Pension Benefit Guaranty 
Corporation (PBGC) was vested with the authority for collecting and 
maintaining information for missing defined contribution plan 
participants. We believe the PBGC continues to represent the single 
best source for missing participant-related information. Accordingly, 
we are encouraged by efforts of the PBGC and the administration to 
implement a program to assist defined contribution plan participants in 
locating their accounts.

    Question. I've worked on legislation along the lines of the 
recommendations in your testimony on developing policies to ensure 
lifetime income portability and annuity selection safe harbors. Why are 
these provisions important?

    Answer. As recognized by the Savings and Investment Working Group, 
defined contribution plans should be encouraged to offer annuities or 
other installment products as investment options, thereby, enabling 
employees to invest in these products gradually over their careers. 
However, changes in providers or investment offerings can put an 
employee's investment in such products and options at risk. While 
innovation is taking place in the marketplace to mitigate such risks, 
we strongly support a legislative solution that would permit the 
distribution of the investment to the employee via a plan-to-plan 
transfer to another employer-sponsored plan or to an IRA, without 
regard to whether a distribution would otherwise be permitted. Such a 
legislative solution was included in S. 1270, introduced by Senator 
Hatch in the 113th Congress and is consistent with the recommendations 
of the Saving and Investment Working Group. We also are encouraged by 
the administration's inclusion of similar proposals in its 2016 and 
2017 Budget documents.

    In addition to lifetime income portability, we support the 
recommendations of the Savings and Investment Working Group relating to 
changes to the rules governing the selection of annuity providers. In 
2010 the Departments of Labor and Treasury solicited public comment and 
held hearings on improving defined contribution plans. One of the key 
takeaways from that joint agency initiative was that the current rule 
governing the selection of annuity providers--a safe harbor intended to 
encourage the inclusion of annuities in defined contribution plans--is 
not working. Of particular concern is that part of the rule that 
requires any employer considering the inclusion of an annuity product 
to assess, and assume fiduciary liability for, the ability of the 
annuity provider to satisfy its contractual obligations.

    While we recognize the importance of such determinations, we 
believe the burden of such assessments is appropriately the role of 
State insurance regulators, not plan fiduciaries. In our experience, 
while most plan fiduciaries are comfortable making determinations 
relating to the reasonableness of costs in relation to benefits and the 
quality of services, few are comfortable determining the long-term 
financial viability of an insurer or other financial institution. For 
this reason, we believe the current safe harbor standard is having a 
chilling effect on plan sponsor considerations of guaranteed lifetime 
income products and new standards, like those identified by the Savings 
and Investment Working Group, are very much needed. With 10,000 
individuals reaching retirement age each day, access to guaranteed 
lifetime income solutions is an issue that needs to be addressed soon.

    Thank you, and we would welcome the opportunity to work with the 
committee on this important issue.

    Question. In 2015, Washington State became one of the first States 
in the country to authorize a Small Business Retirement Marketplace, to 
make it easier and less expensive for small businesses to offer 
retirement savings options to their employees. Under Washington's 
program, employers with fewer than 100 employees will be able to 
voluntarily participate in this marketplace and offer low-cost 
retirement savings plans, which are portable, to their employees. Do 
you believe that this type of marketplace will increase small business 
participation and make it easier for them to offer a retirement plan 
for their employees? What is the impact on employees' savings rates 
when their employer offers a retirement plan compared to those who do 
not?

    Answer. Washington State's marketplace approach to expanding 
retirement coverage is an excellent example of how States can, through 
a voluntary process, increase employer awareness of and access to 
retirement savings opportunities for their employees. We believe a 
Federal solution--namely, Open MEPs--is a necessary complement to the 
efforts of States like Washington. While improved access to retirement 
savings programs is an important step, our research indicates that many 
employers, particularly smaller employers, will continue to have 
concerns about the administrative complexities, costs, and fiduciary 
liability attendant to maintaining a standalone plan. Open MEPs 
represent a means by which to address these issues, but legislative 
action is necessary to expand MEP sponsorship and participation. We 
support the recommendations of the Savings and Investment Working Group 
and look forward to working with you and other members in moving such 
legislation forward.

                                 ______
                                 
             Question Submitted by Hon. Benjamin L. Cardin
    Question. There are many existing proposals to improve our 
retirement system. You mention several in your testimony that could 
increase access to retirement savings as well as increase the amount of 
savings for those who participate in retirement plans. These are 
incredibly important issues, and I hope that our committee can take up 
commonsense, bipartisan proposals to address them. That being said, 
while the focus of retirement policy is often rightly on access and 
accumulation, distribution of retirement benefits over the life of 
retirees is also very important. In your view, what steps can we take 
to encourage lifetime income security? Aside from the suggestions 
contained in the Savings and Investment Working Group report, are there 
any other problems, concerns, or reforms that we should consider to 
address lifetime income and decumulation issues?

    Answer. We believe far too many working Americans do not have 
access to guaranteed lifetime income solutions and far too many of our 
retirees are inadequately prepared to manage investment and longevity 
risks during their retirement years. In our view, these issues could be 
addressed through three regulatory and/or legislative actions. First, 
plan sponsors must be willing to include guaranteed lifetime income 
products as part of their retirement plan investment and/or 
distribution options. The primary impediment to including such 
offerings as part of a defined contribution plan is the fiduciary 
liability attendant to the selection and monitoring of annuity 
providers. This fact was well established by the Department of Labor 
and the Department of the Treasury in 2010 during 2 days of hearings on 
lifetime income issues. Efforts to address this problem through changes 
to Labor's current annuity selection safe harbor have not developed. We 
commend the Savings and Investment Working Group for their support for 
safe harbor changes; changes that recognize the challenges for plan 
sponsors in having to assess the financial capability of an insurer to 
satisfy its long term financial commitments, assessments typically 
reserved to insurance experts in State regulatory agencies. We believe 
that adoption of the proposals identified by the Savings and Investment 
Working Group would represent a major step forward for plan sponsor 
inclusion of guaranteed lifetime income solutions in their plans.

    Second, we need to ensure that participants, through lifetime 
income disclosures, understand how their account balances translate 
into a lifetime income stream. In this regard, we commend the efforts 
of Senators Isakson and Murphy for their work in moving lifetime income 
disclosure legislation forward. We believe clarifying the means by 
which plan sponsors can provide lifetime income disclosures without 
unnecessarily increasing fiduciary and plan liability for such 
disclosures would dramatically increase the offering of such 
disclosures; ultimately resulting in better informed plan participants.

    Lastly, we need to ensure that participants have the information 
they need to make informed decisions regarding their distribution 
options and the challenges attendant to managing investment and 
longevity risks during their retirement years. The guidance provided by 
the Department of Labor in 1996 (Interpretive Bulletin 96-1) clarifying 
the type and form of investment-related information plan sponsors can 
provide their employees without such information being considered 
``investment advice'' has helped millions of plan participants to make 
more informed investment decisions within their 401(k) plans. We 
believe similar guidance, regulatory or statutory, is necessary to 
encourage and promote the furnishing of educational materials and 
programs relating to understanding available distribution options and 
preparing for one's retirement years. We would welcome the opportunity 
to work with you and other members to ensure that the principles of 
Interpretive Bulletin 96-1 are preserved and expanded to include 
education relating to the decumulation phase.

                                 ______
                                 
              Questions Submitted by Hon. Robert Menendez
    Question. Mr. Kalamarides, in your testimony you recommended that, 
in framing legislation that would expand MEP sponsorship and 
participation, consideration should be given to setting forth a model 
Open MEP plan or directing Treasury, IRS and Labor to work together to 
develop such a model. Would you share your thoughts on what should be 
included in such a model plan?

    Answer. Thank you for the question. First, we believe that a model 
plan--a plan that would not be subject to the burdensome and costly 
discrimination and other testing currently applicable to retirement 
plans--will encourage employer participation through reduced costs and 
risks and will enhance employee retirement preparedness through 
increased participation and savings rates. A model plan that is widely 
adopted may also reduce costs for employers moving from one MEP to 
another and may reduce barriers for employee portability. To accomplish 
these objectives, we believe a model plan should provide for:

        Specific identification, in plan documents, of the person or 
persons who will serve as the plan's named fiduciary, as well as the 
trustee or trustees responsible for the management of the plan's assets 
and the prudent collection of employee contributions to the plan.

        Specific identification, in the plan documents, the person or 
persons who will serve as the plan's administrator, responsible for 
compliance with ERISA's reporting and disclosure requirements.

        Automatic enrollment of employees at a contribution rate equal 
to 6%, with a right to opt out of the plan or elect a different 
contribution rate.

        Automatic escalation of employee contributions up to 10 
percent of pay.

        A broad range of investment alternatives, consistent with the 
standards set forth in the Department of Labor's regulations under 
section 404(c) at 29 CFR Sec. 2550.404c-1.

        At least one investment alternative or distribution option 
that includes a lifetime income product--far too few employees 
currently have access to lifetime income through their retirement plan.

        A default investment alternative that, for the first 4 years 
of participation, is designed to preserve principal. After 4 years, and 
in the absence of a participant's direction to the contrary, 
contributions would be transmitted to a Qualified Default Investment 
Alternative (QDIA), consistent with the Department of Labor's 
regulation at 29 CFR Sec. 2550.404c-5. By utilizing a preservation of 
principal investment as the initial default investment, newer 
participants are largely protected from market volatility that could 
discourage continued participation or reduce savings rates during the 
early savings years.

        Hardship withdrawals, but not participant loans; thereby 
reducing the likelihood of leakage from the system.

    While we believe most Open MEPs would gravitate to a model, we 
believe that, in the interest of not discouraging innovation and 
creativity, use of a model plan structure should be voluntary and not a 
mandate for all Open MEPs.

    Thank you, and we look forward to working with the committee on 
this important issue.

    Question. Mr. Kalamarides, in your testimony you make reference to 
the fact that far too many working Americans do not have access to 
guaranteed lifetime income, leaving them on their own to manage 
investment and longevity risks--which we know few are qualified to do. 
Do you have suggestions as to how we might improve this situation?

    Answer. Thank you for the question; you raise a very significant 
question for today's workers and an issue recognized by your 
committee's Savings and Investment Working Group.

    Prudential supports approaches identified by the Working Group 
pursuant to which plan fiduciaries would, on questions of financial 
viability, look to insurers to confirm they are in good standing with 
State licensing, financial solvency, auditing and reporting 
requirements; requirements established by the States to protect their 
citizens, including plan participants.

    In 2010 the Departments of Labor and Treasury solicited public 
comment and held hearings on improving defined contribution plans. One 
of the key takeaways from that joint agency initiative was that the 
current rule governing the selection of annuity providers--a safe 
harbor intended to encourage the inclusion of annuities in defined 
contribution plans--is not working. Of particular concern is that part 
of the rule that requires any employer considering the inclusion of an 
annuity product to assess, and assume fiduciary liability for, the 
ability of the annuity provider to satisfy its contractual obligations.

    While we recognize the importance of such determinations, we 
believe the burden of such assessments is appropriately the role of 
State insurance regulators, not plan fiduciaries. In our experience, 
while most plan fiduciaries are comfortable making determinations 
relating to the reasonableness of costs in relation to benefits and the 
quality of services, few are comfortable determining the long-term 
financial viability of an insurer or other financial institution. For 
this reason, we believe the current safe harbor standard is having a 
chilling effect on plan sponsor considerations of guaranteed lifetime 
income products and new standards, like those identified by the Savings 
and Investment Working Group, are very much needed. With 10,000 
individuals reaching retirement age each day, access to guaranteed 
lifetime income solutions is an issue that needs to be addressed soon.

    Thank you, and we would welcome the opportunity to work with the 
committee on this important issue.

                                 ______
                                 
   Prepared Statement of Alicia H. Munnell, Ph.D., Peter F. Drucker 
  Professor of Management Science, Carroll School of Management, and 
       Director, Center for Retirement Research, Boston College *
---------------------------------------------------------------------------
    * The views expressed are solely those of the author and do not 
represent the views or policy of the Center for Retirement Research at 
Boston College.
---------------------------------------------------------------------------
Chairman Hatch, Ranking Member Wyden, and members of the committee, 
thank you for the opportunity to testify today about ``The Savings and 
Investment Bipartisan Tax Working Group Report.''

    This testimony underlines the importance of the Working Group's 
recommendations to broaden coverage and encourage retirement saving by 
lower-paid workers. But it also argues that we are facing an enormous 
retirement income challenge and therefore need even bolder changes.

    This testimony proceeds as follows. The first section describes the 
retirement landscape, where more than half of working-age households 
are at risk of inadequate retirement income.\1\ The second section 
discusses the extent to which the Working Group's proposals--which 
focus on the coverage gap and contributions by lower-paid workers--
would ameliorate the situation. The third section recommends some 
broader solutions: (1) make 401(k) plans automatic and reduce leakage; 
and (2) enact national auto-IRA legislation. The final section 
concludes that the Senate Finance Committee could make an enormous 
contribution to heading off the coming crisis.
---------------------------------------------------------------------------
    \1\ For more details, see Ellis, Munnell, and Eschtruth (2014).
---------------------------------------------------------------------------
                      the coming retirement crisis
    To address the adequacy of retirement preparedness, the Center that 
I direct has developed a National Retirement Risk Index (NRRI), which 
relies on data from the Federal Reserve's Survey of Consumer 
Finances.\2\ The NRRI compares projected replacement rates for working 
households ages 30-59 to target replacement rates that permit them to 
enjoy the same consumption in each period before and after retirement 
(see Figure 1). The Index measures the percentage of all households 
that fall more than 10 percent below their target.
---------------------------------------------------------------------------
    \2\ For details on the NRRI methodology, see Munnell, Hou, and Webb 
(2014).

    The most recent NRRI results show that about half of all households 
are at risk, up from about 30 percent in 1983 (see Figure 2). So the 
---------------------------------------------------------------------------
problem is widespread and is getting worse over time.

