[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
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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.
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\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\
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\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\
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\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\
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\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.
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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\
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\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\
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\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
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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\
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\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.
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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\
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\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\
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\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
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(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\
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\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\
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\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\
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\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\
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\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\
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\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\
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\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\
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\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\
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\17\ Congressional Budget Office. Tax-Deferred Retirement Savings'
Long-Term Revenue Projections.
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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
---------------------------------------------------------------------------
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.
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