[Senate Hearing 117-678]
[From the U.S. Government Publishing Office]
S. Hrg. 117-678
BUILDING ON BIPARTISAN RETIREMENT
LEGISLATION: HOW CAN CONGRESS HELP?
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HEARING
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
JULY 28, 2021
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[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
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U.S. GOVERNMENT PUBLISHING OFFICE
52-448-PDF WASHINGTON : 2023
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COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
MARIA CANTWELL, Washington CHUCK GRASSLEY, Iowa
ROBERT MENENDEZ, New Jersey JOHN CORNYN, Texas
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
BENJAMIN L. CARDIN, Maryland RICHARD BURR, North Carolina
SHERROD BROWN, Ohio ROB PORTMAN, Ohio
MICHAEL F. BENNET, Colorado PATRICK J. TOOMEY, Pennsylvania
ROBERT P. CASEY, Jr., Pennsylvania TIM SCOTT, South Carolina
MARK R. WARNER, Virginia BILL CASSIDY, Louisiana
SHELDON WHITEHOUSE, Rhode Island JAMES LANKFORD, Oklahoma
MAGGIE HASSAN, New Hampshire STEVE DAINES, Montana
CATHERINE CORTEZ MASTO, Nevada TODD YOUNG, Indiana
ELIZABETH WARREN, Massachusetts BEN SASSE, Nebraska
JOHN BARRASSO, Wyoming
Joshua Sheinkman, Staff Director
Gregg Richard, Republican Staff Director
(II)
C O N T E N T S
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OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Crapo, Hon. Mike, a U.S. Senator from Idaho...................... 4
WITNESSES
Robinson, Aliya, senior vice president, retirement and
compensation policy, The ERISA Industry Committee, Washington,
DC............................................................. 6
Graff, Brian H., chief executive officer, American Retirement
Association, Arlington, VA..................................... 8
Certner, David, legislative counsel and policy director, AARP,
Washington, DC................................................. 9
Read, Hon. Tobias, Oregon State Treasurer, Salem, OR............. 11
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Certner, David:
Testimony.................................................... 9
Prepared statement........................................... 43
Responses to questions from committee members................ 51
Crapo, Hon. Mike:
Opening statement............................................ 4
Prepared statement........................................... 52
Graff, Brian H.:
Testimony.................................................... 8
Prepared statement........................................... 53
Responses to questions from committee members................ 60
Read, Hon. Tobias:
Testimony.................................................... 11
Prepared statement........................................... 67
Responses to questions from committee members................ 70
Robinson, Aliya:
Testimony.................................................... 6
Prepared statement........................................... 70
Responses to questions from committee members................ 77
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 84
Communications
American Benefits Council........................................ 87
American Council of Life Insurers................................ 94
American Heart Association....................................... 99
Association of Mature American Citizens (AMAC)................... 101
Center for Fiscal Equity......................................... 106
Church Alliance.................................................. 110
Coates, James Webster............................................ 113
Committee of Annuity Insurers.................................... 114
Employee-Owned S Corporations of America (ESCA).................. 115
Financial Services Institute..................................... 118
Gould, Erik C.................................................... 119
Hemel, Daniel and Steven Rosenthal............................... 120
ICMA Retirement Corporation (ICMA-RC)............................ 128
Insured Retirement Institute..................................... 129
National Association for Fixed Annuities......................... 135
National Association of Government Defined Contribution
Administrators................................................. 136
Pew Charitable Trusts............................................ 138
Retirement Clearinghouse......................................... 143
Retirement Solutions, LLC........................................ 144
Small Business Council of America................................ 159
South Carolina Small Business Chamber of Commerce................ 164
SPARK Institute, Inc............................................. 165
State Street Global Advisors..................................... 167
XY Planning Network.............................................. 168
BUILDING ON BIPARTISAN RETIREMENT LEGISLATION: HOW CAN CONGRESS HELP?
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WEDNESDAY, JULY 28, 2021
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:13
a.m., via Webex, in Room SD-215, Dirksen Senate Office
Building, Hon. Ron Wyden (chairman of the committee) presiding.
Present: Senators Cantwell, Cardin, Brown, Bennet, Hassan,
Cortez Masto, Crapo, Grassley, Thune, Toomey, Cassidy,
Lankford, Daines, Young, Sasse, and Barrasso.
Also present: Democratic staff: Drew Crouch, Senior Tax and
ERISA Counsel; Grace Enda, Tax Policy Analyst; Joshua
Sheinkman, Staff Director; and Tiffany Smith, Chief Tax
Counsel. Republican staff: Brandon Beall, Senior Policy
Advisor; Jamie Cummins, Tax Counsel; Gregg Richard, Staff
Director; and Jeffrey Wrase, Deputy Staff Director and Chief
Economist.
OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM
OREGON, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The Finance Committee will come to order.
Before there was much knowledge of COVID-19, it was already
far too difficult for Americans to save for a dignified
retirement. According to the National Institute on Retirement
Security, as of 2018 more than 100 million working-age
Americans had no pension and no retirement assets.
The pandemic economic crash made saving even harder. A
recent survey of the impact of the pandemic conducted by AARP
found that, among those fortunate enough to have retirement
accounts, nearly a quarter had to dip into their savings or
quit contributing altogether just to pay the bills. Taken
together, that means a sizeable majority of American workers
fall into one of two camps. Either they cannot afford to save
at all, or they have hardly any financial cushion when times
get tough.
Now more recently, Americans were reminded about long-
running retirement rip-offs by ultra-wealthy individuals
advised by the priciest accountants and lawyers. This really
was not new in a literal sense because, at our request, the
Government Accountability Office years and years ago put
together an extensive report outlining the abuses. Now one of
these reports that Americans learned about included details on
a multi-billion-dollar IRA. And certainly, if you are somebody
who was scrimping and trying to save during the pandemic--say
you are a teacher or a restaurant manager who did not have a
rainy-day fund--then you did not have anything. And then you
read about these well-fed retirement accounts.
What it signaled, just in the last few months, is another
case of double-standard economics. The system does not do
nearly enough to help working people of modest means get ahead,
but individuals at the very top--at the very, very top--are
able to game the rules to get ahead and basically abuse
taxpayer-subsidized accounts with pricey accountants and
lawyers.
So this increases the already-existing inequality between
retirement haves and have-nots to an extreme level. I want to
make it clear--and Senator Crapo has probably heard this more
times than he would wish--I want economic policy that gives
everybody in America the chance to get ahead, not one that
promotes, as we are going to see, retirement haves and have-
nots.
The Finance Committee--Senator Crapo and I were talking
about this--has a bipartisan tradition when it comes to helping
Americans save, and we are going to continue that tradition in
the months ahead. This has been, certainly, a polarized
Congress, but make no mistake about it: this committee is going
to come together as it relates to promoting savings.
So let me kick off a few proposals that I think will help.
First, last week with Senator Bennet, Senator Casey, and
Senator Menendez, I introduced the Encouraging Americans to
Save Act, to get more help to the working folks who need it so
badly. Under that proposal, the credit would be opened up to
millions of Americans with modest incomes who never had access
before. It would become a matching contribution that would go
directly into a retirement account. It has the potential to be
a game changer for folks in Oregon and all across the country
who do not have the ability, as I said, to save much or
anything at all.
Second, our tax code ought to help young people get started
saving earlier in their careers. Too many Americans are unable
to save at work because they are paying off mountains of
student loan debt. Let me drop a picture of the person I am
concerned about. Say you have a young person from a community
of color where nobody has had a chance to go to college, and
they are the first generation that did. They go out and they
get that exciting new job, say with a tech company or
manufacturer, and the company has a terrific retirement
package, but the worker has to match what the employer puts in.
But they are up to their eyeballs in student debt, and so they
cannot take advantage of it.
So our Retirement Parity for Student Loans legislation--
workers who make student loan payments would qualify to get a
matching payment from their employer into a retirement savings
plan like a 401(k). Their student loans shrink, and their nest
egg grows under what we are talking about. That is my view of a
savings win-win, and it is long overdue.
Third, the committee ought to make it easier for them to
move their retirement accounts and continue saving when they
change jobs. This is another area Senator Crapo and I have
talked about because, if you look at the number of people who
change their jobs by the time they are 40, they care enormously
about portability. And in 2021, it is fair to say very few
people stay with an employer for their whole career.
The fact is, given that, it should not be such a pain in
the neck to move your retirement savings. Many Americans just
give up, faced with all the complexity and hassle, and cash out
their savings, losing out on a whole lot of earnings that would
build up over time. These rules essentially penalize Americans
for routine job changes in a modern economy.
So the system ought to change. Even on this committee, back
when we were having a debate in 2009, we also said we wanted to
make health coverage more portable. But we've still got more to
do on that, but this committee has a chance to make retirement
savings more portable, and I am going to work closely with
Senator Crapo to do it.
Finally, it is long past time to crack down on the mega-
IRAs, which, as I held up in this very long GAO report, was
documented years ago. The fact is, from the beginning IRAs--and
you go back and read the documents--Republicans and Democrats
said IRAs were to promote retirement security for the typical
American family. They were not meant to become another tax
dodge for billionaires. And the GAO, as I indicated, in their
landmark study that we requested, essentially looked at it a
number of years back.
GAO found then that nearly 8,000 taxpayers had aggregate
IRA account balances in excess of $5 million. These massive
IRAs have only gotten bigger and more prevalent. Yesterday, the
Joint Committee on Taxation gave me data--and everybody should
know this: it was lawfully obtained, okay, lawfully obtained.
And it just basically showed GAO was right when we asked them
to do it in 2014, and the problem is even greater now.
In 2019, almost 25,000 taxpayers had aggregate IRA account
balances of over $5 million; 497 of those taxpayers had
aggregate IRA accounts of over $25 million, with an average
aggregate account balance of over $150 million each. It is
clearly a tax loophole that ought to be closed. Hopefully we
will have bipartisan support for that.
So we have a lot to talk about. I expect--and Senator Crapo
and I have talked about this--we will have a lot of ideas
coming in from both sides of the aisle. That is what public
service is supposed to be about, to have big, important issues
like retirement savings--which I started caring about years ago
when I was director of the Gray Panthers at home in Oregon and
had a full head of hair and rugged good looks.
My friend Tobias, who will get introduced in a minute,
remembers some of those pictures. He belonged to the Tall Guys
Caucus. So I have a longstanding interest in this, and it is
not about Democrats and Republicans. This is about good policy,
helping people, and giving everybody in America the chance to
get ahead.
So we feel strongly about it, and I will look forward to
remarks from my friend from Idaho.
[The prepared statement of Chairman Wyden appears in the
appendix.]
OPENING STATEMENT OF HON. MIKE CRAPO,
A U.S. SENATOR FROM IDAHO
Senator Crapo. Thank you, Mr. Chairman, and I deeply
appreciate your holding this important bipartisan hearing.
Private retirement savings and retirement security are issues
in the Finance Committee's jurisdiction that have a history of
bipartisan cooperation, and I expect this time will be no
different.
The purpose of this hearing is to hear testimony on how we
can build on that bipartisan track record. In 2015 under then-
Chairman Hatch, I co-chaired the Finance Committee's Savings
and Investment Tax Working Group with Senator Brown. That
working group examined a host of proposals to increase access
to retirement plans, to increase participation in plans, and to
preserve retirement savings.
Many of the findings from the working group--including open
multiple-employer plans and provisions to help long-term part-
time workers--were precursors to RESA and ultimately the SECURE
Act, which became law in December 2019. At the same time,
retirement savings were growing, and the economy was booming
following the pro-growth, pro-worker policies enacted as part
of the 2017 tax reform law. However, the pandemic put a great
deal of stress on workers and retirees, and some had no choice
but to withdraw money from their retirement accounts to make
ends meet.
As the economy continues to bounce back, we have a chance
to build on the success of the SECURE Act in a bipartisan way.
House Ways and Means Committee Chairman Neal and Ranking Member
Brady have already started the process. In the Senate, we are
also making significant progress on this issue, thanks to the
leadership of Senator Portman and Senator Cardin.
Other members, both those who sit on this committee and
those who do not, have been working in a bipartisan way on
retirement proposals which, as Senator Wyden has indicated, we
expect we will hear more about today and will be coming to us
as we put together the legislation that we expect to put
together.
The range of ideas put forth to improve the retirement
system are all important, but my focus is on three points that
are the most pressing for Idahoans and Americans across the
country. First and foremost, Congress should enact policies to
encourage workers to save, so that they can enjoy a retirement.
One survey conducted by the Department of Labor found that,
while 71 percent of civilian workers had access to retirement
benefits, the participation rate for that same group was only
55 percent.
This survey was conducted only months after the SECURE Act
was enacted, so I will be interested to see updated studies and
surveys in the future. But concerns remain about whether enough
workers are saving for retirement.
Second, I frequently hear from small business owners in
Idaho who tell me how expensive and cumbersome the rules are to
offer their employees a retirement plan. These employers want
to provide retirement benefits, but it is just not economically
feasible. I am interested in hearing about what Congress can do
to make it easier and cheaper for the smallest businesses to
offer retirement plans for their employees.
Third, our economy is constantly evolving. People are
working longer. Workers are changing jobs more often, and the
number of gig workers is on the rise. Our retirement system
must adapt with this changing landscape, so that every worker
has a chance to save for a secure retirement. There is no
better time for the Finance Committee to consider further
retirement legislation that will meet these needs.
Mr. Chairman, I look forward to working with you, and all
the members of this committee as well, to consider a so-called
SECURE 2.0 package. To our panel of witnesses, I appreciate
your willingness to share your expertise with us this morning,
and I look forward to hearing from all of you.
[The prepared statement of Senator Crapo appears in the
appendix.]
The Chairman. I thank my colleague.
We have two Senators on our side with a longstanding
interest in retirement security. As I was speaking, Senator
Cardin came in, and he has been working in these savings
precincts for decades, and he deserves an enormous amount of
credit for saying years ago this was an area where Congress
ought to get out beyond the partisan back-and-forth, and he has
teamed up with Republicans repeatedly, and we appreciate it.
The four witnesses are going to be Aliya Robinson, senior
vice president for retirement and compensation policy for the
ERISA Industry Committee. They focus on employee benefit issues
for employers. She previously handled these issues for the
Chamber of Commerce. We are glad you are here, ma'am.
The second witness will be Mr. Brian Graff, the chief
executive officer of the American Retirement Association. It is
an organization that represents a wide range of retirement
professionals. If I listed them all, we would be here until
breakfast. But I would like to note that we have a number of
members from Oregon, so we are very glad you are here.
The third witness, David Certner, is with the American
Association of Retired Persons. The Gray Panthers teamed up
with them a long, long time ago. They do advocacy work for
Americans aged 50 and older, and we are glad you are here.
Our fourth witness is a long-time friend and professional
colleague, the Honorable Tobias Read. He is the State Treasurer
of Oregon. His office is responsible for several savings
programs for Oregonians, and he has really been a pioneer in
this field.
We are very proud of our State. We have a program called
OregonSaves, college savings plans established under the
Federal tax code, and a savings account established under the
Federal tax code for individuals with disabilities. So, Mr.
Read, we welcome you. For all of you, we will make your
prepared remarks a part of the record.
If you would like to take maybe 5 minutes or so to
summarize your comments. It is going to be a hectic day here in
the Senate, as you might imagine with the bipartisan efforts,
and what we are working on in our committee. So members will be
coming in and out, and we welcome you, Ms. Robinson. Please go
ahead.
STATEMENT OF ALIYA ROBINSON, SENIOR VICE PRESIDENT, RETIREMENT
AND COMPENSATION POLICY, THE ERISA INDUSTRY COMMITTEE,
WASHINGTON, DC
Ms. Robinson. Thank you and good morning. Chairman Wyden,
Ranking Member Crapo, members of the Senate Finance Committee,
and others in attendance, I am pleased to testify on behalf of
the ERISA Industry Committee, otherwise known as ERIC, on how
Congress can continue to build bipartisan legislation to help
American workers save for retirement.
I am Aliya Robinson, senior vice president for retirement
and compensation policy at ERIC. ERIC has a unique voice as the
only national association that advocates exclusively for large
employers on health, retirement, and compensation policies at
the Federal, State, and local levels.
Why do we offer a unique voice? Because we speak
exclusively for large companies in their role as benefit plan
sponsors. Our smallest member company has over 10,000
employees, and each operates in multiple States. As a matter of
fact, most of our member companies operate in every State.
This can create compliance and logistical challenges that
are not faced by other employers. More importantly, our member
companies are at the forefront of benefit policies. They are
driving innovative benefit designs and initiatives that often
provide the blueprint for future legislative policies. We are
pleased you want to help, and we have specific recommendations
for action.
ERIC appreciates the efforts of Congress and this committee
in particular, as was noted, to provide much-needed updates to
retirement plan design and operation in the SECURE Act, and to
address COVID-19-related concerns in the CARES Act and, most
recently, in the American Rescue Plan Act.
As our economy continues to rebuild, we appreciate efforts
to increase retirement security, particularly after the
financial strain suffered by many workers and participants.
Since all ERIC member companies offer retirement benefits to
their employees, our focus is not on coverage but on increasing
savings opportunities for plan participants and maximizing
resources by decreasing administrative burdens.
This morning I will highlight a few of our recommendations,
but many more are detailed in my written testimony. So let us
start with student loan assistance. ERIC supports treating
student loan payments as elected deferrals for the purpose of
employer matching contributions, as originally proposed by
Chairman Wyden and included in the bipartisan Retirement
Security and Savings Act introduced by----
The Chairman. Ms. Robinson, can I just freeze that? And we
are not going to do this except on this point. But student
parity is so important to help all these students digging out
from the debt. What this means is the hundreds of employers
that you all represent are going to be supportive of this
concept?
Ms. Robinson. Yes.
The Chairman. Great. Excuse me for interrupting.
Ms. Robinson. Not at all. And to that point, employers do
not want their workers to miss out on matching contributions
because they are repaying their student loan debt. So we
support these efforts to treat student loan payments as salary
reduction contributions.
Our next recommendation is also meant to address
comprehensive financial strains that workers face. ERIC
believes that allowing for emergency savings accounts as part
of retirement savings plans is critical to strengthening the
connection between short-term financial concerns and adequate
savings for retirement.
As such, ERIC supports the bipartisan Enhancing Emergency
and Retirement Savings Act of 2021, introduced by Senators
Lankford and Bennet. As I mentioned, ERIC member companies are
in the forefront of benefit and plan design. One area where our
member companies would like to see innovation is in the
definition of a highly compensated employee.
The purpose of the non-discrimination rules is to ensure
that highly compensated employees who are in decision-making
positions are incentivized to provide proportional benefits for
non-
highly compensated employees. I should note the definition of a
highly compensated employee statutorily is about $130,000 per
year. So we are not talking about billionaires or millionaires.
Many industries have highly paid new hires, and flat
payment structures are offered in locations where the cost of
living is high. So, many employees are inappropriately treated
as highly compensated employees, even though they do not have
decision-making authority. This limits their ability to save,
especially at the crucial early stages of their careers.
Therefore, ERIC proposes that an employer be permitted to limit
the employees considered highly compensated employees to the
top 10 percent group of employees by compensation.
In addition to increasing savings opportunities, ERIC
believes it is equally important to reduce administrative
burdens. Due to the size of ERIC member companies, logistical
issues can be significant and costly, such as the need to
prepare and send required notices. ERIC greatly supports the
provision in the Retirement Security and Savings Act that would
consolidate and simplify existing ERISA and tax reports,
notices, and disclosures.
However, simplifying and consolidating the notice
requirements addresses only one part of the burden. A crucial
factor is the distribution of notices and disclosures.
Therefore, we are very supportive of the changes made by the
Department of Labor to allow plan sponsors to use electronic
delivery as the default option for providing retirement plan
notices, and we encourage Congress to continue this flexibility
for plan sponsors.
My final point is to urge you to avoid unnecessary and
harmful increases in single-employer PBGC premiums, and we look
forward to working with you on the bipartisan Pension and
Budget Integrity Act, which has been introduced in previous
Congresses.
ERIC applauds the leadership of this committee in
recognizing the continued need to focus on retirement security,
and we look forward to continuing to work with you to advance
these and other measures to further promote retirement security
for Americans.
Thank you.
The Chairman. Thank you, Ms. Robinson, and I am sure we are
going to talk to you and ERIC often.
Okay, Mr. Graff next.
[The prepared statement of Ms. Robinson appears in the
appendix.]
STATEMENT OF BRIAN H. GRAFF, CHIEF EXECUTIVE OFFICER, AMERICAN
RETIREMENT ASSOCIATION, ARLINGTON, VA
Mr. Graff. Thank you, Chairman Wyden, Ranking Member Crapo,
and the other members of the committee, for holding this
hearing on improving our Nation's retirement plan system. My
name is Brian Graff. I am the CEO of the American Retirement
Association.
The ARA's 30,000 members and the organizations they are
affiliated with support 95 percent of all the defined
contribution plans like 401(k)s in the U.S. The workplace
retirement plan system has been a success for those who have
access. With almost $10 trillion in assets, these plans provide
long-term economic growth and build financial security for the
middle class.
Nearly two-thirds of participants in 401(k)s earn less than
$100,000 a year. One-third make less than $50,000. For moderate
income workers, the gateway to a comfortable retirement is
being covered by a workplace retirement program. Data shows
moderate-income workers are 12 times more likely to save for
retirement if they have access to some type of workplace
retirement savings program.
Despite these results, far too many Americans still lack
access to a retirement plan at work. This lack of retirement
plan coverage and the resulting lack of retirement savings is
particularly pronounced in the Black and Latinx communities.
Fifty-two percent of Black Americans and 58 percent of Latinx
Americans do not currently have access to a workplace
retirement plan. By contrast, only 40 percent of White
Americans lack access.
As a result, 56 percent of Black families and two-thirds of
Latinx families have zero retirement savings compared to 35
percent of White families. Expanding coverage with auto-
enrollment is the key to solving this problem. Data shows that
when moderate-
income workers are auto-enrolled in a workplace plan, there is
no, let me repeat, no racial disparity in retirement savings
participation, with Black, Latinx, and White Americans all at
about 80 percent.
In recent years, State governments have taken steps to
close the retirement plan coverage gap with the enactment of
automatic IRA programs. The key policy feature of these
programs is a requirement that businesses over a certain size
provide access to some type of retirement plan to their
employees. To date, 10 States have enacted such programs, with
Oregon being the first.
ARA applauds the success of these programs but believes a
Federal policy would better assure the retirement plan coverage
gap would be addressed consistently throughout the entire
country. Senator Whitehouse has introduced the Automatic IRA
Act, which would create a national requirement for businesses
with 10 or more employees to adopt a retirement plan.
Similar legislation has been introduced by House Ways and
Means Chairman Neal, with a tax credit to fully cover any
employer costs. We believe these proposals would significantly
close the retirement plan coverage gap by leveraging existing
retirement plan systems, while imposing practically no burden
on employers.
ARA also supports Chairman Wyden's Encouraging Americans to
Save Act, which is also a key provision in Senator Cardin's and
Senator Portman's bipartisan Retirement Security and Savings
Act. The bill incentivizes and supplements the retirement
savings of moderate-income workers by expanding and enhancing
the existing Saver's Credit, turning it into a government
matching contribution of up to $1,000 a year for workers who
save in a retirement account.
The bill also expands eligibility for the new Saver's
Match, making the full 50-percent match available to families
earning up to $65,000. With these increased income thresholds,
over 120 million American workers would now be eligible for the
new Saver's Match incentive for retirement savings. This
includes millions of new gig workers in this country, as well
as government workers like public school teachers, who
currently are not eligible for matching contributions. Closing
the retirement plan coverage gap and directly contributing to
and incentivizing the retirement savings of
moderate-income workers would have an amazing impact.
Estimates show the enactment of the combination of the
Automatic IRA Act and the Encouraging Americans to Save Act
would create 51 million new retirement savers and over $6
trillion in new savings over the next 10 years. Nearly all 98
percent of these new savers earn less than $100,000 a year.
These two proposals would also greatly benefit the Black and
Latinx communities, creating over 14 million new Black and
Latinx retirement savers.
Retirement savings is accumulated wealth which leads to
generational wealth and is an essential piece to closing the
racial wealth gap. Besides these two important policies, as
discussed in more detail in my written testimony, ARA supports
several other legislative proposals that would strengthen and
expand the workplace retirement plan system.
I encourage the Finance Committee and ultimately Congress
to enact the Automatic IRA Act, the Encouraging Americans to
Save Act, and other proposals designed to expand access to
workplace retirement plans. The 401(k) plan has been a success
story. Now you can make it a story of diversity as well.
Thank you, and I am happy to take any questions.
[The prepared statement of Mr. Graff appears in the
appendix.]
The Chairman. Thank you, Mr. Graff.
And I am glad to have Mr. Certner here. He has been someone
who has given this committee a lot of counsel over the years.
We welcome you, sir.
STATEMENT OF DAVID CERTNER, LEGISLATIVE COUNSEL AND POLICY
DIRECTOR, AARP, WASHINGTON, DC
Mr. Certner. Thank you, Mr. Chairman, members of the
committee. My name is David Certner, and we thank you for the
opportunity to testify today on behalf of AARP on improving our
retirement system.
A secure retirement traditionally centered on the three-
legged stool of employer-provided pensions, personal savings,
and Social Security. Unfortunately, diminishing pensions and
inadequate savings, plus longer life expectancies and higher
health costs, have put a secure retirement out of reach for too
many, requiring Social Security to play an even greater role in
retirement.
Social Security is already the principal source of income
for over half of older households. Roughly one-quarter, about
10 million people, depend on Social Security for nearly all, 90
percent or more, of their income. Social Security keeps
approximately 15 million older Americans out of poverty and
allows millions more to live without fear about losing their
income.
While Social Security is the base of income in retirement,
more is needed. The dramatic switch from defined benefit plans
to defined contribution plans over the past 40 years has had
important implications for retirement security. Employees are
now responsible for whether and how much to save, and must
manage their retirement funds, even though most have little
investment experience.
Unfortunately, most workers are not saving enough. Of
course, access to a plan is better than none at all, and only
about half of all workers have access to a retirement plan at
work. Congress has taken numerous steps to make retirement
saving easier, including features such as automatic enrollment
and default investments, that have helped workers and increased
savings.
However, automatic features only help workers who have a
retirement plan. Expanding coverage to the tens of millions of
workers without coverage remains a high priority. At the State
level, AARP is focused on passing what are called Work and Save
programs, which provide employer-facilitated access to payroll
deduction savings for workers who do not have a way to save for
retirement at work.
Such access helps address the coverage gap, because workers
are 15 times more likely to save for retirement simply through
payroll deduction at work. State programs, as you will soon
hear from my colleague in Oregon, have already shown much
promise in increasing coverage and savings.
In addition to State programs, Federal policy should also
further encourage automatic payroll deduction savings. AARP has
been a long-time supporter of Federal automatic IRA legislation
such as that proposed by Senator Whitehouse.
AARP also supports legislation recently approved by the
Ways and Means Committee, also introduced by Senators Cardin
and Portman, known as SECURE 2, which includes many important
changes. The bill would improve coverage for the 27 million
part-time workers who generally are not covered by retirement
savings plans.
This is especially important for older workers and
caregivers, who often shift to part-time work. This bill would
automatically enroll workers in new retirement plans as well.
Of particular importance, the House version of SECURE 2
includes a requirement for an annual paper benefits statement,
which AARP strongly supports. Plan participants, who generally
prefer paper copies of important financial documents, should be
provided statements in paper form unless they choose electronic
delivery.
Congress needs to ensure workers receive and can review
their annual benefit statements, similar to Social Security and
the Federal employee statement of earned benefits, to help
employees better understand and better manage their plans.
Ensuring workers receive an annual paper statement can be
complemented by added electronic measures.
SECURE 2 would also establish a national lost and found
office, also proposed by Senators Warren and Daines, to help
workers locate retirement accounts of previous employers. This
has become increasingly important as more workers change jobs
several times over their careers.
SECURE 2 also makes improvements to the required minimum
distribution rules, including exempting a threshold amount that
will both simplify the rules and help preserve savings. AARP
also supports separate efforts to improve the saver's tax
credit, which again acts as a matching contribution for low-
and moderate-
income taxpayers who contribute to a retirement plan.
Improvements to the credit, such as those recently proposed by
Chairman Wyden and others, can encourage and increase
retirement savings for those least able to save.
We also must do more to protect retirement nest eggs. All
tax-deferred retirement savings should be prudently invested
with reasonable fees and without conflicts of interest. A
uniform fiduciary standard should ensure that all financial
professionals act in the sole interest of their customers in
providing investment advice.
AARP also urges Congress to discourage pre-retirement cash-
outs of retirement funds, and instead encourage portability and
stable lifetime income streams. We should work together to
encourage asset preservation and to provide low-cost
distribution and spend-down options that meet workers and
retirees' needs.
Finally, AARP commends the Congress for enacting important
legislation earlier this year to protect the earned benefits of
millions of workers and retirees counting on multiemployer
pensions. The legislative support was critical to protecting
the benefits of at-risk workers and retirees who had worked
hard, earned their benefits, and were put at risk through no
fault of their own.
Again, AARP would like to thank the committee for
considering the challenges and needs for a secure retirement,
and for the opportunity to share our policy views.
[The prepared statement of Mr. Certner appears in the
appendix.]
The Chairman. Batting clean-up, as is fitting for
Oregonians, is Tobias Read, and I want to again commend him for
the terrific leadership that he has shown on these issues for a
long, long time.
Treasurer Read?
STATEMENT OF HON. TOBIAS READ,
OREGON STATE TREASURER, SALEM, OR
Mr. Read. Thank you, Mr. Chairman, Ranking Member Crapo. It
is good to see two Senators from States that played an
important role in my life, my home State and the State where I
was raised, and thank you for giving us the opportunity to talk
about this important topic today.
My name is Tobias Read, and I have the honor of serving as
State Treasurer in Oregon. As State Treasurer, I am focused on
promoting the financial security of all Oregonians. In 2015,
when I was a State Representative, I sponsored the legislation
that ultimately created the Oregon Retirement Savings Program,
which is now known as OregonSaves.
The State Treasury is tasked with implementing that
program, and I am here to give you an update on our progress.
Oregon created this first-in-the-Nation State-based automatic
IRA program in response to the growing retirement savings
crisis. When we launched it in 2017, we saw that approximately
1 million private-sector workers in Oregon did not have access
to a retirement savings plan at work.
I am happy to report to you today that more than 110,000
Oregonians have funded IRAs with OregonSaves, and that
collectively they have saved over $123 million. We know from
the research conducted by AARP that people are more than 15
times more likely to save for retirement if there is an option
to do so at work. OregonSaves is proving that out.
As you already heard and are likely already aware, this
retirement savings crisis is particularly acute for people at
the lower rungs of the economic ladder, and especially for
women and people of color. This is one of the reasons that we
are especially excited: in the past year, OregonSaves added
home care workers and personal support workers who provide
home-based help and services to adults and children
experiencing disabilities across Oregon.
These workers are obviously doing critical jobs, and we are
trying to help them prepare for retirement. The inclusion of
these workers in OregonSaves will not only make this a viable
career for many more people, but it will reduce turnover and
thereby improve care for seniors and people living with
disabilities. It is a win for these important workers, a win
for the people they serve, and a win for Oregon.
As we were developing and rolling out OregonSaves, we knew
that it would be important to build a strong collaborative
relationship with employers. We constructed the program to
limit the responsibilities of the employer as much as possible,
and we are always on the lookout for ways to further reduce the
time that employers spend facilitating the program. The goal,
of course, is to ensure that all Oregonians have access to the
program without placing an undue burden on the small employers
around the State.
In fact, in testimony before the Oregon legislature, one
employer group said, ``The Treasurer's Office has been
incredible in the implementation of this program. They have
tirelessly worked with us throughout the rules process to
ensure that this is easy to implement. Clients are excited
about it, and employees are excited about it.'' That, by the
way, is a credit to our team and our staff.
In the beginning, these accounts were designed to provide
workers with a continuity of savings that they otherwise would
not have. Their account moves with them from employer to
employer. The Roth IRA structure also provides flexibility to
the savers, managing the contributions, enabling workers to
leave their money in to grow, to move it elsewhere to another
IRA, or even to withdraw it any time without fear of penalty, a
feature that we know has been especially important to people as
they have faced some real challenges over the last year and a
half.
For instance, in the early days of the pandemic as
businesses were suddenly closing and people still had bills to
pay and groceries to buy, we saw anecdotal evidence that people
were able to use their accounts to provide much-needed
financial stability. Many of these savers did tap their
accounts, but we have seen many of them intentionally leave
their accounts in place so that, as their circumstances change,
they will be able to continue saving.
Obviously, our roots are around retirement, but OregonSaves
has given us a way to engage with Oregonians about the range of
savings needs that they confront, including saving for future
educational needs through 529s, and health-care needs from the
ABLE account.
Looking forward, we are going to continue focusing on ways
to make it easier for people to save for retirement and find
ways to further reduce what we hope is an already minimal
administrative burden for employers. But we are also especially
supportive of your efforts to incentivize savings.
The Encouraging Americans to Save Act, which was introduced
by you, Chairman Wyden, would be a significant boost to
OregonSaves and other programs like it by offering the matching
credit you have already heard about. Anything we can do to
encourage people to save for their future will ultimately take
pressure off of local, State, and Federal budgets.
We are also very excited about discussions here that point
to a possible expansion of who is eligible to participate in
the ABLE savings program led by Senator Casey and others. The
success of OregonSaves will have long-term positive
implications for savers and for Oregon. Fewer Oregonians will
enter into retirement in poverty, being less reliant on the
social safety net, and people will have more dignity and choice
as they age. OregonSaves was designed to improve our business
climate and meet the needs of workers from a variety of
circumstances, ultimately increasing the financial stability of
Oregonians.
This is something we are very proud of as we get started,
and we are also happy to say that this is just the start. I
appreciate this hearing, and I look forward very much to the
discussion we are having today.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Read appears in the
appendix.]
The Chairman. Thank you all. I am going to try and see if
we can cover a fair amount of ground pretty quickly.
Let me start with you, Mr. Graff. You gave everybody really
a jaw-dropping statistic early on. I just want to make sure we
get this right. You said combining our savings credit reforms
with a national program like the one Mr. Read is talking about,
OregonSaves, would result in over 50 million additional
retirement savers, and would add $6.2 trillion in retirement
savings over a decade.
So, if I am getting this right--I want to make sure that we
are--what you are saying is, if you encourage non-savers to
save and those with limited savings to save more, that can
really be a head start for America's future with respect to
retirement savings; is that right?
Mr. Graff. Thank you. Absolutely, Mr. Chairman. It would
have a tremendous impact on, frankly, the potential for a
comfortable retirement for tens of millions of Americans who
currently do not have access. We know that getting access at
the workplace as well as auto-enrollment, which is part of
these proposals, works. The data is absolutely, positively
clear.
As I indicated in my oral testimony, the active
participation rate for folks, regardless of color, is around 80
percent. So these ideas have been proven to work. We just want
to scale them at a national level. And what we are excited
about with respect to your proposal, the Encouraging Americans
to Save Act, is that we think it will bring even more savers
who are currently not employed in a typical way, like gig
workers, into the system, as well as a lot of public employees,
like schoolteachers, who currently do not get matching
contributions.
We are trying to deploy, basically, the success of how
401(k)s in the private workplace have succeeded and apply it
much more universally. The data is very clear on this. This
will work.
The Chairman. Good. And for the record, I want to make
clear that this is the kind of principal Tobias Read has been
employing for Oregon. We appreciate it.
The next question I want to pose to Ms. Robinson and Mr.
Graff is on this issue of portability. And the fact is that,
when the worker takes a devastating financial hit when they
cash out their retirement too early, the statistics are really
pretty ugly.
Research estimates $92 billion leaves the U.S. retirement
system every year as a result of these early cash-outs. Could
you two just briefly offer up your thoughts? I want to get to
one other area before we wrap up, because we are going to work
with you on this for the long term. In fact, why don't we just
start with you, Ms. Robinson?
Ms. Robinson. We absolutely agree. Anything that helps
participants keep track of their retirement accounts, keeps
them in their qualified plan systems, we absolutely support.
In addition to the leakage problem you mentioned, we think
it will also help with the missing participant problem, where
participants either have a small account balance or spend a
short amount of time with an employer, and the employer loses
track of that participant.
If there is an auto-portability, then they are able to keep
track of their accounts, and we think this will be helpful in a
number of different areas.
The Chairman. All right.
Let us turn to this: our question of these abusively large
IRAs. And I want to get your thoughts on this in particular,
because it looks to me, as we unpack this--you look at the GAO
report years ago, reinforced by the new data that when you have
private equity and hedge fund traders and investment managers
using these kinds of vehicles--it sure looks again like the
double standard, because they have access to something that the
typical American, this person who is not able to save at all or
cannot save enough, does not have access to.
So my question to you, Mr. Graff, is, do you think these
massive accumulations are possible largely as a result of the
annual contribution limit to IRAs, whether Roth or traditional
accounts? And what are your thoughts with respect to this,
because it sure looks to me like they are getting access to
something that can explode in value, and the typical American
does not have access to?
Mr. Graff. Thank you, Mr. Chairman. I think it is important
in this regard to distinguish between what are called rollover
IRAs versus contributory IRAs. Rollover IRAs, which most
Americans are familiar with, come from 401(k) plans, other
defined contribution plans, and they were already subject to
very strict limits and non-discrimination rules.
What you are really referring to is more typically
described as a contributory IRA, and I think the concern that
you have usually stems from where venture capitalists
contribute start-up company stock into a contributory IRA.
These are hard-to-value assets that typically are valued at
zero or next to zero. You know, I can give you an example where
you have a venture capitalist go do ten start-ups in a year.
They will put start-up stock in ten of these contributory IRAs,
and one of them hits in a big way like you are talking about
with the data.
You could have hundreds of millions, sometimes billions of
dollars in this IRA. The problem in these hard-to-value assets
is that, one, they are hard to value, and two, the IRS really
has practically no ability to enforce how to value them because
there is typically no appraisal associated with them.
So I think if you are concerned about this type of usage--
this idea of putting the start-up stock into an IRA really is
not a retirement tool. It is more of a tax-planning tool.
The Chairman. Just so we are clear, what I am talking about
is not something that regularly the middle-class American has
access to, in terms of being able to find these kinds of
investments that just explode in value.
Mr. Graff. You have to be a registered securities investor,
and yes, you are absolutely right.
The Chairman. That is the point.
Mr. Graff. Right. That is the point.
The Chairman. Great; thank you very much.
Senator Crapo?
Senator Crapo. Thank you, Chairman Wyden.
I would like to go back to you, Ms. Robinson, and bring up
a topic that has not really been focused on yet. I have long
been a supporter of employee stock ownership plans, ESOPs.
I have talked with middle-income workers in Idaho whose
opportunity for saving for their retirement essentially has
just been phenomenally successful through the ability to
participate in an employee stock ownership plan, and the
employers themselves are very, very interested in this.
Do you believe that we should encourage the use of ESOPs
and, if you do agree with that, could you comment on the role
ESOPs play in the overall retirement system?
Ms. Robinson. Yes, thank you. We are supportive of ESOPs
generally, but also employee stock ownership generally, and it
has been shown that they are a benefit both to the business and
to the participants themselves. There is greater employment
stability.
People are less likely to leave those jobs. There is less
likely to be layoffs when there is employee ownership. They are
more likely to offer secondary retirement plans so that there
is more opportunity for retirement savings.
Participants in these plans often save more than they would
in a 401(k) plan, and they have higher rates of return and less
volatility than 401(k) plans. So they also cover the under-paid
employees and lower-paid employees more so than 401(k) plans.
So we think these are a really good opportunity for
companies that offer this kind of choice in their retirement
savings.
Senator Crapo. Well, thank you. I agree with that
perspective. I hope we will not lose sight of that as we move
forward in this important arena.
Mr. Certner, according to a 2019 survey conducted by your
organization and the Ad Council of moderate-income adults in
their 40s and 50s, roughly 47 percent of the respondents
identified retirement as being in their top three savings
priorities. While this was just one survey, we can probably all
agree that we want that statistic to be higher.
And setting aside for a moment the proposed changes to the
Saver's Credit, can you speak about other policies that would
incentivize and encourage workers to save for retirement?
Mr. Certner. I think first of all, we are talking about a
large percentage who do not have access to a plan. So
certainly, having access to a plan such as, for example the
automatic IRA or programs like the one in Oregon, will help get
more people covered.
Because--to put in context what was talked about earlier--
we have a coverage rate in this country of about 50 percent.
But that coverage rate has not changed in 4 decades. We have
changed what type of plans people have, but we have not really
changed the overall number. So doing more to establish more
plans would be helpful.
Also, we have seen that automatic enrollment has been
incredibly helpful. When plans have automatic enrollment, we
get significantly more people who basically, through inertia,
are going to end up doing the right thing--being in a plan--and
not the wrong thing--being out of a plan. And so we think that
can be very helpful as well.
So giving people access to a plan and having automatic
enrollment are probably two of the most helpful things that we
can do to improve coverage.
Senator Crapo. All right; thank you.
And, Treasurer Read, I understand you were raised in Idaho?
Mr. Read. That is true.
Senator Crapo. Well, I am proud to hear that today; thank
you. I appreciated hearing about your experience with the
OregonSaves program. It certainly is an interesting program,
and I would be interested to hear more about how the
interaction has been with
employer-provided retirement plans.
How have the employers reacted to this program now that it
has been in effect for a few years?
Mr. Read. Mr. Chair, Senator, thank you for the question. I
would say there was, you know, some degree of skepticism as we
got started. There is always some danger in being the first to
try something. But in the years that we have proceeded, we have
addressed a lot of those concerns.
I think there is a range of opinions, of course. But what
has really been striking to me is the number of small
employers--we heard this echoed through your opening comments
and some of the other testimony--who have wanted to provide
retirement options for their employees but have struggled to do
so, either because of their other obligations, the cost, time,
and those sorts of things.
There is a restaurateur in the community where I live--
Beaverton always comes to mind--who summarized this really
well. He said, ``I would love to do this for my employees, but
I do not have an HR department. I have sandwiches to make.''
I think we have addressed a lot of the anxiety that people
felt, as evidenced by the testimony that was offered in the
Oregon legislature as we were doing some clean-up. There is a
relentless focus on our part to make it as easy as possible, as
light a touch as we can possibly muster for employers; and it
is easy for individual savers to participate.
Our point here is to introduce something that is otherwise
complicated and intimidating for a lot of people in a way that
makes it easy for them to get on a good path.
Senator Crapo. Thank you very much.
The Chairman. Thank you, Senator Crapo.
Senator Grassley is next, and he is in person.
Senator Grassley. Thank you. Before I ask a couple of
questions, I would like to say that I appreciate, Mr. Chairman,
your holding this hearing to examine proposals to enhance and
expand access to retirement savings vehicles. It was a pleasure
working with you in the last Congress to enact a bipartisan
retirement plan that this committee had worked on, I think,
over a course of three Congresses.
That legislation, known as the SECURE Act, made a number of
important reforms to expand access and increase participation
of employer-sponsored retirement plans. Chief among those
reforms was to make it easier for employers to pull together to
sponsor a group retirement plan for their workers. By
harnessing economies of scale and reducing administrative
costs, these reforms are making it easier for small businesses
to offer retirement plans.
As a result, these reforms have the potential to expand
retirement plan coverage for millions of American workers. The
SECURE Act represents an important step forward in improving
Americans' retirement security. But because we have a dynamic
economy, that is why we are here now, to see what we can do to
further the successes of the past.
My first question will be to Mr. Graff. I, along with
Senators Hassan and Lankford, introduced the Improving Access
to Retirement Savings Act, which will make pooled employer
plans accessible to more employees.
Our bill clarifies that the small business retirement plan
start-up credit applies to businesses doing pooled plans, and
also would allow non-profit employers to just join pool plans.
So can you expand upon how these provisions could help more
workers gain access to workplace retirement plans?
Mr. Graff. Thank you, Senator Grassley. And absolutely, I
think these are very important changes that we fully support.
You particularly mentioned your proposal that would expand
pooled employer plans to cover 403(b) plans, which is a
particular type of plan like a 401(k) that is utilized by non-
profit organizations.