    Why do we have such a serious retirement income problem today when 
recent generations have retired in relative comfort? The reason is that 
baby boomers--and those who follow--will face a much different 
retirement landscape than their parents. The problem is twofold: (1) 
households will need more retirement income; and (2) they will receive 
less support from the traditional sources of Social Security and 
employer-sponsored plans. And today, as in the past, half of private 
sector workers do not participate in any type of retirement plan at a 
given point in time.
The Need for Retirement Income Is Growing
    Today's workers will need more income when they retire because 
retirement spans are getting longer, health care costs are rising, and 
interest rates are very low.

    Turning first to retirement spans. The number of years spent in 
retirement depends both on when people retire and how long they live in 
retirement. After declining for many decades, in the mid-1980s the 
average retirement age stabilized and then gradually increased from 62 
to 64 for men. However, the latest evidence shows little change in 
average retirement ages over the past several years, suggesting the 
trend toward later retirement may be running out of steam.\3\ 
Meanwhile, life expectancy at 65 is continuing to rise steadily (see 
Table 1). On balance, the retirement period has been getting longer 
over time, from 13 years in 1960 to about 20 years today (see Figure 
3).
---------------------------------------------------------------------------
    \3\ Munnell (2015).

    Second, while retirees have health insurance coverage through 
Medicare, they still face substantial out-of-pocket costs for premiums 
(Parts B and D), deductibles, co-payments, and routine health services 
that are not covered by Medicare. Part B out-of-pocket costs alone have 
more than doubled since 1980, accounting for 15 percent of the average 
Social Security benefit today (see Figure 4). For individuals who 
require more than a brief stay in a nursing home, long-term care costs 
---------------------------------------------------------------------------
represent an additional expense.

    Third, real interest rates have fallen dramatically over the past 
two decades, and today's rates continue to hover around historic lows 
of 1 percent (see Figure 5). Therefore, retirees need a much bigger 
nest egg than in the past to generate a given amount of income.

    These factors combined mean that people are going to need to 
accumulate substantially more retirement income now than in the past.
Traditional Sources of Retirement Income Are Providing Less Support
    At the same time that people need more retirement income, 
traditional sources are shrinking. Both Social Security and employer-
sponsored retirement plans will provide less support than in the past. 
This trend is especially worrisome because people save virtually 
nothing outside of these two vehicles.

    Social Security. Social Security benefits are the foundation of the 
retirement income system. But, under current law, these benefits are 
already shrinking in their ability to replace pre-retirement income for 
three reasons.

    First, the gradual rise in the program's ``Full Retirement Age'' 
from 65 to 67 is cutting benefits across the board. For those who 
continue to retire at 65, this cut takes the form of lower monthly 
benefits; for those who choose to work longer, it takes the form of 
fewer years of benefits. For the typical earner who retires at 65, the 
replacement rate will drop from about 40 percent today to 36 percent 
once the transition is complete.

    Second, Medicare premiums, which are automatically deducted from 
Social Security benefits, are rising faster than benefit levels. As a 
result, Part B premiums alone are estimated to increase from 5.4 
percent of the average Social Security benefit for someone retiring in 
1990 to 10.4 percent for someone retiring in 2030.

    Third, more benefits will be subject to taxation under the personal 
income tax. Individuals with more than $25,000 and married couples with 
more than $32,000 of ``combined income'' pay taxes on up to 85 percent 
of their Social Security benefits. In 1985, only about 10 percent of 
beneficiaries had to pay taxes on their benefits, but the percentage of 
people subject to tax has been increasing over time because these 
thresholds are not indexed for growth in average wages or even 
inflation. Today, almost 40 percent of households pay taxes on their 
benefits, and by 2030 more than half of households are expected to be 
subject to this tax.

    The combined impact of these factors will reduce Social Security 
replacement rates for the average worker retiring at 65 by nearly a 
quarter--from a net 40 percent in 1985 to 30 percent by 2030 (see 
Figure 6).

    And these reductions are happening without any changes in current 
law. If benefits are cut back further to address Social Security's 
long-term financial shortfall, replacement rates will drop even more.

    Employer-Sponsored Retirement Plans. With declining replacement 
rates from Social Security, employer-sponsored retirement plans become 
much more important.

    For those lucky enough to work for an employer providing a 
retirement plan, the nature of these plans has changed dramatically 
from defined benefit plans to 401(k)s. This shift means that the 
employee rather than the employer makes all the decisions and bears all 
the risks. Not long after the advent of 401(k) plans, it became clear 
that participants were accumulating only modest balances in these 
accounts.

    As a result, in 2006 policymakers tried to make 401(k)s function 
more effectively through the Pension Protection Act (PPA). The PPA 
encouraged 401(k) plan sponsors to adopt automatic mechanisms that have 
proven effective at boosting participation (auto-enrollment) and 
contribution rates (auto-escalation). However, the effects of the PPA 
appear to have played themselves out, and today fewer than half of 
participants have access to auto-enrollment and a much smaller fraction 
have auto-escalation.

    As a result, 401(k)s are still far short of being a broadly 
effective retirement savings vehicle.\4\ For example:
---------------------------------------------------------------------------
    \4\ Munnell (2014).

        About 20 percent of those eligible still do not participate in 
---------------------------------------------------------------------------
their employer's plan.

        Typical contribution rates fall short of what most workers 
will need in retirement, and only about 10 percent of participants make 
the maximum contribution allowed.

        Many individuals make investing missteps, such as putting 
their money in mutual funds with high fees, which can substantially 
shrink their assets over time. For example, an additional 100 basis 
points in fees over a 40-year period reduces final assets by about one 
fifth.

        About 1.5 percent of assets leaks out of 401(k) plans each 
year when participants cash out as they change jobs, take hardship 
withdrawals, withdraw funds after age 59\1/2\, or default on loans.

    As a result, in 2013, the typical working household approaching 
retirement with a 401(k) had only $111,000 in combined 401(k) and IRA 
balances (see Table 2). This amount translates into less than $400 per 
month, adjusted for inflation, which will not provide a sufficient 
supplement to Social Security benefits.
And Half of Private Sector Workers Do Not Participate in a Plan
    Unfortunately, those workers covered by a 401(k) plan are the lucky 
ones. Only about half of private sector workers--at any particular 
time--are participating in any form of employer-sponsored plan, and 
this share has remained relatively constant over the last 30 years. The 
lack of universal coverage means that many American workers move in and 
out of plan participation and a significant percentage will end up with 
nothing but Social Security. The size of the pension participation gap 
has recently become controversial.

    While the Working Group report got it right, some commentators 
downplay the problem, citing a Labor Department survey of employers--
the National Compensation Survey (NCS)--showing that about 80 percent 
of workers have access to a plan. However, household surveys 
consistently show that participation rates are in the 40-55 percent 
range. What accounts for the differences? The answer depends on who, 
and what, is being measured.

    To reconcile the numbers, it helps to compare the NCS employer 
survey to a Labor Department survey of households--the Current 
Population Survey (CPS) (see Table 3). The NCS shows that, in 2012, 78 
percent of employers, public and private, offered pensions to full-time 
workers ages 25-64. Excluding public sector workers (who essentially 
have universal coverage) lowers the figure slightly to 74 percent. Add 
in part-time workers (who, after all, will still need to save for 
retirement) and the number drops to 64 percent. Finally, using the 
percentage of workers who actually participate in a plan, rather than 
those who are offered one, reduces the total to 48 percent. This figure 
compares to 43 percent for the same definition in the CPS, still a 
difference but only a modest one. In the end, it seems reasonable to 
conclude that only about half of private sector workers participate in 
a retirement plan.
                      the working group proposals
    The Working Group's report is aimed primarily at reducing this 
coverage gap and encouraging saving among lower-paid workers. The 
report discusses four main types of proposals.

    First, several proposals would broaden access to potentially low-
cost Multiple Employer Plans (MEPs) by getting rid of the requirement 
that (1) participating employers must share a nexus and (2) one ``bad 
apple'' hurts the entire barrel (i.e., a single employer who violates a 
requirement can disqualify the entire plan). Indeed, MEPs may be a 
useful vehicle for expanding coverage; making them more available is a 
positive and appealing step, provided that small employers are 
protected against unscrupulous actors.

    Second, a group of proposals, aimed at small businesses, offer 
increased financial incentives to start new plans, additional 
incentives for auto-enrollment, and credits for employer contributions. 
Other proposals encourage higher matches, less leakage, and the 
portability of lifetime income. All these proposals would have a 
positive impact, albeit very small.

    Third, a proposal to increase coverage for long-term, part-time 
employees is a great idea.

    Finally, a proposal to enhance the Saver's Credit by increasing 
eligibility and making the credit refundable is extremely important. We 
have been doing a lot of work at the State level, and an expanded 
Saver's Credit could be a very helpful component of the State auto-IRA 
proposals.

    The question is the extent to which these proposals will solve the 
coverage problem and increase contributions. I fear that their impact 
will be modest. Making MEPS more accessible does not mean that 
employers will take advantage of the options. Policymakers have tried 
to close the coverage gap in the past by introducing streamlined 
products that can be adopted by small businesses. For example, the 
SIMPLE plan, which is administered by the employer's financial 
institution, does not require the employer even to file an annual 
financial report. These simplification initiatives, however, have 
clearly not reversed the trend toward declining coverage (see Figure 
7).

    This outcome is not surprising given that administrative and cost 
considerations are not the main reasons cited by small businesses for 
not offering plans (see Figure 8). More important concerns are too few 
employees, lack of employee interest, unstable business, and other 
factors. For these reasons, the Working Group's increased financial 
incentives to set up plans are also likely to have little effect.

    The Working Group's proposal to expand the Saver's Credit and make 
it refundable has the potential for a real impact. To achieve this 
impact, however, low-wage workers have to make contributions to a 
retirement account. At this point, relatively few do, because many lack 
coverage. Expanding coverage, coupled with auto-
enrollment, is the only realistic way to achieve this goal. Many States 
are in the process of setting up their own auto-IRA programs, and the 
expanded Saver's Credit could be seen as a matching contribution from 
the government that could encourage workers not to opt out once they 
are auto-enrolled.
                              bolder steps
    Given the enormity of the retirement savings crisis, though, we 
need bolder steps. Within the context of the Working Group report, the 
two most important changes would be to make the 401(k) system work 
better and enact auto-IRA legislation at the national level so that 
each State does not have to set up its own plan.
Make 401(k)s Fully Automatic
    The most important policy change would be requiring all 401(k)s to 
be fully automatic, while continuing to allow workers to opt out if 
they choose. Plans should automatically enroll all of their workers--
not just new hires--and the default employee contribution rate should 
be set at a meaningful level and then increased until the combined 
employee contribution and employer match reach 12 percent of wages. The 
default investment option should be a target-date fund comprised of a 
portfolio of low-cost index funds.

    Separately, the problem of 401(k) leakages needs to be addressed 
more fully. Recommended changes on this front include tightening the 
criteria for hardship withdrawals to limit them to unpredictable 
emergencies; raising the age for penalty-free withdrawals from 59\1/2\ 
to at least 62; and prohibiting cash-outs when switching jobs. These 
changes would go a long way to making 401(k)s a more robust mechanism 
for retirement saving. Participants would retain access to their funds 
in emergencies through loans.
Cover Those Without a Plan
    The Working Group recognizes the importance of the coverage gap, 
but financial incentives alone will not solve the problem. We need to 
automatically enroll uncovered workers into a retirement savings 
program. Once employers are required to provide coverage either under a 
plan that they choose themselves or under a new auto-IRA program, they 
may become more interested in adopting a MEP, with its low cost and 
easier accessibility.

    As I have noted, many States are setting up their own auto-IRA 
programs, but it makes much more sense to pass auto-IRA legislation at 
the national level. Interestingly, anecdotal evidence suggests that 
opposition towards a national plan among some financial services 
companies may be softening, as they would prefer a uniform plan to 50 
different State plans.
                               conclusion
    The retirement income landscape has been changing in a way that 
systematically threatens the retirement security of millions of 
Americans. The Senate Finance Committee could build on the proposals in 
the Working Group report to make two bold changes--make 401(k)s plans 
automatic and cover the uncovered through auto-enrolling workers (both 
full time and career part-time) into a national auto-IRA program. 
Combine these changes with the expansion of the Saver's Credit and this 
Committee will have gone a long way towards averting a retirement 
income crisis.
                               references
    Centers for Medicare and Medicaid Services. 2014. Annual Report of 
the Board of Trustees of the Federal Hospital Insurance and Federal 
Supplementary Insurance Trust Funds. Washington, DC: U.S. Government 
Printing Office.

    Centers for Medicare and Medicaid Services, Office of the Actuary. 
2014. ``SMI Out-of-Pocket Expenses as a Percent of Illustrative Social 
Security Benefit.'' Washington, DC.

    Ellis, Charles D., Alicia H. Munnell, and Andrew D. Eschtruth. 
2014. Falling Short: The Coming Retirement Crisis and What to Do About 
It. New York, NY: Oxford University Press.

    Employee Benefits Research Institute. 2003. ``The 2003 Small 
Employer Retirement Survey (SERS) Summary of Findings.'' Washington, 
DC.

    Haubrich, Joseph G., George Pennacchi, and Peter Ritchken. 2011. 
``Inflation Expectations, Real Rates, and Risk Premia: Evidence from 
Inflation Swaps.'' Working Paper 11-07. Cleveland, OH: Federal Reserve 
Bank of Cleveland.

    Munnell, Alicia H. 2014. ``401(k)/IRA Holdings in 2013: An Update 
from the SCF.'' Issue in Brief 14-15. Chestnut Hill, MA: Center for 
Retirement Research at Boston College.

    Munnell, Alicia H. 2015. ``The Average Retirement Age--An Update.'' 
Issue in Brief 15-4. Chestnut Hill, MA: Center for Retirement Research 
at Boston College.