As I know you are aware, in Iowa as well as throughout the
country, there are literally hundreds of thousands of these
smaller non-profit organizations that do really important work
throughout the country. They want to be able to provide lower-
cost retirement savings options to their employees, and this
proposal, by allowing them to pool just like private-sector
employers, would go a long way towards increasing access for
those employees to a retirement savings program at work.
The tax credit is also important to clarify, so that if a
non-profit organization or any organization joins a pooled
employer plan that might be in existence for a number of years,
they can still get the start-up tax credit even though the
pooled employer plan has been around for a while, because they
have not had a plan before. So these are important changes we
support.
Senator Grassley. A third provision in our bill would allow
employers to make retroactive plan amendments to increase
benefit accruals for employees up until the due date of the
employer's tax return. Can you elaborate on how this provision
could be used by small employers to increase the retirement
savings of their employees?
Mr. Graff. Absolutely; thank you again, Senator Grassley. A
lot of small businesses, as you know, really do not know what
their financial situation is until after the end of the year.
Prior to this proposal, under current law a small business, a
mid-size business, could not do a profit-sharing contribution,
because they did not know whether or not they had any profit
until after they had had a chance to do the books and figure
out where they stood.
This would allow them more time, up until the due date of
the tax return, to assess how their prior year's performance
was and hopefully benefit their employees by providing a bonus
profit-
sharing contribution that would be retroactively applied to the
prior year.
Senator Grassley. My last question will be to Ms. Robinson.
In today's economy it has become increasingly rare for
employees to spend their entire career working for one
employer. The Bureau of Labor says the average worker switches
jobs about every 4 years.
With such frequent turnover, employees may lose track of
employer-based retirement accounts they contributed to early on
in their career. Can you comment on ways we could make sure
workers are not leaving retirement savings behind when they
switch jobs?
Ms. Robinson. Thank you, Senator. Yes, and this is a
concern for our member companies as well. So one we discussed
earlier was the auto-portability, to make sure that, as
participants leave one job, they are automatically tracking
that retirement account moving to their next job.
Another is the lost and found registry, which was also
mentioned, which would give participants a database where they
could look for accounts that they may have left at a previous
employer, where maybe a merger or acquisition has happened, and
they no longer know the name of that employer.
So those are two things that could really help, in terms of
making sure that there are not accounts left behind.
The Chairman. Thank you, Senator Grassley.
Next is Senator Carper on the web.
Senator Carper. Thanks, Mr. Chairman. Good morning,
colleagues. Good morning to each of our witnesses, and many
thanks for joining us today.
Research shows that--part of my background, I used to be
Treasurer of the State of Delaware for about 6 years, and I
focused a whole lot on a pension system, but focused a lot on a
deferred compensation program to encourage folks to save, and
in some cases for the State to match that.
I also worked here in the Senate with Rob Portman, Senator
Portman from Ohio, to make some changes in the Thrift Savings
Plan to encourage greater participation, and I think to good
success. So these are issues I care about, and they are really
important. You all outlined and highlighted that, and I could
not agree more.
Research shows that access to a retirement account is
critical to helping workers save for their future, and workers,
I am told, are some 15 times more likely to save if there is an
option to do so through their employer--15 times. Now nearly
one-half of private-sector employees do not have access to
employer-sponsored plans, and many of these individuals work
for small businesses, which face heightened costs to establish
these plans.
In recent years, I am told, a number of States have
established automatic IRA programs that help extend coverage to
these workers. States like Oregon have had real success in
expanding access to retirement savings vehicles, including
under the leadership of one of our witnesses, Mr. Read. I am
glad to have you back before us.
I am encouraged that leaders in my own State of Delaware
are considering implementing a similar program under the
leadership of our State Treasurer.
I have a question for Mr. Read and Mr. Certner. How can the
Federal Government better help facilitate the broader adoption
and success of auto IRA plans? What features of the Oregon auto
IRA program should be replicated, could be replicated by
similar programs----
Mr. Read. Senator Carper, I am sorry to interrupt. If you
are finished, I think it is a great question. I think there is
a huge opportunity for Congress to provide leadership here. I
would hope that whatever legislation you might consider would
preserve the pioneering role that States like Oregon and
Delaware and others are providing in establishing and designing
and implementing programs like this.
I hope that it would allow States to continue that
experimentation, that innovation, to adapt to changing
circumstances and needs of our various States, potentially even
collaborating among States that have seen significant potential
benefits there as well.
I think there is real benefit to preserving what Louie
Brandeis said, which is States' roles as laboratories of
democracy. Those commonalities amongst the different States,
the experiences that we have had, I think, are already leading
to better outcomes for individual savers and ultimately for the
entire country.
Senator Carper. Thank you for that.
Mr. Certner, your comments, please?
Mr. Certner. Yes, Senator Carper, I think I would agree
with much of what was just said. You know we had previously and
have proposals now to do a Federal auto IRA, to make sure that
every State can have this access and automatic enrollment. That
would really help move people into the retirement system that
we do not have today.
But I think it is important that States which have really
taken the lead on this now be allowed to continue to do what
they are doing across the country. We have at least 10 States
that have done this. We have another 15 or so that are in
process of either moving towards it or looking at it.
We want to make sure we continue to encourage that, while
we also look at the Federal level to see if we can bring this
up nationally, because we do need to make a change like this
that brings access and automatic enrollment to the rest of the
population, if we want to really bump up the numbers of people
who are actually beginning to contribute to accounts for
retirement.
Senator Carper. All right; thank you. Thank you, Mr.
Chairman.
I have one more question I would like to ask you--just
really short answers from each of our witnesses, please. The
question for each of you is, in addition to automatic
enrollment and auto-
escalation of contributions, what are the most effective
behavioral incentives or educational tools Congress could
consider, should consider for promoting increased savings?
Mr. Read. Mr. Chair, Senator Carper, I think you nailed it.
I think it is automatic enrollment. I think it is auto-
escalation. And I think the additional credits and matching
mechanisms in the proposal that Chairman Wyden has offered are
very good starts.
Senator Carper. Okay; thank you.
Other witnesses, please? Mr. Certner?
Mr. Certner. I would agree with that. Having matching
contributions would be very helpful, because we know that
incentives like a saver's tax credit, which are like an
employer matching contribution, will also greatly increase, not
just what one may be contributing but obviously will be adding
to the savings with the match.
Senator Carper. Great, thank you.
Mr. Graff?
Mr. Graff. Thank you, Senator. Coverage and auto enrollment
are absolutely the key. The data consistently shows that. And
then, once we get workers to save, we want to do everything we
can to encourage and incentivize them to keep the money in the
plan or in the IRA. That is also important: preventing leakage.
Senator Carper. And lastly, Ms. Robinson, please.
Ms. Robinson. Thank you, Senator. I agree with what my
colleagues have said, but I do want to highlight that, for
those participants who already are auto-enrolled, auto-
escalated, let us keep moving forward and thinking of new ways
to continue to incentivize employers to offer these plans, but
also incentivize employees to increase their savings as well.
Senator Carper. Here's to you, Mrs. Robinson, and to all of
our other witnesses. Timely testimony, important testimony.
Mr. Chairman, thank you.
The Chairman. Thank you, Senator Carper.
Here is our plan, colleagues, for the morning. We are going
to have a vote at 11:30. Senator Crapo and I are going to keep
this moving. I thank my colleagues for doing it. We have a lot
of Senators because of the great interest in this. We are just
going to keep moving.
Now, Senator Cardin--and many have invoked his name because
of his good work.
Senator Cardin. Well, Senator Wyden, Senator Crapo, thank
you both for your leadership on this issue, and thank you for
conducting this hearing. Just an observation. When I first
started on retirement security issues with Congressman Portman
when we were both in the House of Representatives many years
ago, it was kind of lonely. We did not have a lot of people
interested.
I must tell you, this is such an encouraging hearing, to
see how many initiatives have been made by members of our
committee, how many members of this committee are so interested
in expanding opportunity for savings for retirement.
I want to just give a shout-out to the tragic loss this
week of Mike Enzi, a member of this committee. I joined him on
sponsoring the National Retirement Security Month issues, and
we miss his common sense in this committee, and his loss was a
tragic loss this week. It just was--I want to acknowledge that.
Senator Portman and I have introduced legislation--and I
think almost all of the bills that we have talked about are
trying to focus on how we can get lower-income workers and more
people involved in savings for retirement. I think what we are
all trying to do is at the entry level.
There is the leakage issue, that if we were designing
retirement plans today from scratch, we would not make it as
easy for people to be able to divert retirement funds for other
purposes. But we are where we are, and we now need to work with
the current system, and I think our focus is to help lower-
income workers to save for their retirement.
The auto IRAs and the auto issues are fine, but the issue
for a lot of lower-wage workers is, can they afford to put
money into retirement? That is why an employer-sponsored plan
with this employer match where the employer puts money on the
table--it is hard to leave money on the table, so employees are
likely to participate, and we know that in the Thrift Savings
Plan here as Federal workers.
If you do not have that, the Saver's Credit fills the gap,
and that is why the expansion of the Saver's Credit is such an
important part of any effort to try to expand opportunities,
and it is included in our legislation.
I also want to mention Senator Wyden's initiative in regard
to student loan payment, because students, young workers, have
to pay their student loan debt. That could be--if the employers
match, that solves the problem, and we get more people engaged.
I also support expansion to part-time workers, because
part-time workers are low-wage workers, and any way that we can
get part-time workers engaged in the plans, I think is also an
important part. Enhanced catch-up contributions are important
because, particularly women leave the workplace during parts of
the years. This gives them a chance of equality.
We have already talked about the automatic enrollment. That
is critically important, because too many people make their
decisions by inaction. Access for small companies to get plans
is also important. All these issues are incorporated in a lot
of the bills that have been brought forward.
So I guess my question--I will start with Mr. Graff--is
that, if you had to pick the priorities on trying to enhance
lower-wage workers being able to participate in retirement
savings, which of these tools do you think are most important?
Or do we have to have a menu opportunity here, that one will
not be sufficient without reinforcing other areas?
Mr. Graff. So we have done a lot of economic modeling with
a lot of these proposals, and thank you, Senator Cardin, for
your decades of leadership on these issues. It really is
telling what will move the needle in terms of getting millions
of more people into the system, and really boosting savings at
a macro level.
The two things that are clear are coverage, getting people
access to a plan, and auto-enrolling them as much as possible.
I think right behind that would be, as in your proposal, some
type of booster incentive for folks. There are a lot of folks,
particularly in small businesses, a lot of government workers
in smaller municipalities, who do not have that match incentive
that private-sector workers do. So those, that combination.
What we have found--and this is work that was done by the
non-partisan Employee Benefits Research Institute--is that that
would increase savings over the next 10 years by over $6
trillion.
Senator Cardin. My time is running short. If I could just
emphasize one point and get your response to that, with the
chairman's indulgence: the tax deferral is an important point
for people putting money away for retirement. We find with
younger workers, it unfortunately, in and of itself, does not
motivate them to set up an IRA.
I agree automatic enrollment helps. An employer's match
definitely helps. The Saver's Credit helps, am I correct?
Mr. Graff. Absolutely, and making it into a match, a true
match like you are proposing that would be contributed to the
401(k) and the IRA account of the worker, is also a key part of
that.
Senator Cardin. Thank you.
The Chairman. Thank you, Senator Cardin.
Next will be Senator Brown.
Senator Brown. Thank you, Mr. Chairman. Thank you for just
a succession of really important hearings that we are doing,
and this is an amazing committee and the jurisdiction we have,
and everything that you have done in this committee and these
hearings is so helpful.
I want to start with Ms. Robinson. I would--I said March
6th, the day that the Senate passed the American Rescue Plan--
we had been voting all night for 13 hours. It was Saturday
about noon. I turned to Senator Casey, also a member of this
committee, and said, ``This is the best day of my political
career.''
I said it for two reasons. One, that the Senate passed the
Child Tax Credit, which a number of people on this committee,
particularly Senator Bennet and Senator Wyden, had worked on
with us, that we passed that, which will have a huge impact on
this country for years, we hope.
The other was the multiemployer pension bill, and that that
was included in it. So I want to talk to you for a moment, Ms.
Robinson, about that. The PBGC was tasked with writing
regulations earlier this month. It released an interim final
rule. It is a momentous program. It is going to protect workers
across, especially the industrial heartland and elsewhere, but
especially there. I am proud of the great work the PBGC has
done in a short period of time to get these regulations
written.
I am concerned, however, about whether the regulations as
written will provide enough funding to keep them solvent for
the 30 years, as required by statute. One of my main concerns
is that PGBC is determining the amount of financial assistance
by assuming the plan will earn 5.5 percent annually for 30
years.
At the same time, they require plans to invest the special
financial assistance in investment-grade bonds, which typically
yield about 2 percent. It seems it could encourage the plans in
the worse shape to take undue risk with their plan assets in
order to earn the amount required to keep them solvent.
Have you heard this concern, Ms. Robinson, from your
members? And tell me what they are saying about this.
Ms. Robinson. Yes. Thank you, Senator, for the question and
for your incredible work on the multiemployer pension crisis
and the work done in the American Rescue Plan. Because of the
size of ERIC member companies, we would be the last man
standing. So it was crucial that these reforms happen, and we
were very pleased to see that legislation passed.
And we are working with the PBGC. We are looking at the
guidance that they just put out, and your point is correct.
There have been concerns raised that if there is not enough
flexibility for plans to be able to use the special funds in
the same investments or different investments as they use for
their regular assets, then these funds might not last the way
Congress intended and really be used to help the system. And
not just the multiemployer system itself, but the businesses
and the economy, which tend to also save as well.
Senator Brown. Thank you for that.
Mr. Graff, on a different issue, I want to ask about
section 402(l) of the tax code. This provision allows retired
public safety officers to exclude up to $3,000 from their
income when they use it to pay for health care, for long-term
care insurance, as long as the premiums are paid directly by
the retirement system to the insurance provider.
This does not work for retired Ohio police and
firefighters. It also does not work in Oklahoma, in Iowa and
Texas and Maryland, Virginia and Colorado and Nebraska. Would
you support repealing the direct-pay requirement and increasing
the exclusion from $3,000 to $6,000? Give me your thoughts on
that, Mr. Graff.
Mr. Graff. Thank you, Senator Brown. I think the issue with
respect to the exclusion for retired public safety officers--it
is a very important issue. Obviously, these are people that we
all care about and very much appreciate the amazing work that
they do protecting us.
My understanding is that the problem is the fact that a lot
of these programs, like the one in Ohio, have converted from a
direct payment to passing these subsidies through health
reimbursement accounts. It certainly, from my standpoint, makes
sense to also treat them as direct payments, regardless of
whether they are being directly sent to a health insurance
company or being paid through that health insurance company
through a health reimbursement account. There should be really
no distinction.
As for the amount, you know, I think that is something that
ought to be looked at. I have not seen any specific data as to
where the costs are. Certainly, we all know health-care costs
are rising. One of the things to also think about might be
indexing that amount. So that is certainly something we
obviously have to take a look at.
But as to the fundamental issue as to whether it should be
treated as a direct payment, we certainly agree with you.
Senator Brown. Well indexing--if we can raise first then
index. But okay, I appreciate that, Mr. Graff. Thank you, and,
Mr. Chairman, again thanks for holding this hearing.
The Chairman. Thank you, Senator Brown. I know this has
been part of your efforts to help working families, and it is
great to work with you. Another friend of those workers,
Senator Cortez Masto, will be next, and then I will recognize
our friend from Wyoming and tell him a little bit about what
happened yesterday in this room.
Okay, Senator Cortez Masto.
Senator Cortez Masto. Thank you. Thank you so much. Thank
you to the panelists. It has been such an important
conversation this morning, and we so appreciate all of your
input.
Mr. Certner, let me start with you. In the most recent
legislative session in Nevada, the Nevada legislature
considered a measure to establish an auto IRA program, much
like OregonSaves.
The bill was met, however, with stiff opposition from some
in the retirement industry, who characterized State-based plans
as a low-yield burden on taxpayers and suggested that new
pooled employer plan rules that worked under the SECURE Act
would be a preferable alternative for employers in Nevada.
I was hoping that you could respond to some of these
criticisms and talk about the features of the State-based
option, and whether it is population served or specific
benefits that lead State legislators to get involved despite
the opposition.
Mr. Certner. Senator Cortez Masto, I do not understand that
argument at all. Anyone who is actually interested in coverage
should understand that these are different options. We
supported pooled employer plans, and those are targeted
actually at small employers who want to take advantage of
economies of scale in setting up pension plans and taking on
fiduciary duties.
The auto IRA mechanisms really reach almost a different
kind of employer, who is not interested in setting up an ERISA-
covered plan, and it is much simpler and easier for them. They
have less tasks. They do not have fiduciary responsibilities.
And you can get a lot more people covered, particularly
individuals who are not even associated with an employer, such
as gig workers.
So these options should work in a complementary manner. It
is not a choice of one or the other. And in terms of your
comment about this being bad for taxpayers, I think just the
opposite. To the extent that we can get more people to
accumulate savings and have savings in retirement, that is
going to be less people who are going to have to fall back on
State or Federal support systems for needed money because they
will have their own savings that they can rely on.
So I think actually, it will help taxpayers. So I think the
argument is just completely off-base.
Senator Cortez Masto. Yes, and I appreciate that. In
listening to the conversations this morning in all of your
opening statements and your responses to questions, there is
nothing wrong with more choices for individuals to decide how
they want to participate in a retirement plan.
But I do also appreciate the comments around financial
literacy. I know just listening this morning, the concerns
about the racial retirement savings gap and how it contributes
to the racial wealth gap--that creates intergenerational
challenges for families working to get ahead.
Nevada has a large Latino population. They are a Spanish-
speaking population, and we found that the language barrier can
create access challenges for communities seeking access to the
services and supports that can improve financial stability.
So I would like to just open it up to the panel. I am
curious. Can any of you talk about efforts that the retirement
industry has engaged in to enhance financial literacy among our
diverse communities? Anybody want to take that on?
Mr. Graff. Thanks, Senator. I think the retirement plan
industry is very much aware of the challenges facing all
communities of color, and language barriers have been an issue.
I am happy to say that efforts recently, particularly in the
area of financial wellness, have really been quite successful
in trying to improve that for people who have access to a plan.
And so, more and more of the advisors and firms that work
with employers helping to set up and maintain plans, have been
providing these type of programs--financial wellness programs,
participant education--and doing so on a multilingual basis.
Obviously, we need to do more. Probably the biggest thing,
as I think a lot of us have emphasized, is the importance of
getting more working Americans, particularly in communities of
color, covered by these programs so they have a fair chance at
getting a comfortable retirement, because it is really the only
way we have gotten them effectively to save.
Senator Cortez Masto. Yes, and I could not agree more. Just
the statistics that you talked about earlier, the panelists
talked about in our Latinx communities and our Black
communities. We need to do more. There needs to be more
financial literacy. There needs to be more outreach. If it is
auto-enrollment, whatever it is, I think it is worth making the
effort to do so.
This is a great discussion. I have more questions. I will
submit those for the record. I just so appreciate Mr. Chairman
and the Ranking Member and so many members of this committee
really focused on this issue, and how we ensure that so many
across this country have access and opportunity for retirement
savings. So, thanks again.
The Chairman. Thank you for your good work.
Before I recognize our colleague from Wyoming for his
remarks, I just wanted to pass on briefly what happened in this
hearing room yesterday: the grief welling up from both sides,
with colleague after colleague talking about Mike and what we
remembered so fondly.
I read a text where he invited me to Gillette, and he was
worried my wife would not eat steak and beef. Mike was worried
about it. Well, she happens to love steak. But that was vintage
Mike Enzi. He was always caring about other people.
So I just wanted you to know so you can tell Diana, John.
Just please tell her about this outpouring of grief, because
that is not what is supposed to happen when you retire. When
you retire, you are supposed to have a lot of years, a lot of
years with family.
So please tell Diana that everybody here is thinking about
her, and we recognize you for 5 minutes.
Senator Barrasso. Well, I will most certainly do that, Mr.
Chairman. I am so very grateful for yours and other's comments,
and we have heard from so many members. The entire Senate
Prayer Breakfast today had big pictures of Mike up there in
various parts of the world in some of the missionary work he
had done overseas in Africa.
Every member, Republican and Democrat, had the kindest
things to say about the kindest man you would ever know. He was
a long-term member of this committee, did an amazing job in the
Senate. Twenty-four years, and he always won with big, big
numbers, and it is because people really--they respected him
because he respected them. They understood him because he
understood them and their problems. They believed in Mike
because they knew he believed in them, and it was a model for
all of us.
So I am very grateful for the kind comments of you, other
Senators on this committee, and the entire body of the United
States Senate. Yesterday on the floor, Senator Leahy, as
president pro tempore, started and then the majority leader and
the minority leader both spoke about Mike. Very kind, as you
can imagine, and Cynthia Lummis and I gave presentations as
well and big pictures of Mike with a smile.
Last night we met with his staff, former staff members--
some of them are still on the Hill, others from the community,
and we had a big gathering in Senator Lummis's office, just to
share some of the great stories that we all have of the memory
of a remarkable man. So, thank you very much, Mr. Chairman. I
am very grateful.
I also want to thank you and Senator Crapo for holding this
important hearing. A secure retirement is important for all of
our constituents, and the Federal policy should reflect that
importance.
So, for Mr. Graff, we have data here on employee access and
participation rates, and for employees working at small
businesses--fewer than 50 employees--only half of them have
access to a workplace retirement plan, it looks like. At all of
these businesses, all of these small businesses, it seems like
only about a third of the employees actually participate in the
plans.
So we have seen various proposals to improve participation
in the plans. What can Congress do to help small employers use
these proposals to encourage participation in plans?
Mr. Graff. Thank you, Senator. One of the things that is
critical in terms of getting workers to actually participate--
and the data is very clear on this--is auto-enrollment. We
talked about that a little bit before. But to the extent we
could encourage smaller employers, frankly all employers, to
auto-enroll their workers into these plans, what we see from a
behavioral, economic standpoint is that they stick with it.
They continue to participate.
So the two critical elements--having access in the
workplace and getting small businesses to adopt a plan, and
making it easier for them--we did one amazingly important step
in the SECURE Act with pooled employer plans, and thank you for
that.
But I think there are some other things that we can do to
make the smallest of businesses--to make it easier for them to
offer these programs. One is a tax credit, as some have been
proposing, that would be 100-percent of the cost for the
smallest of businesses.
There is something to be said for being able to tell a
small business owner that this is effectively free; it is not
going to cost you anything. The marketing value of that is very
meaningful. And then there are some things that we could do for
the smallest of businesses around safe harbors, to make the
rules even simpler for them so that it is cost-free and worry-
free.
If we can do those things and do automatic enrollment, we
can make it a long way towards getting the employees that you
are talking about part of the system.
Senator Barrasso. So, in terms of the auto-enrollment, it
is kind of like for organ donors, opt-in versus opt-out, and
making the decision there, where two countries' organ donation
numbers, big or small, relate to whether people have to choose
a decision.
Mr. Graff. Exactly; precisely.
Senator Barrasso. So, in your testimony, you mentioned the
importance of--you just worked in the word ``cost'' there. So,
what costs do small businesses face today when setting up and
running a retirement plan for their employees? Because, as you
said, if we can get it to zero, there is much more of an
incentive.
Mr. Graff. Absolutely. So the two chief costs are the
administrative costs associated with implementing a plan, and
there are requirements and laws and rules and regulations, and
there is a cost associated with that. And then for some
employers, there is a cost associated with having to make
employer contributions to the plan, even if they really cannot
afford it, to satisfy certain non-
discrimination rules.
So I think a combination of encouraging auto-enrollment,
but also, for the smallest of businesses, maybe doing a safe
harbor for smaller businesses that would streamline those
regulations, make it easier for them to put a plan in first
without having to deal with both the admin costs and the
employer contribution costs. That would go a long way towards
expanding coverage in the small business sector.
Senator Barrasso. Sir, in your opinion do the proposals
that we are discussing here today, do they make it easier for
small businesses to establish retirement plans for their
employees, and is there more we can do?
Mr. Graff. I think that a lot of these proposals do move in
that direction, but I also think there are additional things we
could do to make it easier.
Senator Barrasso. What might those be?
Mr. Graff. Well, for example, you could have for the
smallest of businesses, it is called a safe harbor design with
lower limits, because a lot of small businesses do not need to
save a lot. It is really just to start saving a few thousand
dollars for many of these business owners. It goes a long way
towards the ultimate goal.
If we could create a plan that was a safe harbor plan--
perhaps with lower limits--and all of the testing and
administrative and regulatory requirements could be eliminated
for those smaller business plans, that would have a tremendous
effect in terms of making it easier for them.
Senator Barrasso. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Barrasso.
I believe next we will have Senator Thune, who I am told is
on the web.
Senator Thune. Yes, sir. Thank you, Mr. Chairman. And I
want to thank the witnesses for being here today as well, as
the Finance Committee reviews the state of retirement savings
in our Nation and a variety of proposals intended to further
encourage Americans to save for retirement.
This question is for Ms. Robinson. In your testimony, you
outline a number of proposals that have been introduced this
Congress to encourage retirement savings, one of which would
allow employers to make matching 401(k) contributions for
employees paying down student loan debt.
Do you believe companies, both large and small, would
choose to make these matching contributions? And in addition,
for employers choosing to make these matching contributions, in
your view, what degree of confidence would they have in knowing
their employees are in fact making their monthly student loan
payments in full to the loan servicer?
Ms. Robinson. Thank you, Senator, for the question. First,
yes, we are very supportive of this provision. And this is
something that--a lot of times, as a policy person, you bring
ideas to your member companies and ask them if they are okay
with them. But this is one that they came to us with.
They were definitely seeing from their employees--people
were leaving positions for what they call low-dollar amounts,
because every dollar was needed to repay their student loan
benefits. And so, something like this, any benefit they could
see where they could help people with their student loan
repayment and also help them contribute to their retirement,
would be very beneficial and critical.
In terms of making sure that people are actually making
their student loan repayments, they are already in place:
employer-
provided student loan payment assistance programs. So there are
payroll providers and other third-party administrators who are
helping employers verify this information, and to do this in
conjunction with the 401(k) plan would be something that could
easily be done and verified.
Senator Thune. Thank you.
And this is a question, frankly, for any of the witnesses.
As you know, the SECURE Act increased the required minimum
distribution age from 70\1/2\ to 72. Proposals under
consideration this year would further increase the RMD age to
75 over the next decade. Could any of you share your views on
proposals to further increase the RMD age and to what extent 75
is the most appropriate age for it to be increased further?
In addition, since Congress increased the RMD age to 72
through the SECURE Act in 2019, can any of you speak to what
extent we have already seen the effects of that increase, or if
it is too soon to tell?
Mr. Certner. Senator, I think it may be too soon to tell
from the previous change. But what is clear is that, to the
extent that you can raise the age, you are going to do a couple
of things. One, you are going to simplify the rules because,
obviously, people are not going to have to deal with the issue
for a number of years, and that will help simplify it. It will
also ensure that people can keep money in the plans longer.
Remember, these distribution rules are based on lifetime
estimates, and they were set, I think, almost 50 years ago now.
So, if you updated those ages, 75 is probably about the right
age.
And also, we want to make sure that we are not asking
people on average to take their money out too fast because,
obviously, half the folks are going to be living longer than
average. So we want to be able to make sure that people can
keep money in their plans.
A similar proposal that is on the table is to have an
income threshold below which the minimum distribution rules
would not apply. Again, that would be very much of a
simplification rule, because anybody below that level just
would not have to deal with those rules at all and get caught
up in the potential penalties and so forth for not obeying the
rules.
Senator Thune. Anybody else?
Mr. Graff. I would like to just echo what David said about
the idea of having an amount, a safe harbor amount of
contributions in an IRA or a plan that would be exempt from the
required minimum distribution rules. For a lot of folks in
retirement, for elderly folks, it is very complicated.
If they have $20,000, $30,000 in an IRA, trying to figure
out that amount is extremely complicated. A lot of them do not
have access to professionals to help them figure it out. So, if
we could come up with some amount--I have seen proposals, I
think, for like $100,000, where folks, seniors would be able to
avoid having to deal with this altogether. It would be a huge
simplification for a lot of folks.
Senator Thune. Okay; thank you.
I have another question, Mr. Chairman. My time is running
out, so maybe I can submit it for the record. But I do want to
get, Mr. Graff, you on the record with respect to the issue of
the gig economy. This workforce increased 50 percent between
2001 and 2016, and I would like to ask whether existing
retirement plans like pooled employer plans, for example,
adequately accommodate contractors in their ability to save for
retirement. So I will put that one to you for the record, and I
would be interested in getting your response to that.
Thank you, Mr. Chairman.
The Chairman. I thank my colleague. I am very interested as
well in this issue that Senator Thune is talking about, so I
thank my colleague for asking that.
We have a vote on. Let us see if we can get Senator
Lankford and Senator Daines in and still somehow make the vote.
Senator Crapo is trying to get back, so, Senator Lankford.
Senator Lankford. Great. Mr. Chairman, thank you. Thanks
for the bipartisan conversation on retirement savings. This
should not be a partisan issue. This is an issue we should be
able to work together on, so I appreciate that.
Senator Grassley and Senator Hassan and I are partnering
together to reintroduce the Improving Access to Retirement
Savings Act, which some of you have mentioned already--I
appreciate that--trying to deal with multiple-employer plans.
Then last month, Senator Bennet and I introduced the Enhancing
Emergency and Retirement Savings Act of 2021, which a couple of
you have mentioned already today, so I appreciate that.
I want to be able to drill down a little bit more. This is
a result of conversations I have had with multiple folks in my
State who want to be able to set aside for retirement but are
also worried about not having enough in their savings. So they
think, ``How can I save for retirement when I do not even have
enough in my emergency account?'' So they just do not do
retirement savings and stop setting anything aside on this.
The concern is, how do we actually incentivize that when
the most recent survey from a couple of years ago said that 4
in 10 Americans could not even come up with $400 if they had to
at the last minute?
So the goal of the legislation that Senator Bennet and I
have together is to try to figure out, how can we create
flexibility in the plans so that, if you have retirement
savings plans, you could one time a year take out $1,000 as an
emergency without penalty? It would give you the opportunity to
be able to pay that back. When you had actually paid that back,
you could do it again. But you would be limited in the number
of times.
We do not want this to be a bank account. We want it to be
a retirement savings account. But we do want people to have
access to those retirement savings when they have an emergency.
Ms. Robinson, you mentioned that earlier in your oral
testimony. You mention it in your written testimony as well. Is
that the right kind of flexibility, to be able to give the
individuals the right amount and the right way to be able to
take this on?
Ms. Robinson. Thank you. Thank you for both your work on
this and for the question. We believe that flexibility is
appropriate both ways, for the participant, so that they have
this money in their retirement savings, and when we do come to
them and say, ``Hey, let us put this money away,'' and the
response sometimes is, ``I do not have enough, or I might need
this for an emergency later down the road,'' you can say, ``You
can take this out for an emergency.''
It is also flexible for the plan sponsor, in terms of not
having to set up a separate account or maintain different
account information for the participant. The amount, $1,000, we
think is appropriate. We got responses back from our membership
that were anywhere from $1,000 to $3,000, so I think there is
still room for conversation in that.
But I think the consensus was definitely on the smaller
side. You do not want it to be too large to encourage, as you
said, people taking it out for things other than emergencies.
But you do want to make it large enough that they can cover an
emergency that comes up.
Senator Lankford. Mr. Graff, you work with a lot of
different employers. How would this flexibility work? Is this
the kind of thing that employers are looking for as well,
because we are trying to design this in such a way that it is
simple for employers, simple for the plans themselves to be
able to manage, and simple for individuals to be able to get
access to funds in case of emergency. Would this work in this
kind of structure from what you see?
Mr. Graff. Definitely, Senator Lankford. And I also want to
say, thank you for your leadership on this important issue. The
issue of emergency savings, particularly over the last year and
a half, has become a particularly obvious and acute problem, as
you mentioned, given the fact that so many Americans could not
come up with $400 in the case of emergency.
This would go a long way to solving that problem and do so
in a way that is not too much of a burden on employers, because
it does not require them to maintain two different types of
savings systems, and would also do so in a way that does not
undermine the existing retirement saving system, because
employers are not forced with a choice between one account
versus another account.
So we think this is the absolute right way to go, and it
will make a huge difference in terms of making people not only
able to deal with unfortunate situations, but frankly it will
make it more comfortable for them to save in the first place,
because they will know that, in the case of emergency, they
would have access to this money.
Senator Lankford. Ms. Robinson, you, in your written
testimony and then you just mentioned it in your oral
testimony--I do not know if everybody caught it; I caught it
when you said it. You brought up an incredibly wonky budget
issue, the issue of single-employer pension plan premiums being
considered on budget, and so they are used as a pay-for and
used for spending elsewhere.
My friend and all of our friend, Mike Enzi, who passed away
this week, that was his bill that actually our office is
carrying now. We have through this year--not just since his
passing obviously this week, but we started earlier this year--
we are working together, with bipartisan support as he had
bipartisan support for that in the past.
I was surprised when you mentioned that, because a lot of
people do not dig down into that. But we think it is a really
important issue. Why is that important to you?
Ms. Robinson. Thank you. Thank you for your work on this.
Thank you for allowing me to be even more wonky and talking
about it even more. So single-employer PGBC premiums for
employers that offer defined benefit plans--increasing
unnecessarily the premiums has led them to make negative
decisions about their plans, whether it is to freeze the plan,
to not allow new workers in in an effort to get that number
down. The best way to get the number down is to have fewer
people who are subject to that premium, which is unfortunate
because the PBGC single-employer fund is adequately funded and
has been for the last 10 years.
So it has not been necessary to have an increase, and
neither the PBGC nor the administration has called for an
increase in these premiums. They have been done simply to raise
money on the budgetary side, and it is a little bit of a
gimmick because the money goes to the PBGC in a lockbox. It can
only be used for people who are in defined benefit plans, but
it shows up in the budget numbers as going to general
treasuries and can be used for other things.
So we have been working very hard, and we appreciate your
efforts on this, both in educating the Congress about this,
because it is a budgetary gimmick that has a negative impact on
retirement plans, and moving forward to make sure that this
does not happen anymore. So, thank you.
Senator Lankford. Well, thank you.
Thank you, Mr. Chairman.
Senator Crapo [presiding]. Thank you.
Senator Daines?
Senator Daines. Thanks, Mr. Chairman. I am glad to be here
today to talk about the importance of retirement security and
some of the ways that Congress could help Montanans and all
Americans better prepare for retirement.
One very easy thing Congress could do to help current and
future retirees is to pass the bipartisan bill that I
introduced with Senator Warren, which is the Retirement Savings
Lost and Found Act. I am happy this legislation has actually
been included in House Ways and Means Chairman Neal's and
Ranking Member Brady's Securing a Strong Retirement Act, as
well as in Senator Cardin's and Senator Portman's Security and
Savings Act.
Our bill recognizes that Montanans and Americans are
switching jobs at higher rates than ever before, and are often
unknowingly leaving behind their 401(k)s. In fact, these
numbers are staggering. According to the analysis released just
in May of this year, there will be 25 million forgotten 401(k)
accounts.
I am not sure I would have forgotten one, but I guess that
happens now. That is about $1.35 trillion in assets,
representing 20 percent of the $6.7 trillion in total assets in
401(k) plans. Our bill would solve this problem by creating a
national lost and found registry for retirement accounts.
Using this registry, employees will be able to find all of
their former employer-sponsored retirement accounts in one easy
location online. This bipartisan bill will be a huge help for
employers as well, who often spend countless hours trying to
reunite employees with their lost accounts. It is a win for our
workers and families and businesses, and I hope we can get this
passed into law.
A question for the panel. We will start with you, Ms.
Robinson, and we will just go down the line since you have been
wonking out here and geeking out on policy. Do you agree that
creating some kind of retirement lost and found registry would
help reunite workers and retirees with their missing retirement
accounts?
Ms. Robinson. Absolutely. So, thank you for the legislation
and for your work. We fully support it. The missing participant
problem has been something that ERIC has been working on with
the Department of Labor for quite some time.
Employers spend a lot of time and effort voluntarily
setting up benefit plans, with the ultimate goal of getting
participants a retirement benefit. So finding these
participants is a large part of what they consider important,
and it is critical.
To your point, not only are people changing jobs more, but
companies are merging, acquiring other companies. Their names
are changing, and one of the things we found is that when
employers try to connect with the participant, since the
company name is now different from the company that they worked
for, they are hesitant to give personal information about a
retirement plan.
So we think the registry would be very helpful, not only in
addressing that issue but really just raising the profile, that
there is this money out there that people may have forgotten
about, and that they should really be looking at it and trying
to get that money back to them.
Senator Daines. I think we all remember those calculations
that were shown, where the earlier you get in, the greater
effect that has, certainly in terms of compounding effect on a
retirement account, and just to help oftentimes younger
employees to consolidate that, find it. It will help prepare
them for retirement.
Ms. Robinson. Exactly.
Senator Daines. Yes.
Mr. Graff?
Mr. Graff. Thank you, Senator Daines, and we also fully
support your effort in this area. We have heard from our
thousands of plan sponsor members, and they are, as was just
stated, very concerned about having to deal with these missing
participants. This would go a long way to helping solve that
problem.
In fact, we would even like to talk to you about perhaps
expanding it a little bit more than its current levels. For
right now, there is a part of your proposal that would allow a
plan sponsor to send money over to the PBGC as a sort of way to
collect these accounts, the actual assets of the account.
We would like to at least discuss with you the idea of
maybe expanding that a little bit, so that amounts, somewhat
higher amounts that are in accounts of missing participants,
can also be sent to the PBGC, because they are in a much better
position to help find these lost individuals as opposed to a
small business owner, who really is in no position to figure
out where these folks potentially are. And so, we would like
to--we happily will work with you about doing more.
Senator Daines. Thanks, Mr. Graff. Happy to have that
conversation as well. Thank you.
Mr. Certner?
Mr. Certner. Yes, and to be short and quick about it, we
have supported your bill, as you know. We support its inclusion
in the House Ways and Means package. We certainly support the
Senate acting on this as well. I think, as you know, it is
really hard enough for people to save these days, so the least
we can do is reunite people with their own money.
Senator Daines. Great; thanks.
Mr. Read?
Mr. Read. Sure, Senator Daines. I think it is a good idea.
Anything we can do to reunite money with its rightful owners is
good. Another thing Congress could do is help the U.S. Treasury
send the billions of dollars of unclaimed savings bonds to
State Treasurers, so that they can reunite them with their
rightful owners as well.
Senator Daines. There is the voice of a State Treasurer
right there. Thank you.
Senator Crapo, thank you.
Senator Crapo. Thank you, and I believe we have Senator
Cantwell with us remotely. Is Senator Cantwell with us?
How about Senator Young? Senator Young, are you with us?
Senator Young. Thank you, Mr. Chairman.
Senator Crapo. Go ahead.
Senator Young. I want to thank our witnesses for spending
the morning with this committee to discuss retirement security.
This has been an issue of particular importance to me since I
came into the U.S. House of Representatives back in 2011, and
now as ranking member of the Subcommittee on Social Security,
Pensions, and Family Policy.
I will continue to focus on meaningful ways we can help
Americans prepare for their retirement. In Indiana, only 40
percent of the State's workforce participates in an employer-
provided retirement plan. In fact, just half of our Hoosier
workers are offered such a plan at all. I will soon be
reintroducing my Retirement Security Flexibility Act, to help
more Americans save for retirement by expanding access to and
participation in well-designed workplace retirement plans.
There are really two features to this legislation. First,
my bill would enable more small businesses to offer retirement
plans by providing flexibility on the employer contribution
requirements for safe harbor eligibility. Second, the bill
encourages those workplace plans to include automatic
enrollment and automatic escalation provisions, to make it
easier for workers to participate and more quickly escalate
their savings.
Mr. Graff, could you please speak for a moment on the
barriers that currently prevent small business owners from
offering a retirement plan for their employees?
Mr. Graff. Thank you, Senator Young. I think the two key
issues that a lot of small businesses face on a daily basis is
they are, frankly, struggling through the challenges of the
pandemic and other things that a small business owner has to
deal with in terms of keeping their business going, revolving
around administrative costs associated with plans as well as--
as you alluded to, and I think is an important part of your
proposal--the idea of trying to have some flexibility around
the costs associated with employer contributions.
And so, I think if we could do some things to address both
of those points, either through tax credits or making the rules
easier, it would go a long way to making it easier for small
businesses in Indiana to offer plans for their employees. We
would be happy to work with you on some other ideas around even
simpler safe harbors for the smallest of businesses that would
make it, for those very small businesses, easier for them as
well.
Senator Young. I will look forward to that opportunity to
work together. How specifically would easing safe harbor
eligibility rules for these smaller enterprises fit in with
other incentives such as the start-up credit?
Mr. Graff. So the start-up credit particularly gets to the
administrative costs, and these are plans that are subject to
lots of different rules and regulations, as I know you are
aware.
So there is a certain cost associated with operating a plan
that has to be met, and there are tax credits that were in the
SECURE Act, and there are proposals to actually expand those
credits to 100 percent to cover those out-of-pocket costs for
the first 2 years of a small business. So we can tell those
small business owners that, hey, this is essentially free from
an administrative standpoint.
And then on the contribution side, there is an idea to have
even a simpler safe harbor for small businesses with say 25, 50
employees or less, where they would not have to make any
employer contributions necessarily if they cannot afford it, as
long as they have limits that are a little bit lower than a
typical 401(k) plan.
And so this super-simple safe harbor, if you will, would be
a lot easier on those microbusinesses because, one, there would
be a tax credit to fully cover the entire cost, and they would
not have to worry about the testing requirements that sometimes
require them to make contributions they cannot afford.
So really you could tell that small business owner, hey,
there is no reason not to do this because this is practically
free.
Senator Young. Okay. Thank you for that response.
My time is expiring, so I think I will end with maybe what
I hope is a ``yes'' or ``no'' response from you. As I shift to
the employee side, data from 2020 indicates that, on average,
around 87 percent of employees participated in retirement plans
when those plans had an auto-enrollment feature. Without auto-
enrollment, that number drops to 52 percent. The data also
shows that 91 percent of employees who are auto-enrolled do not
drop out.
So, in your opening testimony, you shared that auto-
enrollment is the key to addressing racial inequalities in
retirement plans. My proposal would further incentivize auto-
enrollment and auto-
escalation. Do you think that proposals like mine could help
bridge racial inequality as it relates to retirement security?
Mr. Graff. Very much so, Senator. It is very clear from the
data that if we can get workers access to plans and get them
auto-
enrolled, we can effectively, with respect to retirement
savings, eliminate a large portion of the racial disparity that
we have seen to date in a lot of the data.
We have data that shows when you do both those things, you
can pretty much eliminate that, and regardless of color, people
are saving at the same rates.
Senator Young. Thanks so much.
Mr. Graff. Thank you.
The Chairman. Thank you, Senator Young.
I believe Senator Cantwell is next, and then Senator
Hassan, and I just would say to colleagues on both sides, we
are getting close to wrapping up.
Senator Cantwell?
[No response.]
The Chairman. Senator Hassan?
[No response.]
The Chairman. All right. She is on her way. And do we have
reports on Senator Cantwell? Was she planning to come in
person?
Okay. No reports on how long it might take Senator Hassan?
Senator Cantwell. Hi, Mr. Chairman.
The Chairman. There is Senator Cantwell.
Senator Cantwell. Thank you so much for this important
hearing.
One continuing challenge we face on retirement plans and
the gap coverages, particularly for employees of small
businesses and gig workers and those who are self-employed--the
Bureau of Labor Statistics estimates that 53 percent of
businesses with less than 50 people have access to workplace
retirement. By comparison, 69 percent of those firms with more
than 50 workers and 83 percent of those firms with more than
100 workers have retirement plans.
So, Mr. Graff, you also noted this in your testimony, that
the gap is most pronounced between African Americans and Latino
workers.
Thankfully though, States are leading the way to expand
retirement savings options through innovative solutions. In our
State, we created a small business retirement marketplace in
2015, which makes it easier and less expensive for businesses
to offer retirement savings options to employees. Washington
employers with fewer than 100 employees are able to voluntarily
participate in this marketplace, shop for lower-cost, portable
retirement saving plans for employees.