    Munnell, Alicia H. and Dina Bleckman. 2014. ``Is Pension Coverage a 
Problem in the Private Sector?'' Issue in Brief 14-7. Chestnut Hill, 
MA: Center for Retirement Research at Boston College.

    Munnell, Alicia H., Wenliang Hou, and Anthony Webb. 2014. ``NRRI 
Update Shows Half Still Falling Short.'' Issue in Brief 14-20. Chestnut 
Hill, MA: Center for Retirement Research at Boston College.

    U.S. Board of Governors of the Federal Reserve System. Survey of 
Consumer Finances, 1983-2013. Washington, DC.

    U.S. Board of Governors of the Federal Reserve System. 2013. 
Selected Interest Rates (Daily)--H.15. Washington, DC.

    U.S. Census Bureau. Current Population Survey, 1962-2013. 
Washington, DC.

    U.S. Senate Committee on Finance. 2015. ``The Savings and 
Investment Bipartisan Tax Working Group Report.'' Washington, DC.

    U.S. Social Security Administration. 2014. Annual Report of the 
Board of Trustees of the Federal Old-Age and Survivors Insurance and 
Federal Disability Insurance Trust Funds. Washington, DC: U.S. 
Government Printing Office.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



                Table 1. Life Expectancy at Age 65 for Men and Women, 1960, 1980, 2000, and 2020
----------------------------------------------------------------------------------------------------------------
              Year                                   Men                                    Women
----------------------------------------------------------------------------------------------------------------
1960                                                                  13.2                                 17.4
1980                                                                  14.7                                 18.8
2000                                                                  17.6                                 20.3
2020                                                                  19.7                                 22.0
----------------------------------------------------------------------------------------------------------------
Source: U.S. Social Security Administration (2014).



  Table 2. 401(k)/IRA Balances for Median Working Household with a 401(k), Age 55-64, by Income Quintile, 2013
----------------------------------------------------------------------------------------------------------------
   Income range (quintiles)            Median 401(k)/IRA balance                  Percentage with 401(k)
----------------------------------------------------------------------------------------------------------------
Less than $39,000                                              $13,000                                      22%
$39,000-$60,999                                                $53,000                                       48
$61,000-$90,999                                               $100,000                                       60
$91,000-$137,999                                              $132,000                                       65
$138,000 or more                                              $452,000                                       68
----------------------------------------------------------------------------------------------------------------
Total                                                         $111,000                                       52
----------------------------------------------------------------------------------------------------------------
Source: Author's calculations from U.S. Board of Governors of the Federal Reserve System, Survey of Consumer
  Finances (2013).



Table 3. Percentage of Workers (25-64) with Pensions in the CPS and NCS,
                                  2012
------------------------------------------------------------------------
                      Category                           CPS       NCS
------------------------------------------------------------------------
Employer offers, public and private, full-time            63%       78%
Employer offers, private, full-time                        59        74
Employer offers, private, full-time and part-time          52        64
Employee participates, private, full-time and part-        43        48
 time
------------------------------------------------------------------------
Note: CPS is the Current Population Survey. NCS is the National
  Compensation Survey.
Source: Munnell and Bleckman (2014).


                                 ______
                                 
     Questions Submitted for the Record to Alicia H. Munnell, Ph.D.
               Questions Submitted by Hon. Orrin G. Hatch
    Question. Dr. Munnell, you mentioned part-time workers in your 
testimony. The working group identified proposals that would target 
``long-term'' part-time workers, so-called ``career part-time'' workers 
who spend 3 or more years in part-time status working for the same 
employer. As more workers spend lengthy portions of their careers in 
part-time employment, this seems like an issue that needs to be 
explored. What are the obstacles to such coverage today, and are they 
primarily legal or economic in nature?

    Answer. No economic rationale exists for excluding ``career part-
time'' workers from retirement plan coverage. I applaud the proposals 
discussed by the Bipartisan Working Group that would make it impossible 
to exclude ``long-term part-time'' employees from coverage on the basis 
of not having completed a year of service.

    Question. As I understand it, the Center for Retirement Research at 
Boston College, which you direct, receives funding from the Social 
Security Administration (SSA). Please provide amounts that the Center 
has received from SSA in each of the past 10 years.

    Answer. This information is available through the Social Security 
Administration.

    Question. As a policymaker, I have found it useful to consider 
various alternative ways to calculate so-called ``replacement rates'' 
associated with pensions and Social Security. For a given measure of 
retirement income, different measures of pre-
retirement income (the denominator in the replacement rate calculation) 
provide different answers and different pieces of information. I do not 
believe there is a ``correct'' denominator; what is correct depends 
partly on the question one is trying to answer. Nonetheless, in an 
article dated September 2, 2014, posted on the National Academy of 
Social Insurance website entitled ``Bring Back Social Security 
Replacement Rates!'' you argue that an advocate of consideration of one 
particular replacement rate measure has pernicious motives. You also 
argue that in the absence of reports in Social Security Trustees 
Reports of an alternative replacement rate measure preferred by you, 
the Social Security actuaries, and perhaps the Organization for 
Economic Cooperation and Development, ``policymakers will have no idea 
what they are doing to the retirement security of future workers as 
they consider alternative Social Security provisions.'' Those to whom 
you seem to ascribe a pernicious motive are, according to your article, 
engaged in an ``attack on Social Security replacement rates'' in ``an 
attempt to provide a rationale for cutting benefits.''

    As a policymaker, I believe that my colleagues and I do have clear 
ideas of: how replacement rates can be calculated; how different 
calculations can answer different questions; and how to perform the 
various calculations necessary to arrive at replacement rates using 
various denominators. I also believe that I do, in fact, have clear 
understandings of implications of alternative Social Security 
provisions and how they influence retirement security of workers. My 
question involves recent calculations of Social Security ``replacement 
rates'' provided by the non-partisan Congressional Budget Office 
(December 16, 2015; ``CBO's 2015 Long-Term Projections for Social 
Security: Additional Information''). CBO calculated the rates in a way 
that I believe you describe as an attack on Social Security replacement 
rates.

    Do you disagree with CBO's use of the denominator it chose for 
calculating replacement rates--specifically, the average of the last 5 
years of ``substantial earnings'' before age 62?

    Do you believe the CBO's reported replacement rates provide a 
rationale to change Social Security benefits?

    Answer. No, I do not disagree with CBO. I think the last 5 years of 
``substantial earnings'' before age 62 is a fine measure of pre-
retirement earnings. As you know, the issue was elevated because CBO 
replacement rates jumped from around 40 percent to around 60 percent 
with the introduction of this new measure. However, the 60 percent was 
the result of a programming error, and CBO's corrected numbers are now 
consistent with the agency's previously reported replacement rates and 
with those of the Social Security actuaries.

    The erroneous CBO replacement rates were being used to argue for 
benefit reductions. The corrected rates, however, do not provide any 
rationale to reduce Social Security benefits.

                                 ______
                                 
                Questions Submitted by Hon. Dean Heller
    Question. What is the most important thing lawmakers can do right 
now to help small businesses offer a workplace savings plan to their 
employees?

    Answer. Left on their own, many small businesses have decided that 
it is not in their interest to offer a retirement savings plan for 
their workers. Therefore, the most important change would be to enact a 
Federal mandate that all businesses without a plan automatically enroll 
their employees in an IRA. Action at the Federal level is important so 
that each State does not have to set up its own plan to cover uncovered 
workers employed by small businesses.

    Question. I am deeply concerned with leakage. In my home State, we 
have felt the pressures of the recession and many of the constituents 
have had to dip into their retirement funds to make ends meet. In your 
opinion, what is the single best way we as lawmakers can make it easier 
for workers to return assets for retirement accounts after they have 
been withdrawn?

    Answer. I agree that leakage is an important issue. It occurs when 
workers switch jobs, tap their accounts for hardship reasons (as you 
point out), fail to repay a loan from their account, and take out money 
at age 59\1/2\ when the penalty no longer applies. The best approach 
may be to close down all avenues of leakage other than loans and then 
make the repayment of loans as flexible as possible. These changes 
would ensure that money taken out of the account for emergencies is 
repaid in an orderly fashion.

    Question. I strongly believe that tax reform, done the right way, 
can improve our fiscal picture. What steps can we as lawmakers take to 
improve our retirement savings in a fiscally responsible way?

    Answer. I think the current tax expenditures for retirement plans 
are not an effective way to increase retirement saving. Most of the 
benefits go to people who would have saved for retirement anyway and 
are of little value to lower income people. It would be more helpful to 
low-income people to have credits, rather than deductions, and the 
credit rate could probably be lowered to save tax money. The big point, 
however, is that tax incentives do not have much effect on savings 
decisions for anyone. The way to get people to save is to automatically 
enroll them in a retirement savings plan, with the ability to opt out.

    Question. I understand the President is expected to propose an 
Open-MEP plan in his FY17 budget. I would imagine a significant amount 
of implementing guidance would be needed. If Open-MEPs were expanded, 
what role, if any, would the IRS play in this additional guidance?

    Answer. I am an economist, not a lawyer. So, unfortunately, I 
cannot be helpful here.

    Question. Like many Nevadans, I am a strong supporter of ways to 
help our vulnerable populations save long-term for our retirement. What 
is the single most important thing lawmakers can do right now to help 
low-income and moderate-income families prepare for retirement?

    Answer. Consistent with my earlier response, the most important way 
to boost retirement savings for low- and moderate-income families would 
be to enact a Federal mandate that all businesses without a plan 
automatically enroll their employees in an IRA. These families would 
also benefit enormously from an expanded Saver's Credit (such as S. 
2492), which would make the Credit refundable and essentially serve as 
a ``match'' for their IRA contributions.

                                 ______
                                 
               Question Submitted by Hon. Maria Cantwell
    Question. In 2015, Washington State became one of the first States 
in the country to authorize a Small Business Retirement Marketplace, to 
make it easier and less expensive for small businesses to offer 
retirement savings options to their employees. Under Washington's 
program, employers with fewer than 100 employees will be able to 
voluntarily participate in this marketplace and offer low-cost 
retirement savings plans, which are portable, to their employees.

    Do you believe that this type of marketplace will increase small 
business participation and make it easier for them to offer a 
retirement plan for their employees? What is the impact on employees' 
savings rates when their employer offers a retirement plan compared to 
those who do not?

    Answer. I applaud the initiatives taken at the State level to 
improve coverage under retirement savings plans. Candidly, though, I am 
skeptical that the marketplace approach will have much effect. Many 
small businesses have not introduced plans in the past and, left on 
their own, are unlikely to do so in the future. Thus, I think the Auto-
IRA approach, with a mandate for firms to offer access to a plan, is 
going to be much more effective than the establishment of marketplaces.

    The only place that Americans save is through their employer-
provided plans and through paying down the mortgage on their house. 
People simply do not save for retirement on their own.

                                 ______
                                 
             Question Submitted by Hon. Benjamin L. Cardin
    Question. There are many existing proposals to improve our 
retirement system. You mention several in your testimony that could 
increase access to retirement savings as well as increase the amount of 
savings for those who participate in retirement plans. These are 
incredibly important issues, and I hope that our committee can take up 
commonsense, bipartisan proposals to address them.

    That being said, while the focus of retirement policy is often 
rightly on access and accumulation, distribution of retirement benefits 
over the life of retirees is also very important.

    In your view, what steps can we take to encourage lifetime income 
security? Aside from the suggestions contained in the Savings and 
Investment Working Group report, are there any other problems, 
concerns, or reforms that we should consider to address lifetime income 
and decumulation issues?

    Answer. I agree that decumulation is extremely important. When I 
first looked at this issue, I was worried that everyone would spend 
down their assets too quickly. But, more recently, I have become 
concerned that people will instead cling to their assets, depriving 
themselves of necessities. While people are generally not interested in 
single premium immediate annuities, the advanced life deferred 
annuities (ALDAs) (whereby people take about 15 percent of their assets 
at age 65 to purchase income starting at age 85) seems promising. By 
assuring retirees that they are not going to run out of money if they 
live past 85, the ALDA allows them to spend their accumulated assets 
from age 65 to 85.

                                 ______
                                 
            Question Submitted by Hon. Robert P. Casey, Jr.
    Question. In your opinion, what are the most efficient policy 
options available to make it easier for businesses to help their 
employees save, or individuals save on their own, and for whom will 
that most improve retirement and savings outcomes?

    Answer. Left on their own, many businesses have decided that it is 
not in their interest to offer a retirement savings plan for their 
workers. Therefore, the most important change would be to enact a 
Federal mandate that all businesses without a plan automatically enroll 
their employees in an IRA. Action at the Federal level is important so 
that each State does not have to set up its own plan to cover uncovered 
workers employed by small businesses.

                                 ______
                                 
                 Prepared Statement of Hon. Ron Wyden, 
                       a U.S. Senator From Oregon
    Over the last decade or more, policy experts and lawmakers have 
gathered in rooms like this dissecting this country's growing 
retirement savings crisis far too many times. That includes a hearing 
held by this committee about a year and a half ago.

    The numbers underlying this crisis are jarring to hear every time. 
Barely more than half of American workers have access to a retirement 
savings plan through their employer. A middle-of-the-pack retirement 
account today has enough saved up to pay a 64 year-old retiree little 
more than $300 a month. Half of accounts belonging to 55 to 64 year 
olds have less. And millions of American workers have no pension and 
nothing saved at all.

    Despite those dire statistics, the nonpartisan Joint Committee on 
Taxation tells us that over the next 5 years, taxpayers will pour more 
than $1 trillion into subsidies for retirement accounts. It's the 
second-biggest tax subsidy on the books.

    But the Congressional Budget Office says that the benefits are 
skewed toward people who need help the least. Less than one in five of 
those dollars goes to households with incomes in the bottom 60 percent 
of earners.

    Minority workers have it even worse. For young workers, or people 
seeking jobs in restaurants, hotels, or construction, it may be nearly 
impossible to find an employer who sponsors a retirement plan with a 
matching contribution. The same could be true in the ``gig economy,'' 
which is growing every year.

    It's clear that working families and the middle class need more 
opportunities to save--first and foremost at work. Then, the options 
Americans have for saving need to better reflect the way people work 
and live in retirement. That means retirement savings built up at work 
need to be portable and provide a meaningful lifetime income.

    The good news is that steps are being taken to create opportunities 
for saving. Look no further than my home State of Oregon. It's one of 
three States that has passed what's called an ``auto-IRA'' law to cover 
people without employer-based accounts.

    Here's the bottom line for Oregon workers--when you get a job, 
you'll get a retirement account, and you can start saving. It won't be 
mandatory because workers can opt out, but it's going to relieve a lot 
of headaches and kick saving into a higher gear.

    This was an important step for Oregon to take, because back in 
2013, an AARP survey found that one in six middle-aged Oregon workers 
had less than $5,000 saved. A new report released this month from the 
Pew Charitable Trusts found that less than two-thirds of Oregon workers 
have access to retirement plans through their employers, and barely 
more than half participated. But Oregon's auto-IRA plan, in my view, 
represents a sea change. And I hope this trend leads Federal lawmakers 
to passing the President's national auto-IRA proposal.

    Next, the administration has opened up what it calls ``My-RA'' 
plans to help workers nationwide get started saving. These smart, new 
plans are aimed squarely at working Americans of limited means who've 
been shut out of retirement saving for too long. There aren't any fees 
to eat into your savings, there are no minimum balance or contribution 
requirements, and you'll never lose a single penny you put in. It's a 
great way to start building a nest-egg.

    Additionally, there are more proposals in the works that can make a 
big difference for a lot of workers. Today, I'm introducing a bill to 
strengthen the saver's tax credit so that it does more for the people 
who need the most help. At a time when taxpayers are pouring cash into 
savings incentives that are skewed toward the wealthy, this proposal is 
one step Congress should take to correct that imbalance.

    Furthermore, Senator Hatch and I are working with Senators Brown 
and Nelson on legislation that expands retirement plans that bring 
together multiple employers. Our proposal is aimed at getting old rules 
out of the way, lowering costs, and easing the burden on employers so 
that this type of retirement plan is available to more workers across 
the country.

    So in addition to big progress with auto-IRAs and My-RAs, these are 
two important pieces of legislation coming down the pike. Moving 
forward, I hope to work with the committee on a bipartisan basis to do 
a lot more to help Americans save for retirement.

    Comprehensive tax reform will be a big help. Bills designed to grow 
wages can make an enormous difference. And the recent turmoil in the 
markets is a keen reminder of why it's absolutely vital to keep Social 
Security strong and reject calls for privatization.

    Finally I want to say a few words about the multiemployer pension 
crisis, which absolutely must be solved, and soon. Because of a bad law 
Congress passed over a year ago--which I opposed--some retirees may 
face harsh cuts to the pension benefits they've earned. That cannot 
come to pass, and it must be addressed on a bipartisan basis. In 
particular, lawmakers need to enact legislation as soon as possible to 
ensure that many coal miners receive the retiree health and pension 
benefits they earned over decades of backbreaking work fueling our 
economy. The situation for mine workers gets worse with every passing 
day and constitutes a genuine public policy emergency.

    I thank the Chairman for agreeing to hold a hearing on this issue, 
and I look forward to working with him and the other members of the 
committee on these important issues. I want to thank our witnesses for 
being here today, and I look forward to our discussion.

                                 ______
                                 

                             Communications

                              ----------                              


                  The ERISA Industry Committee (ERIC)

                        Annette Guarisco Fildes

                 President and Chief Executive Officer

                          1400 L Street, N.W.

                               Suite 350

                          Washington, DC 20005

                              202-789-1400

       CONGRESS SHOULD STRONGLY CONSIDER POTENTIAL RAMIFICATIONS

         THAT CHANGES IN CURRENT LEGISLATION MAY HAVE ON LARGE

      EMPLOYERS AND THEIR ABILITY TO CONTINUE TO OFFER RETIREMENT

                PLANS FOR MILLIONS OF AMERICA'S WORKERS

    Chairman Hatch, Ranking Member Wyden, and Members of the Committee, 
thank you for the opportunity to voice the point of view of major 
employers that directly sponsor voluntary retirement benefit plans for 
millions of Americans. My name is Annette Guarisco Fildes, and I am 
President and Chief Executive Officer of The ERISA Industry Committee 
(ERIC).

    ERIC is the only national trade association advocating solely for 
the employee benefit and compensation interests of the country's 
largest employers. ERIC supports the ability of its large employer 
members to tailor retirement, health, and compensation benefits for 
millions of workers, retirees, and their families. ERIC's members 
provide comprehensive retirement benefits to millions of active and 
retired workers and their families. Preserving and enhancing the 
voluntary employer-provided retirement system and the tax incentives 
that support it are key policy goals of ERIC and its members.

    ERIC believes that financial literacy is the first step in 
preparing for retirement. Informing America's workers about their 
retirement options allows them to make better decisions that lead to 
financial security in retirement. ERIC members are leaders in promoting 
financial wellness programs that have increased employee engagement and 
improved financial health. ERIC members have undertaken programs that 
educate their employees on a variety of financial topics, including 
preretirement planning, cash and debt management, tax planning, funding 
higher education, and investing.

    ERIC believes that as proposals aimed at increasing the 
participation of small employers in the retirement system are 
developed, this Committee and Congress should strongly consider 
potential ramifications that changes in current law may have on large 
employers and their ability to continue to offer voluntary employer-
sponsored retirement plans for millions of American workers. I would 
like to highlight key aspects of the current employer-sponsored 
retirement system that support the ability of large employers to 
continue providing retirement benefits to millions of workers.

    ERIC and its members believe the following policy goals are 
critical to the continuation of the employer-sponsored retirement 
system, and recommend that the Committee consider the following with 
respect to retirement plans:

(1) Preservation of the voluntary nature of employer-sponsored 
retirement plans.

    Employer-sponsored retirement plans are critical to the 
continuation of the 
employer-sponsored retirement system. The voluntary nature of the 
retirement plan system works well as a result of the flexibility 
provided to employers and their workers.

    Employers voluntarily establish retirement plans to compete for and 
retain quality workers and to ensure workers are able to retire with 
adequate retirement savings. The voluntary nature of the private-sector 
retirement system is vital to its success. No two employers are 
identical; some employ thousands of workers, while others employ only a 
few. Employers are engaged in different industries, located in 
different geographical regions; some operate in the global market, 
while others operate only in their local community. A ``one-size-fits-
all'' approach to rules and regulations often will not address the 
challenges of every company that wants to offer retirement benefits to 
their workers.

    Flexibility is critical in retirement plans. It allows employers to 
design plans that work effectively and efficiently based on the needs 
of their diverse workforces. Rules that are too onerous or overly 
restrictive can chill an employer's commitment to offer and a 
participant's interest to participate in an employer-sponsored plan.

    The voluntary nature of the current employer-sponsored private 
retirement system and the flexibility employers have in establishing 
and maintaining retirement plans for their workers is vital to 
America's private retirement system. Congress should ensure the current 
private retirement system remains voluntary and flexible to encourage 
continued, and new, employer participation.

(2) Preservation of current tax incentives for retirement benefits.

    Removing the current tax incentives for retirement plans will 
discourage plan establishment and maintenance and reduce the 
participation of employees contributing to their retirement savings.

    Unlike tax expenditures where tax is completely avoided (i.e., 
deductions), taxes on retirement plan contributions are generally 
merely deferred until the participant receives a distribution of the 
funds, which is typically during retirement. In the unusual event a 
participant takes a pre-retirement distribution, there is an additional 
tax penalty, absent a qualifying case of hardship, which results in 
additional money for the government. Tax revenue is not completely lost 
when workers contribute to their retirement plans--it is merely 
delayed.

    When measuring the cost of tax deferrals in retirement plans, such 
as 401(k) plans, the calculations performed by the Joint Committee on 
Taxation (JCT) and the Treasury Department do not consider that there 
is only a deferral of taxation. Workers generally withdraw money from 
these plans only in retirement, the majority of the taxes paid show up 
outside the 10-year time frame used for revenue estimates. As a result, 
the majority of the costs for deferrals is ``scored'' as lost revenue. 
The approach used by the JCT and the Treasury Department significantly 
exaggerates the actual cost to the government with respect to the tax 
incentives for retirement plans and ignores the real long-term value of 
the plans to the country and working Americans. Intricacies in the 
federal budget rules unfortunately result in retirement plan tax 
deferrals being counted as a revenue loss without taking into account 
the corresponding deferred gain.

    Continuing to provide tax incentives encourages both employer and 
worker participation in America's retirement system. Because taxes are 
merely deferred, not excluded, Congress should ensure that employer-
sponsored retirement plans continue to receive the long-standing 
protections on which employers and workers rely.

(3) Ensuring appropriate deferral and contribution limits that reflect 
current inflation rates and economic circumstances. 

    Workers need flexibility to be able to save more when they are able 
and less when they are under financial constraints. For example, an 
individual may be able to save more when they are younger or once their 
children become adults, but have less money to contribute when paying 
for their children's college education or caring for their elderly 
parents.

    Under the current system, employees are able to make elective 
deferrals up to $18,000 annually. Congress recognized the need for 
older workers to save more as they are nearing retirement. As a result, 
workers age 50 and older can currently save up to $24,000 annually. 
Policymakers have acknowledged that the ``savings cycle'' can be 
different depending on an individual's unique circumstances.

    We encourage the Committee to reconsider the current deferral 
limits, which have not kept up with inflation, at a minimum. The limit 
on contributions made on an individual's behalf to a defined 
contribution plan was set at $25,000 (and indexed to inflation) when 
ERISA was enacted in 1974.\1\ By 1982, the limit had increased to 
$45,475.\2\ However, the Tax Equity and Fiscal Responsibility Act of 
1982 reduced the limit to $30,000 and postponed indexation until after 
1985. Indexation was again deferred until after 1987 by the Deficit 
Reduction Act of 1984. Then, in 1986, the contribution limit was frozen 
at $30,000 through 2000 as a result of the Tax Reform Act. Since 2001 
the limit has gradually increased to $53,000,\3\ not much above the 
1982 limit of $45,475, and far below the amount that the 1974 limit of 
$25,000 would represent in 2016 dollars--$133,673.\4\
---------------------------------------------------------------------------
    \1\ 26 U.S.C. 415(c) 1974.
    \2\ Investment Company Institute, 401(k) Plans: A 25-Year 
Retrospective, 12 Research Perspective (Nov. 2006), available at 
https://www.ici.org/pdf/per12-02.pdf.
    \3\ 26 U.S.C. 415(b) (1974). See Emp. Benefit Research Inst., 
EBRI's Fundamentals of Employee Benefit Programs 50 (2009), available 
at https://www.ebri.org/pdf/publications/books/fundamentals/2009/
05_Ret-Plans_RETIREMENT_Funds_2009_EBRI.pdf.
    \4\ Inflation Calculator with U.S. CPI Data, http://
www.calculator.net/inflation-
calculator.html?cstartingamount1=25000&cinyear1=1974&coutyear1=2016&calc
type=1&x=57&y=8 (last visited Feb. 2, 2016).

    Proposals that would limit the amount of retirement plan 
contributions, reduce the current contribution deferrals, or limit the 
value of the retirement benefits would undermine the success of the 
current employer-sponsored retirement system by discouraging employers 
from establishing and maintaining plans and causing some participants 
to decrease their contributions. The result would be reduced savings 
balances at retirement by 6 to 22 percent for workers currently age 26-
35 with the greatest reductions for those in the lowest-income quartile 
\5\--the demographic that Congress seeks to encourage to save more.
---------------------------------------------------------------------------
    \5\ Jack VanDerhei, Modifying the Federal Tax Treatment of 401(k) 
Plan Contributions: Projected Impact on Participant Account Balances, 
33 Emp. Benefit Research Inst. Notes (Mar. 2012), available at https://
www.ebri.org/pdf/notespdf/EBRI_Notes_03_Mar-12.Ktaxes-PThlthCvg1.pdf.

    In the 1980s, we saw the significant negative consequences when a 
well-
intentioned Congress set out to limit retirement contributions. When 
Congress complicated the eligibility requirements for individual 
retirement accounts (IRAs), deductible contributions declined from 
$37.8 billion in 1986 to only $14.1 billion in 1987 and continued to 
steadily decline thereafter.\6\ Workers have shown that they will 
respond to increased complexity in retirement plans by saving less.
---------------------------------------------------------------------------
    \6\ Sarah Holden, et al., Investment Company Institute, The 
Individual Retirement Account at Age 30: A Retrospective, 11 Research 
Perspective (Feb. 2005), available at https://www.ici.org/pdf/per11-
01.pdf.

    It is critical that Congress recognize the value of the current 
system that reflects typical lifetime savings habits and consider 
increasing the elective deferral limit. We urge the Committee to 
continue to support and expand the ability of individuals to save 
through their workplace retirement plans by continuing COLA increases 
to deferral limits and reviewing the adequacy of the 402(g) limits in 
the Internal Revenue Code. Any changes to retirement savings incentives 
must focus on policy that will result in better long-term retirement 
---------------------------------------------------------------------------
outcomes for Americans, rather than on raising federal revenue.

(4) Ensuring PBGC premiums are increased only as needed for the sole 
purpose of maintaining the single employer trust fund for the benefit 
of workers and retirees.

    The Pension Benefit Guaranty Corporation (PBGC) plays an important 
role in protecting the retirement benefits of millions of America's 
workers. PBGC carries out its mission by ensuring that employer-
sponsored defined benefit pension plans are adequately funded, which it 
does, in part, by collecting insurance premiums from employers 
sponsoring such plans. The PBGC is not funded by general tax revenues. 
Accordingly, PBGC should not be used as a vehicle for funding the 
general budget. Premiums paid to PBGC by employers should be increased 
as needed solely to achieve their intended purpose--to ensure adequate 
funds are available for pension plan liabilities in the event an 
employer sponsoring a pension plan is forced into bankruptcy.