Mr. Certner and Mr. Graff, what has been the impact of
these kind of marketplaces on small business participation and
making retirement plans supportable? What is the impact to
saving rates to those employees?
Mr. Certner. I think that you are rightly talking about
targeting the small business sector, because we know that those
with the least coverage are either those who are working for
small business or those who are gig workers or independent
contractors who may not be covered at all.
And so providing--we have been for years trying to provide
incentives for small employers. The recent credit for employers
to make it simpler and easier and less costly to put in plans
is very helpful. Having automatic enrollment is very helpful,
anything we can do to expand access.
The work that States are doing now basically fills in the
gaps for small employers that do not want to put in a plan, do
not want to take on any of the fiduciary responsibility or any
of the other cost or bothers because they are running a small
business. They also do not want to run a plan. Having State-run
plans step in and facilitate programs and use payroll deduction
to enable more people to save has really been, I think, the
biggest jump and change that we have had in the last few years,
and something I think more States should consider.
We are basically working at AARP and across the country to
encourage more States to adopt these employer-facilitated
payroll deduction programs.
Senator Cantwell. So I know in the chairman's State in
Oregon, they have an auto IRA model which allows workers to
save through their employers' retirement saving plan. So what
would we need to do at the Federal level to aid in the
implementation of these State-based auto IRA programs?
Mr. Certner. I think one big help is, obviously, a signal
at the Federal level. One, we could do it federally for the
States that are not engaged. Second would be to make sure, at
the Federal level, that we signal to States that what they are
doing is good, that they can go ahead and keep experimenting
and working on what they are doing at the State level.
A third piece is also improving the Saver's Credit so that
small employers in particular will have a type of matching
contribution, the individuals can have a matching contribution
for contributions that they make, either for a small employer
plan or that they make through some of these State-run
programs.
We know what incentives work: payroll deduction, automatic
enrollment, matching contributions. So being able to get those
to a more universal group of employees is what is going to
really bump up the coverage numbers.
The Chairman. Thank you.
Senator Cantwell. Thank you.
Well, Mr. Chairman, I know you and I are both in the State
innovation camp, but I think again it shows you why allowing
innovation to happen at a less bureaucratic level gets us
answers that we need. So I hope we can pursue avenues to making
small business retirement more of an option and more of a saver
for so many Americans. So I thank you for the hearing, and I
thank the witnesses.
The Chairman. Thank you, Senator Cantwell. And the fact is
that the Pacific Northwest is again out in front in the
innovation derby, and we are very proud of that. And what has
been striking is--Mr. Graff has really touched on it today, and
we are going to wrap up here in a moment and talk about the
bipartisan path forward.
But what it really also allows us to say is, when Oregon
and Washington are doing this phenomenal work and leading the
way, you partner with what we are talking about now, for
example, at the Federal level, and you get what Mr. Graff told
us was this jaw-dropping number.
Senator Hassan, I know you have had a lot of hearings this
morning. But I mean, what Mr. Graff told us is that the
combination of these State efforts and these Federal efforts is
really helpful for two groups of people: people who cannot save
at all and people who cannot save enough.
If you mobilize innovative approaches at the State and
Federal level, Mr. Graff tells you in the next decade, you are
going to make an enormous amount of difference for our families
in New Hampshire and the like. We are going to talk about it
when we wrap up.
But I think it is great to see Oregon and Washington pave
the way at the State level, and what we are going to try to
do--and Senator Crapo and I have been talking about it--is
matching at the Federal level.
Senator Hassan?
Senator Hassan. Well, thank you, Mr. Chair and Ranking
Member Crapo, and I never like to cede innovation chops to any
other part of the country. We are pretty innovative in New
England and New Hampshire too. But boy, it is good to see the
witnesses, and it is really good to be having this hearing,
because we want every American to be able to save for a
dignified retirement, and that is really what this is all
about, and I really look forward to continuing to work with all
of my colleagues to do that.
I have a couple of questions. I will start with you, Ms.
Robinson, because one of the things I have been focused on is
military spouses and their capacity to save, because they often
face a wide gap in terms of retirement because they move
locations more frequently. So they do not always stay long
enough in one job to become eligible for employer-sponsored
retirement plans, and that obviously means they have less
employer matches for retirement savings. So Senator Collins and
I have a bill to help address this issue by incentivizing
employers to make military spouses immediately eligible for
retirement plan participation, including employer
contributions.
So, Ms. Robinson, do you believe that providing employer
incentives would help military spouses save more for
retirement?
Ms. Robinson. Of course, all incentives help employees save
for retirement, so we actually support that, and thank you for
your work. We have not taken a position on this. I would have
to take it back to our membership. But obviously our member
companies are at the forefront of offering retirement plans. We
believe it is an important thing.
So I am very happy to work with you to make sure
administratively it is feasible, and that whatever we do put in
place is actually helpful to the spouses as they are moving
from job to job.
Senator Hassan. Yes; I appreciate that very much. It is
something that we have seen a lot of action on in a variety of
different ways, because military spouses, you know, face such
unique situations. So, thank you for being willing to take it
back to your membership.
I also wanted to talk generally to all of you about the
issue of retirement savings for women, because women often
struggle to save enough for retirement. They lag behind men due
to a number of factors, including lower earnings and more time
away from the workplace because they are primarily caregivers
in a lot of circumstances.
So the pandemic exacerbated many of these issues, with
nearly 1.8 million women leaving the workforce. So, to each of
you, how can Congress help address the retirement gap for
women, especially as the country recovers from COVID-19? We
will start with Treasurer Read and just move right down.
Mr. Read. Mr. Chair, Senator Hassan, I think it is an
excellent observation. The work that we are doing in our State
continues to be about making it easier for people to get
started at an earlier age and establish that habit.
The power, I think, of our example is not going to become
fully realized until someone who starts, maybe without
realizing it, early in their career gets to the point that that
has become a habit and moves on. I think that is especially
true for women and people of color, who do not tend to have
that access through their employers.
So auto-enrollment, escalation, the credit that Senator
Wyden and others have offered, I think those are all really
important elements.
Senator Hassan. Thank you.
Mr. Certner?
Mr. Certner. I think you make a good observation about
women lagging behind, obviously, for a number of reasons,
including lower wages and less access to retirement plans, more
part-timers. We are very strongly supportive of improving
coverage for part-time workers. We know that it is particularly
helpful to women who are caregivers.
We are generally very supportive of trying to improve
access in general, because women tend to be in workplaces that
do not have any coverage. So, if you cannot get employer-
provided coverage, that is where we need those State kinds of
programs that we are doing in Oregon that will help people get
access to a plan, a payroll deduction plan they do not have
now.
Again, we are talking about people who are generally lower-
income. So you need to have additional, I think, incentives for
them to also contribute. So improving on the Saver's Credit,
which is really a matching contribution at the Federal level,
will help both encourage people to contribute to a plan, but
not only that, will obviously increase the size of the
contribution amounts going to the plan.
So I think a combination of those things could all help
improve coverage and adequacy.
Senator Hassan. Thank you.
Mr. Graff?
Mr. Graff. Thank you, Senator Hassan. The issue that you
raise is extremely important, and in particular what the data
shows is that the coverage gap and the savings gap is
particularly acute for single women. There are very similar
challenges with communities of color that we have been
discussing today.
What we found--I am happy to share this data with you--is
that when you overlay proposals like the Automatic IRA Act, the
Encouraging Americans to Save Act, and steps to both get people
covered, single women covered, as well as incentivize them to
save, then you see really great boosts in savings rates among
single females. I can show you. It is very promising.
Senator Hassan. Well, great. And if it is all right with
the chair, Ms. Robinson, can you quickly comment?
Ms. Robinson. Representing plan sponsors who have already
tackled the coverage issue, I will talk about increasing
retirement savings, that increasing catch-up contributions is
enormously helpful for women who may not have had the money
earlier in their careers to, later in their careers, put more
of that into retirement.
We would actually encourage even expanding that for other
opportunities such as being able to do make-up, catch-up
contributions if you had to take time off during your career,
in addition to the other things that have been mentioned, such
as the student loan matching and the emergency savings
provisions that, obviously, impact more than just women, but
probably women in particular.
Senator Hassan. Well, thank you very much.
And, Mr. Chair, as we celebrate the 31st anniversary of the
Americans with Disabilities Act this week, I also just want to
recognize how important ABLE accounts have been to people with
disabilities, and I look forward--I know Treasurer Read has
been particularly involved in administering those accounts. So
I would look forward to continuing to strengthen them as well.
The Chairman. Well, thank you, Senator Hassan. And the fact
that for years you have been such a strong voice for these
families--I guess there is something about the water. And New
Hampshire and Oregon are always teaming up on these kinds of
approaches to empower families that are having some real
challenges and just want a shot.
That is what you and Treasurer Read have been all about. So
we really look forward to working with you on these kinds of
issues, and thank you for being a champion for empowering folks
who are vulnerable to be able to save and participate in our
society.
Senator Hassan. Thanks so much, and thanks again to all the
witnesses.
The Chairman. Thank you.
So Senator Crapo and I, I would say to our guests, have
lengthy closing statements, and when a chair says that is going
to happen, everybody slouches in their seat and says, ``Oh my
God, this is going to be a ghastly affair.''
Now both of us will be very brief, but you have been
terrific, and this has really helped us build on our bipartisan
tradition of working on these issues, and we will recognize
Senator Crapo, and my lengthy statement will take about 2
minutes.
Okay, Senator Crapo.
Senator Crapo. Thank you very much, Mr. Chairman, and I
will be brief. As I said at the outset in my opening statement,
this is a bipartisan issue where retirement security is
something that we all agree on, and the solutions you have
heard discussed today, I believe, are a broad set of solutions.
We will be adding some more to this list as we continue to
work. The message is that Senator Wyden and I have agreed that,
not only is this going to be done on a bipartisan basis, but it
is going to be done on a priority basis. We are moving this to
the very top part of the agenda for our committee and for our
efforts here, because it is so critical.
I want to again thank the witnesses for your testimony
today, and I expect you will get to help us some more as we
reach out to you as we put this legislation together.
Senator Wyden?
The Chairman. Thank you, Senator Crapo. And my colleague is
speaking for me.
Let me just mention four quick takeaways from today. First,
we learned that our Saver's Credit proposal, combined with a
national program like OregonSaves, could lead to a staggering
number of new savers, 50 million new savers, $6.2 trillion in
additional savings, over the next decade. That is a big
takeaway to leave the room with.
Second, we learned from Mr. Graff of the Retirement
Association that mega-IRAs owned by mega-millionaires and
billionaires are largely the result of their access to
investments like private equity that are not generally
available to the middle class and other savers of moderate
means, because these investments are limited under securities
law to wealth investors.
And so, I want everybody in America the chance to get ahead
and to save, and the abusive use of tax incentives meant to
help middle-class savers creates an economic double standard.
It creates a system of saving haves and have-nots. We can do
better than that. We can make sure that everybody has a chance
to get ahead.
We learned about the importance of auto-enrolling workers
in workplace savings plans. I think that was something that was
touched on by a number of our experts, and we also learned that
this will reduce racial disparities in retirement plan savings
rates, which is especially important.
Finally, we learned, because of the important questions of
Senator Cortez Masto, about the importance of multilingual
retirement savings education materials. We have another
opportunity to reduce racial disparities in saving.
We will take those and the other important thoughts that
you all have given us, use them, as Senator Crapo mentioned, on
our efforts, and make sure we continue our tradition of working
on these issues in a bipartisan way.
Members will have 7 days to submit questions for the record
for the witnesses. That means Wednesday, August 4th by close of
business.
With that, the Senate Finance Committee is closing a very
productive hearing.
[Whereupon, at 12:19 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of David Certner,
Legislative Counsel and Policy Director, AARP
introduction
On behalf of our nearly 38 million members, and all Americans age
50 and over, AARP thanks Chairman Wyden and Ranking Member Crapo for
holding a hearing to consider needed improvements to the U.S.
retirement system for American workers, retirees, and their families.
AARP is committed to expanding retirement savings so that all Americans
have adequate income for retirement through Social Security, pensions
and private savings, and we have worked throughout our history to
develop and improve America's retirement system.
We greatly appreciate the committee's leadership on U.S. retirement
system development and improvements. AARP has worked closely with the
committee over decades, from the development of tax favored retirement
accounts to the most recent legislative solutions for the millions of
workers and retirees covered by multiemployer pension plans that face
imminent and long-term funding shortfalls. We look forward to
continuing to work together to expand coverage and adequacy for all
workers and retirees.
impact of covid-19 on current workers and their retirement
Millions of families continue to face dire financial circumstances
as a result of the pandemic and related workplace closures. In a matter
of months, the national unemployment rate climbed from 3.5 percent in
February 2020 to an historic high of 14.7 percent in April. And while
the unemployment rate has since declined to 5.9 percent,\1\ the
percentage of job seekers who are long-term unemployed (i.e., those who
have been looking for work for 27 weeks or more) remains a serious
concern, with older workers being especially hard hit. In June 2021,
36.0 percent of job seekers ages 16 to 54, and 55.3 percent of job
seekers ages 55 and older, were long-term unemployed.\2\
---------------------------------------------------------------------------
\1\ Bureau of Labor Statistics, Economic News Release, The
Employment Situation, June 2021, https://www.bls.gov/news.release/pdf/
empsit.pdf.
\2\ AARP Public Policy Institute's Employment Data Digest, June
2021, https://www.aarp.org/ppi/info-2020/employment-data-digest.html.
As a result, many workers continue to have little choice but to
take actions that reduce their long-term retirement security in order
to make ends meet. Some individuals have been forced to retire earlier
than planned because they were unable to return to work due to
legitimate health concerns or because their jobs simply no longer
exist. According to a June 2020 survey, nearly a quarter (23 percent)
of respondents age 55 to 73 have retired early, or considered retiring
early, because of the pandemic.\3\ Nearly one in four adults ages 25
and older surveyed by AARP dipped into their retirement savings or
stopped contributing to their retirement accounts during the height of
the pandemic.\4\ Earlier retirements and emergency withdrawals from
retirement accounts will likely prevent these workers from accumulating
additional years of wages and savings, resulting in reduced pensions
and lower monthly Social Security benefits for life, as well as the
need to spend down their retirement savings earlier than anticipated.
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\3\ TD Ameritrade, ``COVID-19 and Retirement Survey,'' June 2020,
https://s2.q4cdn.com/437609071/files/doc_news/research/2020/covid-19-
and-retirement-survey.pdf.
\4\ Brown, S. Kathi. How Financial Experiences During the Pandemic
Shape Future Outlook, Washington, DC: AARP Research, April 2021.
https://doi.org/10.26419/res.00450.001.
Americans of any age who are fortunate enough to have a retirement
savings vehicle like a 401(k) plan or an individual retirement account
(IRA) may now be unable to contribute to these accounts, or worse, have
a need to tap them to pay for essentials. According to one survey, 37
and 40 percent of Millennials, 26 and 32 percent of Gen X, and 13 and
18 percent of Boomers have withdrawn, or considered withdrawing, from
an individual retirement account or a 401(k) plan.\5\ Doing so,
however, forces them to reduce what are likely already inadequate
savings, sacrificing future amounts necessary for a secure retirement.
Many who have lost jobs have also lost health insurance and have faced
increased costs for both health-care coverage and treatment.
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\5\ TD Ameritrade, ``COVID-19 and Retirement Survey,'' June 2020,
https://s2.q4cdn.com/437609071/files/doc_news/research/2020/covid-19-
and-retirement-survey.pdf.
These COVID-related pressures only add to other challenges that
have accelerated in recent decades, including diminishing employer-
sponsored pensions, higher health-care costs, and inadequate retirement
savings. Consequently, the prospects of a secure retirement for
millions of workers will be even more precarious following the
pandemic, and more Americans of all ages will need to rely even more on
Social Security's modest benefits for an even greater portion of their
retirement security.
importance of social security
According to the Social Security Administration (SSA), an estimated
180 million Americans paid into Social Security in 2020,\6\ and in June
2021, Social Security provided critical retirement, disability and
survivor benefits to almost 65 million individuals.\7\ Social Security
is already the principal source of income for over half of older
American households receiving benefits and roughly one quarter of those
households, or about 10 million people aged 65 and older, depend on
Social Security for nearly all (90 percent or more) of their income.\8\
The reliance in minority communities is even more pronounced; over 36
percent of African American women in families receiving benefits rely
on Social Security for almost all of their income, and 34 percent of
older Hispanic women do the same.\9\
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\6\ Social Security Administration, ``The 2020 Annual Report of the
Board of Trustees of the Federal Old-Age and Survivors Insurance and
Federal Disability Insurance Trust Funds,'' April 2020; www.sss.gov/
news/press/factsheets/basicfact-alt.pdf.
\7\ Social Security Administration, Monthly Statistical Snapshot,
June 2021, https://www.
ssa.gov/policy/docs/quickfacts/stat_snapshot/index.html?qs.
\8\ Reliance estimates available at AARP Public Policy Institute
Data Explorer, https://dataexplorer.aarp.org.
\9\ Ibid.
Despite its critical importance, Social Security's earned benefits
are modest and in June 2021, average only $1,555 per month for all
retired workers. Disability benefits are even more modest, averaging
only $1,280 per month.\10\ Nonetheless, Social Security keeps
approximately 15 million older Americans out of poverty \11\ and allows
millions more to live their retirement years independently and without
fear of outliving their income.
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\10\ Social Security Administration, Monthly Statistical Snapshot,
June 2021, https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/
index.html?qs.
\11\ Kathleen Romig, Center on Budget and Policy Priorities
analysis of data from the U.S. Census Bureau's March 2019 Current
Population Survey, February 2020, https://www.cbpp.org/research/social-
security/social-security-lifts-more-americans-above-poverty-than-any-
other-program.
For most Americans, Social Security is their only inflation-
protected, guaranteed source of retirement income they have or will
have. AARP believes we must therefore work together--and sooner rather
than later--to ensure Social Security remains strong, not only for
those who are at or near retirement, but also for younger generations
who will likely rely on Social Security benefits as much or even more
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due to the effects of COVID-19 and other retirement trends.
In addition, and on behalf of multiple generations of American
workers, AARP would like to thank Chairman Wyden and Senator Cassidy
for recently introducing the Know Your Social Security Act. This
legislation would once again place vital, paper Social Security
statements in the hands of millions of Americans to help them more
effectively plan for retirement, ensure correct earnings records, and
better understand their stake in Social Security.
The Social Security statement is an essential financial planning
tool that provides key information on an individual's earnings and
payroll tax contributions record, as well as an estimate of their
earned monthly benefits. When Social Security sends this statement
through the mail, more Americans are able to better plan for their
future, not only due to an increased understanding of their Social
Security benefits, but also any gaps in their current retirement plan.
Having a hard copy of your Social Security statement also allows an
individual to spot and correct errors or even to detect outright fraud.
Finding and correcting these errors in a timely manner will save
workers and the Social Security Administration frustration, time, and
money. Moreover, when Americans receive an annual statement in the
mail, it helps them better understand the importance of Social Security
as part of their overall retirement plan.
Paper statements are annual reminders, especially to younger
workers, that they have contributed to Social Security and have earned
a stake in the program. AARP believes strongly that all Americans,
unless they choose otherwise, should have access to their Social
Security statements via mail and we once again thank Chairman Wyden and
Senator Cassidy for introducing the Know Your Social Security Act and
urge its enactment.
the retirement income gap
For more than half a century, a secure retirement in the United
States centered on reliable income from three sources, the so-called
``three-legged stool'' of retirement--employer-provided defined benefit
pension plans, personal savings, and Social Security. Together, these
sources of income offered a stable financial future. Unfortunately,
diminishing pensions and inadequate retirement savings--coupled with
longer life expectancies and higher health costs--has endangered the
dream of a secure retirement for millions of Americans, and without
significant action, will likely require Social Security to play an even
greater role in the lives of older Americans.
Defined Benefit (DB) pension plans once dominated the employment
landscape. In 1983, roughly 60 percent of workers with an employer-
sponsored retirement plan had a DB pension plan; by 2020, however, just
18 percent of full time, private sector workers had access to a DB
pension.\12\ At the same time that fewer workers have been offered a
pension with guaranteed lifetime income, more workers have been offered
defined contribution (DC) plans--such as 401(k) plans--to save for
their retirement. In 1983, only 12 percent of workers offered a
workplace retirement plan were exclusively offered a DC plan, but by
2020, 73 percent of workers offered a workplace retirement plan were
only offered a DC plan.
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\12\ https://fas.org/sgp/crs/misc/R43439.pdf (from CRS quoting
National Compensation Survey of March 2020).
The switch from DB to DC plans has important implications for
retirement security. First, employees now must take responsibility for
determining if and how much to save, and must manage their retirement
funds, even though most have little or no investment experience. As
discussed below, automatic enrollment and similar features help with
these decisions, but not all DC plans include these mechanisms. Second,
retirees run the risk that they may either outlive the savings in a DC
plan because account balances run out, or they fail to spend them for
fear that the money will be needed for some future emergency, resulting
in a lower retirement standard of living than possible.\13\ Third,
despite the increased use of DC plans, financial experts generally
agree individual savings and earnings may not fully compensate for the
loss of employer provided DB pensions.\14\
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\13\ Chris Browning, Tao Guo, and Yuanshan Chen, SSRN, The
Retirement Consumption Gap: Evidence from the HRS, November 2014,
https://papers.ssrn.com/sol3/papers.cfm?abstract
_id=2479021.
\14\ Center for Retirement Research (2015), ``Investment Returns:
Defined Benefit vs. Defined Contribution Plans, '' https://crr.bc.edu/
wpcontent/uploads/2015/12/IB_15-211.pdf.
Most workers who only have access to a workplace savings plan are
not saving enough to adequately fund a secure retirement. For middle-
income households ages 55-64 with a DC plan or IRA, the median balance
is roughly $144,000, not nearly enough to ensure a secure retirement,
especially given that the average number of retirement years has
increased markedly from 12 in the 1960s to almost 20 today.\15\ It is
no wonder that surveys persistently show that Americans do not feel
financially prepared to retire. A Financial Health Network poll, funded
in part by AARP, found that only 18 percent of respondents felt very
confident they could meet their long-term financial goals, including
retirement.\16\
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\15\ Center for Retirement Research (2019), ``401(k)/IRA Balances
for Median Working Household with a 401(k)/IRA, Age 55-64, By Income
Quintile, 2019,'' http://crr.bc.edu/wp-content/uploads/2019/10/Table-
17.pdf; Center for Retirement Research (2019), ``Average Years in
Retirement, 1962-2050,'' http://crr.bc.edu/wpcontent/uploads/2015/10/
figure-10.pdf.
\16\ Thea Garon, Andrew Dunn, Katy Golvala, and Eric Wilson (2018),
``U.S. Financial Health Pulse: 2018 Baseline Survey Results,'' Center
for Financial Services Innovation, https://s3.
amazonaws.com/cfsi-innovation-files-2018/wpcontent/uploads/2019/02/
25191008/Pulse-2018-Baseline-Survey-Results.pdf.
Of course, access to a workplace retirement plan is better than
none at all. Remarkably, just over half of all workers in the United
States do not have access to a retirement plan at work,\17\ a
percentage that has remained largely unchanged for 3 decades. The
coverage gap in communities of color is even greater; 66 percent of
Latino workers, 52 percent of Asian American workers, and 50 percent of
Black workers work for an employer that does not offer a retirement
savings plan.\18\ Workers without a plan are more likely to work part-
time or work in a small business, tend to have less formal education,
and are more likely to be lower paid.\19\ Many middle and higher-income
earners also lack access to a workplace retirement plan; people earning
more than $40,000 represent about 23 percent of the 55 million
employees without a plan.\20\
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\17\ When comparing coverage and participation statistics, it is
important to look at which populations are being considered. Most
studies cover private-sector workers only but differ on including only
full-time employees or both full- and part-time. Similarly, studies
focusing just on employees don't include the millions of contingent
workers of differing types, who may be paid by an employer, but who are
not considered as employees and thus are not eligible to participate in
a retirement plan.
\18\ https://www.aarp.org/content/dam/aarp/ppi/2017-01/
Retirement%20Access%20Race%20
Ethnicity.pdf.
\19\ Center for Retirement Research (n.d.), ``Pension Participation
of All Workers, By Type of Plan, 1989-2016,'' http://crr.bc.edu/wp-
content/uploads/2015/10/Pension-coverage.pdf; Craig Copeland (2014),
``Employment-Based Retirement Plan Participation: Geographic
Differences and Trends, 2013,'' Employee Benefit Research Institute
(EBRI), Issue Brief 405, p. 27, Washington, DC.
\20\ https://www.aarp.org/content/dam/aarp/ppi/2014-10/aarp-
workplace-retirement-plans-build-economic-security.pdf.
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the future of retirement savings
For decades, Congress has enacted laws with the aim of making
retirement saving easier. Congress has created many different types of
plans for employers to offer their workers, including IRAs, SIMPLEs,
Simplified Employee Pensions (SEPs), and Multiple and Pooled Employer
Plans (MEPs/PEPs). Congress has also authorized a number of automatic
features--including automatic enrollment, automatic deferral amounts,
automatic escalation, and automatic default investments--to help
workers who do not make affirmative decisions to begin saving for their
retirement. Such automatic features and payroll deductions have
resulted in significant higher savings. Among new hires, participation
rates nearly double to 93 percent under automatic enrollment, compared
with 47 percent under voluntary enrollment. Over time, 8 in 10
participants increase their contribution rates, either automatically or
on their own, while three quarters of participants remain exclusively
invested in the default investment fund.\21\ Furthermore, plans with
automatic enrollment had an 87 percent participation rate as of the end
of the second quarter, whereas plans without automatic enrollment had a
participation rate of 52 percent. Since 2008, the average savings rate
among employees automatically enrolled has risen from 4 percent to 6.7
percent, and 63 percent of automatically enrolled participants in the
past 10 years have increased their savings rate.\22\
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\21\ https://nam05.safelinks.protection.outlook.com/
?url=https%3A%2F%2Finstitutional.van
guard.com%2Fiam%2Fpdf%2FCIRAE.pdf&data=02%7C01%7C%7C34dd87bd990145d2
669c
08d6d3fd5585%7Ca395e38b4b754e4493499a37de460a33%7C0%7C0%7C63692948234042
9841&
amp;sdata=SuhVz6d8Xc9OYzTEKINqQe817YWi0gH8zpEYW3XgEZM%3D&reserved=0
(February 2018).
\22\ Fidelity data--August 2018, https://
nam05.safelinks.protection.outlook.com/?url=https%3A
%2F%2Fwww.planadviser.com%2Fautomatic-enrollment-helping-participants-
increase-retirement
-
savings%2F&data=02%7C01%7C%7C34dd87bd990145d2669c08d6d3fd5585%7Ca395
e38b4
b754e4493499a37de460a33%7C0%7C0%7C636929482340429841&sdata=FQXZs0ELy
8txGg
DLlfREGecvdvjKIpmFighaFYer8rA%3D&reserved=0.
However, these automatic savings features can only help workers
whose employers offer a workplace retirement plan, and as noted
earlier, over 50 percent of the workforce lacks any workplace
retirement coverage. Expanding coverage for the tens of millions of
workers without coverage continues to be a high priority, and AARP
supports several approaches to extend retirement coverage in the
workplace at both the Federal and State levels.
state work and save programs
To complement our work at the Federal level to help address the
coverage gap, AARP has focused on passing what are called State-level
Work and Save programs, which are intended to provide employer
facilitated access to payroll deduction retirement savings options for
workers who don't otherwise have a way to save for retirement at work.
State-facilitated Work and Save programs, such as Oregon Saves,
CalSavers, and Illinois Secure Choice, are providing critical access to
large, currently underserved populations, such as women, workers of
color, and much of the contingent workforce, including gig workers.
Such access is essential to addressing the retirement income gap
because workers are 15 times more likely to save for retirement simply
by having access to payroll deduction at work. While participation
rates in traditional retirement plans have not budged in decades, Work
and Save programs are leading a change for the better.
Nationwide, the majority of States have considered laws to address
the retirement gap in their States through program legislation or
studying the issue.\23\ Oregon was the first State to launch a Work and
Save program, followed by California and Illinois. These programs have
had tremendous success. As of April 30, 2021, assets under management
between these three States exceeded $250 million, with more than
346,000 funded accounts and more than 34,000 employers registered.\24\
The momentum is not slowing down, and other States continue to pursue
enactment and implementation of programs. Last year, even during the
pandemic, Colorado and New Mexico passed full program legislation. This
year, Virginia and Maine passed new program legislation, New York and
Illinois passed significant program improvement bills dramatically
increasing future participation rates, and California successfully
defeated a lawsuit. States with program legislation like Vermont,
Maryland, and Connecticut continue to work towards implementing a full
and comprehensive program. Meanwhile, efforts are underway in a number
of additional States, including, North Carolina, Pennsylvania,
Wisconsin, and Delaware.
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\23\ https://www.aarp.org/ppi/state-retirement-plans/savings-
plans/.
\24\ https://cri.georgetown.edu/wp-content/uploads/2020/05/
Infographic-20-05.pdf.
These retirement savings programs generally operate much like 529
college savings plans and are operated through public-private
partnerships. Notably, while employers facilitate payroll deductions,
the retirement programs are not operated or overseen by employers and
are not employer-sponsored retirement plans. Rather, employers are
afforded the ability to offer access to a simple, plug-and-play
retirement program to their workers, which only requires employers to
disseminate information packets to their workers and facilitate payroll
deductions, similar to what they must already do to remit taxes. Worker
participation is easy and contributions are typically automatic;
however, worker participation remains voluntary, as they always retain
the option to opt-out of the program at any time. How much a worker
saves, if at all, is entirely up to them, as are investment decisions.
Workers choose if they want to participate, how much they want to
contribute, and the way in which they invest their money. When a worker
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changes jobs, their accounts are portable and can be taken with them.
Work and Save programs are designed to be self-sustaining and
participant-funded--what an individual contributes to their account is
what they get out of it, plus or minus investment gains and losses.
These are not employer pension programs--States play the role of
aggregating smaller employers who otherwise would have to sponsor, pay
for, and manage a retirement plan, including choosing the investments
and providers and incurring fiduciary responsibility. Work and Save
programs can ultimately help U.S. taxpayers as well. By affording
workers access to a simple way to save for retirement, fewer households
will need to rely on social services, ultimately foregoing additional
expenditures by the government. The U.S. could save an estimated $33
billion on public assistance programs between 2018 and 2032 if lower-
income retirees save enough to increase their retirement income by just
$1,000 more per year.\25\
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\25\ https://mcspolicycenter.umaine.edu/wp-content/uploads/sites/
122/2017/03/final-aarp-report.pdf.
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policies to increase retirement savings
In addition to our State work, Federal policies that further
encourage automatic payroll deduction savings for workers who lack
retirement coverage should be enacted. AARP has supported various
efforts--at both the Federal and State levels--to ensure individuals
nationwide are covered by an automatic retirement savings system. AARP
has been a long-time supporter of Federal Automatic IRA legislation,
most recently proposed in the Senate by Senator Whitehouse. We believe
State programs should work in tandem with Federal legislation to be
most effective at offering enhanced coverage and more appropriate
retirement investments. AARP has emphasized that Federal legislation
and regulations regarding retirement security should continue to
encourage and allow for State enactment and implementation of these
programs.
AARP also is supportive of the legislative efforts initiated by
Senators Cardin and Portman and Chairman Neal and Ranking Member Brady,
known as SECURE 2, and looks forward to working with the Congress to
harmonize and update any final bill (the Retirement Security and
Savings Act, S. 1770, and the Securing a Strong Retirement Act, H.R.
2954). Among other changes, the bills would extend greater coverage to
more part-time workers and automatically enroll workers in new employer
retirement savings plans once they have been in business for 3 years
and employ more than 10 employees. As previously noted, automatic
payroll deduction is a proven method of increasing coverage and
participation.
AARP urges Congress to improve coverage for the 27 million part-
time workers who generally are not covered by retirement savings plans.
This is especially important for older workers and caregivers who often
shift from full-time to part-time work or return to the workforce less
than full-time due to caregiving responsibilities. Moreover, women are
far more likely to work part- time than men--two-thirds of part-time
workers are women.\26\ AARP supports Senator Murray's and Rep.
Underwood's Women's Pension Protection Act, Reps. Neal and Brady's
Securing a Strong Retirement Act and Senators Cardin and Portman's
Retirement Security and Savings Act, all of which would offer coverage
to part-time workers after 2 years of employment.
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\26\ Bureau of Labor Statistics, Labor Force Statistics from the
Current Population Survey, Household Data Annual Averages, Table 8:
Employed and unemployed full- and part-time workers by age, sex, race,
and Hispanic or Latino ethnicity (January 18, 2019), available at
https://www.bls.gov/cps/cpsaat08.htm.
In addition to extending coverage to more workers, Congress should
also act to encourage greater savings for those who participate in
workplace retirement plans. While defined benefit plans are generally
designed to provide more adequate retirement benefits to longer service
employees, defined contribution plans--like 401(k) plans--do not always
lead to adequate retirement savings. The 2006 Pension Protection Act
permitted employers to enroll employees automatically at a three
percent contribution level, but this has proven to be too low to fund a
secure retirement.\27\ AARP supports increasing the default
contribution level to five or six percent, provided individuals always
have the ability to select a different level. Retirement plan sponsors
should also offer automatic escalation of employee contributions.
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\27\ https://www.cnbc.com/2017/08/02/the-problem-with-too-low-401k-
contribution-rates.html.
AARP supports improvements to the Saver's Tax Credit, and we
appreciate Chairman Wyden's initiative to improve the credit. Created
in 2001, the Saver's Credit is available to low- and moderate-income
taxpayers who contribute to a retirement savings plan. Unfortunately,
the Saver's Credit is woefully underutilized. From 2006 through 2014,
between 3.25 percent and 5.33 percent of eligible filers claimed the
credit, and the average value of the credit ranged from $156 to $174
over this time period. A series of changes--some small and others more
substantial--would enable more of the tax credit's target population to
benefit from the Saver's Credit to help build significant retirement
resources. One beneficial change for low- and moderate-income savers
would be to make the Saver's Credit refundable. This reform would
especially reward saving among Latinos, who are least likely to be
covered by a workplace retirement plan and are more likely to earn low
incomes.\28\ Other ways to strengthen the Saver's Credit are to raise
the income thresholds and reduce the phase-out of the credit to create
more value and reach more moderate-income filers.
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\28\ http://publications.unidosus.org/bitstream/handle/123456789/
888/32551_file_Retirement
_security_brookings_Fact_Sheet_Final.pdf.
AARP would also like to firmly address the issue of retirement plan
disclosures. Along with fiduciary duty, retirement plan disclosure is a
fundamental consumer protection of ERISA. Workers not only need current
plan information, but often need past records 30-40 years into the
future when benefits are due. ERISA and the tax code require
information to be disclosed to workers about the actions they need to
take and the benefits they are earning. We agree with many critics of
current disclosure documents that they should be shorter, simpler and
more timely. We support efforts to streamline and improve retirement
plan documents and disclosures. We also understand that changes in
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technology allow for more electronic disclosure.
However, we strongly oppose efforts to primarily provide all
required disclosures electronically through generally time-limited
website postings. Employers already may automatically provide
electronic disclosures to workers who typically work with computers,
but most plan participants prefer paper delivery of retirement
information. A 2016 FINRA study showed that only 31 percent of
respondents preferred receiving disclosures by email or through
Internet access; the remainder preferred physical mail (49 percent) or
in person meetings (14 percent). Older respondents preferred paper
documents, while younger respondents preferred in person meetings.
There was no age differential between those who preferred to receive
disclosures by email.\29\ Moreover, the Pew Research Center found that
a third of individuals aged 65 and older do not use the Internet, only
half have broadband at home, and only approximately 40 percent own a
smartphone. Among all adults, a third do not have high-speed Internet
at home and 13 percent only own a smartphone. Disadvantaged populations
have even less access--approximately only half of rural Americans,
African Americans, and Americans with a high school degree or less have
broadband Internet at home.
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\29\ FINRA, Investors in the United States 2016 at 14 (December
2016), https://www.us
financialcapability.org/.downloads/
NFCS_2015_Inv_Survey_Full_Report.pdf.
With such discrepancies in access, and a generally greater consumer
preference for paper copies of important financial documents, it is
crucial that important material be distributed in paper form and that
electronic disclosure not become the default method of delivery. Full
and meaningful disclosure is critical to retirement security and
pension law, and Congress needs to ensure workers will receive and can
review important retirement plan documents. A paper annual benefit
statement, similar to the Social Security and Federal Employee
statement of earned benefits, is essential to help employees better
understand and successfully manage their plans and determine if they
are on track for retirement. We applauded Chairman Wyden and Senator
Cassidy for taking the lead on retaining paper Social Security
statements, and an annual paper statement for both public and private
retirement benefits is potentially a more important consumer
protection, as workers must manage their own retirement plans. AARP
supports default paper delivery of annual benefit disclosures and
supports the availability of electronic disclosures when a participant
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chooses an electronic option.
The bipartisan committee-passed House version of SECURE 2 includes
an important requirement for an annual paper retirement earnings
benefit statement, which AARP strongly supports, and which we urge the
Senate bill to include as well. We are willing to work with interested
Senators to address employee preferences and any other issues of
concern.
We also note the need to establish a national retirement Lost and
Found office to help workers locate retirement accounts with previous
employers. This has become increasingly important as more and more
workers change jobs several times over the course of their careers.
There are at least 21.3 million inactive 401(k) plan accounts as of
2018, the latest year of full data from the Department of Labor Form
5500.\30\ Senators Warren and Daines, and Reps. Bonamici, Messer,
Banks, Neal, and Brady have introduced bipartisan bills to help workers
find ``lost'' accounts. A Lost and Found office could help savers
reclaim their investments and combine accounts to more appropriately
invest their assets and lower their fees and expenses.\31\ The Pension
Benefit Guaranty Corporation (PBGC) is starting a preliminary effort
matching individuals with former retirement accounts. Several other
countries with similar types of retirement systems also are setting up
such low-cost matching programs.
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\30\ https://hicapitalize.com/resources/the-true-cost-of-forgotten-
401ks/.
\31\ https://www.brookings.edu/wp-content/uploads/2020/10/
Retirement-Security-Project-Dashboards-Oct-2020.pdf.
AARP is also continuing to examine provisions related to multiple/
pooled retirement plans for employers, which were established in SECURE
1, including a new proposed expansion to 403(b) non-profit plans. AARP
supported pooled plans in large part because the SECURE Act required
the Department of Labor to issue rules for the operation of these
plans, including a model plan. However, while DOL several times
solicited public comments, it has not yet issued any rules. As a
result, some firms have registered to sell pooled plans, but without
rules, neither the plans, nor employers or consumers know how they
should operate or if they are operating fairly. Congress should ensure
adequate guidance for pooled plans, including for non-profit 403(b)
retirement providers, who are interested in adopting pooled plans.
Relatedly, any legislation should consider the U.S. Supreme Court's
review of 403(b) plan fiduciary compliance with ERISA, which is under
review this term (Hughes v. Northwestern University). AARP urges the
committee to strengthen the requirements for pooled plans and ensure
that any covered plans are governed by clear fiduciary standards for
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all plan providers.
AARP also looks forward to working with the committee and
interested members on a wide range of promising and needed additional
retirement improvement ideas. As retirement savings has become more
individualized and technology improved, new ways to create and maintain
accounts over a lifetime are emerging. Retirement experts are just
starting to understand the many ways in which economic and racial
disparities affect retirement savings. A larger role for participants
in retirement system design is likely to improve coverage of
marginalized groups and improve benefits. From the ERISA Advisory
Council to individual plan retirement committees, a greater role for
covered employees and retirees would be beneficial to the system.
Regular agency reporting on what works and better interagency
coordination also should be considered. The committee also should
ensure that spouses are always protected and fully apprised of their
benefit rights. Additionally, workers should always have full legal
protections to their benefits, including de novo legal review.
ensure fiduciary and account retention protections
For the millions of Americans who have access to a workplace
savings plan and started to save for their retirement, Congress can do
more to protect their hard-earned nest eggs. All tax-preferred
retirement savings should be prudently invested, with reasonable fees
and without conflicts of interest. While ERISA is clear that any person
who exercises discretion over employee benefit plan assets must do so
in a fiduciary capacity, efforts have been made to lower the important
standards that protect retirement investors. Recently, the Securities
and Exchange Commission (SEC) weakened financial adviser investment
advice standards, and the Department of Labor adopted similar
proposals. AARP strongly opposed those efforts and urges both agencies
and Congress to restore ERISA's longstanding protections. A strong
fiduciary standard should include the core principle that when
providing personalized investment advice to customers, financial
professionals must always act in the sole interests of those
customers--whether they be employers acting on behalf of workers or the
workers themselves. That fiduciary standard should be uniform for all
financial professionals and should apply to all types of accounts to
rectify the existing confusion among investors in the marketplace
because of standards that are not uniform. These rules are especially
important when workers terminate employment and help protect workers
who may be considering rollovers from their ERISA protected savings to
often less protected individual retirement investments.
Congress should also discourage pre-retirement cash-outs of
retirement funds and instead encourage account portability and stable
lifetime income streams, such as periodic withdrawal options and fixed
lifetime annuities at retirement age. Too many workers cash out their
savings when they change jobs or experience financial emergencies.
While this may provide short-term relief, cash-outs create significant
risk for diminished financial security for retirees and their spouses
in the future. Cash-outs related to emergencies could be reduced if
individuals could save in more liquid accounts or have greater access
to accounts that have been created through regular payroll
deduction.\32\ Research shows that individuals with emergency savings
accounts are 2.5 times more likely to be confident in their long-term
financial goals.\33\ Employer-facilitated emergency savings programs--
some of which leverage existing retirement savings vehicles--are
growing in popularity.\34\ In a recent AARP survey, 87 percent of
working adults said they support ``laws that make it easier for
employers to offer a safe and simple way for employers to save for
emergencies.''\35\
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\32\ https://www.nber.org/system/files/working_papers/w26498/
w26498.pdf.
\33\ Harvey, Catherine S. Unlocking the Potential of Emergency
Savings Accounts. Washington, DC: AARP Public Policy Institute, October
2019, https://doi.org/10.26419/ppi.00084.001.
\34\ https://www.ebri.org/content/emergency-fund-focused-employers-
goals-motivations-and-challenges.
\35\ Brown, S. Kathi. How Financial Experiences During the Pandemic
Shape Future Outlook, Washington, DC: AARP Research, April 2021,
https://doi.org/10.26419/res.00450.001.
In addition, most defined contribution plans do not accept former
account rollovers or permit contributions to be made to portable
accounts to help workers consolidate savings. Most DC plans also do not
offer fixed annuities or periodic payment options to help ensure that
retirees have more adequate distribution options and do not outlive
their money. AARP looks forward to working with the committee and other
groups to encourage asset preservation, portability, and to provide
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low-cost distribution and spend-down options that meet workers' needs.
Finally, AARP commends the Congress for earlier this year enacting
important legislation to protect the earned benefits of millions of
workers and retirees counting on multiemployer pensions for their
retirement security. We commend Chairman Wyden and the many committee
members who focused their attention on this issue. While most
multiemployer pension plans are well funded, over 100 plans--due to
industry changes and market downturns, among other reasons--do not have
enough assets and contributing employers to pay out full, earned
pensions. Many retirees have already been devastated by significant
reductions to their earned benefits, and over 1 million retirees and
their families were at substantial risk of losing needed retirement
income. While this was a difficult problem with no easy solution, the
legislative support was critical to protecting the benefits of workers
and retirees who had worked hard, earned their benefits, and were put
at risk through no fault of their own.
AARP would again like to thank the committee for considering the
challenges and needs for a secure retirement and for the opportunity to
share our policy priorities to improve the retirement savings of
Americans and their families. We stand ready to work with the committee
to improve Americans' retirement security.
______
Questions Submitted for the Record to David Certner
Question Submitted by Hon. Mike Crapo
Question. The CARES Act and other legislation has allowed workers
and retirees to withdraw money from their retirement accounts at times
they need it the most.
How do we balance the need to prevent leakage with the reality that
retirement accounts are sometimes the only place some people may
believe they can turn to in order to meet short-term liquidity needs?