    Money spent on PBGC premiums takes away from funds that employers 
can use for worker benefits, business expansion, job creation, and 
other contributions to economic growth. When Congress increases PBGC 
premiums absent necessity or improperly allocates premiums, it 
increases economic uncertainty and job loss while chilling investments 
and economic growth.

    Despite Congress's mandate that PBGC is to encourage employers to 
continue and maintain voluntary private pension plans, plan sponsors 
have been replacing defined benefit pension plans with defined 
contribution plans to avoid increased premiums. PBGC premiums already 
account for more than 13 percent of total defined benefit plan 
expenses. Sponsors paid premiums on 2.5 million fewer participants in 
2014 than in 2011 as a result of leaving the defined benefit system to 
alleviate premium burdens.

    ERISA requires that PBGC premiums be paid directly to the PBGC for 
the purpose of crediting funds used to pay benefits to plan 
participants. The Treasury Department's practice of counting increased 
PBGC premiums as general revenue for the budget exhibits poor 
governance and weakens the nation's retirement system and ultimately 
harms employees and retirees. PBGC premiums should be increased only as 
needed to ensure retirement benefits are adequately protected. ERIC 
also encourages the Committee to consider advancing legislation that 
devotes PBGC premiums solely to the PBGC program, taking them ``off-
budget'' so that they can no longer be used as revenue for unrelated 
programs.

(5) Maintaining the IRS determination letter program for large complex 
retirement plans.

    The IRS's decision to eliminate determination letters for 
individually-designed retirement plans disproportionately affects large 
employers and ultimately may diminish retirement benefits for America's 
workers. Larger employers need flexibility to make routine changes to 
their retirement plans to conform with new laws, reflect mergers, 
acquisitions, or spin-offs, or to implement new and innovative changes 
that are in the participants' best interests.

    The IRS answer is for plan sponsors to use prototype plans. Large 
employers have complex plan designs and generally cannot use pre-
approved documents due to the inherent limitations of the format. Their 
use of the IRS's model amendments requires substantial revisions and is 
simply unworkable. According to Employee Benefit Research Institute 
(EBRI) tabulations of 2012 Form 5500 filings, 98.4 percent of pension 
plans with at least 5,000 participants do not use prototype plans. 
Eliminating the IRS determination letter program adversely affects the 
attractiveness of retirement plans to large employers (and even more so 
for large employers who continue to sponsor defined benefit retirement 
plans), including ERIC's members, and results in participants and 
beneficiaries questioning their own tax positions (as, for example, in 
their ability to make a rollover to another qualified plan).

    As a measure of prudence, we believe the determination letter 
program should be maintained for large complex retirement plans and we 
ask for the Committee's support to encourage the IRS to retain the 
program for plan sponsors with at least 15,000 participants or $500 
million in plan assets.

(6) Facilitating the electronic distribution of retirement plan 
information.

    ERIC supports modernizing the communication of retirement plan 
information from large employers to their plan participants and 
beneficiaries. Today the Labor Department requires that participant 
information, such as summary plan descriptions, summaries of material 
modifications, quarterly pension benefit statements, annual funding 
notices, and a variety of other notices, be given in paper format. 
While the Department provides a current safe harbor for electronic 
disclosure under specific circumstances,\7\ the safe harbor's 
significant restrictions render electronic disclosure impractical or, 
in many cases, impossible.
---------------------------------------------------------------------------
    \7\ See 29 CFR 2520.104b-1(c).

    Electronic distribution of retirement plan information reflects 
today's communication norms. America's workers increasingly prefer to 
receive communications electronically, including information concerning 
their retirement plans. Electronic distribution allows participants to 
easily store plan information in a single convenient location available 
for access anytime and anywhere. Electronic communications have become 
more reliable than mailing paper documents, which may be misdelivered 
or otherwise lost in the mail. Electronic distribution is also more 
cost effective, as it will significantly reduce shipping and paper 
costs. Participants who may not have access to the Internet or prefer a 
paper copy should be allowed to elect to continue to receive plan 
information in paper form, but the default should be electronic. We ask 
the Committee to support legislation to allow employers to efficiently 
and effectively communicate plan information with plan participants 
electronically, as long as participants are able to choose a paper 
---------------------------------------------------------------------------
alternative.

    In conclusion, the employer-sponsored retirement system provides 
the bulwark of retirement security for working and retired Americans. 
As a result, it is important that Congress protect the value provided 
by the current retirement plan system and avoid changes that could 
result in unintended adverse consequences to the country and its 
workers and retirees. We urge the Committee to strongly consider key 
aspects of the retirement system that allow large employers to provide 
robust retirement benefits to millions of American workers when 
implementing changes to the current system for small employers.

                                 ______
                                 
                          The ESOP Association
Statement for the Record for

Full Committee Hearing

``Helping Americans Prepare for Retirement: Increasing Access,
Participation, and Coverage in Retirement Savings Plans''

January 28, 2016

The following statement is submitted by The ESOP Association, located 
at 1200 18th Street, NW, #1125, Washington, DC 20036, phone 202-293-
2971. The person who drafted the following statement is J. Michael 
Keeling, President, email [email protected].

    Before setting forth the evidence why employee stock ownership 
plans, referred to as ESOPs, should be promoted and encouraged as good 
retirement savings plans, it is appropriate to set forth what an ESOP 
is, and its history, especially the specific role played by the Senate 
Finance Committee for the past 41 years in the creation of laws 
promoting the creation and operation of employee stock ownership via 
the ESOP model.

                            What Is an ESOP?

    Unique among ERISA plans, an ESOP, by law, must be primarily 
invested in the highest class of stock of the plan sponsor and the 
stock may be acquired with borrowed funds. In practical terms, the plan 
sponsor may take on ``debt'' to acquire shares of the sponsor, and not 
be engaged in a prohibited transaction if the shares are acquired by 
the ESOP trust at a price no greater than the fair market value.

                         Brief History of ESOPs

    The ESOP model of employee ownership actually has its roots in a 
compensation practice from the 19th Century. (A recent book, ``The 
Citizen's Share,'' Blasi, Freeman, and Kruse, Yale Press, wrote a very 
convincing case, pages 1-56, that our founding fathers, such as 
Washington, Jefferson, Adams, Hamilton, et al., believed in broad 
ownership of productive assets as being essential to the survival of a 
democracy. President Lincoln's views, as evidenced by the Homestead 
Act, were also in sync with our founding fathers' views.)

    As the U.S. economy moved into the industrial age, corporations 
with nationwide reach, and large numbers of employees emerged--Procter 
and Gamble, Montgomery Ward, and others. Leaders of these companies 
realized that some employees would work for many years, reach an age 
requiring retirement, and retire with no income. There was no 19th 
Century safety net for retirees, and leaders of a number of national 
firms decided to set aside company stock for the employees to have when 
they retired, and to ``cash in.''

    After World War I, and the ratification of the 161 Amendment to the 
Constitution authorizing a national income tax, Congress recognized 
that taxing income was not so simple, and that many issues had arisen 
because the basic definition that income is anything of value received 
by an individual, and the general rule that an income tax should tax 
anything of value.

    In response to questions of what income should be taxed, Congress 
developed the very first true income tax code, the Code of 1921.

    In developing the Code, those firms that were setting aside stock 
for their retiring employees came to the House Committee on Ways and 
Means and asked--``Is the stock set aside for an employee's retirement 
taxable when set aside, and is the value of the stock an employer's 
compensation cost?''

    The Ways and Means Committee decided no, it was not current income 
to the employee, but would be taxed when the employee realized the 
previously deferred income; and yes, the set aside was compensation, 
and thus a cost of business for the employer and thus deductible for 
income tax purposes.

    Thus, the first deferred compensation plan recognized by Congress 
was the ``stock bonus plan,'' the forerunner of today's ESOP.

    Fast forward to post War World II and owners of privately held 
businesses began to consider how to ``exit'' their businesses and 
``cash'' in their non-tradable stock in the company they started and 
which had become successful because of the hard work of the company 
employees. While somewhat lost in history due to the fact that until 
the mid-1970s private letter rulings were not public documents, an 
owner in Alaska, followed by others, obtained permission from the IRS, 
in a non-public letter ruling, that the company could ``buy'' his stock 
with borrowed money, have the stock placed in the company's stock bonus 
plan, and have the stock allocated to the employees as the debt was 
paid off.

    A true visionary in San Francisco, California, Dr. Louis O. Kelso, 
developed a comprehensive economic philosophy in using such a method 
for funding stock bonus plans to expand ownership in a capitalistic 
society and to facilitate capitalization of for-profit businesses. He 
and his law firm colleagues led the way in expanding the use of this 
method blessed by the letter rulings, and many correctly note that the 
first ``ESOP'' was the sale by exiting shareholders of the Monterrey 
Press north of San Francisco in 1957 to an ESOP.

    By the mid-1950s, many, both conservative and liberals, were seeing 
abuses in the area of pensions, or tax qualified deferred compensation 
plans, which the tax laws sanctioned and encouraged. Evidence was 
overwhelming that some pension funds were investing in organized crime 
activities. Then there was the collapse of major U.S. employers, 
leaving employees with no retirement income as promised. As a result, a 
drive in Congress to ``reform'' the tax and labor laws governing tax 
qualified deferred compensation plans, or ``retirement savings plans,'' 
led to the enactment of ERISA in 1974.

    During Congressional work on these ``tax qualified deferred 
compensation plans,'' a major influence on tax policy of that era, 
Senator Russell B. Long, long time chair of the Senate Committee on 
Finance became a champion of the economic philosophy of Dr. Kelso, and 
made sure the new ERISA law sanctioned ESOPs.

    His support for the ESOP model grew stronger with each passing 
year, and his leadership led to major enactment of tax laws promoting 
the creation and operation of ESOPs. The bulk of these laws passed in 
1984, in legislation referred to as DEFRA, and the perfection of those 
laws were in the Tax Reform Act of 1986.

    Many of these laws of the 1980s remain in the Code, and were 
evidenced and endorsed repeatedly by the Finance Committee members in 
hearings, and tax law legislation of the late 1980s through the late 
1990s, even after Senator Long retired in 1987.

    To be noted, a major partner with Senator Long promoting ESOPs in 
the 1980s through 1988, was former President Ronald Reagan, who often 
spoke of his view that widespread ownership of productive assets was 
the core of maintaining equitable wealth ratios in a capitalistic 
society.

    And, after Senator Long retired, his successor in the Senate, 
former Senator John Breaux, led the expansion of ESOP law in the 1996-
1997 tax bills permitting S corporations to sponsor ESOPs. Since 
Senator Breaux's work to expand ESOPs, the number of 100 percent ESOPs 
that are S corporations has exploded. (There are out of the estimated 
10,000 ESOP companies, an estimated 3,000 are 100 percent ESOP.)

    In sum, the review the Finance Committee is doing is part and 
parcel of a long, supportive policy of the Finance Committee's 
developing laws to have average pay employees, or workers if you will, 
be owners as being good for the employees, good for their employer, and 
good for the well-being of our economy and democracy.

              Recent Finance Committee Positions on ESOPs

    But when reviewing the record of the Senate Finance Committee on 
ESOPs, it is not all ancient history, involving men and women of the 
Senate from years ago.

    For example, in the first quarter of 2015, Chair Hatch, with a goal 
of having members of the Committee, in a bi-partisan effort, 
established ``tasks forces'' to review major areas of the current tax 
code, with an eye towards reform. One task force was the ``Tax Reform 
Group on Savings and Investments,'' which as part of its review 
reviewed current law with regard to encouraging the creation and 
operation of ESOPs. The co-chairs of the S&I Task Force were Senators 
Crapo and Brown, again bi-partisan leadership.

    Page 13 of the memo to the Chair and full Committee of its 
recommendations was a recommendation that S. 1212, be included in any 
tax reform bill's provisions on retirement savings and investments.

    (As an aside, currently S. 1212, introduced by Finance Committee 
member Senator Cardin on May 6, 2015, is co-sponsored by 28 other 
members of the Senate, broken down by 14 Republicans, 13 Democrats, and 
2 independents, including 8 members of the Finance Committee. Fifteen 
other Senators, 5 on the Finance Committee, co-sponsored the same bill 
in the 113th Congress.)

    Page 13 of the S&I Task Force endorsed S. 1212 because of the track 
record of ESOPs providing retirement security for employee-owners of 
both small and large businesses.

    To be noted that early in the second quarter of the past year, the 
Senate Committee on Small Business suggested that the provisions of S. 
1212 be included in any tax reform bill developed by the Committee on 
Finance. (Copy of S. 1212 Attachment 1)

    The question is WHY? Why has a bi-partisan group of women and men 
serving in the Senate renewed evidence of a mainstream view set forth 
by the Finance Committee since 1975 that the expansion of employee 
stock ownership via the ESOP model would be good public policy?

    Just to include in this statement for the record some of the same 
evidence motivating the recommendation from last, and some reinforcing 
evidence.

    1.  Since the 2002 prestigious General Social Survey up to the 
recently released 2014 GSS, evidences clearly that companies with 
employee stock ownership are much more likely to have layoff rates that 
are significantly less than conventionally owned companies--3 percent 
in 2002 for companies with employee ownership, 9.2 percent 
conventionally owned; 2006, 2.3 percent versus 8.5 percent; 2010, 2.6 
percent versus 12.3 percent; and 2014, 1.3 percent versus 9.5 percent. 
Most impressive are the 2010 numbers, reflecting layoffs during the 
Great Recession. (Note that further data crunching by the National 
Center for Employee Ownership indicated that the fact these companies 
with employee stock ownership had fewer layoffs generated $14 billion 
dollars due to employees paying income, Social Security, and Medicare 
taxes, and not taking Unemployment Compensation or Food Stamps, seven 
times more than the general revenue estimates for the ``tax 
expenditures'' of special ESOP tax rules.)

    2.  A study of 1,100 ESOP companies in the late 1990s, compared to 
counterparts in the same industry, by Rutgers Professors Dr. Blasi, and 
Kruse, evidenced the ESOP companies had better sales, more employment, 
and were by a rate of 16 percent greater than their competitors over an 
11 year period remained independent.

    3.  Highly valued as a one source of history and data about 
employee stock ownership, and the ESOP model in particular, is the well 
selling book ``The Citizen's Share,'' by Drs. Blasi and Kruse of 
Rutgers, and Dr. Freeman of Harvard. The easy to read volume contains 
reference to nearly all of the research over the past 30 years with 
regard to the performance of ESOPs, both as a wealth creation, 
retirement savings, and as a jobs policy.

    Attachment 2 is a fuller summary of research and its data of the 
track record of ESOP companies, and their reward of average pay 
employees.

    In sum, Chair Hatch and members of the Committee on Finance, there 
is ample data, and real world experience to continue the push by the 
Committee to increase employee stock ownership. Bottom line, ESOPs are 
more productive, more sustainable, with jobs controlled by U.S. 
interests, providing retirement savings for average pay employees than 
other savings plans, and making our nation more competitive.

                              Attachment 1

                           Summary of S. 1212

                  ``Promotion and Expansion of Private

                    Employee Ownership Act of 2015''

                         Introduced May 6, 2015

S. 1212 will:

      Permit owners of S stock to sell the stock to an ESOP and defer 
the capital gains tax on his/her gain if the proceeds are reinvested in 
the equities of U.S. operating corporations as owners of C corporations 
stock have done under IRC 1042 since 1984;

      Establish an office in the Department of Treasury to provide 
technical assistance to S corporations with ESOPs; and

      Provide that a small business, S or C, eligible for one of the 
many programs provided by the Small Business Administration referred to 
as 8A preference programs to remain eligible for SBA 8A programs if and 
when the company becomes owned 50 percent or more by an ESOP, and the 
workforce remains the same or nearly the same as before the 
establishment of the 50 percent ownership by employees through the 
ESOP.

General Explanation Why S. 1212 Should Become Law

    1.  There is ample macro-data evidencing that the benefits our ESOP 
provides to [name of company] is also the case in the vast majority of 
privately held ESOP companies in America.

    2.  S. 1212 is a modest proposal that will not cost any significant 
tax revenues, and will build even larger account balances for retired 
employee owners, who will pay more taxes on their ESOP distributions 
than the targeted tax expenditure for ESOPs in H.R. 4837. For example, 
more ESOPs will be created, certain existing ESOP small businesses will 
qualify for SBA loans, and all S ESOP private companies can access 
Treasury experts on the complex rules governing S ESOPs.

    3.  In short S. 1212 will address the growing concerns of 
individual access to ownership, equitable distribution of our nation's 
capitalism, in companies that are more productive, more profitable, and 
more sustainable providing locally controlled jobs.

                              Attachment 2

        Employee Owners Impact Corporate Performance Positively;

       Overwhelming Evidence ESOP Companies More Productive, More

  Profitable, and More Sustainable, Providing Locally Controlled Jobs

      During the Great Recession, employee stock owned companies laid 
off employees at a rate of less than 3 percent, whereas conventionally 
owned companies laid off at a rate greater than 12 percent. (Data 
source: 2010 General Social Survey.)

      Because employees of ESOP companies were four times more likely 
to retain jobs during the Great Recession, Federal government 
recognized savings of over $14 billion in 2010 compared to tax. 
payments foregone by laid off employees of conventionally owned 
companies; in other words for every $1 in tax expenditures to promote 
employee stock ownership, the Federal government collected $13 in 
taxes. (Data Source: 2010 General Social Survey analyzed by National 
Center for Employee Ownership.)

      A survey of 1,400 ESOP companies in 2010 evidenced the average 
age of the companies' ESOPs were 15 years, and the average account 
balances for employees were nearly $200,000, much higher than data 
reported for average 401(k) account balances. (The ESOP Company Survey, 
2010, of The ESOP Association's Corporate members.)

      According to 2012 General Social Survey, 13 percent of employees 
of employee stock-owned companies were thinking of seeking employment 
elsewhere, whereas 24 percent of the employees of conventionally owned 
companies were considering leaving their current job.

      In the summer of 2014, the Employee Ownership Foundation 
released results from the 23rd Annual Economic Performance Survey (EPS) 
of ESOP companies. Since the Employee Ownership Foundation's annual 
economic survey began 23 years ago, a very high percentage, 93 percent 
of survey respondents, have consistently agreed that creating employee 
ownership through an ESOP was ``a good business decision that has 
helped the company.'' It should be noted that this figure has been over 
85 percent for the last 14 years the survey has been conducted. In 
addition, 76 percent of respondents indicated the ESOP positively 
affected the overall productivity of the employee owners. In terms of 
revenue and profitability--70 percent of respondents noted that revenue 
increased and 64 percent of respondents reported that profitability 
increased. In terms of stock value, the majority of respondents, 80 
percent, stated the company's stock value increased as determined by 
outside independent valuations; 18 percent of the respondents reported 
a decline in share value; 2 percent reported no change. The survey also 
asked respondents what year the ESOP was established. Among those 
responding to this survey, the average age of the ESOP was 16 years 
with the average year for establishment being 1998.

      More than half of the ESOP companies have two retirement savings 
plan (primarily a 401(k)), whereas more than half of all companies have 
no retirement income savings plan. (Analysis of forms 5500, and Bureau 
of Labor Statistics by the National Center for Employee Ownership, 
funded by the Employee Ownership Foundation.)

      The average ESOP company (less than 200 employees) has sales $9 
million more per year than its non-employee owned comparable 
competition. (June 2008 Dissertation, Dr. Brent Kramer, CUNY.)

      A study of 1,100 ESOP companies over eleven years compared to 
1,100 comparable conventional owned companies evidenced the 1,100 ESOP 
companies had better sales, more employment, and were more likely over 
the period to remain independent businesses by 16 percent. (Most 
detailed study of ESOP companies by Dr. Joseph Blasi, and Dr. Douglas 
Kruse, tenured professors, Rutgers University School of Labor and 
Management, 1999.)

                                 ______
                                 
                   Insured Retirement Institute (IRI)

                   1100 Vermont Avenue NW, 10th Floor

                          Washington, DC 20005

               United States Senate Committee on Finance

          Hearing: ``Helping Americans Prepare for Retirement:

           Increasing Access, Participation, and Coverage in

                       Retirement Savings Plans''

                   Testimony of Catherine Weatherford

            President and CEO. Insured Retirement Institute

                            January 28, 2016

Chairman Hatch, Ranking Member Wyden, and Members of the Full 
Committee, my name is Cathy Weatherford, and I am the President and CEO 
of the Insured Retirement Institute (IRI). On behalf of IRI, I am 
pleased to provide IRI's perspective on your hearing titled ``Helping 
Americans Save for Retirement: Increasing Access, Participation, and 
Coverage in Retirement Savings Plans.'' I commend you for holding this 
hearing, and I value the opportunity to provide testimony.

IRI's member companies also appreciate the Tax Reform Working Group on 
Savings and Investment for issuing key goals for policy makers to 
pursue. Committee Members and staff were dedicated and committed to a 
process that allowed stakeholders such as IRI to contribute ideas that 
led to the development of the report's recommendations.

About the Insured Retirement Institute

As you may know, I have over 30 years of regulatory experience, 
including having spent more than half of that time as an elected 
Insurance Commissioner and Insurance Department staff in the State of 
Oklahoma. Prior to joining IRI, I served as the CEO of the National 
Association of Insurance Commissioners for 12 years, where I worked 
with over 50 state insurance commissioners to craft important consumer 
protections, including critical measures aimed at safeguarding our 
nation's seniors. I joined IRI because my life's work is perfectly 
aligned with IRI's mission.

IRI is the leading association for the retirement income industry. As a 
not-for-profit organization, IRI provides an objective forum for 
communication and education, and advocates for the retirement 
strategies Americans need to help achieve a secure and dignified 
retirement. IRI also proudly leads a national consumer coalition of 
more than 30 organizations that work to promote retirement planning.

IRI is the only national trade association that represents the entire 
supply chain for the retirement income industry. We have more than 500 
member companies, including major insurance companies such as TIAA-
CREF, Prudential and MetLife, banks such as Wells Fargo and PNC asset 
management companies such as Franklin Templeton Investments and T. Rowe 
Price, and broker-dealers such as Morgan Stanley, Raymond James, Edward 
Jones, and LPL Financial, who have affiliated financial advisors in 
communities across America. IRI member companies represent more than 95 
percent of annuity assets, and include the top 10 distributors ranked 
by assets under management. We offer education, research and advocacy 
resources to more than 150,000 financial advisors and more than 10,000 
home office professionals affiliated with our member companies.

Our members are represented by hundreds of thousands of registered 
financial advisors across the country, and therefore, we bring a 
perspective from Main Street America to Congress. After my many 
conversations with these financial advisors, I have developed a deep 
level of appreciation for the longstanding relationships they have with 
their clients and friends, often lasting for 10, 20, or even 40 years. 
Our financial advisors consider these relationships to be a sacred 
trust and, as such, they are intensely committed to helping their 
clients reach their retirement income objectives, which involves a 
series of the most significant financial decisions a person ever makes 
over a very long lifetime.

America's Retirement Income Challenge: The Need for Retirement Income

Products, Lifetime Income Options and Professional Financial Help

Americans today are at risk of outliving their assets. This longevity 
risk has never been greater. The shift from defined benefit to defined 
contribution plans, longer life spans, and the rising costs of health 
care are among the challenges that will put significant financial 
pressures on the shoulders of individual consumers, in particular 
middle-income Americans. These challenges simply did not exist in 
earlier generations.

At the peak in 1985, over 114,000 private-sector defined benefit plans 
were in place,\1\ but by 2015 less than 24,000 of these defined benefit 
plans remained.\2\ Only 8 percent of private-sector workers had access 
to a defined benefit plan in 2015.\3\
---------------------------------------------------------------------------
    \1\ Pension Benefit Guaranty Corporation. Trends in Defined Benefit 
Pension Plans.
    \2\ Pension Benefit Guaranty Corporation. Pension Benefit Guaranty 
Corporation Annual Report 2015.
    \3\ Bureau of Labor Statistics. National Compensation Survey: 
Employee Benefits in the United States, March 2015.

Individuals are living longer than those of earlier generations. The 
population of older Americans continues to increase at a faster rate 
than the overall population. For example, between 2000 and 2010, the 
number of Americans aged 85 to 94 grew by 29.9 percent; by comparison 
the entire U.S. population increased by 9.7 percent during that 
timeframe.\4\ Moreover, according to the Society of Actuaries, a 
married couple age 65 has more than a 65 percent chance of one or both 
living to age 90, and a 35 percent chance of one spouse living to age 
95.\5\
---------------------------------------------------------------------------
    \4\ United States Census Bureau. The Older Population 2010.
    \5\ Society of Actuaries. SOA 2012 Individual Annuitant Mortality 
Tables.

As a result of these trends, today more than 30 million Baby Boomers 
are ``at risk'' of having inadequate retirement income, that is not 
having sufficient guaranteed lifetime income.\6\ Just as concerning, 
nearly half (45 percent) of Generation Xers (ages 36-45) are ``at 
risk'' of having inadequate retirement income.\7\ Alarmingly, only 40 
percent of Americans 30 to 49 years of age have tried to determine how 
much they need to save by the time they retire.\8\ Meanwhile, nearly 
one-third of Baby Boomers cite having adequate retirement assets as a 
top concern, while over three-quarters said they will work for income 
in retirement, meaning they actually will not be retired.\9\
---------------------------------------------------------------------------
    \6\ Employee Benefit Research Institute. EBRI Notes: Retirement 
Income Adequacy for Boomers and Gen-Xers: Evidence from the 2012 EBRI 
Retirement Security Projection Model.
    \7\ Id.
    \8\ Insured Retirement Institute. Baby Boomers and Generations 
Xers: Are They on Track to Reach Their Retirement Goals?
    \9\ Insured Retirement Institute. Boomer Expectations for 
Retirement 2013.

This reality underscores the critical importance of a regulatory 
environment that provides consumers access to products that meet their 
need to protect against longevity risk, as well as one that increases 
access to tax-deferred retirement savings. It also emphasizes the need 
for the advancement of both common sense retirement security policies 
and initiatives to promote consumer education and choice.

Guaranteeing Lifetime Income With Insured Retirement Products

Annuities are the only financial instruments available today, other 
than Social Security and pensions, that can guarantee a lifetime stream 
of income during retirement, and only insurance companies and their 
distribution partners can provide these products. With the proper use 
of annuities and other guaranteed lifetime income products, retirees 
can be assured they will not outlive their assets. Boomers who own 
insured retirement products, including all types of annuities, have 
higher confidence in their overall retirement expectations, with 9 out 
of 10 believing they are doing a good job preparing financially for 
retirement.\10\ Compared to non-
owners, Baby Boomers who own annuities--by more than a two-to-one 
ratio--are likely to be among those who are most confident in living 
comfortably throughout their retirement years.\11\ Baby Boomer annuity 
owners also are more likely to engage in positive retirement planning 
behaviors than Baby Boomer non-annuity owners, with 68 percent having 
calculated a retirement goal and 63 percent having consulted with a 
financial advisor.\12\
---------------------------------------------------------------------------
    \10\ Insured Retirement Institute. Boomer Expectations for 
Retirement 2011.
    \11\ Insured Retirement Institute. Survey of Americans Aged 51 to 
67.
    \12\ Insured Retirement Institute. Tax Policy and Boomer Retirement 
Saving Behaviors.