Answer. Tax-preferred retirement plans were established to ensure
workers accumulate additional retirement income to supplement Social
Security in retirement. For most workers, there are always competing
current needs, making it all the more difficult to set aside savings
for the future. That is why AARP generally supports policies to
discourage ``cash-outs'' or ``leakage'' or other premature access to
retirement funds. Most workers are already falling short of the savings
they will need to maintain their standard of living in retirement--
allowing early access to retirement funds simply trades off problems of
today for greater problems in the future.
Having said that, we recognize that there are critical needs that
do arise. The pandemic was hopefully a once-in-a-generation event that
created a broad emergency need for many. However, for most emergencies,
AARP prefers workers use tools currently available--such as plan loan
provisions which provide the ability to borrow from your plan with the
opportunity to pay yourself back. In addition, workers should be
encouraged to set aside additional funds for emergencies with the
understanding that retirement money is for the future--easy access to
retirement funds undermines the long-term need to save for the future
and the need to both plan for today as well as save for tomorrow.
______
Questions Submitted by Hon. Steve Daines
Question. I am an original cosponsor of the Legacy IRA Act,
introduced by Senators Cramer and Stabenow, that would expand the IRA
charitable rollover to further incentivize charitable giving by
seniors.
From AARP's perspective, can you speak to the value of private
philanthropy to the nonprofit sector, and the benefits of an option
that provides senior donors, especially middle-income seniors, with
retirement income?
Does AARP support this legislation?
Answer. AARP supports efforts to encourage private philanthropy,
including efforts to appropriately encourage charitable giving through
the tax code, to help address many of the unmet needs in our society.
While we have not yet taken a formal position on expanding the IRA
charitable rollover, it appears to be generally consistent with AARP
views on charitable giving and improving retirement income for seniors.
We would be happy to look into this legislation in more detail.
______
Prepared Statement of Hon. Mike Crapo,
a U.S. Senator From Idaho
Thank you, Mr. Chairman, and thank you for holding this important
bipartisan hearing.
Private retirement saving and retirement security are issues in the
Finance Committee's jurisdiction that have a history of bipartisan
cooperation, and I expect this time will be no different. The purpose
of this hearing is to hear testimony on how we can build on that
bipartisan track record.
In 2015, under then-Chairman Hatch, I co-chaired the Finance
Committee's Savings and Investment Tax Working Group with Senator
Brown. That working group examined a host of proposals to increase
access to retirement plans, increase participation in plans, and
preserve retirement savings. Many of the findings from the working
group--including open multiple-employer plans and provisions to help
long-term, part-time workers--were the precursor to RESA and ultimately
the SECURE Act, which became law in December 2019.
At the same time, retirement savings were growing and the economy
was booming following the pro-growth, pro-worker policies enacted as
part of the 2017 tax reform law. However, the pandemic put a great deal
of economic stress on workers and retirees, and some had no choice but
to withdraw money from their retirement accounts to make ends meet.
As the economy continues to bounce back, we have a chance to build
on the success of the SECURE Act in a bipartisan way. House Ways and
Means Committee Chairman Neal and Ranking Member Brady have already
started the process. In the Senate, we are also making significant
progress on this issue thanks to the leadership of Senator Portman and
Senator Cardin.
Other members--both those who sit on this committee and those who
do not--have been working in a bipartisan way on retirement proposals,
which I expect we will hear more about today. The range of ideas put
forth to improve the retirement system are all important, but my focus
today is on three points that are the most pressing for Idahoans and
Americans across the country.
First and foremost, Congress should enact policies that encourage
workers to save so they can enjoy a secure retirement. One survey
conducted by the Department of Labor found that while 71 percent of
civilian workers had access to retirement benefits, the participation
rate for that same group was only 55 percent. This survey was conducted
only months after the SECURE Act was enacted, so I will be interested
to see updated studies and surveys in the future, but the concern
remains about whether enough workers are saving for retirement.
Second, I frequently hear from small business owners in Idaho who
tell me how expensive and cumbersome the rules are to offer their
employees a retirement plan. These employers want to provide retirement
benefits, but it is just not economically feasible. I am interested in
hearing about what Congress can do to make it easier and cheaper for
the smallest businesses to offer retirement plans for their employees.
Third, our economy is constantly evolving. People are working
longer, workers are changing jobs more often, and the number of ``gig
workers'' is on the rise. Our retirement system must adapt with this
changing landscape so every worker has a chance to save for a secure
retirement. There is no better time for the Finance Committee to
consider further retirement legislation that will meet these needs.
Mr. Chairman, I look forward to working with you and all the
members of the committee as we consider a so-called ``SECURE 2.0''
package.
To our panel of witnesses, I appreciate your willingness to share
your expertise with us this morning, and I look forward to hearing from
all of you.
Thank you, Mr. Chairman.
______
Prepared Statement of Brian H. Graff,
Chief Executive Officer, American Retirement Association
Thank you, Chairman Wyden, Ranking Member Crapo, and the other
members of the Senate Finance Committee, for holding a hearing to
examine our workplace retirement savings plan system and for the
opportunity to discuss with you how we can improve that system. My name
is Brian Graff, and I am the chief executive officer of the American
Retirement Association (ARA).
The ARA is the coordinating entity for its five underlying
affiliate organizations representing the full spectrum of America's
private retirement system--the American Society of Enrolled Actuaries
(ASEA), the American Society of Pension Professionals and Actuaries
(ASPPA), the National Association of Plan Advisors (NAPA), the National
Tax-Deferred Savings Association (NTSA), and the Plan Sponsor Council
of America (PSCA). Combined, the ARA represents over 30,000 retirement
plan professionals. The ARA's members and the organizations they are
affiliated with support 95 percent of all the defined contribution
plans, such as 401(k) plans, in the United States. The ARA and its
underlying affiliate organizations are diverse in the roles they play,
but united in their dedication to the success of America's private
retirement system.
ARA's mission is to help American workers bolster their retirement
security by facilitating well-designed workplace retirement savings
plans. We do that by both educating and informing retirement benefits
professionals, and by advocating for policies that give every working
American the opportunity to achieve a comfortable retirement.
workplace plans are the foundation for a secure retirement
The workplace retirement savings plan has been a success for those
that have access to them. These plans provide long-term economic growth
and build financial security for the middle class. Nearly 60 percent of
American households--some 74.5 million had access to a workplace plan
in 2020. At the end of the first quarter in 2021, defined contribution
retirement plans--the most common being the 401(k) plan--had $9.9
trillion in assets.\1\ Household retirement savings--including assets
accumulated through those retirement plans plus all other types of
retirement plans represents 59 percent of the non-bank financial
capital provided to the equity and bond markets.\2\
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\1\ Investment Company Institute, Quarterly Retirement Market Data,
June 16, 2021, available at: https://www.ici.org/statistical-report/
ret_21_q1.
\2\ Oxford Economics, Another Penny Saved: The Economic Benefits of
Higher US Household Savings, June 2014, available at: http://
www.oxfordeconomics.com/anotherpennysaved.
The middle class is the primary beneficiary of these plans. Nearly
two-thirds (64 percent) of active participants in 401(k) plans have an
adjusted gross income of less than $100,000 per year.\3\ One-third (33
percent) of participants have an income less than $50,000.\4\ The
critical factor that determines whether these moderate-income workers
save for their retirement is whether they have access to a retirement
savings plan at work. Data shows that more than 70 percent of workers
earning $30,000 to $50,000 will save in a plan when given the
opportunity at work, but fewer than 7 percent save on their own through
an IRA.\5\ In other words, moderate income workers are 12 times more
likely to save for their retirement if they have access to some type of
payroll deduction retirement savings program through their work.
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\3\ Judy Xanthopoulos, Ph.D. of Quantria Strategies, analysis of
Internal Revenue Service, Statistics of Income, Individual Income Tax,
and IRA Studies, 2017 Tax Year.
\4\ Ibid.
\5\ IRS tabulations and Vanguard, How America Saves, 2018.
The Senate Finance Committee's continued support of expanding
retirement plan coverage and simplifying retirement plan rules will
increase retirement savings and build even further on the success of
the workplace retirement plan system. An analysis by Oxford Economics
in 2014, projected that increasing retirement savings one to five
percentage points, including increasing the number of working Americans
saving, was projected to increase the Nation's long-term economic
growth by a full 3 percent--$3,500 per person--over the next 25
years.\6\ In other words, an increase in access, and the resulting
increase in retirement savings, produces not only individual wealth,
but ultimately benefits the greater economy.
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\6\ Oxford Economics, Another Penny Saved: The Economic Benefits of
Higher U.S. Household Savings, June 2014, available at: http://
www.oxfordeconomics.com/anotherpennysaved.
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who is left behind?
Despite these positive results, far too many Americans still lack
access to a retirement plan at work and thus lack an equitable
opportunity to achieve a comfortable retirement. This retirement plan
coverage gap, and the corresponding lack of retirement savings, is
particularly pronounced in the Black and Latinx communities. In fact,
according to a recent research report, 52 percent of Black Americans
and 68 percent of Latinx Americans do not currently have access to a
workplace retirement plan.\7\ By contrast, only 40 percent of White
Americans lack access to a retirement plan at work.\8\
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\7\ Richard W. Johnson, Urban Institute Fellow, How Can
Policymakers Close the Racial Gap in Retirement Security?, October
2020, available at: https://www.urban.org/research/publication/how-can-
policymakers-close-racial-gap-retirement-security/view/full_report.
\8\ Ibid.
Since so many Black and Latinx workers do not have access to a
retirement plan, it should be no surprise that a majority of Black and
Latinx families do not have any retirement account savings. Fifty-six
percent of Black families and 67 percent of Latinx families have zero
retirement savings assets compared with 35 percent of White
families.\9\
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\9\ Monique Morrissey, Economic Policy Institute, The State of
American Retirement Savings, December 2019, available at: https://
www.epi.org/publication/the-state-of-american-retirement-savings/.
Some of this gap can be attributed to the size of the organizations
for which these communities tend to work. According to the Department
of Labor's Bureau of Labor Statistics, only 53 percent of employees at
smaller businesses (firms with less than 50 workers) have access to a
workplace retirement plan, compared to 69 percent of those at firms
with more than 50 workers and 83 percent of those at firms with more
than 100 workers.\10\
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\10\ Department of Labor, Bureau of Labor Statistics, Employee
Benefits in the United States News Release, September 2020, available
at: https://www.bls.gov/news.release/archives/ebs2_
09242020.htm.
[GRAPHIC] [TIFF OMITTED] T2821.001
.epswhat can be done?
Expanding coverage with auto-enrollment is the key to addressing
racial inequities in retirement savings. Data shows that when moderate
income workers are auto-enrolled in a workplace retirement plan there
is no racial disparity in retirement savings participation with Black,
Latinx, and White Americans all at about 80 percent.\11\
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\11\ 401(k) Plans in Living Color, A Study of 401(k) Savings
Disparities Across Racial and Ethnic Groups, The Ariel/Aon Hewitt
Study, 2012.
In recent years, State and local governments have taken steps to
close the retirement plan coverage gap in their jurisdictions with the
enactment of laws that have created government facilitated automatic
IRA programs. Chairman Wyden's home State of Oregon was a trailblazer
here, becoming the first State in the Nation to formally launch such a
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program when OregonSaves came online on July 1, 2017.
A key policy feature of most of these automatic IRA programs is a
requirement that businesses over a certain size provide access to some
type of retirement plan to their employees. If employers do not already
offer a workplace retirement plan, or do not want to adopt one
available to them in the private marketplace, they can enroll their
employees in the State or local program. To date, 10 states--including
Oregon--have enacted such programs.\12\
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\12\ See the Center for Retirement Initiatives at Georgetown
University for a complete list of these programs found at: https://
cri.georgetown.edu/.
The ARA applauds the work and success of these State and local
programs but believes a Federal policy would better assure the
retirement plan coverage gap can be addressed consistently throughout
the entire country. In this regard, it is not our intent to displace
the great work of State and local governments that have already enacted
a program. Senator Whitehouse has introduced the Automatic IRA Act (S.
2370, 116th Congress) that would create a national requirement for
businesses with 10 or more employees to adopt at minimum an automatic
IRA plan. Similar legislation has been introduced in the past by
Congressman Neal, Chairman of the House Ways and Means Committee. We
believe the approach in both pieces of legislation could significantly
close the current retirement plan coverage gap while imposing
practically no burden on employers. This approach leverages existing
private sector solutions in the marketplace instead of causing a
massive disruption by replacing the entire existing retirement plan
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system with a government run program.
The ARA enthusiastically supports Chairman Wyden's legislation, the
Encouraging Americans to Save Act (S. 2452, 117th Congress), which
shares a key provision in Senator Cardin's and Senator Portman's
bipartisan Retirement Security and Savings Act (S. 1770, 117th
Congress), specifically designed to incentivize and supplement the
retirement savings of moderate-income workers. The bill, recently
reintroduced in this Congress, expands and enhances the existing
Saver's Credit by turning it from a tax credit of which only some can
take advantage into a government matching contribution of up to $1,000
a year for workers who save in a retirement account. The bill also
enhances and simplifies the new Saver's Match to make the full 50
percent match available to individuals earning up to $32,500 and
families earning up to $65,000.
[GRAPHIC] [TIFF OMITTED] T2821.002
.epsWith the increased income thresholds under this legislation,
over 120 million American workers would now be eligible for the new
Saver's Match incentive for retirement savings.\13\ This includes
millions of new gig workers in this country as well as government
workers, like public school teachers, many of whom are not eligible for
matching contributions. This expanded Saver's Match would both
encourage saving and help moderate income earners build assets by
providing an immediate, meaningful return on personal retirement
contributions.
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\13\ Estimates prepared by Judy Xanthopoulos, Ph.D. of Quantria
Strategies, based on IRS, SOI W-2 Data.
The potential results of Congress tackling the two biggest
challenges in the retirement savings policy space--closing the
retirement coverage gap and directly contributing to and incentivizing
the retirement savings of moderate-income workers--are extraordinary.
Estimates show that enactment of the combination of the Automatic IRA
Act and the Encouraging Americans to Save Act would create 51 million
new individuals now saving for retirement \14\ and would add an
additional $6.2 trillion in retirement savings over a 10-year
period.\15\ Nearly all--98 percent--of these 51 million new savers earn
less than $100,000 per year.\16\
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\14\ Ibid.
\15\ Employee Benefit Research Institute's Retirement Security
Projection Model--version 3671.
\16\ Estimates prepared by Judy Xanthopoulos, Ph.D. of Quantria
Strategies, based on IRS, SOI W-2 Data.
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closing the racial wealth gap through retirement savings
Moreover, these two vital retirement savings proposals would
greatly benefit the Black and Latinx communities, creating 5.8 million
new Black retirement savers and 8.4 million new Latinx savers that earn
less than $100,000 per year.\17\ For Black and Latinx Americans earning
under $30,000, this includes a 74 percent and a 76 percent increase in
retirement plan participation rates, respectively. For those Black and
Latinx Americans earning between $30,000 and $50,000, the increases are
56 percent and 60 percent, respectively.\18\
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\17\ Ibid.
\18\ Ibid.
[GRAPHIC] [TIFF OMITTED] T2821.003
.epsWhy is retirement savings important? Retirement savings allows
for a cushion against unexpected financial shocks. Retirement savings
opens doors for small business creation. Retirement savings is
accumulated wealth which leads to generational wealth. Ultimately,
retirement savings is an essential piece to closing the racial wealth
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gap.
I encourage the Senate Finance Committee, and, ultimately,
Congress, to implement into law the Automatic IRA Act and the
Encouraging Americans to Save Act. Besides these two important
policies, other legislative items have been introduced that would
support and expand the workplace retirement savings system.
student loan retirement matching program
The ARA strongly supports Chairman Wyden's Retirement Parity for
Student Loans Act (S. 1443, 117th Congress) which allows plan sponsors
to make an employer contribution to the retirement plan account that
matches a percentage of an employee's student loan payments. The latest
version of this legislation addresses a concern that the ARA identified
regarding how this new retirement plan design feature could negatively
impact the average deferral percentage (ADP) test that 401(k) plans
must satisfy. Since that problem has been addressed, small and medium-
sized businesses will now not have to worry that this new and
innovative retirement benefit puts their retirement plan testing at
risk.
emergency savings in retirement plans
The Federal Reserve found that nearly 4 in 10 adults in 2019 would
have difficulty covering a $400 unexpected expense using cash or its
equivalent,\19\ a situation that has likely grown worse for significant
portions of the population due to the economic impact of the COVID-19
pandemic.
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\19\ Board of Governors of the Federal Reserve System, Report of
the Economic Well-Being of U.S. Households in 2019: May 2020.
The ARA supports proposals--like Senator Lankford's and Senator
Bennet's Enhancing Emergency and Retirement Savings Act (S. 1870, 117th
Congress)--to create a new category of retirement plan distribution
that would allow workers who have a balance in these accounts to
readily access their money in the case of a personal financial
---------------------------------------------------------------------------
emergency without tax penalty and a minimal amount of paperwork.
This proposal leverages the existing workplace defined contribution
retirement plan system to address emergency savings shortfalls. This
would encourage increased participation in retirement plans especially
among moderate income workers since those workers will know that they
can access a portion of their savings in the case of a financial
emergency.
This approach is simple (no new or separate accounts), includes a
tax benefit to encourage saving, and does not undermine long-term
retirement savings. Employers are already familiar with processing such
requests since 401(k) plans have built in rules allowing access to
savings on account of hardships--and these funds are protected through
the Employee Retirement Income Security Act (ERISA).
The legislation would allow for one emergency distribution per
calendar year of up to $1,000 from the individual's account balance in
the plan and requires that the withdrawn funds be paid back to the plan
before an additional emergency distribution from that same plan is
allowed. The amount can be recontributed within a 3-year period to any
eligible plan to which a rollover contribution can be made.
The ARA and its members have concerns with other approaches that
push for employers to create and automatically enroll employees into an
entirely new and separate emergency savings account program. The ARA
believes that this sidecar approach would not only undermine retirement
savings, but create an unnecessary administrative burden for employers,
and would potentially expose the employer to more liability.
small employer retirement plan tax credit enhancements
The 2019 SECURE Act significantly increased the small business
pension plan startup tax credit to a maximum annual cap of $5,000, but
still limited it to 50 percent of any administrative expenses incurred
in the first 3 tax years of a new retirement plan.
Section 102 of House Ways and Means Committee Chairman Neal's and
Ranking Member Brady's Securing a Strong Retirement Act (H.R. 2954)
(a.k.a. SECURE 2.0) increases the existing small employer pension plan
start-up credit for employers with 50 or fewer employees to 100 percent
of administrative retirement plan expenses for the first 3 tax years of
a new retirement plan. The dollar cap would continue to apply.
Section 102 also adds a new tax credit to subsidize employer
contributions made to a new retirement plan (other than a defined
benefit plan). The Employer Contribution Credit is equal to the
applicable percentage of the amount contributed by the employer up to a
per-employee cap of $1,000. The applicable percentage is equal to 100
percent in the first tax year for a new plan, 75 percent in the second
year, 50 percent in the third year, 25 percent in the fourth year. The
full additional Employer Contribution Credit is limited to employers
with 50 or fewer employees and phased out for employers with between 51
and 100 employees.
The ARA supports these commonsense incentives that will encourage
small businesses to adopt a robust retirement benefit for their
workers.
pooled employer plans
Another key provision in the 2019 SECURE Act allows two or more
unrelated employers to join a multiple or pooled employer plan. The
provision includes important consumer protection safeguards requiring
the service provider of such an arrangement to take responsibility for
the proper operation of the pooled plan. Allowing unrelated employers
to pool their assets into one plan creates economies of scale that can
reduce administrative burdens and lower both employer and plan
participant cost, making this type of arrangement attractive for small
business owners who might otherwise not consider offering a program.
Senator Grassley's, Senator Hassan's, and Senator Lankford's
Improving Access to Retirement Savings Act (S. 1703, 117th Congress)
has thoughtfully included two provisions that address technical issues
with respect to these so-called ``open'' pooled employer plans,
building upon the improvements made to these arrangements in the 2019
SECURE Act. The first provision would allow 403(b) plans that are
generally sponsored by charities and public educational organizations,
to participate in open multiple employer plans as corporate plans can
currently. This provision includes important language requiring the
Department of Treasury and the Department of Labor to educate non-
profit plan sponsors on their fiduciary obligations. The second
provision would allow employers who wish to join an existing multiple
employer plan to receive the small employer pension plan startup
credit. These provisions would improve access to high-quality low-cost
retirement plans for the benefit of small business rank-and-file
workers.
other useful retirement plan tools and rule fixes
New Required Beginning Dates for Required Minimum Distributions
The 2019 SECURE Act provided greater flexibility in retirement
planning by moving back the age that individuals are required to begin
taking distributions from their tax-favored retirement accounts from
age 70\1/2\ to age 72. The 2021 SECURE 2.0 Act moves back those ages
even further to age 73 starting on January 1, 2022, to age 74 starting
on January 1, 2029, and to age 75 starting on January 1, 2032. A
similar provision is also included in Senator Cardin's and Senator
Portman's Retirement Security and Savings Act (S. 1770, 117th
Congress). These new required beginning dates will allow individuals to
hold on to their retirement assets longer should they wish to account
for a longer expected lifespan in retirement.
Family Attribution Rule Fixes
The ARA strongly supports Congressman Panetta's and Congressman
Arrington's Family Attribution Modernization Act (H.R. 2796, 117th
Congress) that is also included in the 2021 SECURE 2.0 Act. This
critical modification updates old tax rules to not only reflect the
modern economy, but it removes needless barriers to small business
retirement plan formation, particularly for women business owners.
Specifically, the legislation addresses two inequities in the stock
attribution rules that impact certain tests a retirement plan must
complete each year to remain qualified: (1) it removes attribution for
spouses with separate and unrelated businesses who reside in community
property States, and (2) it removes attribution between parents with
separate and unrelated business who have minor children.
Discretionary Amendments
Senator Grassley's, Senator Hassan's, and Senator Lankford's
Improving Access to Retirement Savings Act (S. 1703, 117th Congress)
includes an important provision--also contained in the 2021 SECURE 2.0
Act--that gives employers more time to adopt beneficial discretionary
retirement plan amendments--specifically up until the due date of the
employer's tax return. This new deadline to adopt a beneficial
discretionary amendment is consistent with the deadline to adopt a new
retirement plan that was provided for in the 2019 SECURE Act and gives
employers with existing retirement plans the flexibility to make their
retirement plans more generous to rank and files workers after the end
of the year.
Financial Factors in Selecting Retirement Plan Investments
The ARA has long believed that retirement plan participants and
beneficiaries are best served when the Employee Retirement Income
Security Act (ERISA) principles governing the selection of retirement
plan investments by plan fiduciaries are clear. ERISA fiduciaries'
obligations of prudence and exclusive purpose are at the heart of
ERISA's protections of retirement plans and participants, including
plan investment selection. The ARA believes that ERISA requirements for
fiduciaries selecting plan investments should neither promote the
sacrifice of investment returns or assumption of greater investment
risks as a means of promoting collateral social policy goals--nor
should they preclude consideration of benefits other than investment
return.
To that end, the ARA supports Senator Smith's Financial Factors in
Selecting Retirement Plan Investments Act (S. 1762, 117th Congress).
This legislation clarifies ERISA fiduciary obligations to make it clear
that a plan fiduciary may consider environmental, social, and
governance (ESG) factors in the selection of retirement plan
investments and provides that ESG investments are permitted as
qualified default investment alternatives in ERISA-covered retirement
plans. It establishes the principle in ERISA that ESG investments
should not be discouraged or treated differently than other retirement
plan investment options.
Federally Declared Disaster Distributions
Every year tens of thousands of Americans are victims of disasters
from floods, tornadoes, hurricanes, forest fires, or more recently a
global health pandemic. But because there are not permanent rules on
the use of retirement funds by individuals impacted by these
situations, victims are dependent upon congressional action after the
occurrence of each disaster. The ARA strongly supports permanent
retirement plan tax relief measures that would automatically apply once
a Presidential disaster declaration is issued. ARA applauds and
supports Senators Menendez and Cassidy's legislation that would make
eligibility for these distributions in these circumstances permanent.
Electronic Disclosure
The ARA strongly believes that electronic disclosure be the default
method of communication with retirement plan participants and
beneficiaries. Electronic delivery encourages participants to engage
with their investments, which results in better outcomes, including
higher deferral rates and improved retirement preparedness. According
to the Investment Company Institute's survey of a cross section of
401(k) recordkeepers conducted in the winter of 2017-2018, the average
contribution rate of participants who interacts with their plan website
averaged 7.8 percent of salary versus just 5.8 percent of salary for
those who did not interact with the plan's website. However, we are
aware of legislation in the House of Representatives developed in
response to a Department of Labor regulation released in 2020. The
legislation is counter to the DOL regulation and would only serve to
further complicate plan sponsors' ability to efficiently operate a
retirement plan. We propose a compromise that would streamline all
existing regulatory rules on the mechanics behind who receives
disclosures and how an individual receives disclosures, but the default
would be electronic except for one paper benefit statement provided
annually. We would like to work with Congress and other stakeholder
groups on this proposal in order to provide plan sponsors and
participants certainty on how disclosures are distributed in the
future.
conclusion
The ARA appreciates the Senate Finance Committee's focus on the
ongoing challenges that American families face in achieving a secure
retirement. We thank Congress for taking a major step forward to
improve the workplace retirement system with the enactment of the
SECURE Act at the end of 2019. We look forward to working with Congress
as it moves forward with further improvements to the system in this
Congress.
______
Questions Submitted for the Record to Brian H. Graff
Questions Submitted by Hon. Mike Crapo
Question. Small business owners in Idaho tell me how expensive it
is to offer their employees a retirement plan. The smallest businesses,
which may only have 5-10 employees, some of whom may work part-time,
can really benefit from tax incentives like the startup credit. I hear
that ongoing compliance with complex ERISA and tax code rules drive
much of the cost.
Would streamlining these rules make it easier--and therefore
cheaper--for small employers to comply?
Answer. Yes. The good news is that former Senate Finance Committee
Chairman Orrin Hatch included such a proposal in his retirement bill,
the SAFE Retirement Act of 2013 (S. 1270, 113th Congress, https://
www.congress.gov/bill/113th-congress/senate-bill/1270). Section 201 of
that bill creates a ``Starter 401(k)'' wage deferral-only super simple
safe harbor 401(k) plan. This proposal was also incorporated into House
Ways and Means Committee Chairman Richard Neal's Automatic Retirement
Plan Act (H.R. 4523, 115th Congress, https://www.congress.gov/bill/
115th-congress/house-bill/4523).
The plan allows employees to save up to $8,000 per year in a tax-
preferred account--more than in an IRA--but does not involve the
administrative burden or expense of a traditional 401(k) plan. For
example, this plan does not require any employer contributions or
complicated nondiscrimination testing and employees are automatically
enrolled. In other words, the ``Starter 401(k)'' is perfect for a small
or start-up business that is not in a position to contribute to a plan
but wants to help its employees save for retirement.
Question. How should Congress approach this challenge?
Answer. Congress should immediately enact this new plan design into
law. The American Retirement Association strongly supports passage of
the Automatic Retirement Plan Act, but, in addition, would support a
stand-alone measure, such as section 201 of the SAFE Retirement Act of
2013.
Question. In your testimony, you mentioned the importance of making
it easier to help small employers offer retirement plans. I agree with
you that making it easier for small employers is essential to closing
the coverage cap.
Do the proposals discussed in the July 28th hearing accomplish that
goal? If yes, which provisions or proposals are the most important? If
not, what else could be done?
Answer. The most effective way to close the coverage gap is to
require businesses to offer the opportunity for their employees to save
for retirement through payroll deduction. Senator Whitehouse's
Automatic IRA Act (S. 2370, 116th Congress, https://www.congress.gov/
bill/116th-congress/senate-bill/2370) creates such a national
requirement for businesses with 10 or more employees. Covered
businesses would be required to at minimum automatically enroll
employees into a payroll deduction IRA arrangement. House Ways and
Means Committee Chairman Richard Neal has introduced similar
legislation. Implementing these proposals will significantly close the
current retirement plan coverage gap while imposing practically no
burden on employers.
Enhancing the small employer retirement plan tax credit is also
critical. The 2019 SECURE Act significantly increased the small
business pension plan startup tax credit to a maximum annual cap of
$5,000, but still limited it to 50 percent of any administrative
expenses incurred in the first 3 tax years of a new retirement plan.
The bipartisan Securing a Strong Retirement Act (H.R. 2954, 117th
Congress, https://www.congress.gov/bill/117th-congress/house-bill/2954)
(a.k.a. SECURE 2.0) increases the existing small employer pension plan
start-up credit for employers with 50 or fewer employees to 100 percent
of administrative retirement plan expenses for the first 3 tax years of
a new retirement plan. The dollar cap would continue to apply. SECURE
2.0 also adds a new tax credit to subsidize employer contributions made
to a new retirement plan. These common-sense incentives will encourage
small businesses to adopt a robust retirement benefit for their
workers.
Expanding and enhancing the existing Saver's Credit will encourage
workers to participate in these retirement plans. Chairman Wyden's
Encouraging Americans to Save Act (S. 2452, 117th Congress, https://
www.congress.gov/bill/117th-congress/senate-bill/2452), which shares a
key provision in Senator Cardin's and Senator Portman's bipartisan
Retirement Security and Savings Act (S. 1770, 117th Congress, https://
www.congress.gov/bill/117th-congress/senate-bill/1770), is specifically
designed to incentivize and supplement the retirement savings of
moderate-
income workers. These proposals transform the Saver's Credit from a tax
credit of which only some can take advantage into a government matching
contribution of up to $1,000 a year for workers who save in a
retirement account. The bill also enhances and simplifies the new
Saver's Match to make the full 50 percent match available to
individuals earning up to $32,500 and families earning up to $65,000.
Estimates show that enactment of the combination of the Automatic
IRA Act and the Encouraging Americans to Save Act would create 51
million new individuals now saving for retirement and would add an
additional $6.2 trillion in retirement savings over a 10-year period.
Nearly all--98 percent--of these 51 million new savers earn less than
$100,000 per year.
Question. The bipartisan SECURE Act in 2019 expanded retirement
plan coverage for long-term, part-time workers. The U.S. workforce has
changed and will continue to change over time, and the pandemic is just
the most recent demonstration of changing dynamics.
What impact would the proposal to further expand retirement plan
coverage for long-term, part-time employees have on employers and
employees?
Answer. The American Retirement Association supports the expansion
of retirement plan coverage to long-term, part-time employees.
Provisions in both the bipartisan 2021 SECURE 2.0 bill and the
Retirement Security and Savings Act would reduce the period of service
requirement for long-term part-time employees from 3 to 2 years.
The 2019 SECURE Act excludes the counting of periods of service
prior to 2021 for purpose of determining the eligibility of long-term
part-time employees to contribute to the plan. However, it does not
explicitly exclude the counting of prior periods of service for vesting
purposes. Recent IRS guidance (Notice 2020-68, https://www.irs.gov/pub/
irs-drop/n-20-68.pdf) to implement the SECURE Act stated that because
of this statutory language omission, all prior service of long-term
part-time employees must be considered for vesting. Although employers
are not required to provide long-term part-time employees with employer
contributions, some employers may want to be more generous so as to not
treat them differently that full-time employees. This IRS
interpretation unfairly and negatively impacts those employers wanting
to be more generous.
The American Retirement Association supports a statutory
clarification to the 2019 SECURE Act so that the exclusion of periods
of service before the 2021 plan year also applies for purpose of
counting vesting service. This way, periods of service for both
eligibility and vesting will be counted the same way. Before the 2019
SECURE Act was enacted, there was no need to maintain the service and
hour records of employees not eligible to participate in the plan, so
many more generous employers will have trouble complying with the
recent IRS guidance.
Question. Automatic escalation features would clearly increase
retirement savings, but for some small employers, it may not be
feasible to offer such a feature.
Can you comment on the role automatic escalation features play in
retirement savings and how small employers can use these features?
Answer. Since 1998, employers have been permitted to automatically
enroll newly hired employees into a 401(k). In 2000, automatic
enrollment was extended to current workers. The 2006 Pension Protection
Act (PPA) created clear automatic enrollment and automatic escalation
safe harbors for employers.
According to the Plan Sponsor Council of America's 2019 Annual
Survey of Profit Sharing and 401(k) Plans, 60.2 percent of plans had
automatic enrollment, but that percentage drops to 34.8 percent for
employers with less than 50 plan participants. From the same survey,
32.7 percent of plans had an automatic escalation feature that
automatically increases the default deferral rates over time (typically
at 1 percent of pay per year) including 34.2 percent of employers with
less than 50 plan participants. So, if small employers have an
automatic enrollment feature in their plan, they also typically have an
automatic escalation feature as well.
While these automatic features are effective, the bigger problem is
that, according to the DOL's Bureau of Labor Statistics, only 53
percent of workers at businesses with less than 50 workers have access
to a workplace retirement plan, compared to 69 percent of workers at
businesses with 50-100 workers, and 83 percent of workers at businesses
with more than 100 workers. We need to focus on getting small
businesses to adopt retirement plans first.
Question. In your written statement, you mentioned pooled employer
plans--or ``PEPs''-- which were enacted as part of the SECURE Act. I
hear a lot of enthusiasm about these plans, and I understand that as of
January 1st, pooled plan providers can begin to offer PEPs.
Can you comment on how PEP implementation is going?
Answer. Many retirement plan service providers have unveiled
various pooled employer plan (PEP) products this year. In a PEP, the
plan sponsor role is outsourced to a professional third party known as
the Pooled Plan Provider (PPP). Because the PPP is the plan sponsor,
the PPP is also the designated plan administrator and named fiduciary,
two very important legal roles in determining who has fiduciary
responsibility for the plan. The PPP role is likely to be filled by
third-party administrators (TPAs), recordkeepers, registered investment
advisors (RIAs) or some other financial services firm. The PPP must
acknowledge their fiduciary responsibilities in writing and ensure all
participating employers are complying with their obligations and that
the plan is properly bonded. All of these requirements are further
monitored by registration requirements with the U.S. Department of
Labor (DOL).
The SECURE Act laid a solid foundation upon which to build PEPs,
but there remains a need for regulatory guidance. Most important will
be the need for the DOL to address potential conflicts of interest when
a service provider takes on the PPP role and then hires themselves to
take on other roles in the plan for compensation. This scenario is
likely to occur in many PEPs where a recordkeeper serves as a PPP and
hires themselves as the plan administrator or an RIA serves as the PPP
and hires themselves as the discretionary investment manager. Conflicts
could also arise if the PPP includes proprietary investment products in
the PEP. These scenarios could be addressed with DOL guidance on
reasonable arrangements and proper disclosures, but that exemption does
not currently exist.
Question. What else needs to be done for these plans to become more
widespread?
Answer. Senator Grassley's, Senator Hassan's, and Senator
Lankford's Improving Access to Retirement Savings Act (S. 1703, 117th
Congress, https://www.
congress.gov/bill/117th-congress/senate-bill/1703) has thoughtfully
included two provisions that address technical issues with respect to
pooled employer plans, building upon the improvements made to these
arrangements in the 2019 SECURE Act. The first provision would allow
403(b) plans that are generally sponsored by charities and public
educational organizations, to participate in open multiple employer
plans as corporate plans can currently. This provision includes
important language requiring the Department of Treasury and the
Department of Labor to educate non-profit plan sponsors on their
fiduciary obligations. The second provision would allow employers who
wish to join an existing multiple employer plan to receive the small
employer pension plan startup credit. Besides this important
legislation, the market needs time to develop the products and for plan
sponsors to become aware of the products that are available.
Question. In your written statement, you mentioned the family
attribution rules that affect retirement plans in community property
States. As you know, Idaho is a community property State, so I am
interested to hear more.
Please elaborate on how these rules affect small business owners in
Idaho.
Answer. Under the tax code, certain related businesses must be
aggregated when performing the coverage and nondiscrimination tests.
The aggregation rules are generally based on the degree of common
ownership of the businesses. For example, if an individual owns 100
percent of two separate businesses, they must be aggregated for
purposes of the tests.
In determining the level of ownership in a business the tax laws
have certain attribution rules whereby an individual is deemed to own
stock held by other individuals or entities.
As a general rule, an individual is attributed any ownership
interest held by his or her spouse. There is an exception to this rule.
A spouse is not deemed to own the stock of his or her spouse if: (1)
the individual does not have direct ownership in the spouse's business;
(2) the individual is not a director or employee, and does not
participate in the management of the spouse's business; (3) no more
than 50 percent of the spouse's business's gross income for a taxable
year is derived from passive investments (e.g., royalties and rents);
and (4) the spouse's ownership interest is not subject to disposition
restrictions running in favor of the individual or the minor children
of the individual and the spouse (e.g., the business owner cannot be
required to offer a right of first refusal to his or her spouse or
their children before selling the business to a third party).
In a community property State, spouses are automatically considered
to own half of the property acquired during the marriage, except under
certain limited circumstances. The result is that the first criteria
(no direct ownership in each other's business) is not satisfied and
there would be stock attribution among the spouses.
The application of this rule can create situations where a business
owner is not able to establish a plan for her employees solely because
she resides in a community property State.
The ARA strongly supports Congressman Panetta's and Congressman
Arrington's Family Attribution Modernization Act (H.R. 2796, 117th
Congress, https://www.
congress.gov/bill/117th-congress/house-bill/2796) that is also included
in the 2021 SECURE 2.0 bill. The Family Attribution Modernization Act
updates old tax rules to reflect the modern economy and removes
needless barriers to small business retirement plan formation,
particularly for women business owners. Specifically, the legislation
addresses two inequities in the stock attribution rules: (1) it removes
attribution for spouses with separate and unrelated businesses who
reside in community property States, and (2) it removes attribution
between parents with separate and unrelated business who have minor
children.
______
Question Submitted by Hon. John Thune
Question. An IRS report from 2019 indicated that the independent
contractor workforce increased nearly 50 percent between 2001 and 2016.
As the number of individuals choosing to participate in the gig
economy increases, either as a full-time job or a way to supplement
income, do you believe existing retirement plans, like pooled employer
plans for example, adequately accommodate independent contractors in
their ability to save for retirement?
Answer. It is unclear whether gig workers are eligible to join a
pooled employer plan (PEP), so this is another area for DOL to provide
further PEP clarification and guidance.
______
Questions Submitted by Hon. Todd Young
Question. As I mentioned during my opening statement, only 40
percent of Indiana's workforce participates in an employer-provided
retirement plan. In fact, just half of all Hoosier workers are offered
such a plan in the first place.
During our conversation, you mentioned that two of the major
hurdles small businesses face in offering employer-provided retirement
plans are (1) administrative costs and (2) the limited flexibility
around costs involved with employer contributions. I was proud to
support the bipartisan SECURE Act last Congress which eased some of the
costs related to setting up such plans, especially for small
businesses.
The second hurdle you had mentioned--giving small businesses more
flexibility--is an area in which I have taken great interest, as we
discussed. In particular, my Retirement Security Flexibility Act would
address shortcomings in current contribution safe harbor provisions by
empowering employers to auto-enroll employees in plans and auto-
escalate employee contributions to help employees accumulate savings
more quickly, while also easing burdensome contribution matching
requirements for small employers.
During the hearing you had shared ideas similar to those present in
this legislation. Would you agree that relaxing the minimum
contribution limits for the smallest employers would encourage such
employers to offer retirement plans to their employees and ultimately
increase retirement savings among its workers?
Answer. Yes. The American Retirement Association support's your
Retirement Security Flexibility Act (S. 2602, 117th Congress, https://
www.congress.gov/bill/117th-congress/senate-bill/2602) to create an
additional automatic contribution 401(k) plan safe harbor for small
employers. This additional safe harbor would give small employers more
flexibility for employer contributions than is provided in the existing
401(k) plan safe harbor arrangements.
And as I mentioned to you during the hearing, an even simpler
approach is the ``Starter 401(k)'' proposal in former Chairman Orrin
Hatch's SAFE Retirement Act. The ``Starter 401(k)'' allows employees to
save up to $8,000 per year in a tax-preferred account--more than in an
IRA--but does not involve the administrative burden or expense of a
traditional 401(k) plan. For example, this plan does not require any
employer contributions or complicated nondiscrimination testing and
employees are also automatically enrolled.
Question. Many Americans are vulnerable to sudden and unexpected
expenses. The annual Federal Reserve Report on the Economic Well-being
of U.S. Households revealed that roughly 40 percent of Americans are
unable to cover a $400 expense. While the COVID-19 Economic Impact
Payments temporarily alleviated this problem, it appears that increased
consumer spending has largely eliminated short-term gains made in
savings. I am working with Senator Booker to reintroduce a number of
bills that would help incentivize emergency savings, including by
setting aside a portion of one's tax refund into a rainy day fund and
enabling workers to set up short-term savings accounts through their
employers.
How important is it that emergency savings issues are addressed
alongside broader retirement savings reform?
Answer. It is very important that emergency savings issues get
addressed, since the lack of emergency savings is a significant barrier
preventing Americans from setting aside long-term savings for a more
comfortable retirement.
To give American workers a peace of mind that they can access funds
set aside in a retirement account for an unexpected financial
emergency, the American Retirement Association supports Senator
Lankford's and Senator Bennet's Enhancing Emergency and Retirement
Savings Act (S. 1870, 117th Congress, https://www.congress.gov/bill/
117th-congress/senate-bill/1870). This bill creates a new category of
retirement plan distribution that would allow workers who have a
balance in these accounts to readily access their money in the case of
a personal financial emergency without tax penalty and a minimal amount
of paperwork.
This proposal leverages the existing workplace defined contribution
retirement plan system to address emergency savings shortfalls. This
would encourage increased participation in retirement plans especially
among moderate income workers since those workers will know that they
can access a portion of their savings in the case of a financial
emergency.
This approach is simple (no new or separate accounts), includes a
tax benefit to encourage saving, and does not undermine long-term
retirement savings. Employers are already familiar with processing such
requests since 401(k) plans have built-in rules allowing access to
savings on account of hardships--and these funds are protected through
the Employee Retirement Income Security Act (ERISA).
The ARA and its members have concerns with other approaches that
push for employers to create and automatically enroll employees into an
entirely new and separate emergency savings account program. The ARA
believes that this sidecar approach would not only undermine retirement
savings, but create an unnecessary administrative burden for employers,
and would potentially expose the employer to more liability.
Question. What are the trade-offs of allowing emergency savings to
be drawn from retirement accounts, as many did during the pandemic?
Answer. The obvious trade-off is that workers who draw down their
retirement accounts for emergency or other eligible hardship
distributions will have less money saved for their retirement. The
Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed
eligible retirement savers to take a coronavirus-related distribution
(CRD). Individuals affected by the coronavirus were able to withdraw up
to $100,000 from their retirement plan penalty free until December 30,
2020. This is the first time these emergency distribution provisions
were put into place on a national scale.
At the time of its passage, some were concerned that this bill
would open the floodgates to a large percentage of workers cashing out
years of retirement savings. Fortunately, this did not happen.
According to an analysis of Vanguard 401(k) plan recordkeeping data,
more than 94 percent of plan participants did not access their
retirement savings, and instead stayed the course. Less than 6 percent
of participants have withdrawn assets, with the typical participant
accessing about $13,300. Recovery from such an early distribution can
be achieved with marginal increases to savings and sufficient time to
retirement.
Question. How do we ensure Americans have the freedom of using
their savings to cover immediate needs while preserving the integrity
of their long-term retirement accounts?
Answer. This a critical balance. The Enhancing Emergency and
Retirement Savings Act only allows for one emergency distribution per
calendar year of up to $1,000 from the individual's account balance in
the plan and requires that the withdrawn funds be paid back to the plan
before an additional emergency distribution from that same plan is
allowed. The amount can be recontributed within a three-year period to
any eligible plan to which a rollover contribution can be made.
These reasonable restrictions also highlight the importance of
automated features in retirement plans. In addition to the savings
benefits of automatic enrollment, automated plan design will provide
many employees with an additional source of emergency money.
______
Questions Submitted by Hon. Catherine Cortez Masto
Question. Northern Nevada communities are facing the effects of
devastating wildfires--a threat that has grown in intensity over the
years. Though Nevada has been spared the major structural damage that
other Western communities have seen recently, Nevadans must be equipped
with the tools they need to keep their families safe during disasters
such as access to emergency savings. Chairman Wyden has supported
legislation that would enable families affected by catastrophic
wildfires and other disasters to withdraw funds from their retirement
accounts without penalty for disaster-related expenses. Congress has
regularly relaxed penalties for folks impacted by major disasters on an
ad hoc basis, just as we did during the pandemic, yet families
shouldn't have to come to Congress in the darkest hour of their lives
asking for tax relief.
Can you elaborate on the importance of allowing families to access
these funds as emergency savings under extraordinary circumstances?
Answer. It is critically important. I absolutely agree with your
assessment. Every year tens of thousands of Americans are victims of
major disasters, and Congress on occasion has allowed these victims to
use their own retirement funds through special distribution and loan
rules to help them cope and recover from the disaster. But because
there are not permanent rules in the tax code for these situations,
victims are dependent upon ad hoc congressional action to get increased
access to their retirement funds after the occurrence of each disaster.
For example, in 2005, Congress created these special retirement
plan rules for Hurricane Katrina victims. However, Congress provided no
such relief for Hurricane Sandy victims. This disparate treatment is
unfair and even if Congress eventually provides the relief in many
cases the special rules are put in place too late to be useful. Without
permanent relief, the general recovery process in the aftermath of a
disaster is slowed.
Fortunately, Senator Cassidy and Senator Menendez recently
introduced the Disaster Retirement Savings Act (S. 2583, 117th
Congress, https://www.congress.gov/bill/117th-congress/senate-bill/
2583) that would make these sensible disaster relief rules permanent.
The ARA strongly supports permanent retirement plan tax relief measures
that would automatically apply once a Presidential disaster declaration
is issued. ARA applauds and supports Senators Cassidy and Menendez's
legislation that would make eligibility for these distributions in
these circumstances permanent and urges Congress to promptly enact this
bill into law.
Question. How does that ability impact workers' decision to save
for retirement in the first place?
Answer. If American workers fear that they will be unable to or
unfairly penalized for accessing their savings, they will be less
likely to save in these types of retirement accounts in the first
place. Proposals like the Enhancing Emergency and Retirement Savings
Act and the Disaster Retirement Savings Act strike the proper balance
to ensure Americans have the ability to use their savings to cover
emergency needs while preserving their long-term retirement savings.
Question. Nevada follows community property rules, which suggest
that families have joint ownership of an enterprise run by one spouse.
I understand this has created challenges for small business owners
looking to start a retirement plan.
Can you explain why this is occurs? How do we fix it?
Answer. Under the tax code, certain related businesses must be
aggregated when performing the coverage and nondiscrimination tests.
The aggregation rules are generally based on the degree of common
ownership of the businesses. For example, if an individual owns 100
percent of two separate businesses, they must be aggregated for
purposes of the tests.
In determining the level of ownership in a business the tax laws
have certain attribution rules whereby an individual is deemed to own
stock held by other individuals or entities.
As a general rule, an individual is attributed any ownership
interest held by his or her spouse. There is an exception to this rule.
A spouse is not deemed to own the stock of his or her spouse if: (1)
the individual does not have direct ownership in the spouse's business;
(2) the individual is not a director or employee, and does not
participate in the management of the spouse's business; (3) no more
than 50 percent of the spouse's business's gross income for a taxable
year is derived from passive investments (e.g., royalties and rents);
and (4) the spouse's ownership interest is not subject to disposition
restrictions running in favor of the individual or the minor children
of the individual and the spouse (e.g., the business owner cannot be
required to offer a right of first refusal to his or her spouse or
their children before selling the business to a third party).
In a community property State, spouses are automatically considered
to own half of the property acquired during the marriage, except under
certain limited circumstances. The result is that the first criteria
(no direct ownership in each other's business) is not satisfied and
there would be stock attribution among the spouses.
The application of this rule can create situations where a business
owner is not able to establish a plan for her employees solely because
she resides in a community property State.
The ARA strongly supports Congressman Panetta's and Congressman
Arrington's Family Attribution Modernization Act (H.R. 2796, 117th
Congress, https://www.
congress.gov/bill/117th-congress/house-bill/2796) that is also included
in the 2021 SECURE 2.0 bill. The Family Attribution Modernization Act
updates old tax rules to reflect the modern economy and removes
needless barriers to small business retirement plan formation,
particularly for women business owners. Specifically, the legislation
addresses two inequities in the stock attribution rules: (1) it removes
attribution for spouses with separate and unrelated businesses who
reside in community property States, and (2) it removes attribution
between parents with separate and unrelated business who have minor
children.
______
Prepared Statement of Hon. Tobias Read, Oregon State Treasurer
introduction
Chairman Wyden, Ranking Member Crapo, and members of the committee,
thank you for the opportunity to address the committee on the topic of
retirement security.
My name is Tobias Read, and I have the honor of serving as Oregon's
State Treasurer. At the Oregon State Treasury, we focus on promoting
the financial security of all Oregonians. We manage a roughly $100
billion investment portfolio, issue the State's bonds, serve as the
central bank for State agencies and local governments, and administer
savings programs for individuals and families.
Before I was elected State Treasurer, I served in the State
legislature. In 2015, I co-sponsored the legislation that led to the
creation of the Oregon Retirement Savings Program, also known as
OregonSaves. The Oregon State Treasury is tasked with implementing
OregonSaves, and my experience with OregonSaves is why I am here to
testify before you today.
We created the first-in-the-Nation OregonSaves program in response
to our Nation's retirement savings crisis. According to the World
Economic Forum, the retirement savings gap in America is estimated to
be at least $28 trillion.\1\ At the same time, more than half of the
private sector workforce in the United States lacks access to an
employer-sponsored retirement savings plan at work. In Oregon alone,
with a working age population of 1.8 million, there were an estimated 1
million
private-sector workers without such access. And that matters, because
research by the AARP shows that workers are 15-times more likely to
save if there is an option to do so at work.\2\
---------------------------------------------------------------------------
\1\ https://www.nirsonline.org/wp-content/uploads/2017/06/
retirementsavingscrisis_final.pdf.
\2\ https://www.aarp.org/content/dam/aarp/ppi/2017-01/
Retirement%20Access%20Race%20
Ethnicity.pdf.
That's why everyone should be happy to see the efforts of Oregon
and other States to expand savings options to more people. Empowering
more people to invest in their own futures is vital to the financial
---------------------------------------------------------------------------
well-being of individuals and families alike.
The program is working. I am pleased to report that OregonSaves is
a success, and it is still just getting started. Tens of thousands of
people are already participating and most of these Oregonians had never
saved before. Over 100,000 Oregonians have accounts with OregonSaves
and participants have collectively saved over $123 million dollars for
their retirement.
what is oregonsaves?
OregonSaves is an easy, automatic way for Oregonians to save for
retirement at work. Workers at an employer that does not offer a
qualified retirement plan can automatically enroll and start saving
into their own personal Roth IRA. OregonSaves is also a public-private
partnership. The program is overseen by the State and managed by a
private program administrator with extensive experience in the
financial services industry, similar to how 529 plans are structured.
Oregon employers that do not offer a retirement savings option are
required to offer OregonSaves to their workers. Participating workers
contribute to their IRA with every paycheck, and those IRAs are tied to
the worker and not the job, ensuring that what a worker saves is
portable and will always be their money and under their control.
Workers can opt out if they want, but most are staying in--about 3 of
every 4 eligible workers.
Based on early demographic data, two-thirds of workers age 35-44
choose to participate in OregonSaves when they work at a facilitating
employer.\3\ This means OregonSaves is laying a foundation for a long-
term culture shift, in which saving early and throughout your career
becomes the norm.
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\3\ http://crr.bc.edu/wp-content/uploads/2018/12/IB_18-22.pdf.
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how does it work?
The program fills an important gap by expanding access to workers
who have traditionally been unable to contribute to workplace
retirement accounts. Workers, such as hair stylists or those in
construction, generally work for themselves or for small businesses
that lack employer-sponsored plans. For these workers, making long-term
financial plans--including for retirement--often takes a back seat.
The program is currently registering employers with 5 or more
workers. The State-wide rollout will continue in waves through 2022,
which is the timeline for small businesses with four or fewer workers.
However, many employers see the benefits of OregonSaves and aren't
waiting to register. Employers of any size can enroll at any time ahead
of their registration date, with thousands having already chosen to do
so.
The program is also open for voluntary enrollment by individuals,
including the self-employed, gig economy workers, and those whose
employers do not facilitate OregonSaves.
The participation rate of eligible workers has remained steady at
around 72 percent since we launched, consistent with the market
research analysis completed in 2016,\4\ which estimated opt-out rates
of 20 to 30 percent. Workers automatically enrolled in OregonSaves
utilize a standard set of options designed to reduce the stress and
decision paralysis often ascribed to individuals enrolling in
retirement savings plans. The standard savings rate and account type
for OregonSaves is 5 percent of gross pay into a Roth IRA. Other states
(CA, IL) initially set their standard savings rate at 3 percent, for
fear that a higher initial percentage would reduce participation in the
program. Our results show the higher percentage has not affected
participation. The average savings rate is currently around 5.5
percent, and workers are contributing an average of $140 per month.
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\4\ https://www.oregon.gov/retire/SiteAssets/Pages/Newsroom/
ORSP%20Market%20Analysis%
2013JULY2016.pdf.
We chose a Roth IRA as the standard account type because workers
can withdraw their contributions at any time without penalty. This is
an important design feature for new savers, many of whom lack emergency
savings to weather financial shocks such as car repairs or medical
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bills.
In fact, at the beginning of the pandemic when many of our
participants were laid off when workplaces were required to close,
their OregonSaves accounts were able to provide some financial
stability some savers.
Additional standard design features include depositing the first
$1,000 saved into a capital preservation fund. This serves a dual
purpose: first, it keeps our participants away from market volatility
in the early months when they are new to the program. Second, it
ensures that if a worker is automatically enrolled and decides soon
thereafter to withdraw from the program, they can quickly access all
contributed funds. Contributions above $1,000 automatically flow into a
target date fund based on the participant's estimated retirement age.
The Board has recently made some changes in how the capital
preservation feature operates that will occur later this year.
Finally, the standard design includes an automatic escalation of 1
percent on January 1st of each year until the contribution rate reaches
10 percent. We're happy to report that 94.6 percent of savers that
experienced an auto-escalation in 2021 took no action, allowing that
increase in their contribution rate. In fact, 102 participants used the
reminder as an opportunity to increase their savings rate even further.
What this means in numbers--more than 32,000 OregonSaves participants
had their savings rate auto-escalated this year, and of those, more
than 10,000 were auto-escalated for the second time and almost 4,000
for the third time.
employer facilitation
From the beginning, Treasury was aware that the success of
OregonSaves relied heavily on our relationship with employers. We
constructed the program to limit the requirements on employers as much
as possible and are constantly considering ways to decrease the time
employers spend facilitating the program. Employer interaction with the
program includes the steps outlined below.
First, registration or exemption. All Oregon employers receive
notices from the OregonSaves program in the months leading up to their
registration date. For employers that already offer a qualified
retirement plan, these notices simply prompt them to go online and
certify themselves as exempt. In practice, we have seen a small number
of employers use these program notices as a prompt to set up their own
qualified retirement plan instead of facilitating OregonSaves. We see
this as an exciting development, both for workers, who will have access
to better benefits, and for private industry.
In addition to the self-exemption process, we have determined two
other ways to certify that an employer is exempt. If an employer files
a Federal form 5500 and our staff is able to positively match the
business on the form 5500 with the Oregon business, we will send a
notice of presumed exemption from the program.
public support
The public overwhelmingly supports OregonSaves. Employers say it is
easy to sign up workers, and based on a recent public survey by DHM,\5\
the level of support has actually increased in the first year. That
poll found an astounding 82 percent of people support OregonSaves.
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\5\ https://www.aarp.org/content/dam/aarp/research/
surveys_statistics/econ/2018/oregon-retirement-savings-
oregonsaves.doi.10.26419-2Fres.00248.001.pdf.
They know it is the right approach, and that it will improve
savings, making Oregon stronger, today and in the long run. Or as John,
an employee at Provoking Hope in McMinnville told us, ``I'm 30 and now
just thinking about my future. For the first time in my life, I'm
thinking ahead. Where I'm at today is a 180 [degree] turn--I never even
had a bank account before. I'm grateful these types of programs are
available to get people on the right track.''
federal law and interaction with state programs
OregonSaves and the other State-based auto IRA programs are
constantly seeking better ways to serve employers and program
participants. We believe the following changes at the Federal level
would help achieve our program goals of reduced burden on employers and
a better product for our participants:
Passage of the Encouraging Americans to Save Act (EASA): EASA
creates a Federal matching credit for contributions to an IRA,
and as written will allow participants in OregonSaves to
qualify for the matching credit. This is an extremely important
step in addressing the retirement savings crisis. Additionally,
because savings in ABLE accounts would also be eligible for the
match, we see this as an important incentive that will help
broaden Oregonians' participation in saving for future
disability related costs.
Creating a robust 5500 database. As previously mentioned, we
currently use Form 5500 data to presume employers exempt from
the program. While helpful, that data is not as robust as we
originally anticipated. Our match rate was approximately 11.5
percent when comparing our data with the Form 5500 filings.
Upon further research, we believe part of the issue is that
subsidiary companies are not listed in a way that can be easily
searched and retrieved. If a more robust database existed,
OregonSaves and the other State programs could more easily
exempt employers that offer a qualified retirement plan,
meaning we can reduce the administrative burden on exempt
employers and focus our efforts and resources on those
businesses who need to facilitate.
Allowing minors to use OregonSaves. Under the age of majority
(18 or 21, depending on the State) an IRA is a custodial
account that a custodian (typically a parent) holds on behalf
of a minor child. The account is transitioned into the child's
name at the age of majority. We recommend changing this
requirement and allowing minors as young as 16 to open their
own accounts and hold the money in their own names. This would
allow State-based programs to auto-enroll minors working at
facilitating employers and get young workers in the habit of
saving early in their working lives.
Exemption from future Federal legislation. When considering
Federal legislation that would overlap or create national-level
retirement savings programs, we would ask for an exemption to
allow State-based programs to continue where they already
exist.
conclusion
OregonSaves is already succeeding and achieving the goal of
improved access to retirement savings. Workers and businesses across
Oregon express strong support and agree about the need for the program.
The success of OregonSaves will have long-term positive
implications for the savers and for Oregon. Thousands of Oregonians
have already set aside significant amounts in the hope of greater
retirement security. Every person is different and their retirement
needs will vary, but OregonSaves and the ability to save is already
improving our business climate, and is already increasing the long-term
financial stability of thousands of Oregonians.
______
Questions Submitted for the Record to Hon. Tobias Read
Questions Submitted by Hon. Mike Crapo
Question. As you know, ERISA provides Federal protection for
workers participating in most retirement plans sponsored by private
businesses. The law assigns a fiduciary duty to sponsoring employers to
ensure that plan decisions are made solely in the interest of
participants. ERISA also provides a grievance procedure for workers to
claim benefits and participant rights to take legal action and to
receive damages. The prevalent State-facilitated model of payroll
deduction IRAs means that most of these programs do not have ERISA
protections.
Does it concern you that these programs do not have ERISA
protections?
Answer. Workers participating in OregonSaves are protected by
robust fiduciary safeguards comparable to, and sometimes exceeding,
those of ERISA plans. Our program is supervised by a State-appointed
board which, as State Treasurer, I chair. The Board is a fiduciary with
a statutory duty to manage OregonSaves for the exclusive benefit of
participants under a strict ``prudent expert'' standard. The Board's
duties include selecting investments and service providers and keeping
fees low. In addition, participants enjoy the transparency mandated by
the Oregon Public Meetings Law and the Oregon Public Records Law, a
protection that ERISA plan participants do not have. It is my
understanding that the other State auto IRA programs provide similar
levels of strong fiduciary protection and governance as OregonSaves.
Question. For private-sector retirement plans, the employer has a
fiduciary responsibility to oversee the expenses associated with
investments and any fees charged to the plan or participants.
Who bears the responsibility in a State-run retirement program to
select, monitor, and understand the fees?
Answer. As mentioned in my previous response, the OregonSaves Board
is a fiduciary, owing participants an ERISA-like duty of care in
selecting and monitoring a prudent array of investments and keeping
investment and administration fees low. ORS 178.205(2)(c); ORS
178.210(1)(q). The Board has retained a third-party investment expert
(Sellwood Consultants) which, in addition to the State Treasury staff,
assists the Board in fulfilling its duties.
______
Prepared Statement of Aliya Robinson, Senior Vice President,
Retirement and Compensation Policy, The ERISA Industry Committee
Chairman Wyden, Ranking Member Crapo, and members of the Senate
Finance Committee, thank you for the opportunity to testify before the
committee on behalf of The ERISA Industry Committee (ERIC) on how to
Congress can help to continue building bipartisan legislation to help
American workers save for retirement. ERIC's voice is unique as the
only national association that advocates exclusively for large
employers on health, retirement, and compensation public policies at
the Federal, State, and local levels. ERIC's member companies are
leaders in every industry sector and provide comprehensive retirement
and health benefits to tens of millions of active and retired workers
and their families across the country. As such, ERIC has a strong
interest in policies that impact employers' ability to provide cost-
effective retirement programs and the ability of employees to receive
such benefits and enjoy a secure retirement.
ERIC member companies are working hard to keep their businesses
viable, protect workers and their jobs, and tailor employee benefits to
the needs of their workforce, even enhancing them to address needs
during the pandemic, as allowed by law. Each member company has
different workforce needs, but changes in The Employee Retirement
Income Security Act of 1974, as amended (ERISA) would help all of them
support their workers and their workers' retirement security. ERIC
appreciates the efforts of this committee to provide much-needed aid to
retirement plan participants and plan sponsors in the SECURE Act in
2019 and to address COVID-19 pandemic-related concerns in the
Coronavirus Aid, Relief, and Economic Security (CARES) Act and in the
American Rescue Plan Act of 2021.
ERIC member companies want to expand saving opportunities for
workers and optimize resources for retirement savings. We look forward
to working with this committee as the country recovers from the
pandemic and focuses on these longer-term needs.
An essential part of the recovery from the pandemic is to increase
retirement security. Providing opportunities for greater savings into
retirement plans play a significant role in increasing retirement
security for workers--particularly those who have suffered recent
financial stress. To expand retirement savings for workers, ERIC
recommends the enactment of the following provisions:
Increase the age for required minimum distributions to age 75.
Treat student loan payments as elective deferrals for the
purpose of employer matching contributions.
Provide a safe harbor for the recovery of retirement plan
overpayments.
Allow for emergency savings accounts as part of retirement
savings plans.
Provide additional savings opportunities for those close to
retirement by increasing catch-up limits in plans.
Modify the definition of a Highly Compensated Employee (HCE)
to encourage the inclusion of employees who meet the definition but are
not on an executive or management level.
Expand cafeteria plans to allow participants additional pre-
tax benefit options such as student loan repayment, disability
insurance, long-term care insurance, longevity insurance, and
retirement planning services.
Strengthen Retiree Health Care by extending Internal Revenue
Code section 420.
Employers voluntarily offer retirement plans for their workers,
expending significant resources to provide retirement benefits. As
such, ERIC urges Congress to pass legislation that will allow these
employers to optimize resources by eliminating unnecessary
administrative burdens.Specifically, we recommend the enactment of the
following provisions:
Simplify reporting and disclosure requirements by eliminating
redundant and unnecessary disclosures.
Maintain electronic disclosure as a default distribution.
Establish an Office of Retirement Savings Lost and Found
within the Pension Benefit Guaranty Corporation (PBGC) that would serve
as a repository for information about all lost retirement accounts
accessible through a searchable online database.
Prevent raising single-employer PBGC premiums to pay for non-
retirement legislation.
Protect ERISA preemption in efforts to increase retirement
coverage.
Below, we provide further details on our recommended provisions to
increase retirement security and reduce administrative burdens on plan
sponsors. We note when the recommendations have previously been
introduced.
Increase the age for required minimum distributions to age 75.\1\
The required minimum distribution (RMD) rules are aimed at preventing
individuals from using their qualified plans and IRAs to accumulate
significant assets for future generations. However, the current RMD
rules too rigidly affect smaller account balances and the flexibility
needed to provide effective annuity-like income distribution options
that support more successful retirement outcomes. Therefore, we support
increasing the required beginning date from 70\1/2\ to age 75.
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\1\ Retirement Security and Savings Act--Section 108, https://
www.congress.gov/bill/117th-congress/senate-bill/1770/text; Securing a
Strong Retirement Act of 2020--Section 105, https://www.congress.gov/
bill/117th-congress/house-bill/2954/text--increases the required
beginning date to either age 73, 74, or 75 depending on the individuals
age at the time of distributions.
Treat student loan payments as elective deferrals for the purpose
of employer matching contributions. Many Americans are interested in
obtaining higher education and are burdened with the cost of attending
school. Nearly 44 million people owe $1.7 trillion in Federal student
debt, making it difficult for some to save for retirement.\2\ Employers
are interested in helping these employees save for their futures by
establishing student loan matching programs. In 2018, the IRS issued a
Private Letter Ruling (PLR-131066-17) allowing a 401(k) plan sponsor to
contribute to a 401(k) plan on behalf of plan participants who pay down
student loan debt but do not necessarily contribute to the employer's
401(k) plan.\3\ Since the PLR applies only to the employer who receives
the letter, congressional action is necessary to allow other employers
to support their workers in this way. To solve this matter through
legislative action, Congress should pass the Securing a Strong
Retirement Act, which includes Chairman Wyden's Retirement Parity for
Student Loans Act (S. 1443).\4\ The legislation would permit 401(k),
403(b), SIMPLE and governmental 457(b) retirement plans to make
matching contributions to workers as if their student loan payments
were salary reduction contributions. As such, recent graduates who
cannot afford to save money beyond their student loan repayments would
no longer have to forego the employer match and can start to build
retirement savings while paying down their student loan debt.
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\2\ ``Consumer Credit--G-19,'' Federal Reserve, https://
www.federalreserve.gov/releases/g19/current/default.htm.
\3\ ``Private Letter Ruling (PLR-131066-17),'' Internal Revenue
Service, https://www.irs.gov/pub/irs-wd/201833012.
\4\ Retirement Security and Savings Act; Securing a Strong
Retirement Act of 2020.
Provide a safe harbor for the recovery of retirement plan
overpayments. Plan sponsors have a fiduciary obligation to ensure that
retirement plans are adequately funded and that every participant
receives the benefits that have been promised. Overpaying benefits to
certain plan participants can undermine these efforts. On the other
hand, plan sponsors do not want to burden retirees with paying back
amounts that were mistakenly overpaid, especially de minimis amounts.
However, it is unclear whether plan sponsors can forego the recoupment
of benefit overpayments without violating their fiduciary duties. As
such, ERIC supports legislation that would provide a safe harbor to
allow well-funded plans to forego recoupment of overpayments that were
not the fault of the retiree.\5\
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\5\ Retirement Security and Savings Act--Section 322, https://
www.congress.gov/bill/117th-congress/senate-bill/1770/text; Securing a
Strong Retirement Act of 2020--Section 301, https://www.congress.gov/
bill/117th-congress/house-bill/2954/text. We note that the IRS has
recently issued guidance in this area as well in Revenue Procedure
2021-30. While we appreciate this effort, we believe that providing a
legislative solution will avoid potential changes in different
administrations.
Allow for emergency savings accounts as part of retirement savings
plans. Short-term financial needs and risks create significant
financial stress for employees, undermine their productivity, and
interfere with their retirement savings. According to a report by
Bankrate.com, 26 percent of all Americans have no emergency savings,
and people between 30 and 49 are more likely than any other age group
to have no emergency savings.\6\ On top of this, the Urban Institute
computes that the value of Americans' retirement accounts has shrunk
from over $18 trillion in 2019 to roughly $14 trillion in 2020.\7\
Clearly, there is a need to encourage both emergency and retirement
savings. ERIC believes that it is crucial to recognize the holistic and
lifetime nature of financial well-being (including retirement) and
strengthen the connections between short-term financial concerns and
adequate savings for retirement.
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\6\ Carlozo, Lou, ``How Does Your Emergency Fund Compare? New Stats
Reveal Americans' Rainy Day Savings Habits,'' Money Under 30, December
18, 2019, https://www.moneyunder30.
com/compare-average-emergency-fund-savings.
\7\ Farrell, Chris, ``Analysis: The Pandemic Is Making America's
Reitrement Cirsis Worse. Here's What You Can Do, PBS News Hour, April
30, 2020, https://www.pbs.org/newshour/economy/analysis-the-pandemic-
is-making-americas-retirement-crisis-worse-heres-what-you-can-do.
As such, ERIC supports The Enhancing Emergency and Retirement
Savings Act of 2021, which would provide up to $1,000 from a retirement
savings account to be used for personal emergencies.\8\ Allowing
participants access to savings for emergencies will encourage
participation in retirement programs--particularly for those who may be
hesitant to ``lock away'' money in case they will need it later. Plan
sponsors and service providers have been actively developing tools to
educate workers on the importance of saving and retirement readiness
through financial wellness programs and other measures. We believe this
legislation complements the private sector efforts by providing
additional ways for employees to handle their financial
responsibilities.
---------------------------------------------------------------------------
\8\ Enhancing Emergency and Retirement Savings Act of 2021, https:/
/www.congress.gov/bill/117th-congress/senate-bill/1870/
text?q=%7B%22search%22%3A%5B%221870%22%5D%7D&r=2
&s=1.
Provide additional savings opportunities for those close to
retirement by the increasing catch-up limits in plans. In balancing
short-term and long-term financial needs, it is important to give
workers greater flexibility about exactly which year they make elective
deferrals. For example, older workers should have the opportunity to
make higher elective deferrals to 401(k) plans than is possible under
current law in recognition that: (i) in some earlier years, they and
their families may have had important financial needs they reasonably
prioritized ahead of elective deferrals, and (ii) a dollar contributed
at a younger age will generate a larger retirement benefit at
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retirement age than a dollar contributed at a later age.
Therefore, we support legislation that increases the catch-up
amount for those who are close to retirement.\9\
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\9\ Retirement Security and Savings Act--Section 120, https://
www.congress.gov/bill/117th-congress/senate-bill/1770/text; Securing a
Strong Retirement Act of 2020--Section 107, https://www.congress.gov/
bill/117th-congress/house-bill/2954/text.
In addition, we believe that workers of all ages should be provided
with some flexibility in making elective deferrals to 401(k) plans
during times of unpaid leave. The catch-up contributions would be in
the amount that would have been allowed if payments were continued
during that time. Furthermore, upon making the catch-up contribution,
the participant should receive all matching contributions that would
---------------------------------------------------------------------------
have been otherwise made.
Modify the definition of a Highly Compensated Employee to encourage
the inclusion of employees who meet the definition but are not on an
executive or management level. A vital component of these
nondiscrimination rules is the definition of an employer's HCEs. This
definition must achieve an appropriate policy balance--enough of the
employer's leadership/management employees should be HCEs so that the
employer will have a strong incentive to maintain a qualified plan that
also benefits significant Non-Highly Compensated too many of them will
be inappropriately limited in the contributions they can make or
receive under the plan, particularly in a 401(k) plan.
Not surprisingly, employers' workforces reflect the economic,
business, geographic, and labor contexts within which they operate. The
current coverage and nondiscrimination rules were initially developed
based primarily on what is perhaps the most common, straightforward
employer and workforce structure--a single organization operating in a
single business line with a workforce characterized from a compensation
distribution perspective by a pyramid image (i.e., small group of
employees at the ``high-paid top'' of the pyramid with increasingly
larger groups of employees as compensation decreases from the ``high-
paid top'' toward the ``lowest-paid base'' of the pyramid). However,
many companies have moved away from this pyramid model. Instead, the
workforce structure is flatter, with a significant number of highly
paid employees at the base with only another layer or two of decision-
makers above the base. In 1996, Congress adopted a modification to the
HCE definition to better recognize employers with a high proportion of
highly paid employees without undercutting the critical coverage and
nondiscrimination policies. The change allows an employer to limit the
employees treated as HCEs because they had compensation above the
statutory compensation threshold ($125,000 for 2019) compared to those
employees who were also in the top-paid 20 percent of all the
employer's employees by compensation.\10\ While this change is helpful,
it requires another update to keep pace with changing workforce
structures. For some employers with certain workforce structures, in
certain high-compensation industries (e.g., technology or financial
services), and in certain high cost-of-living locations, even the top-
paid 20 percent HCE option will result in a larger HCE group than is
appropriate. To further improve the HCE definition to address these
situations, we propose that an employer be permitted to limit the
employees earning over the annual compensation HCE threshold who are
treated as HCEs for the current year to the top-paid ten percent group
of employees by compensation.
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\10\ The Small Business Job Protection Act of 1996, Pub. Law 104-
188, section 1431, https://www.congress.gov/bill/104th-congress/house-
bill/3448.
Expand cafeteria plans to allow participants additional pre-tax
benefit options such as student loan repayment, disability insurance,
long-term care insurance, longevity insurance, and retirement planning
services. Cafeteria plans can be effective vehicles for employers to
offer and employees to address key short-term financial needs and
risks. They are also used to purchase key insurance benefits such as
disability insurance, long-term care insurance, longevity insurance,
and retirement planning services. These benefits and coverages could be
bought under the cafeteria plan on a pre-tax basis. As such, ERIC
supports making these benefits qualified benefit options for cafeteria
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plans.
Strengthen retiree health care by extending Internal Revenue Code
section 420. We urge Congress to extend section 420 of the Internal
Revenue Code (the ``Code''), which will continue bipartisan legislation
that encourages continued funding and vesting of employer-provided
retiree welfare benefits.\11\ section 420 allows employers with
generously overfunded pension benefits and group life insurance
coverage) for the plans' retirees without jeopardizing the security of
the underlying pension promise. These retiree welfare transfers benefit
both employers and retirees. They provide a funding source for retiree
welfare benefits (which, unlike pensions, are not subject to funding
requirements) and also effectively require the employer to continue to
provide the underlying retiree welfare benefits for a stated number of
years after the transfer, making section 420 the only provision in
ERISA or the Code that statutorily vests retiree welfare benefits.
section 420 was originally enacted in 1990 on a temporary basis and is
currently set to expire at the end of 2025. It has been subject to
numerous extensions, on a bipartisan basis, in advance of its then-
scheduled expiration.\12\ These transfers are good retirement policy
and good fiscal policy and should be extended.\13\
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\11\ Section 405(a) of S. 1770, the Retirement Security and Savings
Act of 2021, as introduced by Senators Cardin (D-MD) and Portman (R-OH)
and co-sponsored by Senators Hassan (D-NH) and Collins (R-ME), would
extend section 420 for 6 years, from the end of 2025 to the end of
2031.
\12\ Most recently, section 420 was extended in the Surface
Transportation and Veterans Health Care Choice Improvement Act of 2015
(the ``2015 Act''), Pub. L. No. 114-41, Sec. 2007 (2015). At that time,
section 420 was scheduled to expire at the end of 2021 but was extended
to the end of 2025. The 2015 act had overwhelming bipartisan support
(it received votes of 91-4 in the Senate and 385-34 in the House) and
was signed into law by President Obama.
\13\ Notably, extending section 420 also raises revenue (transfers
for retiree welfare benefits replace deductible corporate payments for
these same benefits), allowing funding of a variety of spending and
other priorities. The 2015 act, which extended section 420 for 4 years,
raised $172 million over the 10-year budget window.
Simplify reporting and disclosure requirements by eliminating
redundant and unnecessary disclosures. The tax code and ERISA include
many rules requiring and governing the reports, disclosures, and
notices that employers and qualified plans must provide to employees
and participants. We believe that these communications are complex,
burdensome, and costly and are less informative or effective for
employees and participants than they should be. ERIC agrees with
proposals that direct the DOL, Treasury, and the PBGC to issue
regulations to consolidate and simplify the existing ERISA and tax
reports, notices, disclosures, and other information relating to
deferred compensation, pension, profit-sharing, and other retirement
plans.\14\ In developing these regulations, the agencies should consult
with the appropriate stakeholders and organizations (including
sponsors, plans, administrators, recordkeepers, communication experts,
and others) to identify problems, areas of possible improvement, and
approaches to improvement. The agencies should review the efficacy and
ability to combine summary plan descriptions, summary annual reports,
summary of material modifications, single employer annual funding
notices, fee disclosures, QDIA/safe harbor notices, section 402(f)
rollover notices, participant account statements, securities-related
disclosures, distribution options (including lifetime annuity estimate
disclosures, choices around risk transfer transactions), and other
communications to employees and participants.
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\14\ Retirement Security and Savings Act--Section 301, https://
www.congress.gov/bill/117th-congress/senate-bill/1770/text; Securing a
Strong Retirement Act of 2020--Section 304, https://www.congress.gov/
bill/117th-congress/house-bill/2954/text.
Maintain electronic disclosure as a default distribution. ERIC's
member companies invest considerable time and expense providing and
improving communications to participants, beneficiaries, and others and
have found that electronic communications offer significant advantages
to plan sponsors, administrators, participants, and beneficiaries.
Therefore, we were very supportive of the changes made by the DOL that
allow plan sponsors to provide electronic delivery as the default
option for providing retirement plan notices. This regulation
significantly delivery systems and move into the 21st century, and
importantly allowed them to target delivery more appropriately offer
notices and information more quickly, and provide beneficiaries an
opportunity to act on information provided with embedded links, website
access, etc. Consequently, one point of concern in recent legislation
is the attempt to roll back recent advances in electronic delivery
flexibility.\15\ We encourage Congress to allow plan sponsors to
provide retirement notices in the same manner as other notices and
information, including those provided by the government. At the very
least, if Congress decides that an annual disclosure is necessary, it
should be a short and generic notice--i.e., a ``postcard notice''--
which can be provided more easily and quickly than an annual benefit
statement.
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\15\ Securing a Strong Retirement Act of 2020--Section 313(b)(2),
https://www.congress.gov/bill/117th-congress/house-bill/2954/text.
Establish an Office of Retirement Savings Lost and Found within the
Pension Benefit Guaranty Corporation (PBGC). ERIC's member companies
care significantly about the participants and beneficiaries in their
employer-
sponsored plans. They put tremendous resources and funds into these
retirement plans and want each participant to benefit fully from these
plans. As such, plan sponsors want all participants to be found and
receive their hard-earned retirement benefits. ERIC member companies
work hard to find all participants but there are still missing
retirement plan participants and recalcitrant participants who remain
out of contact or stubbornly refuse to commence their benefits (or cash
checks once received). This challenge has been compounded by the
termination of the IRS and Social Security Letter Forwarding Program.
This challenge is also expected to grow, given that today's workers
tend to switch jobs more frequently.\16\ Although plans of all sizes
deal with missing participant issues, ERIC's large employer members are
especially likely to face these challenges because their plans tend to
be larger and more complex with more significant acquisition histories
(including acquisitions where a plan has inherited incomplete records).
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\16\ Also, auto-enrollment usage has increased due to the 2006
Pension Protection Act and successfully brought many more participants
into the employer-provided system. However, the increased number of
plan participants also increases the challenges associated with missing
and unresponsive participants.
ERIC's members are, therefore, incredibly supportive of solutions
that address this issue. An Office of Retirement Savings Lost and Found
would serve as a repository for all ``lost'' retirement accounts
accessible through a searchable online database,\17\ that participants
could utilize to find former employers and determine whether they have
retirement accounts from which they could receive distributions. Such a
database would be beneficial in ensuring that participants receive the
benefits that they have earned and, thereby, decrease the number of
missing participants.
---------------------------------------------------------------------------
\17\ Retirement Security and Savings Act--Section 323, https://
www.congress.gov/bill/117th-congress/senate-bill/1770/text; Securing a
Strong Retirement Act of 2020--Section 306, https://www.congress.gov/
bill/117th-congress/house-bill/2954/text.
Stop unnecessary and harmful PBGC premium increases that are
implemented as part of a budget gimmick and outside of established
policy procedures. Congress mandated that PBGC's mission is ``to
encourage the continuation and maintenance of voluntary private pension
plans,'' but increased premiums drive employers away from the defined
benefit system. In rapid succession, and without input from the
committees of jurisdiction or a policy justification for the $86/person
in 2021--an increase of $55/participant over 14 years, compared to an
increase of only $30 over the previous 32 years. In addition, Congress
subjected these rates to annual increase by indexing them to inflation.
Congress raised PBGC premiums even though neither PBGC nor the
administration called for an increase, and the single-employer program
was already adequately funded. As a result of these needless increases
made in the dead of night, many plan sponsors are deciding to exit the
system by dropping or freezing their defined benefit plans, or
disallowing benefits for new workers. In 2018, there were 5.5 million
fewer participants in the
single-employer system than in 2014. And the ever-increasing PBGC
premiums are one of the reasons employers are terminating these
plans.\18\ For those employers that are not completely terminating,
others have decided to de-risk either by offering lump sums or
purchasing annuities for select groups, which lowers their PBGC
premiums but deprives these individuals of ERISA's protections.\19\ By
the PBGC's own estimates, the PBGC's trust fund for the single-employer
system does not pose any immediate or long-term threat of default. In
fact, the PBGC's 2020 Annual Report shows that the single-employer
program is overfunded by $15.5 billion and is projected to have a $46.3
billion surplus by 2029. Any increase in PBGC premiums at this point
would be entirely unrelated to PBGC's or participant needs.\20\
Therefore, we urge Congress to pass legislation that prevents
increasing single-employer PBGC premiums without a full and fair
review.\21\
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\18\ See ``PBGC Single-Employer Premiums and Their Impact on Plan
Sponsorship,'' American Academy of Actuaries, October 2020, available
at https://www.actuary.org/sites/default/files/2020-10/
PBGCPremiumsIB.pdf.
\19\ See the 2018 Annual Report of the Participant and Plan Sponsor
Advocate citing Mercer's study on de-risking, available at https://
www.pbgc.gov/sites/default/files/pbgc_advocate_report
_2018.pdf.
\20\ PBGC's 2020 Annual Report at https://www.pbgc.gov/sites/
default/files/pbgc-annual-report-2020.pdf. In fact, decrease in such
premiums is very much needed to prevent a downward spiral in which
healthy companies are effectively forced out of the system, leaving
PBGC with less-healthy companies to support it, which are the very
companies that are at risk for needing the PBGC's support.
\21\ See The Pension and Budget Integrity Act of 2019 which creates
a budget point of order for any provision that increases single-
employer pension program premiums payable to the PBGC.
Expand the ability of plans to self-correct plan errors. Plan
sponsors and administrators should be permitted to play a more
significant role in identifying and correcting plan errors, including
excess, insufficient, and missed contributions, compensation and
service, accrued benefit, and other determinations and calculations. In
particular, employers should be allowed greater opportunities to self-
correct routine, common operational, and plan document mistakes without
the need for the incurrence of fees and Federal agency oversight and
approval. To this end, expanding the Employee Plans Compliance
Resolution System (EPCRS) and the Voluntary Fiduciary Correction
Program (VFCP) would increase compliance and reduce the cost of plan
administration without adversely affecting participants' benefits.\22\
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\22\ Retirement Security and Savings Act--Section 115, https://
www.congress.gov/bill/117th-congress/senate-bill/1770/text; Securing a
Strong Retirement Act of 2020--Section 307, https://www.congress.gov/
bill/117th-congress/house-bill/2954/text.
Protect ERISA preemption in efforts to increase retirement
coverage. The ability of large employers to follow a single set of
Federal rules is critical to their ability to provide benefits to their
workers, families, and retirees across the country. As different States
have set up retirement programs for their private citizens, ERIC has
been vigilant in protecting ERISA preemption and ensuring that
employers who voluntarily provide retirement benefits can do so on a
uniform basis.\23\ ERIC does not oppose State efforts to provide
retirement plan options to for workers without access to an employer-
provided retirement plan but opposes any attempt to mandate reporting
or other obligations on companies that offer a federally regulated
retirement plan. ERIC has successfully worked with all State retirement
programs to ensure that our member companies are not burdened by
reporting requirements that infringe upon ERISA's preemption laws. We
will continue advocating on the Federal, State, and local levels to
protect large employers' ability to design and administer retirement
plans unique to their workforces without mandates that violate Federal
law.
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\23\ In 2017, ERIC filed a lawsuit requesting that the Oregon
Retirement Savings Board halt the reporting requirement because it
violates ERISA preemption, https://www.eric.org/
uploads/doc/legal/ERIC%20v%20Oregon%20Retirement%20Savings%20Board.pdf.
ERIC and OregonSaves reached a settlement agreement by which ERIC
members are automatically exempt from the reporting requirements of the
OregonSaves employer exemption process.
You will note that many of these provisions that ERIC supports and
recommends were included in the Retirement Security and Savings Act by
Senators Cardin and Portman.\24\ ERIC applauds the leadership of these
members of Congress in recognizing the continued need to focus on
retirement security. Some newer measures and modifications are needed
to ensure that workers in all industries and in all workplaces can
fully achieve retirement security.
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\24\ Many of these provisions are also included in the Securing a
Strong Retirement Act of 2021 (SSRA) which was introduced by Ways and
Means Committee Chairman Neal and Ranking Member Brady in the House.
ERIC and our large employer plan sponsors look forward to
continuing to work with you and other interested parties to advance
these measures and explore additional provisions that can be included
to further promote retirement security for working Americans. Thank you
for the opportunity to share our ideas. If you have any questions, do
not hesitate to contact meat arobinson@eric.org or by calling 202-789-
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1400.
______
Questions Submitted for the Record to Aliya Robinson
Questions Submitted by Hon. Mike Crapo
Question. An essential part of the recovery from the pandemic is to
increase retirement security. Providing opportunities for greater
savings into retirement plans play a significant role in increasing
retirement security for workers--particularly those who have suffered
recent financial stress.
Of the proposals discussed in the hearing on July 28th, which of
them are most important for simplifying or clarifying the rules
governing retirement plans from an employer perspective?
Answer. Simplify notices and disclosures. The tax code and ERISA
include many rules requiring and governing the reports, disclosures,
and notices that employers and qualified plans must and may provide to
employees and participants. We believe that these communications are
complex, burdensome and costly and, therefore, are less informative or
effective for employees and participants than they should be. ERIC
agrees with proposals that direct the DOL, Treasury, and the PBGC to
issue regulations to consolidate and simplify the existing ERISA and
tax reports, notices, disclosures, and other information relating to
deferred compensation, pension, profit sharing, and other retirement
plans.\1\ In developing these regulations, the agencies should consult
with the appropriate stakeholders and organizations (including
sponsors, plans, administrators, recordkeepers, communication experts,
and others) to identify problems, areas of possible improvement, and
approaches to improvement. The agencies should review the efficacy and
ability to combine summary plan descriptions, summary annual reports,
summary of material modifications, single employer annual funding
notices, fee disclosures, QDIA/safe harbor notices, section 402(f)
rollover notices, participant account statements, securities-related
disclosures, distribution options (including lifetime annuity estimate
disclosures, choices around risk transfer transactions), and other
communications to employees and participants.
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\1\ Retirement Security and Savings Act--Section 301, https://
www.congress.gov/bill/117th-congress/senate-bill/1770/text; Securing a
Strong Retirement Act of 2020--Section 304, https://www.congress.gov/
bill/117th-congress/house-bill/2954/text.
Provide a safe harbor for the recovery of retirement plan
overpayments. Plan sponsors have a fiduciary obligation to ensure that
retirement plans are adequately funded and that every participant
receives the benefits that have been promised. Overpaying benefits to
certain plan participants can undermine these efforts. On the other
hand, plan sponsors do not want to burden retirees with paying back
amounts that were mistakenly overpaid, especially de minimis amounts.
However, it is unclear whether plan sponsors can forego the recoupment
of benefit overpayments without violating their fiduciary duties. As
such, ERIC supports legislation that would provide a safe harbor to
allow well-funded plans to forego recoupment of overpayments that were
not the fault of the retiree.\2\
---------------------------------------------------------------------------
\2\ Retirement Security and Savings Act--Section 322, https://
www.congress.gov/bill/117th-congress/senate-bill/1770/text; Securing a
Strong Retirement Act of 2020--Section 301, https://www.congress.gov/
bill/117th-congress/house-bill/2954/text. We note that the IRS has
recently issued guidance in this area in Revenue Procedure 2021-30.
While we appreciate this effort, we believe that providing a
legislative solution will avoid potential changes in different
administrations.