Proposals Related to Retirement Savings and Lifetime Income

The Insured Retirement Institute recently released its 2016 legislative 
agenda. The principle of protecting and expanding access to American 
retirement savers is at its foundation. Our agenda identifies policy 
solutions to expand access to workplace retirement plans that help 
Americans save and prepare for retirement; to increase access to 
lifetime income options that help Americans ensure their savings will 
not be outlived; and to improve access to education and information 
that American savers need to make better and more-informed decisions 
regarding their finances. Below are a number of our priorities that we 
hope the Senate Finance Committee will pursue:

Provide Multiple Employer Plans (MEPs) With Lifetime Income Options

All small employers should be able to join multiple employer plans, or 
MEPs, which will result in more workers having access to retirement 
plans. There is bipartisan support in Congress to make MEPs available 
to all start-ups and small businesses, and the President will include 
in his 2017 budget a proposal that would make it easier for employers 
to use MEPs to create 401(k) plans for their employees.

Today, these businesses face financial and administrative challenges, 
as well as legal risks, in offering a retirement plan to employees. 
Allowing small businesses to band together to offer their employees a 
retirement plan will greatly reduce the number of workers without 
access to a workplace plan. Given that lifetime income strategies 
greatly reduce the risk of outliving retirement savings, these plans 
should be required to make a lifetime income option available to their 
employees.

IRI agrees with the recommendations put forth in the Senate Finance 
Committee's Savings and Investment Bipartisan Tax Working Group Report 
in July 2015. In the report, the Tax Working Group discusses the power 
of MEPs to enable small employers to sponsor high-quality, low-cost 
plans. The working group recommends that the Senate Finance Committee 
consider proposals that will allow all employers to join multiple 
employer plans, as well as allow businesses to share administrative and 
other responsibilities associated with providing retirement plans to 
their employers.

The proposal contained in the President's 2017 Budget would remove the 
``common bond'' requirement for using a MEP, and as a result, would 
enable employers to take advantage of ``Open MEPs'' while adding 
significant new safeguards to ensure workers are protected. This will 
allow more small businesses to offer cost-effective, pooled plans to 
their workers, and certain nonprofits and other intermediaries will be 
able to create plans for contractors and other self-employed 
individuals who don't have access to a plan at work. As an added 
benefit, if an employee moves between employers participating in the 
same Open MEP, or is an independent contractor participating in a 
pooled plan using the Open MEP structure, the employee can continue 
contributing to the same plan after starting work for a different 
company.

Enable Annuity Portability

In addition to expanding coverage for American workers, we also need to 
reinvent retirement programs to ensure that workers in an increasingly 
mobile economy can carry their benefits with them across an entire 
career. One such effort would be to have Congress amend a technicality 
in the tax code to make a record keeping change a distributable event 
for annuities with lifetime income benefits. This change will ensure 
workers do not lose the lifetime income guarantees they have already 
paid for if their employer decides to change annuity products or 
service providers. Unfortunately, to avoid this possibility, many 
employers simply choose not to offer lifetime income options to their 
workers. The report's guidance about the issues that occur based on 
current law that prevent savers from transferring their lifetime income 
investment to another retirement plan or IRA is a valuable statement of 
support for our efforts. Lifetime income portability provisions to 
solve this problem were included in Chairman Hatch's SAFE Retirement 
Act and the President's budget.

Clarify Employer Fiduciary Responsibility

An increase in workers' access to lifetime income in retirement plans 
is a crucial step in the advancement of common sense retirement 
security policies. This will require clear rules for employers to 
follow about how to select lifetime income products in their retirement 
plans so that they are confident in meeting their fiduciary 
responsibilities. Employers do not have the expertise to make the 
decisions required by current regulations. This can be addressed by 
allowing employers to select products provided by insurers that meet 
certain existing regulatory requirements, such as minimum capital and 
reserving standards. Members of the committee have proposed a safe 
harbor with respect to the selection of a lifetime retirement income 
contract as long as certain requirements are met. Such a safe harbor 
would go a long way towards encouraging more retirement plans to offer 
lifetime income options.

Increase Auto-Enrollment and Auto-Escalation Default Rates

The Pension Protection Act allows employers to automatically enroll 
employees in 401(k) plans. Currently the majority of private-sector 
employees using automatic enrollment set the default rate at 3 percent 
of pay, the starting point for the auto-enrollment safe harbor. This is 
too low for adequate retirement savings. Research by EBRI has found 
that a 6 percent default savings rate would lead to significantly 
better retirement outcomes for workers without causing a marked 
increase in workers opting out of the plan. Workers across all income 
brackets are more likely to participate when their employers have auto-
enrollment, but will need higher savings thresholds to reach their 
retirement savings goals. Starting the deferral rate at 6 percent at 
the time of automatic enrollment with automatic escalation up to 15 
percent would greatly increase retirement savings in the United States. 
Legislation should be enacted to increase the thresholds. IRI supports 
the Working Group's recommendation to expand the safe harbor for 
automatic enrollment plans and provide a new credit to further help 
small employers offering matching contributions.

In addition, IRI recently submitted a comment letter to the Department 
of Labor regarding its proposed regulation titled ``Savings 
Arrangements Established by States for Non-Governmental Employees'' (29 
CFR Part 2510), as published in the Federal Register, Volume 80, No. 
222 on November 18, 2015. The proposed regulation would establish a new 
safe harbor under the Employee Retirement Income Security Act of 1974 
(ERISA) for state governments to create and administer automatic 
enrollment payroll deduction savings arrangements for private-sector 
employees whose employers do not offer retirement savings plans.

IRI recommended that the Department of Labor address concerns about 
multiples classes of employers across state lines by directing its 
efforts to expand coverage on employers rather than providing a path 
for states to act as plan providers. Specifically, in lieu of the 
proposed safe harbor for state-run plans, the DOL should simply modify 
the existing safe harbors referenced above to: (1) Allow all IRA and 
403(b) programs and arrangements covered by the existing safe harbors 
to offer automatic enrollment and automatic escalation features, 
subject to the requirements already applicable to automatic features in 
non-safe harbor plans; and, (2) if desired, clarify that the existing 
IRA safe harbor is available for IRA programs offered or required under 
applicable state law so long as participation by individual employees 
remains voluntary. IRI would strongly urge Congress to consider making 
the amendments to the existing ERISA safe-harbors referenced above 
which would contribute greatly to greater use of auto-enrollment and 
auto-escalation features of IRA's by workers.

Require Lifetime Income Estimates on Workers' Benefit Statements

The Working Group noted that requiring lifetime income disclosures on 
retirement statements would aid plan participants in making choices 
about how to spend their savings. To help workers save appropriately 
for retirement, they need to be aware of how much monthly income their 
nest egg will generate in retirement. The Department of Labor is 
working on a rule that would require this information to be included on 
benefit statements--via lifetime income estimates. Likewise, 
legislation has been introduced that would also require the inclusion 
of these estimates on statements. Research by IRI found that more than 
90 percent of workers want these estimates and find them helpful. 
Additionally, more than 75 percent of workers said they would increase 
their savings level by a few percentage points or more after seeing 
these retirement income estimates.

Update Required Minimum Distribution (RMD) Rules to Reflect Longer

Lifespans

Legislation should be enacted to increase the RMD age from 70\1/2\ to 
at least 75, and mortality tables should be updated to reflect longer 
life expectancies. The RMD age has been set in stone for more than 50 
years. When it was set in 1962, life expectancies were considerably 
shorter than they are today. Today's workers face an increased risk of 
outliving retirement assets as a result of longer life spans. 
Increasing the RMD age will give individuals more time to let their 
savings grow and allow them to take larger distributions in the future.

Tax Deferral Spurs Retirement Savings

The deferral of taxes on the investment growth within a retirement 
savings product is one of the cornerstones of retirement planning. The 
deferral of this growth leads to a larger retirement nest egg for the 
investor. For example, a 45-year old investor at the 15 percent tax 
bracket who makes a one time $1,000 contribution before taxes into a 
tax-deferred retirement account, earning a 6 percent interest rate, 
will at age 60, have accumulated $2,397 but must pay a 15 percent tax--
or $359--upon withdrawing the savings from the account. After taxes, 
there will be $2,038. If the same investor used after-tax dollars 
contributed to a taxable account the value of the account at age 60 
would be $1,793, or $245 less than the tax deferred savings.\13\
---------------------------------------------------------------------------
    \13\ Id.

Annuity ownership provides an avenue for many to attain tax-deferred 
retirement savings growth. More than four in 10 American private-sector 
workers do not have access to a tax-deferred defined contribution 
retirement plan through their employer,\14\ so annuities provide a 
vehicle for these workers to access tax-deferred retirement savings.
---------------------------------------------------------------------------
    \14\ Bureau of Labor Statistics. National Compensation Survey: 
Employee Benefits in the United States, March 2013.

American consumers place a high-level of importance on tax deferral. 
Tax deferral is cited by consumers and financial advisors as a top 
reason for purchasing an annuity.\15\ Among middle-income Boomers, 77 
percent said that tax deferral is an important consideration when 
selecting a retirement product.\16\
---------------------------------------------------------------------------
    \15\ Insured Retirement Institute and Cogent Research. The 
Evolution of the Annuity Industry, 2012.
    \16\ Insured Retirement Institute. Tax Policy and Middle-Income 
Boomers.

It is important to note that while the tax-deferred treatment of 
annuities helps consumers reach a higher level of savings, interest and 
earnings credited to annuities are taxed when distributions are taken 
at retirement-taxes on retirement savings and annuities are deferred, 
not exempt or excluded. Thus, while the removal of annuities' tax--
deferred status would not necessarily generate additional tax revenue 
over the long term, it would have a negative effect on Americans' 
ability to save for retirement. In fact, a Congressional Budget Office 
study determined that tax-
deferred retirement savings would moderately increase federal revenues 
as a percentage of gross domestic product over the long term.\17\
---------------------------------------------------------------------------
    \17\ Congressional Budget Office. Tax-Deferred Retirement Savings' 
Long-Term Revenue Projections.
---------------------------------------------------------------------------

Conclusion

The Savings and Investment Working Group report issued last summer 
specifically identified three key goals for policy makers to pursue: 
(1) increasing access to tax deferred retirement savings, (2) 
increasing participation and levels of savings, and (3) discouraging 
leakage while promoting lifetime income. IRI strongly supports these 
goals. The President's budget includes many of the same ideas. 
Therefore, strong, bipartisan support exists for these proposals, and 
IRI will continue to work with Congress as the Senate Finance Committee 
moves forward with legislation to enact these commonsense reforms.

Thank you, again, for the opportunity to present this testimony. We 
hope you will find it useful, and we would welcome the opportunity to 
work with the Senate Finance Committee in the future as you consider 
additional legislative changes to help all Americans attain financial 
security in retirement.

                                 ______
                                 
               National Center for Policy Analysis (NCPA)

                        IDEAS CHANGING THE WORLD

 Dallas Headquarters: 14180 Dallas Parkway, Suite 350  Dallas, Texas 
                      75254  972-386-6272

   Washington Office: 202-830-0177  [email protected]  
                              www.ncpa.org

          Access to Retirement Accounts and Savings Incentives

               Will Help Americans Prepare for Retirement

                        Statement for the Record

                           Pamela Villarreal

                             Senior Fellow

                  National Center for Policy Analysis

    ``Helping Americans Prepare for Retirement: Increasing Access, 
                           Participation, and

                 Coverage in Retirement Savings Plans''

               United States Senate Committee on Finance

                            January 28, 2016

Chairman Hatch, Ranking Member Wyden, and members of the committee, 
thank you for the opportunity to submit written comments about the 
challenges facing retirement savers today and how to increase access 
and participation for all workers. I am Pamela Villarreal, a senior 
fellow at the National Center for Policy Analysis. We are a nonprofit, 
nonpartisan public policy research organization dedicated to developing 
and promoting private alternatives to government regulation and 
control, solving problems by relying on the strength of the 
competitive, entrepreneurial private sector.

    The Obama Administration has made it a goal to increase access to 
retirement savings accounts for workers whose employers do not provide 
401(k) accounts. Consider:

      According to the Department of Labor March 2015 benefits survey, 
69 percent of civilian workers had access to a defined benefit or 
defined contribution retirement plan. Of those workers 77 percent 
participated. In March 2012, 68 percent of civilian workers had access 
to a defined benefit or defined contribution plan, with a participation 
rate of 79 percent.
      When broken between full-time and part-time workers in the March 
2015 survey, however, 80 percent of full-time workers had access to a 
defined benefit or defined contribution plan, compared to 38 percent of 
part-time workers. Moreover, only half of part-time workers who had 
access to plans actually participated.
      But these statistics include only plans offered through 
employers. According to the Investment Company Institute, in 2013 67 
percent of U.S. households had retirement accounts through their 
employer of through individual IRAs.

    While one could argue that the participation rate could be much 
higher, it does not necessarily mean that access is the problem. 
Between 401(k) plans, SEP plans, traditional and Roth IRA plans and the 
new MyRA accounts, anybody who earns at least the amount in wages that 
they plan on contributing to a retirement account can start and 
contribute to some type of retirement savings vehicle. But merely 
increasing access to retirement accounts does not mean that households 
will contribute to them. The real question is, with the availability of 
so many types of accounts, why are workers not saving as much as they 
should, particularly those with lower incomes?

    Social Security crowds out saving. As long as Social Security 
remains the primary income replacement for some workers when they 
retire, they have little incentive to save. In essence, it is their 
``bond'' fund, and even if they do set aside a little bit of savings, 
they are not confident that it really matters much in the future 
compared to the needs they have in the present.

    Lower-income workers are risk adverse, and government policies 
perpetuate this. Not only do lower income workers save less, they are 
more risk adverse when they do save. Unfortunately, the MyRA, which is 
designed to be an attractive vehicle for young and lower income savers, 
relegates them to a Treasury bond fund similar to the Federal Thrift 
Savings Plan's ``G'' fund, which is not the ideal choice for a worker 
with 30 to 40 more years before retirement. Since 1987, the average 
annual rate of return of the G fund has ranged from 1.89 percent to 
5.54 percent, depending on the length of time the bonds are held.