Establish an Office of Retirement Savings Lost and Found within the
Pension Benefit Guaranty Corporation (PBGC). Another area of needed
---------------------------------------------------------------------------
clarifications pertains to missing participants.
ERIC's member companies care significantly about the participants
and beneficiaries in their employer-sponsored plans. They put
tremendous resources and funds into these retirement plans and want
each participant to benefit fully from these plans. As such, plan
sponsors want all participants to be found and receive their hard-
earned retirement benefits.
ERIC member companies work hard to find all participants, but there
are still missing retirement plan participants and recalcitrant
participants who remain out of contact or stubbornly refuse to commence
their benefits (or cash checks once received). This challenge has been
compounded by the termination of the IRS and Social Security Letter
Forwarding Program. This challenge is also expected to grow, given that
today's workers tend to switch jobs more frequently.\3\ Although plans
of all sizes deal with missing participant issues, ERIC's large
employer members are especially likely to face these challenges because
their plans tend to be larger and more complex with more significant
acquisition histories (including acquisitions where a plan has
inherited incomplete records).
---------------------------------------------------------------------------
\3\ Also, auto-enrollment usage has increased due to the 2006
Pension Protection Act and successfully brought many more participants
into the employer-provided system. However, the increased number of
plan participants also increases the challenges associated with missing
and unresponsive participants.
ERIC's members are, therefore, incredibly supportive of solutions
that address this issue. An Office of Retirement Savings Lost & Found
would serve as a repository for all ``lost'' retirement accounts
accessible through a searchable online database,\4\ that participants
could utilize to find former employers and determine whether they have
retirement accounts from which they could receive distributions. Such a
database would be beneficial in ensuring that participants receive the
benefits that they have earned and, thereby, decrease the number of
missing participants.
---------------------------------------------------------------------------
\4\ Retirement Security and Savings Act--Section 323, https://
www.congress.gov/bill/117th-congress/senate-bill/1770/text; Securing a
Strong Retirement Act of 2020--Section 306, https://www.congress.gov/
bill/117th-congress/house-bill/2954/text.
Maintain electronic disclosure as a default distribution. ERIC's
member companies invest considerable time and expense providing and
improving communications to participants, beneficiaries, and others and
have found that electronic communications offer significant advantages
to plan sponsors, administrators, participants, and beneficiaries.
Therefore, we were very supportive of the changes made by the DOL that
allow plan sponsors to provide electronic delivery as the default
option for providing retirement plan notices. This regulation
significantly eased administrative burdens for plan sponsors by
allowing them to modernize their notice delivery systems and move into
the 21st century, and importantly allowed them to target delivery more
appropriately, offer notices and information more quickly, and provide
beneficiaries an opportunity to act on information provided with
embedded links, website access, etc. Consequently, one point of concern
in recent legislation is the attempt to roll back recent advances in
electronic delivery flexibility.\5\ We encourage Congress to allow plan
sponsors to provide retirement notices in the same manner as other
notices and information, including those provided by the government. At
the very least, if Congress decides that an annual disclosure is
necessary, it should be a short and generic notice--i.e., a ``postcard
notice''--which can be provided more easily and quickly than an annual
benefit statement.
---------------------------------------------------------------------------
\5\ Securing a Strong Retirement Act of 2020--Section 313(b)(2),
https://www.congress.gov/bill/117th-congress/house-bill/2954/text.
Expand the ability of plans to self-correct plan errors. Plan
sponsors and administrators should be permitted to play a more
significant role in identifying and correcting plan errors, including
excess, insufficient, and missed contributions, compensation and
service, accrued benefit, and other determinations and calculations. In
particular, employers should be allowed greater opportunities to self-
correct routine, common operational, and plan document mistakes without
the need for the incurrence of fees and Federal agency oversight and
approval. To this end, expanding the Employee Plans Compliance
Resolution System (EPCRS) and the Voluntary Fiduciary Correction
Program (VFCP) would increase compliance and reduce the cost of plan
administration without adversely affecting participants' benefits.\6\
---------------------------------------------------------------------------
\6\ Retirement Security and Savings Act--Section 115, https://
www.congress.gov/bill/117th-congress/senate-bill/1770/text; Securing a
Strong Retirement Act of 2020--Section 307, https://www.congress.gov/
bill/117th-congress/house-bill/2954/text.
Question. People may be reluctant to tie their money up in
retirement plans in case they will need that money to cope with a
future emergency. Emergencies like the COVID pandemic and wildfires
---------------------------------------------------------------------------
have highlighted that concern.
How can Congress help balance providing flexibility while
encouraging savings and guarding against too much leakage out of
retirement savings?
Answer. Employers and employees report that short-term financial
needs and risks create significant financial stress for employees,
undermine their productivity, and interfere with their retirement
savings. ERIC believes that it is important to recognize the holistic
and lifetime nature of financial well-being (i.e., including
retirement) and thus to strengthen the connections between short-term
financial concerns and adequate savings for retirement. Allowing
defined contribution plans to permit participants to withdraw or use
limited, pre-tax elective deferrals for critical short-term financial
needs, such as emergency savings funds, without imposing an early
distribution tax penalty can promote retirement security.
Consequently, we support the Enhancing Emergency and Retirement
Savings Act of 2021 introduced by Senators Jim Lankford and Michael
Bennet. This legislation would allow employees in employer-sponsored
retirement accounts to withdraw up to $1,000 a year to pay for
necessary personal or family emergency expenses. ERIC supports this
legislation as a way to further promote emergency savings and
retirement security for Americans.
Question. Studies show and testimony at last week's hearing
reinforced the idea that when workers are enrolled in their employer's
retirement plan by default, participation and retention in those plans
increase. Your organization represents large employers, which
undoubtedly have a lot of experience with this feature.
Would you share your thoughts and experience on how important
automatic enrollment is to your members' plans?
Answer. Automatic enrollment is beneficial for ERIC member
companies in preparing their workforce for retirement and is a valuable
tool in their retirement plan designs. According to Vanguard's 2021
report, workers that are automatically enrolled in retirement plans
have 57 percent higher savings rates. ERIC supports incentives for
employers to offer a more generous automatic enrollment plan and
receive a safe harbor from certain retirement plan rules.\7\
---------------------------------------------------------------------------
\7\ Retirement Security and Savings Act--Section 102, https://
www.congress.gov/bill/117th-congress/senate-bill/1770/text.
Question. Do you think there are lessons that smaller employers can
---------------------------------------------------------------------------
learn from this experience?
Answer. Large employers often pave the way for new benefit
designs--including the use of automatic enrollment. Small employers can
also benefit from utilizing automatic enrollment and can learn from
America's largest employers. As demonstrated above, large employers
have shown that the use of automatic enrollment can significantly
increase retirement enrollment and retirement savings.
Question. Treasury's recent Revenue Procedure 2021-30 modifies its
Employee Plans Compliance Resolution System, or ``EPCRS.'' For example,
the Revenue Procedure provides guidance on the recoupment of
overpayments; it eliminates the anonymous submission procedure under
the Voluntary Correction Program and adds a free and anonymous pre-
submission conference procedure; it extends the correction period for
significant failures under the Self-Correction Program and expands the
ability to correct errors by plan amendment; and it extends the
availability of the safe harbor correction method for certain elective
deferral failures related to automatic contribution features.
Can you comment on the importance of the EPCRS?
What else should be improved, if anything?
Answer. As stated above, we believe that providing plan sponsors
and administrators with a greater role in identifying and correcting
plan errors can significantly ease administrative burdens and simplify
plan administration. In particular, employers should be allowed greater
opportunities to self-correct routine, common operational and plan
document mistakes without the need for the incurrence of fees and
Federal agency oversight and approval. We appreciate that Revenue
Procedure 2021-30 expands EPCRS in this manner.
In addition, we are very pleased that in Revenue Procedure 2021-30
the IRS encourages employers ``to avoid seeking recoupment of benefit
overpayments made to participants and beneficiaries'' and adds two new
retirement correction methods for employers to utilize: the funding
exception correction method and the contribution credit correction
method. The clarification of plan sponsors' duties with respect to the
recoupment of pension overpayments is an important step. We encourage
Congress to make this step permanent by including similar provisions in
legislation. Consequently, we support the inclusion of provisions for
the recoupment of pension overpayments in the Retirement Security and
Savings Act.\8\
---------------------------------------------------------------------------
\8\ Section 322, https://www.congress.gov/bill/117th-congress/
senate-bill/1770/text.
Question. In some cases, workers are not able to save as much for
retirement when they are younger. That is why catch-up contributions
are so important--so that workers close to retirement can contribute
more to their retirement accounts to make up for earlier years when
their contributions may have been lower. Your written statement
mentioned your organization's support for expanding catch-up
---------------------------------------------------------------------------
contributions to include time of unpaid leave.
Would you please elaborate on how this could help workers in Idaho?
Answer. Approximately 20 percent of all workers take unpaid leave
during a year.\9\ If this 20 percent is applied to Idaho's 9 million
employees,\10\ there are approximately 1.8 million employees in Idaho
who take unpaid leave in a year. Each year, these employees must
forfeit making contributions to their retirement plans. If catch-up
contributions are permitted for these periods of unpaid leave, then
almost 2 million employees in Idaho will be able to increase their
retirement security.
---------------------------------------------------------------------------
\9\ U.S. Bureau of Labor Statistics, Workers' Access to and Use of
Leave from Their Jobs in 2017-18, p. 9, https://www.bls.gov/spotlight/
2020/workers-access-to-and-use-of-leave/home.
htm.
\10\ U.S. Bureau of Labor Statistics, https://www.bls.gov/eag/
eag.id.htm#eag_id.f.1.
These catch-up contributions would be in the amount that would have
been allowed if payments were continued during that time. Furthermore,
upon making the catch-up contribution, the participant should be able
to receive all matching contributions that would have been otherwise
made. This flexibility will allow for more parents and family members
who take unpaid leave to not be at a disadvantage in their retirement
---------------------------------------------------------------------------
savings.
______
Questions Submitted by Hon. Tim Scott
Question. One of the best ways to improve retirement security for
working families is to make it easier for people who change jobs to
move their savings to their new employer's 401(k).
Right now, it can be hard to move your savings and many people end
up just cashing out. The difficulty of moving accounts and the lure of
viewing a cash out as a windfall, leads people to just cash out their
retirement accounts rather than preparing for the future.
Under the previous administration, I led an effort, with strong
bipartisan support, to promote retirement plan auto-portability as a
means of reducing plan leakage and bolstering retirement security,
particularly for Americans who change jobs relatively often, Americans
with low-account balances, and Americans from underserved communities
and communities of color.
Unfortunately, this cash out problem hits African Americans
particularly hard because they are 62 percent more likely to cash out
over time.
In response to our efforts during the last administration, the
Department of Labor took the regulatory actions needed to facilitate
auto-portability.
I hope to build on this legacy of success in the coming years,
increasing access to auto-portability in order to open the door to
opportunity and long-term prosperity for more working Americans.
Fortunately, we're making progress toward universal portability.
Many members of this committee have been very supportive of auto
portability, so as we consider legislation, I hope, Mr. Chairman, that
we will prioritize creating incentives to ensure that every plan is
plugged into the auto portability network.
Please answer the following with specificity: I know your members
are committed to helping reduce the number of cash-outs, and they want
to help people keep track of their savings and consolidate their
accounts. Can you talk a little bit about the obstacles and experiences
of small accounts?
Answer. ERIC appreciates your work to create universal portability
and agrees that the loss of small accounts negatively impacts overall
retirement security. Small account balances can cause employees to
leave the accounts dormant, which requires plan sponsors to use
significant time and effort in locating missing participants. Some
large plan sponsors use multiple resources in trying to locate
participants and even hire additional staff to aid in their search.
Various service providers and financial institutions currently help
plans to find missing participants or hold the assets of missing
participants in IRAs. However, many terminating plans have difficulty
finding IRA providers that will accept small accounts, particularly
those valued at less than $1,000. Therefore, universal portability can
aggregate small accounts into larger amounts that can be accepted by
IRA providers.
In addition, ERIC supports the creation of a pension lost and found
database to track qualified plan accounts.\11\ Giving participants the
ability to find their missing accounts, which often tend to be small
balances, will go a long way in solving the missing participant problem
and increasing retirement security.
---------------------------------------------------------------------------
\11\ A pension registry proposal was introduced by Senators
Elizabeth Warren and Steve Daines in the Retirement Savings Lost and
Found Act of 2020 and included in the Retirement Security and Savings
Act of 2021--Section 323.
______
Questions Submitted by Hon Todd Young
Question. Senator Booker and I will soon reintroduce legislation
that would create a Federal commission on retirement security to study,
and advise Congress on, the most pressing issues related to the private
retirement system. Of course, many of the longstanding and well-
understood issues Americans face with respect to retirement security
were exacerbated by the pandemic as workers were displaced from their
jobs and had to draw from their retirement savings to cover immediate
expenses. As we work toward economic recovery, it is vital that our
private retirement system is sustainable and ready to support future
generations of American retirees.
What kinds of new challenges does the private retirement system
face as we emerge from the pandemic?
Answer. ERIC member companies are working hard to keep their
businesses viable, to keep workers employed, and to tailor their
benefits to the needs of their workforce, often enhancing them to
address needs during the pandemic, as allowed by law. Each member
company has a different situation, but changes in ERISA would help all
of them support their workers and their workers' retirement security.
To further support the financial and retirement security of workers and
retirees emerging from the pandemic, ERIC encourages Congress to
implement the following proposals.
Allow for emergency savings accounts as part of retirement savings
plans. The COVID pandemic created financial stress for many people and
left them unable to set aside enough savings for unplanned expenses.
While we are encouraged that the pandemic will end, many Americans will
continue to struggle to save for the future and an emergency savings
fund will help. ERIC believes that it is crucial to recognize the
holistic and lifetime nature of financial well-being (including
retirement) and strengthen the connections between short-term financial
concerns and adequate savings for retirement.
As such, ERIC supports the Enhancing Emergency and Retirement
Savings Act of 2021, which would provide up to $1,000 from a retirement
savings account to be used for personal emergencies.\12\ Allowing
participants access to savings for emergencies will encourage
participation in retirement programs--particularly for those who may be
hesitant to ``lock away'' money in case they will need it later. We
believe this legislation complements the private sector efforts by
providing additional ways for employees to handle their financial
responsibilities.
---------------------------------------------------------------------------
\12\ Enhancing Emergency and Retirement Savings Act of 2021,
https://www.congress.gov/bill/117th-congress/senate-bill/1870/
text?q=%7B%22search%22%3A%5B%221870%22%5D%7D&r=2
&s=1.
Treat student loan payments as elective deferrals for the purpose
of employer matching contributions. Many Americans are interested in
obtaining higher education and are burdened with the cost of attending
school. Nearly 44 million people owe $1.7 trillion in Federal student
debt, making it difficult for some to save for retirement.\13\
Employers are interested in helping these employees save for their
futures by establishing student loan matching programs. In 2018, the
IRS issued a Private Letter Ruling (PLR-131066-17) allowing a 401(k)
plan sponsor to contribute to a 401(k) plan on behalf of plan
participants who pay down student loan debt but do not necessarily
contribute to the employer's 401(k) plan.\14\ Since the PLR applies
only to the employer who receives the letter, congressional action is
necessary to allow other employers to support their workers in this
way. To solve this matter through legislative action, Congress should
pass the Securing a Strong Retirement Act, which includes Chairman
Wyden's Retirement Parity for Student Loans Act (S. 1443).\15\ The
legislation would permit 401(k), 403(b), SIMPLE and governmental 457(b)
retirement plans to make matching contributions to workers as if their
student loan payments were salary reduction contributions. As such,
recent graduates who cannot afford to save money beyond their student
loan repayments would no longer have to forego the employer match and
can start to build retirement savings while paying down their student
loan debt.
---------------------------------------------------------------------------
\13\ ``Consumer Credit--G-19,'' Federal Reserve, https://
www.federalreserve.gov/releases/g19/current/default.htm.
\14\ ``Private Letter Ruling (PLR-131066-17),'' Internal Revenue
Service, https://www.irs.gov/pub/irs-wd/201833012.
\15\ Retirement Security and Savings Act; Securing a Strong
Retirement Act of 2020.
Provide additional savings opportunities for those close to
retirement by the increasing catch-up limits in plans. Increasing
catch-up contributions will also help plan participants in recovering
from the pandemic. In general, it is important to give workers greater
flexibility about exactly which year they make elective deferrals. For
example, older workers should have the opportunity to make higher
elective deferrals to 401(k) plans than is possible under current law
in recognition that in some earlier years, they and their families may
have had important financial needs they reasonably prioritized ahead of
elective deferrals. This need is exacerbated for those that have had
financial struggles during the pandemic. Allowing them to provide
additional contributions at a later time when their finances are more
secure will be critical to retirement security. Therefore, we support
legislation that increases the catch-up amount for those who are close
to retirement.\16\
---------------------------------------------------------------------------
\16\ Retirement Security and Savings Act--Section 120, https://
www.congress.gov/bill/117th-congress/senate-bill/1770/text; Securing a
Strong Retirement Act of 2020--Section 107, https://www.congress.gov/
bill/117th-congress/house-bill/2954/text.
Question. Do you believe that a bipartisan Federal commission
studying pressing issues related to the private retirement system could
---------------------------------------------------------------------------
assist Congress in developing solutions?
Answer. The creation of a retirement security commission will
certainly benefit Congress in highlighting new policy solutions from
various experts. Because members of the commission will include former
and current members of Congress appointed by both House and Senate
leadership, the commission's report will provide a bipartisan analysis
that is important to address all private retirement issues. ERIC looks
forward to working with the Commission to create recommendations on how
to best build upon the success of the current private retirement plan
system.
Question. Establishing an employer-sponsored retirement plan is
costly and burdensome, particularly for small businesses, but the
ongoing management of those plans is equally onerous. Taken together,
the time and money requisite to provide a plan is simply too much for
some businesses that would otherwise be happy to offer it for their
employees.
What can Congress do to streamline compliance requirements for
employer-
sponsored retirement plans?
Answer. Simplify reporting and disclosure requirements by
eliminating redundant and unnecessary disclosures. The tax code and
ERISA include many rules requiring and governing the reports,
disclosures, and notices that employers and qualified plans must
provide to employees and participants. We believe that these
communications are complex, burdensome, and costly and are less
informative or effective for employees and participants than they
should be. ERIC agrees with proposals that direct the DOL, Treasury,
and the PBGC to issue regulations to consolidate and simplify the
existing ERISA and tax reports, notices, disclosures, and other
information relating to deferred compensation, pension, profit sharing,
and other retirement plans.\17\ In developing these regulations, the
agencies should consult with the appropriate stakeholders and
organizations (including sponsors, plans, administrators,
recordkeepers, communication experts, and others) to identify problems,
areas of possible improvement, and approaches to improvement. The
agencies should review the efficacy and ability to combine summary plan
descriptions, summary annual reports, summary of material
modifications, single employer annual funding notices, fee disclosures,
QDIA/safe harbor notices, section 402(f) rollover notices, participant
account statements, securities-related disclosures, distribution
options (including lifetime annuity estimate disclosures, choices
around risk transfer transactions), and other communications to
employees and participants.
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\17\ Retirement Security and Savings Act--Section 301, https://
www.congress.gov/bill/117th-congress/senate-bill/1770/text; Securing a
Strong Retirement Act of 2020--Section 304, https://www.congress.gov/
bill/117th-congress/house-bill/2954/text.
Maintain electronic disclosure as a default distribution. ERIC's
member companies invest considerable time and expense providing and
improving communications to participants, beneficiaries, and others,
and have found that electronic communications offer significant
advantages to plan sponsors, administrators, participants, and
beneficiaries. Therefore, we were very supportive of the changes made
by the DOL that allow plan sponsors to provide electronic delivery as
the default option for providing retirement plan notices. This
regulation significantly eased administrative burdens for plan sponsors
by allowing them to modernize their notice delivery systems, move into
the 21st century, and offer significant advantages to plan sponsors,
---------------------------------------------------------------------------
administrators, participants, and beneficiaries including:
Time efficiency. Electronic communications get to recipients
faster than paper communications. The time difference ranges from a few
days to more than two weeks.
Interactive capability. Interactive features make many
electronic communications more user-friendly than paper communications.
For example, most electronic documents have search features and can
include hyperlinks to relevant background information.
Privacy. A secure electronic system offers more privacy
protection than paper communications. For example, when a document is
delivered by mail, there is no way to control who reads it. Usernames
and passwords protect against unauthorized access.
Keeping track of updates. A well-managed website can alleviate
the burden of saving paper documents and keeping personal files up to
date. A website can provide immediate access to the most up-to-date
relevant documents.
Cost efficiency. Providing communications electronically
reduces the cost of preparation and distribution.
Environment. Use of electronic media saves paper.
Consequently, one point of concern in recent legislation is the
attempt to roll back recent advances in electronic delivery
flexibility.\18\ We encourage Congress to allow plan sponsors to
provide retirement notices in the same manner as other notices and
information, including those provided by the government. At the very
least, if Congress decides that an annual disclosure is necessary, it
should be a short and generic notice--i.e., a ``postcard notice''--
which can be provided more easily and quickly than an annual benefit
statement.
---------------------------------------------------------------------------
\18\ Securing a Strong Retirement Act of 2020--Section 313(b)(2),
https://www.congress.gov/bill/117th-congress/house-bill/2954/text.
Expand the ability of plans to self-correct plan errors. Plan
sponsors and administrators should be permitted to play a more
significant role in identifying and correcting plan errors, including
excess, insufficient, and missed contributions, compensation and
service, accrued benefit, and other determinations and calculations. In
particular, employers should be allowed greater opportunities to self-
correct routine, common operational, and plan document mistakes without
the need for the incurrence of fees and Federal agency oversight and
approval. To this end, expanding the Employee Plans Compliance
Resolution System (EPCRS) and the Voluntary Fiduciary Correction
Program (VFCP) would increase compliance and reduce the cost of plan
administration without adversely affecting participants' benefits.\19\
---------------------------------------------------------------------------
\19\ Retirement Security and Savings Act--Section 115, https://
www.congress.gov/bill/117th-congress/senate-bill/1770/text; Securing a
Strong Retirement Act of 2020--Section 307, https://www.congress.gov/
bill/117th-congress/house-bill/2954/text.
Question. Do you believe that proposals like my Retirement Security
Flexibility Act would help incentivize more employers to offer plans,
---------------------------------------------------------------------------
and more employees to participate in such plans?
Answer. ERIC does believe that the changes included in the
Retirement Security Flexibility Act will encourage the increased
creation of and participant in retirement plans. The purpose of the
safe harbor design is to achieve the desired nondiscrimination goals
without the administrative burden and compliance risks associated with
the statutory actual deferral percentage (ADP) and actual contribution
percentage (ACP) tests. Removing the testing requirements provides an
incentive for employers to implement safe harbor features. Given the
success of the safe harbor model, it makes sense to expand the
availability of the safe harbor to provide for increased retirement
savings.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
Before anybody ever heard of COVID-19, it was already far too
difficult for Americans to save for a dignified retirement. According
to the National Institute on Retirement Security, as of 2018, more than
100 million working-age Americans had no pension or any retirement
assets.
The pandemic economic crash made saving even harder. A recent
survey on the impact of the pandemic conducted by AARP found that among
those fortunate enough to have retirement accounts, nearly a quarter
had to dip into those savings or quit contributing altogether just to
pay the bills.
Taken together, that means a sizable majority of American workers
fall into one of two camps--either they can't afford to save at all, or
they've got hardly any financial cushion when times get tough.
More recently, those Americans were reminded about long-running
retirement rip-offs by ultra-wealthy individuals advised by the
priciest accountants and lawyers. One report included details on a
multi-billion-dollar IRA. It's enough to make your head explode if
you're a teacher or a restaurant manager without a rainy-day fund, much
less a well-fed retirement account.
It's clear to me that this is another case of double-standard
economics. The system doesn't do nearly enough to help working people
of modest means get ahead, but individuals at the top are able to game
the rules to abuse taxpayer-subsidized accounts with their pricey
accountants and lawyers. This is increasing the already existing
inequality between retirement haves and have-nots to an extreme level.
The Finance Committee--which has a history of bipartisan progress
when it comes to helping Americans save--ought to look at ways to
address these issues in the months ahead. I want to tick through a few
proposals I believe will help.
First, last week, along with Senator Bennet, Senator Casey, and
Senator Menendez, I introduced the Encouraging Americans to Save Act to
get more help to the working people who need it so badly. Under that
proposal, the credit would be opened up to millions of Americans with
modest incomes who never had access before. It would become a matching
contribution that would go directly into a retirement account. It has
the potential to be a game changer for people in Oregon and all across
the country who do not have the ability to save much or anything at all
today.
Second, our tax code ought to help young people get started saving
earlier in their careers. Too many Americans are unable to save at work
because they're paying off mountains of student loan debt. That's why
in April I reintroduced the Retirement Parity for Student Loans Act.
Under my proposal, workers who make student loan payments would qualify
to get a ``matching'' payment from their employer into a retirement
savings plan like a 401(k). Their student loans shrink and their nest
egg grows--that's a win-win.
Third, this committee ought to make it easier for people to move
their retirement accounts and continue saving when they change jobs. In
2021, hardly anybody in America stays with one employer for their
entire career. However, it is a pain in the neck to move your
retirement savings. Many Americans just give up and cash out their
savings, losing out on a whole lot of earnings that would build up over
time. The rules essentially penalize Americans for routine job changes
in the modern economy, so the system ought to change.
Finally, it's long past time to crack down on mega-IRAs, which the
GAO documented as a problem years and years ago. The fact is, from the
beginning, IRAs were about retirement security for typical families.
They were never meant to become another tax dodge for billionaires, but
this abuse is not new. The GAO conducted a landmark study on this issue
at my request back in 2014 using information lawfully available to it
from 2011 taxpayer returns. GAO found then that nearly 8,000 taxpayers
had aggregate IRA account balances in excess of $5 million. These
massive IRAs have only gotten bigger and more prevalent since then. JCT
gave me data lawfully available to it yesterday that shows in 2019
almost 25,000 taxpayers had aggregate IRA account balances of over $5
million; 497 of those taxpayers have aggregate IRA account balances
over $25 million, with an average aggregate account balance of over
$150 million each. It's clearly an unfair loophole that must be closed,
and there ought to be bipartisan agreement on this.
So there's a lot for the committee to discuss. Members on both
sides will have a lot of strong ideas of their own to discuss today. As
I said at the outset, this is a subject on which the Finance Committee
has a long track record of bipartisan progress, including a bill made
up of dozens of ideas from both sides in 2016. After a lot of work,
that bill became law a few years later. I hope today's hearing is a
launching pad for the committee to develop another bipartisan
retirement package in the months ahead.
______
Communications
----------
American Benefits Council
1501 M Street, NW, Suite 600
Washington, DC 20005
202-289-6700
Facsimile 202-289-4582
www.americanbenefitscouncil.org
May 18, 2021
The Honorable Ben Cardin The Honorable Rob Portman
509 Hart Senate Office Building 448 Russell Senate Office Building
Washington, DC 20510-2002 Washington, DC 20510-3506
Dear Senator Cardin and Senator Portman:
We are writing on behalf of the American Benefits Council to thank
you for your historic leadership with respect to retirement policy over
many years. The retirement years of millions of Americans have been
made more secure by your work.
We support the reintroduction of the Retirement Security and
Savings Act. Your longstanding commitment to bipartisan retirement
policy has set a pattern which has endured and produced much helpful
legislation that built on a tremendously successful system making it
stronger and broadening its availability to and use by more Americans.
Your successful leadership and efforts to pass the Setting Every
Community Up for Retirement Enhancement (SECURE) Act of 2019 are but
one example of this commitment.
The American Benefits Council is a Washington, DC-based employee
benefits public policy organization. The Council advocates for
employers dedicated to the achievement of best-in-class solutions that
protect and encourage the health and financial well-being of their
workers, retirees and families. Council members include over 220 of the
world's largest corporations and collectively either directly sponsor
or support sponsors of health and retirement benefits for virtually all
Americans covered by employer-provided plans.
As the country responds to the challenges it faces, it is important
to continue our work on enhancing retirement security. Retirement
savings plays a critical role in helping workers and their families
achieve financial security and supports economic and job growth. As we
build our economy back from the pandemic, part of that effort needs to
include even greater attention to the role of retirement programs that
have been jeopardized by that crisis and were at risk for many
Americans even before the pandemic.
We commend you on the introduction of this bipartisan bill, which
includes many priorities for the retirement community and the Council,
including:
The ability to self-correct inadvertent plan errors without a
submission to the IRS.
An increase in the age at which required minimum distributions
must commence to 75.
Permitting employers to match student loan repayments.
Eliminating unnecessary disclosure burdens with respect to
employees who are not participating in a plan.
Enhanced catch-up contributions.
Critical pension plan reforms, including correction of funding
mortality tables and fixing a burdensome glitch in the PBGC premium
regime.
We so much appreciate the thoughtfulness that underlies the
provisions of this bill and we know how much they would enhance
Americans' retirement security. We look forward to continued
discussions on retirement policy issues, including the challenges in
reuniting employees with their benefits as this process moves forward.
Thanks to your leadership, millions more Americans will be able to
retire with dignity.
Sincerely,
Lynn D. Dudley
Senior Vice President
Global Retirement and Compensation Policy
______
The American Benefits Council (the ``Council'') thanks Chair Wyden
and Ranking Member Crapo and all members of the committee for holding
the hearing, ``Building on Bipartisan Retirement Legislation: How Can
Congress Help?'' Your work and that of the committee has been
instrumental in the great bipartisan strides we have made in this area.
We appreciate your leadership in further improving retirement outcomes
for American workers and their families.
The private retirement system has helped millions of Americans
achieve retirement security. According to a post-election poll
conducted by Public Opinion Strategies in the 2020 presidential
election, a majority of voters trust employers the most in helping them
achieve a secure retirement and a majority of voters believe that the
standards for employer-provided benefits should be established at the
federal level. The Setting Every Community Up for Retirement
Enhancement (SECURE) Act enacted in 2019 was a major step forward in
meeting the challenges faced by Americans in achieving a secure
retirement. In addition, the American Rescue Plan Act enacted earlier
this year included vital funding reform that provided much needed
stabilization to single-employer pension plans. Even with those changes
being enacted, the system can be further improved and strengthened and
there are numerous existing bipartisan legislative proposals--several
of which are discussed below--that we believe can help achieve that
result.
[GRAPHIC] [TIFF OMITTED] T2821.004
.epsThe American Benefits Council is a Washington, DC-based
employee benefits public policy organization. The Council advocates for
employers dedicated to the achievement of best-in-class solutions that
protect and encourage the health and financial well-being of their
workers, retirees and their families. Council members include over 220
of the world's largest corporations as well as organizations serving
employers of all sizes. Collectively our members directly sponsor or
administer health and retirement benefits for virtually all Americans
covered by employer-
sponsored plans.
Key Bipartisan Proposals for Improving Retirement Security
There are many retirement policy proposals that are worthy of
discussion. We are highlighting several that Council members have
identified as important reforms that build on the SECURE Act and
significantly help American workers better prepare for retirement. Many
of the proposals below are included in both the Retirement Security and
Savings Act of 2021 (S. 1770, the ``Cardin/Portman'' bill) and the
Securing a Strong Retirement Act of 2021 (H.R. 2954, the ``Neal/Brady''
bill, as approved by the House Ways and Means Committee). Some
proposals not included in the bills should be considered as well. Some
of the proposals are additionally found in other legislation, such as
the Retirement Parity for Student Loans Act (S. 1443, the ``Wyden
student loan'' bill) and the Retirement Savings Lost and Found Act (S.
1730, the ``Warren/Daines missing participants'' bill).
Self-Correction Procedures
Plan sponsors should generally be permitted to self-correct
inadvertent plan violations under the IRS' Employee Plans Compliance
Resolution System (EPCRS) without a submission to the IRS or a fee
payable to the IRS. This will help employees because errors can be
corrected more quickly and more efficiently. Under a proposal included
in the Cardin/Portman bill and the Neal/Brady bill, all inadvertent
plan violations could be self-corrected under EPCRS without a
submission or fee to the IRS, provided that this rule would not apply
if the IRS discovers the violation on audit and the employer has not at
that point taken actions that demonstrate a commitment to correct the
violation. These bills, which we strongly support, would also make
improvements to the self-correction process that would make self-
correction a more reliable and effective process.
Recent IRS guidance expands the inadvertent errors that may be
self-corrected without a submission to the IRS but does not achieve the
full goals of the bills, which would allow substantially all
inadvertent errors to be self-corrected. We highly recommend Congress
take this additional step to make self-correction as broadly available
as possible.
Reducing Barriers to Saving Through Student Loan Repayment Programs
The burden of student loan debt serves as an unfortunate barrier to
saving for retirement. Given the benefit of compound interest, putting
money away early in one's career--especially through an employer-
provided plan with matching contributions and low fees--can have a
powerful effect on one's retirement savings account balance at
retirement age. But student debt prevents many individuals, especially
in their 20s and 30s, from saving optimally for retirement.
Many employers are interested in helping employees save for
retirement despite student tuition or debt obligations and are
considering a variety of innovative approaches to do so. We urge
Congress to support these programs with policies that embrace
innovation.
For example, the Council supports proposals that would make it
easier for employers to provide matching contributions to 401(k)
retirement plans based on an employee's student loan payments. Such a
provision is included in the Wyden student loan bill. The Wyden student
loan proposal is also included in Cardin/Portman, Neal/Brady and the
Retirement Parity for Student Loans Act of 2021 (H.R. 2917). Measures
like these that would leverage the tax laws and behavioral economics
would go a long way toward reducing barriers to retirement savings
particularly for younger workers. Just like saving early, enacting
supportive policy as soon as possible will have a positive effect on
retirement outcomes.
We are supportive of other proposals to give employers greater
flexibility in helping their employees with student loan debt including
making permanent provisions that make it easier for employers to pay
down student loans for their employees without triggering taxable
income for their employees, up to an annual limit of $5,250 on the
total of such repayments as well as other educational assistance.
PEP and ``Group of Plan'' Reforms
Policymakers are constantly searching for ways to improve
retirement plan coverage and Council members believe that the best way
to do so is to build on the employer-based system. Open multiple
employer plans (called ``pooled employer plans,'' or PEPs) present a
significant opportunity to do so. Much was accomplished in the
enactment of the SECURE Act but additional reforms can make PEPs even
more effective in expanding coverage, reducing costs, ensuring
consistent participation and providing a solid retirement. We note the
following proposals:
Provide the same PEP advantages to charities, churches and
public educational institutions: Currently, the PEP provisions in the
SECURE Act do not cover 403(b) plans, which are widely used by
charities, churches and public educational organizations (the only
entities permitted to maintain such plans). We support the expansion in
Neal/Brady and the Improving Access to Retirement Savings Act (S. 1703)
of the PEP provisions to cover 403(b) plans, so that these entities can
enjoy the same new economies of scale being made available to taxable
employers.
Service Crediting: Under a MEP that is not a PEP (a ``closed
MEP''), if an employee works for one employer in the MEP and then moves
to another employer in the MEP, the employee's service with the first
employer counts with the second employer and vice versa.
PEPs: The service crediting rule makes sense in
the context of a closed MEP where employees are moving among closely
related employers. But in the context of a PEP, it does not make sense.
For example, why should a hardware store in Maine have to make a new
employee immediately eligible and immediately vested based on prior
service by the same employee for a barber shop in Nevada, just because
the two employers participate in the same PEP?
Statute and policy: The statute is not clear on
whether the MEP rule applies to PEPs. In our view, it should not. From
a policy perspective, the growth of PEPs and the expansion of coverage
would be inhibited if the MEP rule applied to PEPs.
If small employers know that, for example, they may
need to treat new hires as immediately eligible and immediately vested
that could mean fewer small employers join PEPs, undermining the extent
of the coverage expansion. This is because the potential additional
expenses of applying the service crediting rules across the entire PEP
could erase cost savings obtained elsewhere for the PEP through
economies of scale and tracking service crediting based on an
employee's previous employers does little to advance administrative
simplicity and cost savings.
Similarly, many employers would likely be concerned to
learn that, under a PEP, a short-term employee who left after a couple
of years could become 100% vested later by reason of working for an
unrelated employer. Again, this has cost implications.
Trustee duties: SECURE requires the trustee of a PEP ``to be
responsible for collecting contributions'' to the PEP.
Different business models: Based on the input
we have received, there are different business models that may be used
with respect to the collection of contributions to the PEP. Under one
business model, the trustee would be responsible for collecting
contributions. Under a second business model, the PEP would use a
directed trustee, which would not have any fiduciary expertise or any
administrative system that could be used to enforce or oversee the
collection of contributions. If the trustee in this second business
model were forced to take on this responsibility, it would have to
establish new systems to perform a new function, which would trigger
unnecessary costs and delays in implementing PEPs.
Flexibility would expand coverage: We believe
that it is important to accommodate both business models, so that PEP
coverage can be expanded to the greatest extent. Accordingly, we ask
that that Congress treat PEPs in the same way as all other types of
plans. PEPs should be permitted to assign contribution collection
responsibility to the entity best suited to this task, which will often
be the pooled plan provider. This legislative solution would simply
permit the collection process to be assigned to other fiduciaries,
which would facilitate the use of the fiduciary with the most
experience and expertise in this regard.
Groups of plans that are permitted to file a single Form 5500
under Section 202 of the SECURE Act: Under current law, generally, a
Form 5500 for a defined contribution plan must contain an opinion from
an independent qualified public accountant as to whether the plan's
financial statements and schedules are fairly presented (referred to
below as the ``audit requirement''). However, generally, no such
opinion is required with respect to a plan covering fewer than 100
participants.
A group of plans that fits within the SECURE
provision may contain some plans that are subject to the audit
requirement and some that are not. Under the proposed change, plans
which are subject to the audit requirement may elect to jointly file a
single audit as if they were part of the same plan, but the audit
requirement and expense would not be imposed on the small plans. As an
alternative, to further simplify the administration of the group of
plans and to enhance security, the plan administrator may elect to
treat all the plans in the group as one plan for purposes of the audit
requirement--including the small plans upon which the requirement would
otherwise not be imposed. The latter election would simplify plan
administration by accommodating a wider variety of coverage solutions
being developed in the marketplace.
Improving Required Retirement Plan Reports and Disclosures
Under current law, employer-sponsored retirement plans and IRAs are
required to provide a variety of reports and disclosures to
participants at various times or upon the occurrence of specified
events. The Council believes there is a significant opportunity to
improve both the content and the timing of required disclosures in a
manner that provides for more effective and meaningful communications
to participants and account owners, while also decreasing
administrative costs for plans and IRAs.
We support bipartisan proposals to take such steps, such as a
proposal included in both the Cardin/Portman bill and the Neal/Brady
bill. That proposal would direct the U.S. Treasury Department, the U.S.
Department of Labor (DOL) and the Pension Benefit Guaranty Corporation
(PBGC) to review the reporting and disclosure requirements and make
recommendations to Congress to consolidate, simplify, standardize and
improve these participant communications.
A related issue that we urge the committee to consider is one that
affects those plan participants who are not enrolled in the plan but
who nevertheless are considered participants because they are eligible
to enroll in the plan. Under current law, even non-enrolled
participants are required to receive the same reports and disclosures
as participants who are enrolled in the plan. Because these non-
enrolled participants are receiving plan communications that do not
relate to them, the Council strongly supports the proposal in both the
Cardin/Portman bill and the Neal/Brady bill under which non-enrolled
participants would not be required to receive the unnecessary notices
that they receive under current law. Instead, such participants would
receive an annual reminder of their eligibility to participate in the
plan.
Stop Indexing the PBGC Variable Rate Premium for Single-Employer Plans
A bipartisan proposal aimed at addressing concerns over PBGC
premiums, which are a factor in causing employers to fully or partially
terminate their plan, is included in the Cardin/Portman bill. Today,
single-employer defined benefit plans pay both a per-participant flat-
rate premium and a variable-rate premium to the PBGC each plan year.
Both types of premiums are currently indexed. But indexing the
variable-rate premium does not make sense because the variable-rate
premium is calculated based on the plan's unfunded vested benefits, an
amount that is inherently indexed. As a result, indexing the variable-
rate premium will eventually lead to companies owing 100%, 200% or even
more of their underfunding to the PBGC. The Cardin/Portman bill would
address this by eliminating the indexing of the variable-rate premium
and freezing such rate at the 2018 premium level ($38 per $1,000 of
unfunded vested benefits).
Permitting Higher Catch-Up Contributions for Older Americans
Even though most Americans understand the benefit of saving for
retirement throughout their working years, younger workers, in
particular, often face competing financial priorities, such as buying a
home, paying off student loans and raising a family. These expenses can
make it challenging for many workers to prioritize saving for
retirement until their 40s, 50s or even 60s. In 2020, most employees
are generally limited to making elective deferrals of $19,500 to a
401(k), 403(b), or governmental 457(b) plan ($13,500 with respect to
SIMPLE IRAs and SIMPLE 401(k)s). But individuals age 50 and older may
make a ``catch-up'' contribution of an additional $6,500 ($3,000 for
SIMPLEs). To give workers nearing retirement age an even greater
ability to better prepare for retirement, the Council supports the
provisions in the Cardin/Portman and Neal/Brady bills that would
increase the catch-up contributions for certain older workers.
Increasing the Age at Which RMDs Must Begin
The Council believes it is important that retirees be allowed to
retain their savings in retirement accounts as long as possible to help
protect against the risk of retirees depleting their retirement savings
during their lifetime. We therefore urge the committee to support
bipartisan proposals such as those in the Cardin/Portman and Neal/Brady
bills that would further increase the age at which participants and IRA
account owners must begin taking RMDs to age 75.
Reforming the Rules Regarding Inadvertent Overpayments to Participants
The complexity of administering a retirement plan can result in a
plan incorrectly calculating benefit payments for a participant,
especially in a defined benefit plan. Sometimes these errors result in
an overpayment being made to a participant. IRS correction procedures
in some cases require plans to seek to recoup from participants a
discovered overpayment, sometimes months or even years after the
overpayment was made to the participant. This often causes significant
distress for participants--many of whom were retirees--who had no idea
that the plan incorrectly calculated their benefits. Further
complicating matters, in many cases an overpayment was rolled over to
an IRA or another plan because the participant believed that such
amount was eligible for rollover treatment when, in reality, it was
not.
In some circumstances under EPCRS a plan sponsor may correct for an
overpayment without seeking recoupment from the participant. Recent
guidance improves the rules governing overpayments but does not resolve
major challenges, such as the ability to roll over an inadvertent
overpayment and does not provide important participant protections. The
Council's members believe that additional steps to protect retirees
should be taken and therefore the Council strongly supports provisions
in the Neal/Brady and Cardin/Portman bills that would permit employers
not to seek recoupment from the participant and would permit rollovers
of inadvertent overpayments.
Expansion of Electronic Disclosure of Plan Communications
DOL regulations give plan sponsors the option to provide required
notices and statements in an electronic format while providing
participants with appropriate protections and the right to receive
paper copies of notices at no charge. The Council strongly supported
updating the means by which plan sponsors can fulfill their disclosure
requirements. We believe that electronic communication can improve
employee engagement and help them take more effective and timely
action. Bipartisan proposals that restrict this option should be
carefully measured against these goals and should be designed to
resolve a specific problem so as not to undermine the goals.
Similarly, we support retirement plan proposals to allow remote
notarization with strong safeguards to protect participants and
spouses. This was acutely necessary during the pandemic and has been
allowed on a temporary basis and recently extended for one year. The
success of this system--in terms of efficiency, protections and
flexibility--on a temporary basis and its recent extension provide a
solid basis for making this rule permanent.
Missing Participants
Our members devote a great deal of effort and financial resources
to sponsoring retirement plans and to searching for those who have
unclaimed benefits. We wholeheartedly share the goal of reuniting plan
participants with their retirement benefits.
In this regard, we welcomed the introduction of missing participant
legislation in Neal/Brady, Cardin/Portman and Warren/Daines, which
addressed the missing participant issue. The Department of Labor has
issued guidance, in the nature of best practices, but more is needed
because the guidance does not help employers know what should be done
to find a missing participant. The Council believes strongly in the
need for comprehensive guidance on plan fiduciary responsibilities with
respect to unresponsive and missing participants.
The bills also include a provision that would use data that
employers are already required to report to Treasury to create a
national, online lost and found for Americans' retirement accounts. In
addition, the Department of Labor would be directed to develop
standards for determining if an employer has satisfied their fiduciary
responsibilities with respect to missing participants; in our view, all
agencies involved should develop the standards jointly, including
Treasury and PBGC.
We also believe that the bills would require transfers to a new
government program of benefits that are currently being transferred to
automatic rollover IRAs--a private sector solution that is working
well. We recommend modifying the government program to supplement
private sector solutions, rather than taking them over. And it should
be clear that once a plan does not contain any benefits on behalf of a
participant, the plan fiduciaries should have no further duty to search
for that participant.
We look forward to continuing to work with Congress on these
issues. Our members' extensive experience with missing and lost
participants provides a valuable resource for policymakers, including
input with respect to strategies to improve consistency among agencies
with regulatory authority for missing and unresponsive participants.
New ``Secure Deferral Arrangement'' Automatic Enrollment Safe Harbor
A significant retirement policy success in recent years has been
encouraging plan sponsors to automatically enroll their employees in a
retirement plan at a default contribution rate and then to periodically
increase that rate over time. But as successful as these automatic
enrollment and automatic escalation features have been to date,
policymakers are now looking at options to continue building on their
success.
Under the existing automatic enrollment safe harbor, plans are
generally deemed as meeting certain nondiscrimination testing rules if
certain criteria are met, including that employees are automatically
enrolled at a contribution rate of at least 3% of compensation in the
first year and such rate must increase by at least 1% a year until the
contribution rate is at least 6% (but not greater than 15%) by the
fourth year.
The Council encourages the committee to consider proposals that
would build upon the existing safe harbor by adding a new automatic
enrollment safe harbor for ``secure deferral arrangements.'' A secure
deferral arrangement would, among other features, provide for a higher
default contribution rate in the first year (i.e., at least 6 but not
greater than 10%) and would remove that 10% cap on default deferrals
after the first year. Such proposals have been included in the Cardin/
Portman bill, S. 1703 and the 2017 Neal bill.
Emergency Savings
The pandemic has highlighted the longstanding need for Americans to
save for emergencies. We believe that this can be done in a way that
protects and enhances retirement security. In that regard, we were very
pleased by the introduction of the Enhancing Emergency and Retirement
Savings Act of 2021 (S. 1870).
The bill allows a retirement plan, such as a 401(k) plan, or IRA to
be accessed for a small amount in the case of emergency without any
penalty. As a result of knowing they have access to a modest amount in
case of an emergency, individuals will be more likely to contribute to
the plan or IRA and often will end up not having to make emergency
withdrawals, thus enhancing their overall retirement security while
improving their financial resilience.
There are a number of ways to improve emergency savings that the
Council supports, including programs outside of the retirement plan and
we look forward to a continued dialogue about how to further improve
emergency savings and strengthen personal financial security. However,
this bill is an important step towards addressing the critical problem
faced by many Americans by offering a solution that harnesses the
successful 401(k) or similar plan structure that utilizes payroll
deduction and allows for recontribution.
Remove Limitations on Subsidies Resulting From Accumulation of
Retirement Assets
Effective retirement saving can improve overall health and
financial well-being. Individuals and families should not be penalized
for preparing for retirement. The Council urges the committee to
support legislation that would exclude current retirement plan assets
and future retirement plan benefits from eligibility calculations for
state and federal housing and food subsidies.
ABLE Programs
The Council also supports provisions that address the needs of
eligible ABLE individuals. A bipartisan House bill (H.R. 4672)
introduced by Representatives Suozzi and Wenstrup would allow such
individuals to elect to have employer retirement contributions made to
their ABLE program instead, which is designed to suit their unique
needs more effectively than a retirement account.
Parity for Cooperative and Small Employer Charity (CSEC) Organizations
The SECURE Act, Neal/Brady and Cardin/Portman together include
numerous very helpful tax credits as incentives for taxable companies
to start a plan or to adopt certain pro-participant features. For
example, the following very beneficial proposals are either in the law
or being considered:
The SECURE Act increased the cap on the small business start-
up credit from $500 to $5,000.
The SECURE Act provided a three-year $500 small business tax
credit for adopting automatic enrollment.
Neal/Brady would increase the start-up credit in two very
material ways:
Increase the credit from 50% to 100% of start-
up costs for companies with up to 50 employees.
Provide a contribution-based credit that could
be worth over $100,000 over five years, depending on the size of the
business.
Cardin/Portman would provide a five-year tax credit for small
businesses that adopt a new type of safe harbor automatic enrollment
401(k) plan.
Similar to Neal/Brady, Cardin/Portman would enhance the small
business start-up credit by increasing it from a credit equal to 50% of
start-up costs to a 75% credit for the smallest employers.
Cardin/Portman would provide a three-year $500 small business
credit for adopting automatic re-enrollment.
Unfortunately, tax-exempt organizations do not receive any of these
credits, so the significant help--well over $100,000 in total in some
cases--that the credits provide is not available to tax-exempt
employers. Moreover, tax-exempt organizations do not pay any less to
set up a plan.
We strongly believe that something needs to be done to level the
playing field to treat tax-exempt organizations more fairly. We also
recognize that addressing this issue in a comprehensive way for all
tax-exempt organizations is a broad project that will require further
work and consideration. But we believe that it is appropriate to start
the legislative process with a small but important step and therefore
support a proposal that would provide tax credits to employees in CSEC
plans.
A Consistent Federal Framework
We have one key point in conclusion. The fundamental basis for an
effective private retirement system is the ability to rely on the
single set of national rules applicable to designing and operating
retirement plans, especially for companies that operate in more than
one state. These rules can be found in Section 514 of the Employee
Retirement Income Security Act of 1974 (ERISA). There is no greater
threat to the health of the private retirement system than a possible
erosion of this principle of current law. We urge Congress to work with
us to support and enforce the federal nature of the rules governing
qualified retirement plans.
* * * * *
The ability to save for retirement is a critically important part
of Americans' sense of economic security. Employer-provided retirement
plans are a uniquely positive influence on one's financial well-being
in retirement. Public policy should therefore encourage participation
and adequate savings in these plans whenever possible.
We thank the committee for holding this hearing and for a long
history of dedicated bipartisan work on protecting and enhancing the
private retirement system. We look forward to continuing to work with
the committee on this critical endeavor.
______
American Council of Life Insurers
101 Constitution Avenue, NW
Washington, DC 20001
Statement of Susan K. Neely, President and CEO
The American Council of Life Insurers (ACLI) is pleased to submit this
statement for the record on ``Building on Bipartisan Retirement
Legislation: How Can Congress Help?'' ACLI thanks Chairman Ron Wyden
(D-OR) and Ranking Member Mike Crapo (R-ID) for holding this important
hearing. This statement will highlight the successes of the current
retirement system, the challenges many workers and retirees face,
especially in light of the COVID-19 global pandemic, and public policy
proposals supported by ACLI that would enhance and build upon the
successes of our nation's retirement system.
THE AMERICAN COUNCIL OF LIFE INSURERS
The American Council of Life Insurers (ACLI) advocates on behalf of 280
member companies dedicated to providing products and services that
promote consumers' financial and retirement security. Financial
security is our core business, and retirement security for all
Americans is a critical mission. We protect 90 million American
families with financial products that reduce risk and increase
financial security, including life insurance, annuities, retirement
plans, long-term care insurance, disability income insurance, dental
and vision benefits, and other supplemental benefits. As society and
work changes, we are committed to financial security solutions that
protect all Americans, regardless of where and how they work, their
stage in life, or the economic status of their household. Americans are
living longer, and financial security into retirement is a big
challenge facing our country. Life insurers help people retire with
financial security, through products that are available, accessible,
and affordable to all.
ACLI members represent 95 percent of industry assets in the United
States. Through a well-crafted partnership of the private solutions
ACLI members provide, and public solutions that are necessary, we
believe the benefits of financial security can be made available to all
Americans. Accordingly, ACLI member companies offer insurance contracts
and investment products and services to employment-based retirement
plans (including defined benefit pension plans, 401(k), SIMPLE, SEP,
403(b), and 457(b) plans) and to individuals (through IRAs and
annuities). Three out of five small employers (those with 99 or fewer
employees) rely on life insurer products and services in their
employment-based retirement plan. ACLI members are also employer
sponsors of retirement plans for their employees. And there are more
than 15 million annuity-based IRAs held by individuals. As product and
service providers, as well as plan sponsors, life insurers know that,
coupled with Social Security, adequately and consistently saving for
retirement, effectively managing assets throughout retirement and
utilizing appropriate financial protection products ensure Americans'
retirement and financial security.
Americans are faced with significant financial security challenges, and
the insurance industry is a vitally important part of how Americans are
able to plan, save and guarantee themselves a secure retirement.\1\ In
2020, American families received $392.3 billion in payments from
annuities, $130 billion in payments from life insurance, $20 billion in
disability income insurance benefits and $11.4 billion in long-term
care insurance benefits. No other industry provides Americans with the
level of financial guarantees provided by the life insurance industry.
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\1\ ACLI analysis of preliminary 2020 NAIC Annual Statement data.
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THE RETIREMENT SYSTEM IN AMERICA
The retirement system for private-sector workers in America builds upon
the contributions made to Social Security and is enhanced by
employment-based retirement plans, individual retirement accounts,
annuities, and other investments. Private sector savings play a vital
role in retirement security for millions of Americans. Current tax
incentives for pensions and retirement savings encourage employers to
provide and maintain work-based plans and have enabled millions of
American families to accumulate savings, thereby improving their
retirement security. According to the Bureau of Labor Statistics, more
than 80 percent of full-time civilian workers have access to a
retirement plan through their employer, and of these workers, 82
percent participate in a workplace plan.\2\ Yet, there remain workers,
mostly those who are working part-time and those at small businesses,
without such access. More can and should be done to ensure that
everyone who can afford to save for retirement is saving for
retirement.
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\2\ Bureau of Labor Statistics, National Compensation Survey:
Employee Benefits in the United States, March 2020, https://
www.bls.gov/ncs/ebs/benefits/2020/employee-benefits-in-the-united-
states-march-2020.pdf.
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CHALLENGES FACING RETIREMENT SAVERS
While the current combination of Social Security and employment-based
and individual retirement arrangements has successfully demonstrated
that workers can attain retirement security, the global pandemic has
brought into sharp focus challenges Americans face with ensuring they
have both short-term and long-term savings--both key components to
financial health. In 2019 for example, almost 50 percent of all U.S.
households had less than $5,300 in liquid savings that can be used for
an emergency.\3\ This was exacerbated in 2020 as families faced
financial crises with the economic downturn related to COVID-19. Some
retirement savers, having little to no emergency savings, tapped their
retirement savings through plan loans and distributions features made
available through the Coronavirus Aid, Relief, and Economic Security
(CARES) Act. According to Fidelity Investments, the median amount of
coronavirus distribution was $4,800, indicating an amount of emergency
savings deficiency for many families.
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\3\ ACLI analysis of the Federal Reserve, Survey of Consumer
Finances, 2019.
While workplace retirement plans with payroll-deducted contributions
are incredibly effective at helping people save, impediments still
exist that prevent many Americans from maximizing this important
savings tool. Certain segments of the population have greater barriers
to savings. Despite 80 percent of full-time civilian workers having
access to a retirement plan in the workplace, only 40 percent of part-
time workers enjoy access to workplace savings, in particular, gig
economy workers and people who work for small employers.\4\
Additionally, Federal Reserve data shows that Black and Hispanic savers
have savings rates that lag significantly behind their white
counterparts. These deficiencies are magnified in women. Millennials
also tend to be less prepared for retirement than earlier generations
at the same stage in life with 45 percent having no dedicated
retirement savings. Almost 41 percent are burdened with student loan
debt and may delay saving for retirement.\5\ This segment may also face
challenges related to access to a retirement savings plan in the
workplace. Adult caregivers are also in a challenging situation. Many
financially assist their children, while an estimated 9.7 million adult
children over the age of 50 care for their parents as well.\6\
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\4\ Bureau of Labor Statistics, National Compensation Survey:
Employee Benefits in the United States, March 2020, https://
www.bls.gov/ncs/ebs/benefits/2020/employee-benefits-in-the-united-
states-march-2020.pdf.
\5\ ACLI analysis of the Federal Reserve, Survey of Consumer
Finances, 2019.
\6\ MetLife, Mature Market Institute, The MetLife Study of
Caregiving Costs to Working Caregivers, https://www.caregiving.org/wp-
content/uploads/2011/06/mmi-caregiving-costs-working-caregivers.pdf.
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BOLD SOLUTIONS TO ADDRESS RETIREMENT CHALLENGES
The passage of the Setting Every Community Up for Retirement
Enhancement (SECURE) Act of 2019, the most comprehensive retirement
legislation passed since the Pension Protection Act in 2006, is
expected to prove instrumental in increasing access to retirement
plans. The provisions within the SECURE Act built upon the current
successful private sector system, making important enhancements to
improve American's financial retirement security. For example, the
SECURE Act includes provisions making it easier for employers to
sponsor a retirement plan, encouraging employees to save, and helping
them prepare for a secure retirement through lifetime income solutions,
have real-world positive benefits. Increasing access for employees of
small employers alone is anticipated to result in more than 700,000 new
retirement savings accounts.
To build upon the success of the SECURE Act, other effective public
policy proposals, in addition to action by plan sponsors and providers,
can help to address savings challenges and help Americans ensure a
secure retirement. Policymakers should continue to seek to increase
access to workplace retirement savings, strive for financial equality,
and encourage essential financial protections offered by guaranteed
retirement income products. The focus should continue to be on ways to
help more people achieve a financially secure retirement--increasing
savings rates, workplace access and lifetime income security for all
Americans, all key to financial security.
The following are policy proposals that seek to increase retirement
security and savings that ACLI supports include:
1. Increased Access to and Participation in Retirement Plans
A sizable majority of full-time workers have access to a retirement
plan in the workplace. Still, more could be done to expand access and
coverage. While access is high for workers at larger employers, roughly
50 percent of all workers employed by small businesses--those with
fewer than 50 workers--have access to a workplace retirement plan.\7\
Of those workers, only 39 percent take advantage of the plan in the
workplace.\8\ While small businesses have access to a robust
marketplace of product offerings, the uncertainty of revenue is the
leading reason given by small businesses for not offering a plan,
followed by cost, regulatory and administrative burdens and lack of
employee demand. Congress should build upon the current
employer-provided system and advance policy that seeks to increase
access to workplace savings. Measures that accomplish these goals
include:
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\7\ Bureau of Labor Statistics, National Compensation Survey 2020,
https://www.bls.gov/news.release/ebs2.t01.htm.
\8\ Id.
Retirement Savings Option for All Employees: Requiring a
universal approach for employers without a retirement plan to provide
workers with access to payroll deducted savings through an IRA, 401(k),
or other qualified retirement savings plan, is key to fundamentally
expanding access to the power of workplace, payroll deducted savings.
Employers should have the flexibility to choose to use IRAs or set up a
401(k), or other qualified retirement savings plan. Employers should
not be overly burdened by administrative costs in order to comply and
workers must have the right to opt out of participation. When offered a
retirement plan by their employer, four out of five full-time private-
sector workers participate. Additionally, nearly 73 percent of
employers now automatically enroll new participants into their plan.\9\
While employees have the option to opt out, most do not. In fact, with
new employees, participation rates nearly double to 93 percent when
automatically enrolled, compared with 47 percent under voluntary
enrollment.\10\ ACLI strongly supports a universal approach in which
all employers with more than 10 employees offer a plan in the
workplace. This would provide an estimated 27.7 million workers with
access to an employment-based retirement plan with 20.8 million
additional workers participating in those plans.\11\
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\9\ Willis Towers Watson, 2017 Defined Contribution Plan Survey,
https://globenewswire.com/news-release/2018/02/26/1387421/0/en/U-S-
employers-enhancing-defined-contribution-retirement-plans-to-help-
improve-workers-financial-security.html.
\10\ Jeffrey W. Clark, Jean A. Young, Vanguard, Automatic
Enrollment: The Power of Default, https://institutional.vanguard.com/
iam/pdf/CIRAE.pdf.
\11\ ACLI estimates based on the National Compensation Survey:
Employee Benefits in the United States, March 2020, National
Compensation Survey: Employee Benefits in the United States, March
2020.
Increased Default Contribution Levels: Currently, employers
typically automatically enroll employees into their retirement plans at
three percent of their employees' salary. While automatic enrollment is
an excellent tool to help workers contribute to their retirement plan,
increasing the contribution percentage each year, similar to a
provision included in the Retirement Security and Savings Act (RSSA) of
2021, introduced in the 117th Congress by Senators Portman (R-OH) and
Cardin (D-MD), would result in more meaningful savings levels.\12\
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\12\ Id.
Automatic Enrollment Incentive for Small Businesses: Similar to
automatic escalation tools, automatic enrollment has proven to be
extremely effective in increasing participation rates, and ultimately,
savings balances. Pending legislation would provide small businesses
with a tax credit of $500 per year for 3 years for automatic
enrollment.\13\ Not only would this mitigate the cost for these
businesses, but it would ensure more workers are saving at work.
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\13\ S. 1770, The Retirement Security and Savings Act of 2021,
introduced in the 117th Congress by Senators Portman (R-OH) and Cardin
(D-MD). H.R. 2954, The Securing a Strong Retirement Act of 2021,
introduced in the 117th Congress by Chairman Richard Neal (D-MA) and
Ranking Member Kevin Brady (R-TX).
Credit for Small Employers Providing Retirement Plans for
Military Spouses: It is critical to address savings shortages prevalent
among military spouses. Military spouses support their service members
and families through relocations and deployments, frequently
sacrificing their own career aspirations--and often their ability to
save for their own retirement.\14\ Congress should provide a tax credit
for small employers that: make military spouses eligible for their
retirement plan within two months of hire; provide a matching or non-
elective contribution to the plan; and ensure these spouses are 100
percent vested in all employer contributions within the same time
frame.
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\14\ S. 1770, The Retirement Security and Savings Act of 2021,
introduced in the 117th Congress by Senators Portman (R-OH) and Cardin
(D-MD), S. 1273, the Military Spouses Retirement Security Act,
introduced in the 117th Congress by Senators Susan Collins (R-ME),
Maggie Hassan (D-NH), James Lankford (R-OK), Mike Bennet (D-CO), Angus
King (I-ME) and Steve Daines (R-MT).
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2. Incentivizing Savings for Vulnerable and At-Risk Populations
Special consideration should be given to individuals who face unique
challenges when it comes to retirement savings. These groups, many
times, can benefit greatly from focused public policy initiatives to
make their path to saving for retirement easier. These include:
Institutionally Disadvantaged Savers: For too long, racial
injustice and systemic inequity have excluded communities of color from
traditional pathways to financial security and created fewer
opportunities for financial peace of mind. Everyone, no matter their
age, job, income level, gender or race, deserves the chance to build
financial certainty and Congress should look for ways to collaborate
with critical industries in order to drive solutions that address
systemic inequities by investing in underserved communities, advancing
financial education, and removing barriers to access.
Low-Income Earners: While the current Saver's Credit allows low-
and
middle-income earners a tax credit, RSSA would significantly improve
the incentive by expanding those eligible for the credit, making the
credit refundable, and contributing it directly to a retirement plan or
Roth IRA.\15\
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\15\ S. 1770, The Retirement Security and Savings Act of 2021,
introduced in the 117th Congress by Senators Portman (R-OH) and Cardin
(D-MD). H.R. 2954, The Securing a Strong Retirement Act of 2021,
introduced in the 117th Congress by Chairman Richard Neal (D-MA) and
Ranking Member Kevin Brady (R-TX).
Part-time Workers: Part-time workers have historically had less
access to and lower participation in retirement plans. Currently, only
39 percent of part-time workers have access to a retirement plan at
work.\16\ With the enactment of the SECURE Act, current law now
requires employers to allow long-term, part-time workers with at least
500 hours of service in 3 consecutive years to participate in their
401(k) plans. RSSA expands eligibility to those with at least 500 hours
of service in two consecutive years.
---------------------------------------------------------------------------
\16\ Bureau of Labor Statistics, National Compensation Survey 2020,
https://www.bls.gov/news.release/ebs2.t01.htm.
Student Loan Borrowers: Innovative policy approaches that would
assist employees in saving for retirement should be a top priority for
legislators. One legislative approach ACLI supports would enable
employers to contribute a ``match'' to an employee's 401(k), 403(b) or
SIMPLE plan account based on the employee's student loan
repayments.\17\
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\17\ S. 1443, the Retirement Parity for Student Loans Act of 2021,
introduced in the 117th Congress by Senators Wyden (D-OR), Cantwell (D-
WA), Cardin (D-MD), Whitehouse (D-RI) and Brown (D-OH). S. 1770, The
Retirement Security and Savings Act of 2021. H.R. 2954, The Securing a
Strong Retirement Act of 2021.
Those Closest to or in Retirement: The way we live and work has
been impacted by the global pandemic. Those closest to retirement need
even more flexibility regarding how they continue to accumulate assets,
but also, when they are obligated to begin tacking distributions. More
and more savers are opting to stay in the workforce and public policy
should accommodate them by increasing the required minimum distribution
(RMD) age from 72 to 75 and allowing those 62-64 to save even more.\18\
Savers that are close to or in retirement may want to take steps to
ensure they do not outlive their savings. Only one vehicle can
guarantee this, an annuity. Removing barriers to annuities provides
savers with the option to ensure they have income for life. Qualified
longevity annuity contracts (QLAC) help retirees ensure retirement
solvency. Public policy should modernize the QLAC rules, by repealing
the 25-percent account balance limit, increasing the eligible QLAC
amount to $200,000 and making important changes to ensure spousal
survivor rights.\19\
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\18\ S. 1770, The Retirement Security and Savings Act of 2021. H.R.
2954, The Securing a Strong Retirement Act of 2021.
\19\ S. 1770, The Retirement Security and Savings Act of 2021. H.R.
2954, The Securing a Strong Retirement Act of 2021.
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3. Additional Plan Innovations
While the SECURE Act certainly made a large impact on the retirement
savings landscape, small changes can build upon and improve the current
retirement system. These include:
Expansion of the Open Multiple Employer Plans (Open MEPs)
provision to include 403(b) plans sponsored by certain tax-exempt
employers and public educational institutions.
Clarification of the rules applicable to stable financial
planning tools that can meet savers' financial needs. Currently there
is ambiguity surrounding fiduciary liability as it relates to general
account funds. Insurance companies offer guaranteed principal and
interest through these conservative, insured instruments. Backed by the
insurer's general assets, general account products often provide higher
rates of return than other fixed return and stable value investment
vehicles. Many employers include them among the investment options
available to their retirement plan participants. Large sums of 401(k)
assets are invested in these products. It is critical that Congress
provide clarity to permit these stable, safe arrangements to continue.
Support for legislative efforts, like the Lifetime Income for
Employees Act, bipartisan legislation introduced in the 116th Congress
by Representatives Don Norcross (D-NJ) and Tim Walberg (R-MI). This
bill would remove a barrier that prohibits annuities from being offered
as a default investment option in workplace retirement plans.\20\
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\20\ H.R. 8990, The Lifetime Income for Employees Act, introduced
in the 116th Congress by Representatives Don Norcross (D-NJ) and Tim
Walberg (R-MI).
Facilitate emergency saving to ensure Americans have funds to
cover unexpected financial challenges while protecting critical long-
term retirement savings. Several proposals have been introduced in the
Senate.\21\
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\21\ S. 1870, The Enhancing Emergency and Retirement Savings Act of
2021, introduced in the 117th Congress by Senators James Lankford (R-
OK) and Michael Bennet (D-CO). S. 1019--Strengthening Financial
Security Through Short-Term Savings Accounts Act of 2019, introduced in
the 116th Congress by Senators Doug Jones (D-AL), Tom Cotton (R-AR),
Cory Booker (D-NJ) and Todd Young (R-IN).
Reinforcement of the value and benefits associated with modern,
electronic delivery of retirement plan documents and notices, while
ensuring an opt-out option for plan participants. COVID-19 has
demonstrated that access to important documents electronically is a
critical need of Americans.
CONCLUSION
Providing Americans, especially vulnerable populations, with greater
access to retirement savings tools will help them better prepare for
retirement. Many retirees can expect to live more than 30 years or
longer in retirement. Facilitating lifetime income solutions and
increasing financial education empowers and educates Americans to make
better decisions. By taking action now, Congress has an opportunity to
help more people retire with peace of mind. ACLI urges policymakers to
support and enhance the current retirement system. We and our members
stand ready to assist the Congress in this worthwhile endeavor.
______
American Heart Association
National Center
7272 Greenville Avenue
Dallas, TX 75231
Statement of Larry D. Cannon,
Chief Administrative Officer and Corporate Secretary
July 26, 2021
The Honorable Ron Wyden The Honorable Mike Crapo
Chair Ranking Member
U.S. Senate U.S. Senate
Committee on Finance Committee on Finance
Washington, DC 20510 Washington, DC 20510
Dear Chairman Wyden and Ranking Member Crapo:
The American Heart Association is proud to lead a coalition of more
than 55 national charities and faith-based organizations who support
the bipartisan Legacy IRA Act (S. 243), sponsored by Senators Cramer
and Stabenow. In conjunction with the retirement hearing scheduled for
July 28th, this coalition urges you to include the Legacy IRA Act in
future legislation, such as the ``Securing a Strong Retirement Act of
2021.'' A full list of coalition members is attached.
First, thank you for your leadership to support relief for charities
impacted by COVID-19. Nonprofits responded quickly on the frontlines
and continue to respond. The American Heart Association developed the
first COVID-focused registry to aggregate data and aid research on
COVID-19, treatment protocols, and risk factors tied to adverse
cardiovascular outcomes. In addition, the Association committed $2.5
million in rapid response research awards to better understand the
virus and its interaction with heart and brain systems. These
initiatives, and others like them, would not be possible without public
support and charitable giving.
The Legacy IRA Act will encourage more charitable giving by enabling
seniors to make contributions from their individual retirement accounts
(IRA) to charities through life-income plans. Seniors are a key
demographic as they typically make up more than 40% of the donor base
for charities. This is an expansion of the existing IRA Charitable
Rollover provision, which is the fastest growing area of philanthropy.
Many nonprofits are dependent on private philanthropy, including gift
planning. The Legacy IRA Act offers seniors another philanthropic
option and would incentivize more giving to help charities while
helping middle-income seniors who need a lifetime income.
American Heart Association was pleased that a modified version of the
Legacy IRA Act was already included in the House Ways and Means
Committee passed ``Securing a Strong Retirement Act of 2021'' (Sec.
310) in May. We strongly support the inclusion of the Legacy IRA Act in
this or other legislative packages. America is stronger when everyone
has the opportunity to give, to get involved, and to strengthen their
communities.
Sincerely,
Larry D. Cannon
Chief Administrative Officer and Corporate Secretary
Help Seniors Increase Charitable Giving Legacy IRA Act of 2021
The Issue
The undersigned nonprofit organizations support legislation allowing
middle-income seniors more flexibility to make gifts to charities
through their individual retirement accounts (IRAs). This expansion of
current law would increase critical charitable giving, now more
important than ever as nonprofits lost nearly one million jobs due to
the pandemic. Given trends over the last six months, it will take
nearly 18 months for nonprofits to regain all of the jobs lost since
COVID hit.
Despite the financial and operational challenges due to COVID-19, our
nonprofit coalition partners have continued to provide critical
services such as health research and patient education, food
assistance, domestic violence services, childcare, youth homeless
shelters, and virtual cultural and arts programming.
The Legislation
In 2015, Congress passed the PATH Act, which included the IRA
Charitable Rollover provision allowing individuals to make direct tax-
free charitable gifts up to $100,000 annually from their IRA starting
at age 70\1/2\. Since its enactment, the IRA Charitable Rollover has
generated millions of dollars in new or increased contributions to
local and national charities. The Legacy IRA Act builds on that success
to expand the existing IRA Charitable Rollover, allowing seniors
starting at age 65 to make tax-free IRA rollovers to charities through
life-income plans (charitable gift annuity or charitable remainder
trust).
The Legacy IRA Act offers an opportunity for Congress to support
middle-income seniors who have a charitable intent but need retirement
income. Charitable donors have been setting up charitable gift
annuities for more than 100 years, which have long been regulated by
state insurance departments. The donor receives lifetime payments, and
the charity receives any remainder when the donor passes away.
The Legacy IRA Act provides seniors who have planned well for
retirement with another giving option by allowing them to use their
IRAs to fund a gift annuity. It is estimated that seniors have up to $5
trillion in IRA assets. This offers a way for middle-income donors to
combine charitable gifts with retirement income. It helps existing
charities, as seniors typically make up more than half of their donors.
The undersigned coalition of nearly 60 national nonprofits support the
bipartisan Legacy IRA Act. In the 117th Congress, Senators Cramer and
Stabenow introduced The Legacy IRA Act (S. 243). A modified version of
the Legacy IRA Act (H.R. 2909) was introduced by Representatives Beyer
and Kelly. This modified proposal allows for a one-time funding of life
income gifts up to $50,000 and indexes for inflation the original IRA
Rollover provision. H.R. 2909 was included in the bipartisan Securing a
Strong Retirement Act of 2021 (H.R. 2954) introduced by House Ways and
Means Committee Chairman Neal and Ranking Member Brady. The Securing a
Strong Retirement Act of 2021 was unanimously approved by the committee
in May 2021. This coalition strongly supports the bipartisan Legacy IRA
Act and urges Congress to pass the legislation on its own or as part of
a broader retirement package.
Supporters
Arab Community Center Council on Foundations National Association
for Economic and of College and
Social Services University Business
(ACCESS) Officers
Alliance for Strong Covenant House National Community
Families and International Action Partnership
Communities
ALS Association DANCE/USA National Council of
Nonprofits
Alternate ROOTS The Evangelical National Health
Lutheran Good Council
Samaritan Society
Alzheimer's Association Girl Scouts of the USA National Multiple
and the Alzheimer's Sclerosis Society
Impact Movement
American Alliance of Girls Inc. The Nonprofit Alliance
Museums
American Cancer Society Goodwill USA OPERA America
Cancer Action Network
American Council for Habitat for Humanity Performing Arts
Gift Annuities International Alliance
American Heart Hemophilia Federation Providence St. Joseph
Association of America Health
American Lung Immune Deficiency The Salvation Army USA
Association Foundation
American Red Cross Independent Sector ServiceSource, Inc.
Americans for the Arts JDRF Theatre Communications
Group
Asian Pacific Community Jewish Federations of UNICEF USA
Fund North America
Association of Art League of American United Philanthropy
Museum Directors Orchestras Forum
Association of Lutheran Services in United Way Worldwide
Fundraising America
Professionals
Boys & Girls Clubs of March of Dimes Volunteers of America
America
Catholic Charities USA Mental Health America YMCA of the USA
Council for Advancement National Alliance on YWCA USA
and Support of Mental Illness
Education
Council for Christian National Association of
Colleges and Charitable Gift
Universities Planners
We urge Members of Congress to support the Legacy IRA Act. For more
information about the bill, please contact Emily Horowitz, American
Heart Association Government Relations Manager, at
Emily.horowitz@heart.org.
______
Association of Mature American Citizens (AMAC)
312 Teague Trail
Lady Lake, FL 32159
855-809-6976
https://amacaction.org/
@MatureAmericans
August 10, 2021
The Honorable Ron Wyden The Honorable Mike Crapo
Chairman Ranking Member
U.S. Senate U.S. Senate
Committee on Finance Committee on Finance
219 Dirksen Senate Office Building 219 Dirksen Senate Office Building
Washington, DC 20510 Washington, DC 20510
Dear Chairman Wyden and Ranking Member Crapo,
On behalf of the Association of Mature American Citizens (AMAC) and
their over 2.3 million members, I am submitting this statement for the
record for the hearing entitled: ``Building on Bipartisan Retirement
Legislation: How Can Congress Help?''
AMAC is a member benefits organization supporting all Americans,
especially those 50 plus in age. AMAC is centered on American values:
freedom of the individual, free speech, exercise of religion, equality
of opportunity, sanctity of life, rule of law, and love of family. AMAC
Action, a 501(c)(4), advocates for issues important to AMAC's 2 million
plus members on Capitol Hill, in state capitals, and local government.
AMAC Action ensures our members' voices are heard through grassroots
activism. The AMAC Foundation serves as a source of guidance for older
Americans about Social Security and Medicare, completely free of
charge. The AMAC Foundation has a staff of certified National Social
Security Advisors to counsel retiree and pre-retirees on questions and
issues relating Social Security and provides an array of educational
opportunities on other issues.
As an organization supporting Americans aged 50-plus, AMAC strongly
believes more can be done to help Americans to save for retirement. The
complexity of the American retirement system has made it difficult for
mature adults to reap the full benefits of retirement savings. The
SECURE Act was a good first step in simplifying retirement savings for
millions of Americans, but more can and should be done to simplify the
system.
[GRAPHIC] [TIFF OMITTED] T2821.005
.epsJust looking at JCT's analysis \1\ for this hearing, which spans
more than 60 pages, shows the need for a simpler system. Currently
private sector and governmental employees have access to nearly a dozen
different retirement savings systems depending on the type of
employment, defined contribution or defined benefit, single employer or
multi-employer, and existence of collective bargaining agreements. Even
with all these various types of qualified retirement plans, 33 percent
of private sector workers do not have access to an employer sponsored
plan and only 76 percent of those with access choose to use it. A study
by the Federal Reserve found that 26 percent of non-retirees had no
retirement savings in 2020.\2\ This high number of non-savers can be
distilled down to two reasons:
---------------------------------------------------------------------------
\1\ Joint Committee on Taxation. Present Law and Background
Relating to Retirement Plans (JCX-32-21), July 26, 2021.
\2\ Federal Reserve. ``Report on the Economic Well-Being of U.S.
Households in 2020.'' May 2021.
1. The complexity of the retirement savings systems leads many to
skip saving for retirement.\3\
---------------------------------------------------------------------------
\3\ Washington Post. ``Why it's so hard for Americans to save for
retirement.'' September 15, 2017.
2. The voluntary nature of employers offering access to retirement
plans leaves some employees without easy access to retirement
savings.\4\
---------------------------------------------------------------------------
\4\ Pew Charitable Trusts. ``Employer Barriers to and Motivations
for Offering Retirement Benefits.'' June 2017.
Since 2013 \5\ the number of respondents to the Federal Reserve survey
with no retirement savings has decreased marginally, however the high
number still leads AMAC to believe a retirement savings crisis exists.
---------------------------------------------------------------------------
\5\ Federal Reserve. ``Report on Economic Well-Being of U.S.
Households'' 2013-2020. 2014-2021.
In addition to the current system's inability to deal with this crisis
of non-savers, changes in employee preferences will also be impacted by
the complexity of the retirement savings system. According to data from
the Bureau of Labor Statistics, more than 70 percent of workers aged
25- to 34-years-old have less than four years of tenure with their
current employer whereas the inverse is true, over 70 percent of 55- to
64-year-old workers have worked more than 4 years with the same
employer and over half have tenure of more than 10 years.\6\ The
preference for younger employees to move jobs more often will have an
impact on retirement savings. Employees with multiple former employers
are often left with multiple retirement savings accounts, some of
different types. While many employees consolidate retirement accounts,
consolidation can have major tax implications or impact fees paid to
the retirement plan provider.
---------------------------------------------------------------------------
\6\ Bureau of Labor Statistics. ``Median tenure with current
employer was 4.1 years in January 2020.'' September 29, 2020.
[GRAPHIC] [TIFF OMITTED] T2821.006
.epsAnother concerning action being taken is the number of employees
either borrowing from or cashing out retirement savings. According to
the Federal Reserve's 2020 data, 24 percent of non-retirees surveyed
had removed money from self-directed retirement savings in the previous
12 months.\7\ While tax penalties \8\ are designed to reduce permanent
withdrawal of funds from retirement accounts, a significant portion of
employees still viewed retirement savings as a source of extra funds
instead of as a nest egg necessary for the future. These reductions in
savings are likely part of the reason 45 percent of employees believe
their retirement savings is not on track to reach their goals.\9\
---------------------------------------------------------------------------
\7\ Ibid.
\8\ 26 U.S.C. 72(t)(1).
\9\ Ibid.
Reductions in retirement savings will have a greater impact on future
retirees due to the shortfall of future Social Security revenue used to
pay benefits. According to the 2020 Social Security Trustees Report,
the Old-Age and Survivors Insurance Trust Fund, commonly called the
Social Security Trust Fund, will move to a cash basis in 2034 and is
expected to only be able to meet 76 percent of scheduled benefits.\10\
Because of the pandemic caused recession in 2020 and resulting high
unemployment, it is likely this date will be sooner than the most
recent report suggests.
---------------------------------------------------------------------------
\10\ Social Security Administration. ``The 2020 Annual Report of
the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Federal Disability Insurance Trust Funds.'' April 22, 2020.
Without adequate retirement savings, or Congressional action to stop or
delay the shortfall, many retirees will face economic hardship. This
economic hardship could be made worse by rising inflation that makes
many of the products retirees need more expensive while living on fixed
incomes if adequate savings that provide increasing income do not
exist. While not an issue covered by this hearing, AMAC strongly
encourages Congress to make improvements to the Social Security program
that will hold off insolvency and improve benefits for those without
---------------------------------------------------------------------------
retirement savings to minimize the impact of increasing costs.
AMAC has created to the Social Security Guarantee \11\ to help deal
with these issues and can serve as a blueprint for Congress to pass
real Social Security improvements without the need to make unnecessary
tax increases or cut benefits for those that need them most. To help
ensure retirees can afford retirement, especially those with little to
no savings, AMAC suggests changing the way the annual cost of living
adjustment is made:
---------------------------------------------------------------------------
\11\ Association of Mature American Citizens. ``The Combined Social
Security Guarantee and Social Security Plus Initiative.'' August 2020.
Implement a tiered approach to the calculation of Cost-of-Living
---------------------------------------------------------------------------
Adjustments (COLA) as follows:
1. For beneficiaries with a household income (Modified Adjusted
Gross Income) level less than 150 percent of the federal poverty
threshold (FPT, 150% FPT limit would be $25,860 for 2020), set an
annual COLA range of 3 percent minimum--4 percent maximum.
2. For beneficiaries with a household income (MAGI) between 150
percent and 300 percent of FPT ($25,860-$51,720 for two-person
households in the continental U.S.) set an annual COLA range of 1.5
percent minimum and 3 percent maximum.
3. For beneficiaries with a household income (MAGI) exceeding 300
percent of federal poverty threshold ($51,720 for two-person households
in the continental U.S.), set an annual COLA range of .5 percent
minimum and 1.5 percent maximum.
Additional changes to the program are also necessary to avoid
insolvency and more details about the Social Security Guarantee are
available at the end of these comments.
One of the most important parts of the Social Security Guarantee is
helping to increase retirement savings for non-retirees. To accomplish
this AMAC recommends the creation of a new ``Social Security Plus''
(``SSP'') account to be a supplemental voluntary companion benefit
retirement account to provide access to additional funds for all
workers at age 62.\12\
---------------------------------------------------------------------------
\12\ Ibid.
According to a February 2018 Pew Research report:\13\
---------------------------------------------------------------------------
\13\ Pew Charitable Trusts. ``Workplace Retirement Plans Tend to
Sharpen Focus on Financial Futures Survey.'' February 2018.
``[M]ore than one-third of all private sector workers lack
access to a workplace plan. Moreover, 31 percent of those whose
employers offer retirement benefits do not participate. Some
may decide they are unable to afford regular contributions,
while others may be ineligible because of plan rules, such as
---------------------------------------------------------------------------
requirements for a minimum number of hours worked each year.''
In sum, tens of millions of Americans have no retirement plan, and the
average person receiving retirement benefits collects slightly more
than $16,000 per year. Accordingly, the majority of retired workers
rely on Social Security as the largest portion of their retirement
income. For many Americans, Social Security is their only source of
income. There is an urgent need to help workers save more for
retirement.
AMAC recommends the creation of a simple voluntary employer-offered
companion retirement savings option that can be easily and
inexpensively implemented by small employers--a Social Security Plus
(SSP) account. SSP employee accounts would be managed for the
employee(s) by established financial services firms and accountable to
an industry board functioning under the auspices of the Social Security
Administration.
Recommended core elements of the SSP:
It must be offered by the employer to all employees (full and
part-time), but participation will be a voluntary account for both
employee and employer.
When new employees are hired, they must opt out of the SSP
account, or they will be enrolled at $10/week.
The individual is the owner of this supplemental retirement
savings account.
Tax deduction for employer contributions, after-tax contribution
for employee with income sheltered.
Employee not taxed on receiving funds (similar to a Roth IRA).
Paid via payroll deduction, employer provides the contribution
slot to employee.
The weekly minimum is $5, the weekly maximum is $100 or $5,200/
year.
Employer may elect to contribute to employees' SSP accounts in
any amount or percentage of pay they choose up to $50 per week ($2,600
per year).
The employer may start or stop their contribution at any time.
Portability, if wage earner changes jobs, new employer must add
payroll access for the SSP.
Funds only available to wage earner at age 62 unless death or
total disability occurs.
Wage earner may elect to start receiving payouts at any age
between 62 and 70\1/2\.
Death benefit is the accrued value of account at time of death.
SSP account benefits, including earnings, are tax-free.
Contribution should be indexed for inflation at 4%.
Investment options for the Social Security Plus retirement savings
account:
80% of the funds must invested in stock funds and bonds and the
other 20% may be invested in any approved conservative investment
(i.e., S&P 500 index).
A volunteer board of investment experts creates lists of
approved investments to assure quality.
Investment choices would be similar to those used in 401(k)
plans and IRAs and the cost of administration would be borne by the
same providers who offer those plans, not the federal government.
A program such as the Social Security Plus account or other automatic
IRA approach would ensure more Americans are able to save for
retirement. Under this proposal, a 23-year-old employee contributing
only $25/week in the first year and an employer contributing $15/week,
with both adding 4 percent annually thereafter, in a mix of 80 percent
stock funds and 20 percent conservative investments, would accumulate
over $1 million by age 65. Having an extra $1 million in retirement
savings would greatly reduce reliance on Social Security income for
many retirees.
Ensuring our members have a smooth transition into retirement is a top
priority for AMAC. Previous legislation to improve retirement security
have been valuable, but continued bipartisan improvements are needed to
increase retirement savings with a less complicated system. We
appreciate the bipartisan efforts in working towards a solution to help
preserve retirement savings for seniors.
Sincerely,
Bob Carlstrom
President
______
Center for Fiscal Equity
14448 Parkvale Road, Suite 6
Rockville, MD 20853
fiscalequitycenter@yahoo.com
Statement of Michael G. Bindner
Chairman Wyden and Ranking Member Crapo, thank you for the opportunity
to submit these comments for the record to the Committee on this topic.
The title is a bit ironic. Only Congress can build on retirement
legislation. Whether Congress is helping or not is the open question.
Gridlock is not helping, although sometimes doing nothing is better
than faux bipartisanship that makes things worse.
The current structure of Social Security found its genesis in the 1983
Greenspan Commission, which resulted in a Social Security Trust Fund,
which raised taxes on workers for their future retirements while
avoiding the repeal of President Reagan's signature tax cuts.
Many think tanks of a certain ideology hint that we cannot afford the
burden of retirement spending as repaying trust is a budget buster. It
is not. Certain people simply must pay what they owe. Whatever the
future of Social Security, for the present, the burden of repaying the
Trust Fund is on the wealthy, not current or future retirees. The bill
is now coming due and those families who received the benefit of this
plan owe the rest of us some money.
Truth is more important than bipartisanship.
The 1990s found us in a pension crisis. Actuaries sold the nation on
the belief that pay-as-you-go pensions were not adequate. Investments
must be fully funded. This led many companies to stop funding their
plans altogether, shifting funds to defined contribution programs. As
fortune would have it, the financial sector had many ideas (and
products to sell) to fill this need. It is almost as if the actuaries
had been talking to those who created the new regime.
Bipartisan reforms of late have been an effort to strengthen this
regime. They have been good for many retirees. Most retirees, however,
were not able to afford to make the required savings because their
incomes were not adequate to do so. By most, I mean the vast majority.