    Arguably, there are better options for savers than the MyRA. To 
illustrate this, consider comparisons of a stock or stock/bond index 
fund to a Treasury bond fund. Comparing the rates of return on four 
stock funds and the G fund shows that, before adjusting for inflation:

      The Vanguard Windsor II fund, which has been around as long as 
the FTSP G fund, earned a 9.4 percent annual return on investment from 
1987 to 2013. Over the same span of 26 years, the FTSP G Treasury bond 
fund yielded an annual return on investment of only 5.54 percent.
      Stock funds performed better than the G fund even over shorter 
time spans; the Vanguard 500 Index and Schwab 1000 Index funds had 
annual rates of return well above 8 percent from 1994 to 2014.
      Even the Fidelity Asset Manager fund (a mix of 85 percent stocks 
and 15 percent bonds) yielded an annual return on investment (before 
inflation) of more than 7 percent over 15 years.

    Three stock funds performed better over a shorter time period than 
the G fund did over a quarter century!

    In essence, retirement incentives supported by policymakers often 
lack product neutrality and are even harmful to some savers.

    Tax credits are biased against saving. To add insult to injury, 
significant tax credits such as the Earned Income Tax credit or the 
Saver's Credit, which benefit low- to moderate-income workers, are 
refunded to the individual with no stipulations on how the money is 
spent. While the Saver's Credit does require an individual to have a 
retirement account, the money received from the credit can be spent 
however the individual chooses. In 2014, households that qualified for 
the Earned Income Tax Credit received an average of $2,400, yet the 
EITC is not tied to savings incentives in any way, shape or form.

    Politicians and policymakers often perpetuate the myth that equity 
investments are only for the wealthy. About a year ago, 30-year 
Treasury bond yields hit an all-time low. Yet few policymakers talk 
about the effect of this on savings, such as the fact that retirees may 
outlive their money if they can't keep up with inflation. Instead, most 
of the rhetoric is about how dangerous the stock market is, when it is 
due for a correction, and the billions ``lost'' in wealth. Yet, there 
are many who are not wealthy but quietly saving for retirement through 
regular contributions to equity funds and stocks.

    In fact, during the financial crisis of 2008, many faithful 
retirement account savers pulled money out of equity investments or 
simply stopped saving altogether. But those who stuck with their equity 
funds and rode out the crisis were better off. From December 1, 2008 to 
December 31, 2010:

      A $100 monthly (taxable) contribution to a traditional savings 
account invested in money market funds would have yielded only $21--a 
0.71 percent after-tax return.
      A $100 monthly tax-deferred contribution to a bond index fund 
would have yielded $140--a 5.39 percent rate of return.
      A $100 monthly tax-deferred contribution to an S&P index fund 
would have yielded $783--a return of nearly 26 percent.

    Economists often argue that since Social Security acts as a bond 
fund due to its safety and low return on investment, thus those who 
have little to save should be invested in equity funds to provide 
balance to their retirement ``portfolio.''

                           Possible Solutions

    Expand Individual Retirement Accounts (IRAs). Current tax law 
penalizes those who do not have employer-sponsored savings plans. For 
example, participants in an employer-sponsored 401(k) plan can 
contribute up to $18,000 annually, while nonparticipants can contribute 
only $5,500 to a tax-advantaged IRA. This policy is particularly 
harmful to early retirees. Level the playing field to treat all savers 
equally.

    Add savings stipulations to tax credits. Rather than send low-
income workers a check when they file their tax returns, the federal 
government could deposit half of each EITC refund into an IRA-type 
account, similar to auto enrollment in employer plans. Tax filers would 
still receive half of the credit in cash. Likewise, the Savers' credit 
could also be deposited into the account.

    Expand the MyRA to include other fund options as are available in 
the Federal Thrift Savings Plan. Or better yet, scrap the MyRA and 
incorporate some of the features of the MyRA (minimum amount needed to 
open the account and portability) into universal Roth IRA accounts.

    Focus less on creating another retirement account and more on 
helping those who are unbanked. It is estimated that between 30 and 70 
million people do not have a bank account, citing Jack of money, 
mistrust of banks and high fees for services. While it is not possible 
to convince everybody to open a bank account if they don't trust banks, 
it is possible to address high fees. Many experts cite Dodd-Frank, 
particularly the ``Durbin amendment'' (imposed price controls on the 
fee paid by retailers when consumers use a debit card) for the increase 
in fees and the rise in the number of unbanked and underbanked. 
Empirical evidence shows that people are more likely to save if they 
have a bank account, so it is important to address regulatory barriers 
that deter consumers from having bank accounts.

    Thank you for the opportunity to submit these written comments.

                                 ______
                                 
           Women's Institute for a Secure Retirement (WISER)

                      1140 19th St., NW, Suite 550

                          Washington, DC 20036

                    U.S. Senate Committee on Finance

   Hearing on ``Helping Americans Prepare for Retirement: Increasing 
                                Access,

       Participation, and Coverage in Retirement Savings Plans''

                            January 28, 2016

                        Testimony for the Record

                      M. Cindy Hounsell, President

Introduction

We appreciate the opportunity to submit testimony for the record, to 
ensure that members of the Finance Committee recognize the significant 
retirement risks women face--particularly the millions of women who are 
on the cusp of retirement.

WISER is a nonprofit organization that works to help women, educators 
and policymakers understand the important issues surrounding women's 
retirement income. Our primary mission is financial education and 
capability--providing women with the crucial skills and information 
they need to avoid poverty in retirement. As the only organization to 
focus exclusively on the unique financial challenges that women face in 
retirement, WISER supports women's opportunities to secure adequate 
retirement income through research, training workshops, educational 
materials and outreach. WISER and the U.S. Administration on Aging 
operate the National Education and Resource Center on Women and 
Retirement Planning.

WISER's testimony will focus primarily on highlighting the challenges 
women face when it comes to retirement security and the activities 
WISER undertakes to help women deal with these challenges. We will also 
summarize the outcomes of a WISER project that showed significant 
savings outcomes for low-income workers that resulted from combining a 
simple savings product with savings incentives. The project suggests 
that the myRA and an expanded and refundable Saver's Tax Credit would 
boost saving among low-income workers.

Challenges Women Face

It is clear from the data that, no matter how you slice it, American 
workers are not saving enough for retirement. This issue is compounded 
for women. For one, women live longer, which means they need more 
income and their retirement assets have to last longer. Older women are 
also more likely to have chronic and costly medical conditions and need 
long-term institutional care. Further, older women are more likely to 
be single, which puts them at higher risk for poverty. It is at this 
later stage of life that many women become poor or in the near poor 
category for the first time in their lives.

Despite needing more retirement assets, women end up having less. 
Factors that play into this include pay inequity, uneven work histories 
due to caregiving responsibilities, and a greater likelihood of working 
part-time where retirement benefits are not offered.

Financial Capability

The reality of today's retirement landscape is do-it-yourself and do it 
right, or live at or below the edge of poverty in what are supposed to 
be the golden years. The nature of today's system of individual 
responsibility demands financial capability. This is WISER's primary 
area of focus. We focus on women because of the challenges we set forth 
earlier. Women are in the difficult position of making big decisions 
while being unable to afford even a small mistake.

Women, along with their male counterparts, tend also to lack basic 
financial knowledge, which is often the reason for making serious 
financial mistakes. Women need the best information and opportunity to 
access information to ensure that they do not make costly decisions; 
this information should be targeted to women as spouses and caregivers, 
as well as to women as employees.

Experience and research shows that relevant information and education 
can have a dramatic impact on financial outcomes. Blanchett and Kaplan 
find that good financial planning decisions increase retirement income 
by 29 percent, which is the equivalent of generating 1.82 percent per 
year of higher returns.\1\
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    \1\ Blanchett, David and Paul Kaplan, Alpha, Beta . . . and Now 
Gamma. Measuring the Importance of Intelligent Financial Planning 
Decisions. December 18, 2012. http://www.morningstar.com/advisor/t/
68379508/alpha-beta-and-now-gamma.htm.

As mentioned earlier, one of WISER's key initiatives is a program 
administered cooperatively and funded by the Administration on Aging--
the National Education and Resource Center on Women and Retirement 
Planning. The AoA/WISER Resource Center's primary goal is to educate 
the most women we can possibly reach with information that can assist 
them in their retirement planning. We seek to provide average and low-
income women the opportunity to take the first step toward controlling 
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their financial futures.

WISER's approach is to bring financial planning back to the basics. Our 
goal is to help women make the best decisions they can with the limited 
resources they may have. We train trainers who assist women in their 
communities. We explain the hard reality of having to adjust living 
standards to live within their means and to find resources in their 
communities that they may not be aware of.

The Center has directly reached tens of thousands of women through our 
own and our partners' workshops, and we've reached millions with our 
publications and website. The Center's strength is providing women with 
core financial knowledge that encourages them to make financial and 
retirement planning a priority in their lives. We focus on such issues 
as health and retirement, benefits at work (or the implication of the 
lack of such benefits), the financial implications of providing care 
for children, parents and spouses, and the risks of inflation and 
longevity.

We have identified several issues that women are in particular need of 
learning about or better understanding:

 How much is needed for a secure retirement.

 Longevity risk.

 The value of guaranteed lifetime income.

 How to draw down assets.

 The impact of future inflation and taxes.

It's important to recognize that many women assume they will just keep 
working beyond normal retirement age. But more than 40 percent of 
Americans end up retiring earlier than they planned to, usually due to 
job loss, family needs including caregiving, health issues, or poor 
personal health.

Appalachian Savings Project

Retirement income security is an elusive goal for low-wage earners. 
They tend to have no access to 401(k)-type plans, and IRAs are out of 
reach, with minimum deposits and required automatic payments the norm.

Through WISER's Appalachian Savings Project, we set out to determine 
the impact on saving of combining easy access to a simple savings 
vehicle with a matched incentive to save. The project demonstrated that 
low-income workers are interested in saving and can accumulate 
significant savings when they are incentivized to do so.

The project established incentives for rural childcare workers to save 
small amounts with auto-debits for US I-Bonds via TreasuryDirect, the 
U.S. Treasury's online site.\2\ Participants received a $50 match to 
establish an account, and another $50 if they directed at least $50 
into their accounts at tax time. Further, the project matched 50 
percent of savings after a year of participation (up to $400), 
simulating an expanded Saver's Credit to measure its effects on savings 
rates. Quarterly financial workshops were offered to participants, each 
tailored to the childcare business.
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    \2\ WISER selected I Bonds because they only have to be held for 
one year. If the money is withdrawn before 5 years, only one quarter's 
interest is forfeited. I Bonds have no fees for opening or maintaining 
an account, have a low minimum contribution, no risk of loss of 
principal, and inflation protection.

Topics included preparing for tax filings, Social Security, and a legal 
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seminar on wills, power-of-attorney and related subjects.

Among the project findings:

      Participants' total savings including the match averaged $1,150, 
estimated to be 5.5 percent of their average annual incomes.

      Nearly all respondents agreed that their total savings and 
investments had increased compared to 12 months earlier.

      Only two respondents reported an increase in debt over the same 
period.

      Six in 10 respondents reported purchasing savings bonds monthly 
or more often during the program.

      About one-half used their most recent tax refund to purchase 
savings bonds.

      The interviewees had generally earmarked their savings bond 
purchases for longer-term uses, including retirement.

These findings indicate that the savings participants accumulated 
through the program represented a net increase in savings, rather than 
a shift in existing resources to savings bonds or increased use of debt 
in order obtain the match.

The Appalachian Savings Project demonstrated that a low-dollar, easily 
accessible savings vehicle, combined with a matched incentive to save, 
produces significant savings by low-wage earners. The 50 percent match 
provided a clear economic incentive to save. In theory, the Saver's 
Credit should function in the same way. However, the credit is 
currently nonrefundable and only applies to contributions to qualified 
retirement accounts, dramatically limiting the number of households 
that benefit from it. This project suggests that an expanded and 
refundable Saver's Tax Credit would support saving by financially 
vulnerable households.

Historically, a significant gap has existed in the marketplace for a 
savings product that meets the needs of moderate- and low-income 
workers; one that does not require a large minimum investment to open 
the account, is low-risk with low fees, that can be purchased in small 
increments, is available nationally, and is accessible regardless of 
credit score.

When the Appalachian Savings Project began, the I-Bond through 
TreasuryDirect was the best savings vehicle available for lower-income 
savers. Since then, however, the U.S. Department of the Treasury 
unveiled the MyRA. The design, modeled after a Roth IRA, allows for an 
initial contribution of as low as $25, and even lower additional 
contributions. The interest rate is set at the same variable rate as 
investments in the government securities fund for federal employees and 
has no fees associated with it. Further, contributions to a MyRA are 
eligible for the Saver's Credit. Going forward with the Appalachian 
Savings Project and similar efforts by WISER, MyRA will be the 
preferred savings vehicle.

Conclusion

Mr. Chairman, thank you for including women's retirement issues as part 
of the broader discussion on retirement security. As I hope my written 
testimony has pointed out, women are at a particularly high risk for 
poverty in retirement. We need to make it easier for people and give 
them some level of confidence that they can do this, or they just throw 
their hands in the air and say, ``I will never have $2 million so what 
is the point?'' The point is that a little can go a long way and we 
know that women need confidence to build on their financial knowledge 
and make better decisions.

There is no single solution to these issues. We need to start 
understanding what the specific challenges are to certain segments and 
target those segments with a wide range of solutions from financial 
education, to guaranteed income product design, policy changes and 
other innovations.

Most of all, we need to continue to build on what is working and make 
it better. While there are endless discussions in Washington about what 
the correct solution is, millions of Americans are just trying to 
achieve financial stability.

                                  [all]