Few workers have the economic clout to insist on wages high enough to
adequately save. Those who do are bedeviled by the need to ``hit their
number.'' Job one in doing this is to control the income and benefits
of the non-professional class.
The only thing that saves most retirees and the disabled is Social
Security. It is not currently adequate. Before the Reagan Revolution,
the National Commission on Social Security did its work, releasing its
recommendations in 1981, which were rejected out of hand. The report is
available at https://www.ssa.gov/history/reports/80commission.html. The
Commission found that the best way to assure retirement security is to
build it around, not away from, Social Security.
The Commission noted that savings would not have increased were it not
for the program. Like now, the economy was a concern for solvency. The
Pandemic may be duplicating those economic conditions, especially if
the Fed starts to fight inflation. The declining birth rate was a
concern then. It still is. One thing that is different is that
productivity was stagnant the decade before. It is not stagnant now
(although the gains have not been shared.
They proposed a higher retirement age (eventually passed), general
funding (which is now programmed in as the trust fund is paid down),
independent funding of Medicare, Medicaid, Disability and SSI under a
separate agency (trust funds have met with limited success) and other
recommendations for 88 in total. Their OASDI trust fund was only for a
year. More than a few of their recommendations deserve a second look,
particularly with regard to healthcare and disability insurance.
We cannot turn the clock back to 1981 (or November 1980). This does not
mean that we are without options. Committee members and staff are
likely familiar with our proposed solutions. The tax reform plan to
enact them can be found in our first attachment. We will refer to it in
the text.
Our first task must be to increase incomes for workers and retirees.
The President's Budget features a permanent increase in the Child Tax
Credit, retaining the refundability added as part of the American
Rescue Plan Act. The CTC is the ultimate in bipartisan legislation.
Both Republicans and Democrats have added to it, although only now has
it become refundable for smaller families. It is still not adequate.
Making these reforms permanent and increasing benefit levels further
should be seen as bipartisan as well. As we have pointed out (because
our Center has a religious bent), higher incomes for families are one
of the most effective ways to reduce the number of abortions. We call
upon the U.S. Conference of Catholic Bishops and the National Right to
Life Committee to make doing so a required vote to maintain a perfect
pro-life voting record.
If we want people to save for retirement, we must make sure that they
can also eat and have adequate housing and medical care. Higher incomes
achieve both of those goals (while the latter is outside the scope of
these comments).
Our tax reform plan, specifically the Subtraction Value-Added Tax,
details how the Child Tax Credit can be paid out without turning the
Internal Revenue Service to society's pay master. Payments through the
IRS are a temporary expedient, but this is likely too much government
for Republican members to support on a permanent basis. Distributing
benefits through other government payments, such as Social Security,
Unemployment Insurance and TANF training stipends and through wages (as
an offset to either the subtraction VAT or quarterly payments to the
IRS) is more likely to stand the test of time.
Our second attachment addresses how to raise the minimum wage and why
this is essential for retirees. Enacting these changes must be a
required vote for ratings by the American Association of Retired
Persons and other retiree coalitions.
Our second task is to reform how Social Security taxes are collected.
Disability Insurance, the Employer Contribution to FICA and
Supplemental Security Insurance should be decoupled from wages and
credited on an equal dollar basis. Our first attachment explains how
this can be done through tax reform. Doing so could be funded by
consumption taxes in three ways.
Our (Credit) Invoice VAT will increase the competitiveness of our
exports and protect worker jobs while decreasing employer costs. Our
Subtraction (Net Business Receipts) VAT is useful if options include
personal accounts holding employer voting and preferred stock (but in
no cases should it be invested in the stock market). Our Asset VAT is
appropriate for funding the repayment of the Social Security Trust
Fund.
Each of these proposals (all of which can be used) burden the entire
economy, as well as investors, who have had the benefit of worker
productivity, especially that part of productivity which featured the
destruction of unions and limiting pay and benefits for all but the top
10% of households. There are no caps to increase with these taxes and
they can be adjusted more easily than payroll taxes (which are
regressive).
Our third task is to move toward employee ownership, which allows a
return to defined benefit compensation.
Our Asset VAT can be enacted as a replacement for estate (death) taxes
and capital gains and income taxes (including dividends, interest, rent
and pass-throughs) through personal income tax filing. Corporate income
taxes and business taxes collected through individual income taxes and
all but the highest taxes on salaries would be shifted to our
subtraction VAT. The Asset and Invoice VATs are superior to Wealth
Taxes because they are impossible to dodge. This also makes them
superior to the Estate Tax. This is described in detail in our first
attachment.
The key feature of the Asset VAT would be an easier path for
shareholders to avoid taxation on sales to qualified Employee Stock
Ownership Plans. This benefit is available to only a small number of
business owners. It should be available to every investor and heir. It
would not be paid by inheritors until they sell the family business,
farm or share holdings. ESOP sales allow them to avoid taxation
altogether (except when purchasing new shares or spending the gains).
Employee-ownership is real liberty for workers. Capitalist ownership
fosters an authoritarian workplace, not a libertarian one. Being paid
to obey is not freedom. Any libertarian worthy of the name must
recognize this.
The 2017 tax reform brought capital gain and profit taxes into a small
range. They should be set to a single rate rather than being debated
with each change of administration. When net interest payments on the
debt become less workable, this is one of the taxes that would be
increased, along with a high salary surtax (which could be collected
through tax prepayment bonds for a quick buy-back).
We must put our fiscal house in order. It is the most important thing
we can do for retirees.
Thank you for the opportunity to address the committee. We are, of
course, available for direct testimony or to answer questions by
members and staff.
Attachment One--Tax Reform, Center for Fiscal Equity, March 5, 2021
Individual payroll taxes. These are optional taxes for Old-Age and
Survivors Insurance after age 60 for widows or 62 for retirees. We say
optional because the collection of these taxes occurs if an income
sensitive retirement income is deemed necessary for program acceptance.
Higher incomes for most seniors would result if an employer
contribution funded by the Subtraction VAT described below were
credited on an equal dollar basis to all workers. If employee taxes are
retained, the ceiling should be lowered to $85,000 to reduce benefits
paid to wealthier individuals and a $16,000 floor should be established
so that Earned Income Tax Credits are no longer needed. Subsidies for
single workers should be abandoned in favor of radically higher minimum
wages.
Wage Surtaxes. Individual income taxes on salaries, which exclude
business taxes, above an individual standard deduction of $85,000 per
year, will range from 6.5% to 26%. This tax will fund net interest on
the debt (which will no longer be rolled over into new borrowing),
redemption of the Social Security Trust Fund, strategic, sea and non-
continental U.S. military deployments, veterans' health benefits as the
result of battlefield injuries, including mental health and addiction
and eventual debt reduction. Transferring OASDI employer funding from
existing payroll taxes would increase the rate but would allow it to
decline over time. So would peace.
Asset Value-Added Tax (A-VAT). A replacement for capital gains taxes,
dividend taxes, and the estate tax. It will apply to asset sales,
dividend distributions, exercised options, rental income, inherited and
gifted assets and the profits from short sales. Tax payments for option
exercises and inherited assets will be reset, with prior tax payments
for that asset eliminated so that the seller gets no benefit from them.
In this perspective, it is the owner's increase in value that is taxed.
As with any sale of liquid or real assets, sales to a qualified broad-
based Employee Stock Ownership Plan will be tax free. These taxes will
fund the same spending items as income or S-VAT surtaxes.
This tax will end Tax Gap issues owed by high income individuals. A 26%
rate is between the GOP 24% rate (including ACA-SM and Pease surtaxes)
and the Democratic 28% rate. It's time to quit playing football with
tax rates to attract side bets. A single rate also stops gaming forms
of ownership. Lower rates are not as regressive as they seem. Only the
wealthy have capital gains in any significant amount. The de facto rate
for everyone else is zero.
Subtraction Value-Added Tax (S-VAT). These are employer paid Net
Business Receipts Taxes. S-VAT is a vehicle for tax benefits, including
Health insurance or direct care, including veterans' health care
for non-
battlefield injuries and long term care.
Employer paid educational costs in lieu of taxes are provided as
either
employee-directed contributions to the public or private unionized
school of their choice or direct tuition payments for employee children
or for workers (including ESL and remedial skills). Wages will be paid
to students to meet opportunity costs.
Most importantly, a refundable child tax credit at median income
levels (with inflation adjustments) distributed with pay.
Subsistence level benefits force the poor into servile labor. Wages and
benefits must be high enough to provide justice and human dignity. This
allows the ending of state administered subsidy programs and
discourages abortions, and as such enactment must be scored as a must
pass in voting rankings by pro-life organizations (and feminist
organizations as well). To assure child subsidies are distributed, S-
VAT will not be border adjustable.
The S-VAT is also used for personal accounts in Social Security,
provided that these accounts are insured through an insurance fund for
all such accounts, that accounts go toward employee-ownership rather
than for a subsidy for the investment industry. Both employers and
employees must consent to a shift to these accounts, which will occur
if corporate democracy in existing ESOPs is given a thorough test. So
far it has not. S-VAT funded retirement accounts will be equal-dollar
credited for every worker. They also have the advantage of drawing on
both payroll and profit, making it less regressive.
A multi-tier S-VAT could replace income surtaxes in the same range.
Some will use corporations to avoid these taxes, but that corporation
would then pay all invoice and subtraction VAT payments (which would
distribute tax benefits. Distributions from such corporations will be
considered salary, not dividends.
Invoice Value-Added Tax (I-VAT). Border adjustable taxes will appear on
purchase invoices. The rate varies according to what is being financed.
If Medicare for All does not contain offsets for employers who fund
their own medical personnel or for personal retirement accounts, both
of which would otherwise be funded by an S-VAT, then they would be
funded by the I-VAT to take advantage of border adjustability. I-VAT
also forces everyone, from the working poor to the beneficiaries of
inherited wealth, to pay taxes and share in the cost of government.
Enactment of both the A-VAT and I-VAT ends the need for capital gains
and inheritance taxes (apart from any initial payout). This tax would
take care of the low-income Tax Gap.
I-VAT will fund domestic discretionary spending, equal dollar employer
OASI contributions, and non-nuclear, non-deployed military spending,
possibly on a regional basis. Regional I-VAT would both require a
constitutional amendment to change the requirement that all excises be
national and to discourage unnecessary spending, especially when
allocated for electoral reasons rather than program needs. The latter
could also be funded by the asset VAT (decreasing the rate by from
19.5% to 13%).
As part of enactment, gross wages will be reduced to take into account
the shift to S-VAT and I-VAT, however net income will be increased by
the same percentage as the I-VAT. Adoption of S-VAT and I-VAT will
replace pass-through and proprietary business and corporate income
taxes.
Carbon Value-Added Tax (C-VAT). A Carbon tax with receipt visibility,
which allows comparison shopping based on carbon content, even if it
means a more expensive item with lower carbon is purchased. C-VAT would
also replace fuel taxes. It will fund transportation costs, including
mass transit, and research into alternative fuels (including fusion).
This tax would not be border adjustable unless it is in other nations,
however in this case the imposition of this tax at the border will be
noted, with the U.S. tax applied to the overseas base.
Tax Reform Summary
This plan can be summarized as a list of specific actions:
1. Increase the standard deduction to workers making salaried income
of $425,001 and over, shifting business filing to a separate tax on
employers and eliminating all credits and deductions--starting at 6.5%,
going up to 26%, in $85,000 brackets.
2. Shift special rate taxes on capital income and gains from the
income tax to an asset VAT. Expand the exclusion for sales to an ESOP
to cooperatives and include sales of common and preferred stock. Mark
option exercise and the first sale after inheritance, gift or donation
to market.
3. End personal filing for incomes under $425,000.
4. Employers distribute the child tax credit with wages as an offset
to their quarterly tax filing (ending annual filings).
5. Employers collect and pay lower tier income taxes, starting at
$85,000 at 6.5%, with an increase to 13% for all salary payments over
$170,000 going up 6.5% for every $85,000--up to $340,000.
6. Shift payment of HI, DI, SM (ACA) payroll taxes employee taxes to
employers, remove caps on employer payroll taxes and credit them to
workers on an equal dollar basis.
7. Employer paid taxes could as easily be called a subtraction VAT,
abolishing corporate income taxes. These should not be zero rated at
the border.
8. Expand current state/federal intergovernmental subtraction VAT to a
full GST with limited exclusions (food would be taxed) and add a
federal portion, which would also be collected by the states. Make
these taxes zero rated at the border. Rate should be 19.5% and replace
employer OASI contributions. Credit workers on an equal dollar basis.
9. Change employee OASI of 6.5% from $18,000 to $85,000 income.
Attachment Two--Raising the Minimum Wage to Raise Retirement Income
An increased minimum wage is an essential part of increasing income.
Earlier this year, Senate Republicans countered the proposal for a $15
per hour wage with a $10 wage. This would return the current wage to
the purchasing power it had at the last increase. Let us join hands and
make this change now and with no phase-in period. From this point
forward, the wage must be automatically indexed for inflation.
When this is done, the benefits of current retirees should be adjusted
accordingly. An additional Cost of Living Adjustment is necessary as
well. Food prices have gone through the roof and current retirees are
suffering. We cannot wait for an end of the year price adjustment.
Over and above inflation, the minimum wage should reflect increased
labor productivity. To get to parity with where wages and productivity
diverged, a $12 per hour wage is necessary. Another way to reward
workers (and retirees) for productivity gains is to shorten the
workweek to 32 hours (with 26 hours being considered full time for the
purpose of benefits). In this case, the wage could be set to $11 per
hour.
Would these changes cost jobs? Hardly. Low wage workers are sent home
when workload is low and required to stay (or not call in) when
workload is high. Their work is supplemented by work by higher wage
workers in high demand situations, regardless of how much more these
workers are paid. Unlike salaried workers, low wage workers are never
allowed to sit or stand around doing nothing. Lower wages would not
change this.
A statutory wage increase means that employers who do the right thing
and pay a higher wage are not put at a competitive disadvantage to
those without scruples. This is the logic behind increasing the child
tax credit. Without such a credit, workers with children would either
not be welcome or would, as now, suffer hunger while working.
Higher wages, ideally $18 an hour ($15 was so 2000s), would be
accompanied by alternative educational opportunities (with pay) so that
workers who are less productive would be paid the same wage to increase
both literacy and job skills.
______
Church Alliance
1601 K Street, NW
Washington, DC 20006
Tel (202) 778-9000
Fax (202) 778-9100
July 28, 2021
The Honorable Ron Wyden The Honorable Mike Crapo
Chairman Ranking Member
U.S. Senate U.S. Senate
Committee on Finance Committee on Finance
219 Dirksen Senate Office Building 219 Dirksen Senate Office Building
Washington, DC 20510 Washington, DC 20510
Dear Chairman Wyden and Ranking Member Crapo:
The Church Alliance is pleased to submit the following statement
for the record ahead of the Senate Committee on Finance's July 28, 2021
hearing on Building on Bipartisan Retirement Legislation: How Can
Congress Help? We greatly appreciate the Committee's work over many
years on bipartisan retirement reform. Building on passage of the
Setting Every Community Up for Retirement Enhancement (SECURE) Act, we
are looking forward to consideration and passage of the next iteration
of retirement reform legislation. As the Committee considers retirement
reform, the Church Alliance is pleased to serve as a resource on issues
impacting the church benefits community.
ABOUT THE CHURCH ALLIANCE
The Church Alliance is an organization composed of thirty-seven
church benefit boards, covering mainline and evangelical Protestant
denominations, several Jewish entities, and Catholic schools and
institutions. The boards provide employee benefit plans, including
retirement and/or health coverage, to approximately one million
participants (clergy and lay workers) serving over 155,000 churches,
parishes, synagogues and church-associated organizations. The Church
Alliance is dedicated to ensuring that clergy and lay church workers
can enjoy retirement security following years of dedicated service and
appreciate your ongoing efforts to strengthen our country's retirement
system.
RETIREMENT SECURITY & SAVINGS ACT (S. 1770)
As the Committee considers different approaches to retirement
reform, the Church Alliance would like to express our appreciation for
the introduction of the Retirement Security & Savings Act (S. 1770) by
Senators Ben Cardin and Rob Portman. This legislation, which builds
upon the important reforms included in the SECURE Act, touches on two
issues of particular importance to the Church Alliance.
The Church Alliance appreciates inclusion of Section 502, a
provision to expand the IRA charitable distribution provision to
include distributions from certain qualified retirement plans. During
this time of increased need, allowing individuals to make charitable
distributions from qualified retirement plans would enable them to
continue to build on a lifetime of service by making charitable
distributions to organizations playing a critical role in our
communities.
Additionally, the Church Alliance supports the inclusion of Section
503, which would allow surviving spouses to use the same methodology
for calculating their required minimum distributions (RMDs) if they
elect to remain in their deceased spouses' employer plans than if they
had rolled over those plan assets to an IRA. Allowing a surviving
spouse to remain in his or her spouse's retirement plan, with the
Uniform Table being applied to calculate his or her RMD, would equalize
RMD calculations between employer plans and traditional IRAs. This
would create flexibility for the surviving spouse, eliminating the
burden now imposed when he or she remains in the deceased spouse's
employer plan. In the church plan context, allowing employer defined
contribution plans to use the same methodology for calculating RMDs as
is allowed for IRAs would level the playing field. This would result in
surviving spouses having the freedom to stay in a retirement plan
aligned with their needs, values, and culture. Church retirement plans
often provide strong, customized customer support and low fees. Church
plans also often provide a bundled suite of benefits, including health
coverage with robust mental health benefits, which can provide
important support and comfort during a challenging time. This provision
helps ensure that a grieving spouse continues to have access to the
robust benefits they enjoy in their church plan without having to make
a sudden change during this difficult time.
It is worth noting that these two provisions were not included in
the Securing a Strong Retirement Act (H.R. 2954). We would greatly
appreciate inclusion of these provisions in any potential compromise
retirement reform legislation.
The Church Alliance also appreciates inclusion of provisions to
allow nonspousal beneficiaries to roll assets into retirement plans (in
particular 403(b) plans), and allow employers to provide matching
contributions to retirement plans for employees making student loan
payments. The streamlined language included in Section 108 with respect
to increasing the RMD age is also beneficial--numerous changes to the
RMD can create administrative burdens on plans and potentially confuse
plan participants; this streamlined approach will be much simpler and
clearer to implement. We also appreciate changes previously made to
language providing an exemption from RMDs for individuals with less
than $100,000 in aggregate retirement savings, which help relieve
potential administrative burdens (Section 316). All of these provisions
contribute to improving the financial security of our retirees and,
importantly, encourage them to save for retirement.
Finally, the Church Alliance appreciates efforts to make
improvements to and strengthen the Saver's Credit. We applaud Chairman
Wyden's work on this important tax credit, as well as the inclusion of
improvements to the Saver's Credit in S. 1770.
CONCLUSION
On behalf of the Church Alliance, thank you for your ongoing
leadership on these important issues. We applaud your bipartisan
efforts on retirement reform, and are happy to serve as a resource for
the Committee on these and other issues impacting church benefits
plans.
Sincerely,
James F. Sanft
Chair
Chair: Secretary:
Mr. James F. Sanft * Ann T. Stillman
Concordia Plan Services of Concordia Plan Services of
The Lutheran Church--Missouri Synod The Lutheran Church-Missouri Synod
1333 S. Kirkwood Road
St. Louis, MO 63122
(314) 885-6701
Treasurer: Vice Chair:
Robert A. Bouche Rev. Jeffrey Thiemann *
Concordia Plan Services of Evangelical Lutheran Church in
America
The Lutheran Church--Missouri Synod 800 Marquette Ave., Suite 1050
Minneapolis, MN 55402
(612) 752-4051
Members:
Rev. Dr. Todd Adams Mr. Louis Barbarin *
Christian Church (Disciples of
Christ) American Baptist Churches
Mr. Brian Bodager * Ms. Barbara A. Boigegrain *
United Church of Christ United Methodist Church
Mr. John H. Bolt Mr. John Brummitt
Christian Reformed Church in North
America National Association of Free Will
Baptists
Mr. Scott Dolfi * Mr. Mark Dowley
Young Men's Christian Association Free Methodist Church of North
America
Mr. Nevin Dulabaum Dr. Craig A. Dunn
Church of the Brethren Wesleyan Church
Mr. Ed Dunnington Mr. Curtis Farmer
Presbyterian Church in America Christian and Missionary Alliance
Mr. Rob Fox Mr. Bart J. Francescone
CBF Church Benefits Evangelical Presbyterian Church
Mr. Kevin Gilmore Dr. O. S. Hawkins *
Church of the Nazarene Southern Baptist Convention
Mr. Ken Hochstetler Mr. Reggie Hundley
Mennonite Church Christian Churches Pension Plan
Mr. Michael Kimmel Mr. Steve Klimkowski
Reform Pension Board Evangelical Covenant Church
Rev. Richard Nugent Rev. Jim M. O'Bold
Unitarian Universalist Association Board of Pensions of the Church of
God (IN)
Ms. Kelly Oliveira Mr. Joshua Peterman
Reformed Church in America Wisconsin Evangelical Lutheran
Synod
Mr. Jonathan Phillips Br. Michael F. Quirk, FSC *
International Church of the
Foursquare Gospel Christian Brothers Services
Mr. Arthur D. Rhodes Mr. Edwin G. Romero
Church of God Benefits Board (TN) General Conference of Seventh-Day
Adventists
Ms. Rachel Roth Mr. Mitchell J. Smilowitz *
American Conference of Cantors Joint Retirement Board for
Conservative Judaism
Rev. Frank C. Spencer * Rev. Ric Stanghelle
Presbyterian Church (U.S.A.) Board
of Pensions Evangelical Free Church of America
Rev. Bernard E. Tanis Mr. James P. Thomas
Converge/Baptist General Conference Churches of God, General Conference
Ms. Mary Kate Wold *
Church Pension Group/Episcopal
Church
* Steering Committee Members.
______
Statement Submitted by James Webster Coates
I am a citizen of the United States of America, duly registered to vote
in the 3rd Congressional District of Pennsylvania. I live in Japan,
where I moved in May 2001, immediately after graduating from college. I
have lived and worked in Japan for my entire adult life, and am married
to a Japanese citizen, with whom I have two young sons.
While I am proud to be an American and enjoy visiting the United States
once a year to see family and friends, I have made my life in Japan and
this is my permanent home. Since my employment income is generated in
Japan and denominated in Yen, as are all of my living expenses, I need
to organize my financial and retirement planning in Japan. I am, of
course, a tax resident in Japan, where I am subject to full taxation at
rates of up to 55% on my worldwide income.
The problem I have is that the U.S. tax laws make it very difficult for
me to live the same kind of life that my friends and neighbors live.
You see, they are subject only to the Japanese tax system and can
organize their finances appropriately. As a U.S. citizen, I am subject
to the tax system here in Japan and the U.S. tax system. Those systems
are not compatible. Most attempts at responsible financial/
retirement planning here in Japan are frustrated by the need to comply
with U.S. tax laws.
The issues resulting from the U.S. system of citizenship-based taxation
are particularly problematic when saving and planning for retirement.
Congress should address issues such as the following in order to
eliminate double taxation and unnecessary reporting complexity, and to
facilitate effective retirement planning by U.S. citizens who reside
overseas:
Many investment products in our home countries are categorized
as a ``Passive Foreign Investment Company'' (PFIC), which results in
punitive taxation on ``excess distributions,'' which does not apply to
the equivalent U.S.-based financial product. As a result of this highly
discriminatory rule, U.S. citizens residing outside the United States
are effectively prohibited from investing in common investment vehicles
such as mutual funds, ETFs, and certain types of pension or annuity
products. Meanwhile, we cannot open accounts or purchase investment
products in the United States since we do not have a U.S. address.
Congress should provide an exception to PFIC treatment for non-resident
U.S. citizens so that we can responsibly invest for our future.
Furthermore, there are complex disclosures required for all
types of non-U.S. financial products. These things aren't ``foreign''
to me. They are necessities to protect my family and responsibly
prepare for retirement. Again, the equivalent financial products in the
U.S. are not subject to these requirements. U.S. domestic investment
products are easy to report to the IRS. Those of us living abroad are
punished by tax rules which don't fit our financial lives. All IRS
reporting requirements including Form 3520 (``Annual Return to Report
Transactions with Foreign Trusts and Receipt of Certain Foreign
Gifts''), Form 3520A (``Annual Information Return of Foreign Trust with
a U.S. Owner''), Form 8621 (``Information Return by a Shareholder of a
Passive Foreign Investment Company or Qualified Electing Fund''), Form
8938 (``Statement of Foreign Financial Assets''), and Financial Crimes
Enforcement Network Form 114 (``Report of Foreign Bank and Financial
Accounts'') should be modified to eliminate reporting requirements for
accounts held by individuals in their country of residence.
Bilateral tax treaties are intended to prevent double taxation.
Indeed, the full name of the U.S.--Japan treaty is the ``Convention
between the Government of the United States of America and the
Government of Japan for the Avoidance of Double Taxation.'' However,
this is unbelievable, but the United States inserted a provision in
Article 4 Paragraph 3 of the treaty (the so-called ``savings clause''),
which reserves the right of the United States to tax its citizens based
on citizenship, effectively overriding the other provisions of the
treaty which would otherwise provide some margin of relief for U.S.
citizens. For example, Articles 17 and 18 of the U.S.--Japan treaty
state that pension distributions are to be taxed based on residency,
but that does not apply to U.S. citizens, so I will pay double tax once
I retire and begin to draw a pension. All bilateral tax treaties should
be updated with the latest provisions related to foreign pension plans
of U.S. participants, which are included in the 2016 United States
Model Income Tax Convention.
The Foreign Earned Income Exclusion should be redefined to
include already-taxed retirement income, and foreign government social
welfare payments such as indigent pension, aged pension, unemployment,
disability pension, child care, parental leave, pandemic support, etc.
The Windfall Elimination Provision should be repealed so that
people who have worked in both the United States and another country
can receive the pension benefits which would otherwise be due to them.
I do not live ``offshore.'' I do live in Japan, where I am responsible
for paying tax on my worldwide income at rates of up to 55%. Yet,
because I am a U.S. citizen, I am subject to the U.S. extraterritorial
tax regime, which means the United States imposes taxation on my non-
U.S. income even though I am already fully taxed on that income in my
country of residence, and I do not live in the United States. There is
no other advanced country in the world that imposes such
extraterritorial taxation.
The U.S. extraterritorial tax regime makes it difficult for me to save,
invest, participate in pension plans and generally behave in a
financially responsible way. This is because all of these essential
activities are taking place in my country of residence and not in the
United States. My retirement investments are foreign to the United
States, but local to me. As a tax resident of both the United States
and my country of residence, I get the worst of both tax systems.
This is extremely unjust. For many years, Americans abroad have been
attempting to get both Treasury and Congress to address these issues.
It is time for the United States to stop extraterritorial taxation of
non-resident citizens. The best solution to this problem is for the US
to come into alignment with every other developed nation on the planet
and move to a residence-based taxation system for individuals. The
definition of ``individual'' in Treasury Regulation, 26 Section 1.1-1
should be modified to include only ``residents.'' U.S. citizens who are
tax residents of other countries would continue to be liable to pay
U.S. Federal Income Tax on any income which is effectively connected
with the United States, as all non-resident aliens do, by using Form
1040-NR instead of Form 1040.
Thank you for reading my entire statement.
James Webster Coates
Tokyo, Japan
______
Committee of Annuity Insurers
1455 Pennsylvania Avenue, NW, Suite 1200
Washington, DC 20004
(202) 347-2230
www.annuity-insurers.org
May 19, 2021
The Honorable Ben Cardin The Honorable Rob Portman
509 Hart Senate Office Building 448 Russell Senate Office Building
Washington, DC 20510 Washington, DC 20510
Re: The Committee of Annuity Insurers Supports the Retirement
Security and Savings Act of 2021
Dear Senator Cardin and Senator Portman:
On behalf of the Committee of Annuity Insurers (CAI), we want to
express our strong endorsement of The Retirement Security and Savings
Act of 2021 (RSSA). The CAI greatly appreciates your leadership on
modernizing and improving retirement plans, especially your focus on
increasing access to guaranteed lifetime income solutions for middle-
class Americans.
The CAI is a coalition of life insurance companies formed in 1981
to participate in the development of federal policy with respect to
annuities. The CAI's 31 member companies represent approximately 80% of
the annuity business in the United States and are among the largest
issuers of annuity contracts to employer-sponsored retirement plans. A
list of member companies is attached.
The RSSA has great potential to significantly improve retirement
security for middle-class Americans, particularly by increasing their
access to guaranteed lifetime income. From the CAI's perspective, the
provisions of the bill that would remove barriers for life annuities
under the required minimum distribution rules, enact important reforms
for qualifying longevity annuity contracts, and clarify the
substantially equal periodic payment rules for annuities are
particularly important. These changes have been long sought by the CAI,
and we truly appreciate your great work in bringing them one step
closer.
We greatly appreciate your continued focus on retirement security
and look forward to working together to ensure that all Americans have
access to lifetime income solutions through their retirement plans and
IRAs.
Counsel to the Committee of Annuity Insurers
Bryan W. Keene Mark E. Griffin
Partner, Davis and Harman LLP Partner, Davis and Harman LLP
bwkeene@davis-harman.com megriffin@davis-harman.com
The Committee of Annuity Insurers
AIG Life and Retirement, Los Angeles, CA
Allianz Life Insurance Company, Minneapolis, MN
Allstate Financial, Northbrook, IL
Ameriprise Financial, Minneapolis, MN
Athene USA, Des Moines, IA
Brighthouse Financial, Inc., Charlotte, NC
Equitable, New York, NY
Fidelity Investments Life Insurance Company, Boston, MA
Genworth Financial, Richmond, VA
Global Atlantic Financial Group, Southborough, MA
Great American Life Insurance Co., Cincinnati, OH
Guardian Insurance & Annuity Co., Inc., New York, NY
Jackson National Life Insurance Company, Lansing, MI
John Hancock Life Insurance Company, Boston, MA
Lincoln Financial Group, Fort Wayne, IN
Massachusetts Mutual Life Insurance Company, Springfield, MA
Metropolitan Life Insurance Company, New York, NY
Nationwide Life Insurance Companies, Columbus, OH
New York Life Insurance Company, New York, NY
Northwestern Mutual Life Insurance Company, Milwaukee, WI
Ohio National Financial Services, Cincinnati, OH
Pacific Life Insurance Company, Newport Beach, CA
Protective Life Insurance Company, Birmingham, AL
Prudential Insurance Company of America, Newark, NJ
Sammons Financial Group, Chicago, IL
Security Benefit Life Insurance Company, Topeka, KS
Symetra Financial, Bellevue, WA
Talcott Resolution, Windsor, CT
Thrivent, Minneapolis, MN
TIAA, New York, NY
USAA Life Insurance Company, San Antonio, TX
The Committee of Annuity Insurers was formed in 1981 to participate in
the development of federal policies with respect to annuities. The
member companies of the Committee represent approximately 80% of the
annuity business in the United States.
______
Employee-Owned S Corporations of America (ESCA)
1341 G Street, NW, Suite 600
Washington, DC 20005
Statement of Noelle Montano, Executive Director
Thank you, Chairman Wyden, Ranking Member Crapo, and members of the
Committee, for holding this hearing to continue your consideration of
legislative solutions to address ongoing challenges to American
retirement security. The Employee-Owned S Corporations of America
(ESCA) applauds your longstanding leadership in promoting bipartisan
policies to encourage retirement savings. ESCA appreciates the
opportunity to submit comments about the important role that private
employee ownership plays in providing retirement security for hundreds
of thousands of American workers.
ESCA is the national voice for employee-owned S corporations, and its
exclusive mission is to preserve and protect employee-owned S
corporations and the benefits provided to their employee-owners. Most S
corporation ESOPS are 100-percent owned by their employees. Our S ESOP
companies engage in a broad spectrum of business activities, many of
which were on the front lines of the response to the pandemic from
health care to manufacturing tubing for ventilators to playing critical
supporting roles such as retail grocery stores and other essential
functions to America's infrastructure. There are almost 3,000 S ESOPs
in the U.S. which account for $92 billion in direct output to the
nation's economy. (Economic Growth Through Employee Ownership Study)
It was 25 years ago that Congress passed legislation creating S ESOPs
with the goal of encouraging employee ownership of private industry,
enabling workers to benefit from their labor, and creating a path for
building meaningful retirement savings. We have appreciated your
comments over the years that private ESOPs are a successful model for
growing jobs and providing workers with retirement savings and that we
should do more to grow this model, and know that you are well aware
that a large bipartisan majority of the Members of the Senate Finance
Committee are strong supporters of private employee ownership.
Your enthusiasm and others' for S corporation ESOPs, we believe, is
attributable to the fact that the evidence is compelling that expanding
the availability of S corporation ESOPs for more companies and their
workers would not only boost the retirement savings of countless
working Americans, but would also create more jobs, generate more
economic activity, and encourage the formation of businesses that are
more stable and successful because they provide their employees with
the kind of built- in incentives conducive to loyalty and productivity.
That is why your Finance Committee colleagues Senators Cardin and
Portman (along with the following original sponsors from the Senate
Finance Committee: Crapo, Stabenow, Cantwell, Daines, Brown,
Whitehouse, Hassan, and Casey) again introduced legislation at the
start of the 117th Congress, the Promotion and Expansion of Private
Employee Ownership Act (S. 1300) that will:
Encourage owners of S corporations to sell their stock to an
ESOP
Provide additional technical assistance for companies that may
be interested in forming an S corporation ESOP
Ensure small businesses that become ESOPs retain their SBA
certification
Acknowledge the importance of preserving the S corporation ESOP
structure in the Internal Revenue Code
This measure was mentioned in the 2015 submission of the Committee's
Savings and Investment Working Group, chaired by Senators Brown and
Crapo, for its bipartisan support and the benefits it offers to
encourage more employee ownership.
The bill currently has 30 bipartisan cosponsors and would provide
incentives to owners of S corporations to sell their stock to an ESOP,
an incentive that currently exists only for owners of C corporations.
Section 1042 of the Tax Code allows a C corporation owner to defer the
recognition of gains when the owner sells shares to an ESOP. Extending
parity to S corporation owners is the most significant legislative
action that Congress could take to encourage S corporation owners to
choose an ESOP when they consider how to transition their business from
their current ownership.
This provision was also included in the Retirement Security and Savings
Act (S. 1770) introduced by Senators Cardin and Portman in May. ESCA
appreciates this incentive for employee ownership being included in
this comprehensive bipartisan approach to retirement security. While
you have seen firsthand from your visits to
employee-owned companies in Oregon and Idaho, many studies, by renowned
economists from across the ideological spectrum, illustrate how S ESOPs
are powerful for workers as a retirement savings and economic security
tool, and how they have contributed to communities and the national
economy. A few key points from the most recent studies:
New Survey by John Zogby Strategies
A new John Zogby Strategies survey--in partnership with ESCA--of mid-
and lower-level employees at employee-owned private companies tells an
encouraging story about the financial stability of S ESOP employees
during the COVID-19 pandemic. Survey results found that employee owners
reported significantly less financial adversity, more stable jobs,
better housing security and consistent retirement savings than non-ESOP
employees.
In the midst of a public health emergency that triggered a massive
unemployment event, non-ESOP employees reported experiencing:
Six times the rate of job losses or downsizing of employee
owners;
Financial insecurity at more than three times the rate of
employee owners;
Inability to pay down debt at more than twice the rate of
employee owners.
Despite the pandemic economic downturn, twice as many ESOP workers as
employees at non-ESOP companies expect to retire by the age of 60.
These findings confirm what employee owners have known to be true for
decades, building on research that shows working for a private ESOP
company better equips American workers to weather periods of economic
uncertainty. Zogby Strategies notes in their findings that this data
should compel policymakers to make the ESOP structure an option ``for
as many working Americans as possible,'' giving more workers the
opportunity to gain financial independence and build retirement savings
through future public health and economic crises.
New Jared Bernstein Study
In January, ESCA released a study by Jared Bernstein--now serving on
President Biden's White House Council of Economic Advisors--that looks
at why there are not more ESOPs and considers how to address potential
barriers to entry. His analysis found that education and awareness
about private ESOP structures are the most frequent hurdles to ESOP
creation and that private and governmental approaches could ``help more
retiring business owners access the resources and information they need
to fully consider an ESOP for their company,'' especially as those
owners are considering retiring.
This work follows a 2016 Jared Bernstein study showing that by
increasing capital ownership, ESOPs reduce wealth inequality and do not
have the effect of trading employee ownership for wages. In fact, the
study finds that if S ESOP plans were to proliferate, the impact could
be far more significant. Bernstein's report also found that ESOP
companies provide more stable employment than other businesses, were
better able to weather the Great Recession, and provide capital
ownership, pay better wages, and, in the majority of cases, provide
employees with an additional 401(k) or similar plan.
Additionally, we believe that when we have data from the pandemic-
induced recession that S ESOP companies will again prove to be a bright
spot with their resilience and commitment to job preservation and
creation. In a 2010 Georgetown University/McDonough School of Business
study, two leading tax economists reviewed the performance of a cross-
section of S corporation ESOP companies during the 2008-2009 recession
and found that these companies performed better than other companies in
job creation, revenue growth, and providing for workers' retirement
security. Specifically, the study found that:
Companies that are S corporation ESOPs are proven job creators,
even during tough times. While overall U.S. private employment in 2008
fell by 2.8%, employment in surveyed S ESOP companies rose by 1.9%.
Meanwhile, 2008 wages per worker in surveyed S ESOP companies rose by
5.9%, while overall U.S. earnings per worker grew only half that much.
S corporation ESOP companies provided substantial and
diversified retirement savings for their employee-owners at a time when
most other, comparable companies did not. Despite the difficult
economic climate, surveyed S-ESOP companies increased contributions to
retirement benefits for employees by 18.6%, while other U.S. companies
increased their contributions to employee retirement accounts by only
2.8%, or one-sixth that amount.
Quite simply, more S ESOPs means more worker savings, wealth and wage
equality, job stability and national economic benefit. We look forward
to continuing to work with Finance Committee members to advance
policies to encourage more private, employee ownership so that more
workers can benefit from the American Dream at Work. Thank you for your
continued consideration and your support for S ESOPs and the employees
who own them.
______
Financial Services Institute
1201 Pennsylvania Ave., NW, Suite 700
Washington, DC 20004
888 373-1840
https://financialservices.org/
The Financial Services Institute (FSI) represents independent broker-
dealers (IBD) and the independent financial advisors affiliated with
them. We are pleased that the Committee is holding this hearing to
explore the issues facing Main Street Americans saving for retirement,
particularly given that the COVID-19 pandemic has only worsened the
country's existing retirement savings crisis. We support Congressional
efforts to help more Americans save for a secure and dignified
retirement, particularly those that provide private sector solutions to
ensure that retirement savers have access to personalized investment
advice.
Specifically, we wish to register our support for several pieces of
legislation: the Securing a Strong Retirement Act (H.R. 2954), the
Retirement Security and Savings Act (S. 1770), the Encouraging
Americans to Save Act (S. 2452), and the Improving Access to Retirement
Savings Act (S. 1703). The changes contained in these bills would not
only make retirement saving more streamlined and accessible for
investors, they would also increase the flexibility that financial
professionals have to help their clients save for a financially secure
retirement. We are encouraged that Congress has taken a bipartisan
approach to moving these crucial pieces of legislation forward.
While these bills differ in some respects, they all seek address areas
that are key to improving the retirement system. In particular, FSI
believes that Congress should include the following in retirement
security legislation: expanding access to retirement savings plans;
encouraging workers to begin saving for retirement earlier through
automatic enrollment; helping small businesses offer retirement plans
to their employees; and allowing individuals to save for retirement
longer.
Further, FSI Members believe that all investors should have access to
competent and affordable financial advice, products, and services.
Sadly, too many Americans do not have access to such advice to help
them save for a dignified retirement. Research shows that investors who
work with a financial advisor are better prepared for their retirement,
better understand the costs that may arise in retirement and how to
save for them and feel more confident in their ability to be successful
in retirement.\1\ S. 1770 would provide a tax deduction for financial
advice by allowing employees to use pre-tax dollars through employer-
based retirement programs to pay for retirement related financial
planning services. This provision will encourage retirement savers to
seek advice from financial professionals, which is even more important
in these turbulent economic times. Many investors, including those
nearing retirement, are watching their hard-earned savings fluctuate
with the turbulent stock market. Financial advisors can help investors
avoid common errors in response--such as buying high and selling low or
losing sight of their long-term financial plan--to ensure that their
retirement savings are secure.
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\1\ The Insured Retirement Institute, The State of Retirement
Security in America Today--2019 Boomer Expectations for Retirement
Study, available at: https://www.myirionline.org/docs/default-source/
default-document-library/
iri_babyboomers_whitepaper_2019_final.pdf?sfvrsn=0; Claude
Montmarquette, Nathalie Viennot-Briot, Centre for Interuniversity
Research and Analysis on Organizations (CIRANO), The Gamma Factor and
the Value of Advice of a Financial Advisor, available at https://
www.cirano.qc.ca/files/publications/2016s-35.pdf.
We urge Congress to build on the success of 2019's SECURE Act to
further strengthen Americans' access to retirement savings vehicles and
planning services. We thank the Committee for holding this hearing and
for the work it is doing to address these issues. We are ready to serve
as a resource in your efforts to help Main Street Americans save for
their retirement. Should you have any questions or would like more
information on FSI and our position on this important issue, please
contact our Director of Legislative Affairs, Hanna Laver, at (202) 499-
7224.
Background on FSI Members
The independent financial services community has been an important and
active part of the lives of American investors for more than 40 years.
In the U.S., there are more than 160,000 independent financial
advisors, which account for approximately 52.7 percent of all producing
registered representatives.\2\ These financial advisors are self-
employed independent contractors, rather than employees of the
Independent Broker-Dealers (IBD).\3\
---------------------------------------------------------------------------
\2\ Cerulli Associates, Advisor Headcount 2016, on file with
author.
\3\ The use of the term ``financial advisor'' or ``advisor'' in
this letter is a reference to an individual who is a dually registered
representative of a broker-dealer and an investment adviser
representative of a registered investment adviser firm. The use of the
term ``investment adviser'' or ``adviser'' in this letter is a
reference to a firm or individual registered with the SEC or state
securities division as an investment adviser.
FSI's IBD member firms provide business support to independent
financial advisors in addition to supervising their business practices
and arranging for the execution and clearing of customer transactions.
Independent financial advisors are small-business owners and job
creators with strong ties to their communities. These financial
advisors provide comprehensive and affordable financial services that
help millions of individuals, families, small businesses, associations,
organizations, and retirement plans. Their services include financial
education, planning, implementation, and investment monitoring. Due to
their unique business model, FSI member firms and their affiliated
financial advisors are especially well positioned to provide Main
Street Americans with the affordable financial advice, products, and
---------------------------------------------------------------------------
services necessary to achieve their investment goals.
FSI members make substantial contributions to our nation's economy.
According to Oxford Economics, FSI members nationwide generate $48.3
billion of economic activity. This activity, in turn, supports 482,100
jobs including direct employees, those employed in the FSI supply
chain, and those supported in the broader economy. In addition, FSI
members contribute nearly $6.8 billion annually to federal, state, and
local government taxes. FSI members account for approximately 8.4% of
the total financial services industry contribution to U.S. economic
activity.\4\
---------------------------------------------------------------------------
\4\ Oxford Economics for the Financial Services Institute, The
Economic Impact of FSI's Members (2016).
______
Statement Submitted by Erik C. Gould
As Congress considers what additional improvements that can be made to
retirement programs (in effect, a SECURE Act II), I would urge it to be
fair to existing IRA participants, and to not further disadvantage them
like it did with the original SECURE Act.
Pre-SECURE Act ROTH IRA holders accelerated the payment of taxes on
ROTH contribution/conversion IRA dollars, (risking a result in which
they will have already paid taxes on gains that might be later lost,
with no tax deduction for such losses), precisely in exchange for
having their IRA investment be able to grow tax-free (without a cap),
to avoid being subject to minimum distributions, and to have the
ability to confer those benefits to chosen beneficiaries who could
``stretch'' those tax benefits over their statistical life
expectancies.
Congress, to help ``pay for'' the SECURE Act, chose to remove this
bargained-for benefit of the ``stretch'' from the IRA rules and
existing IRA holders. Taking away this benefit from existing ROTH IRA
account holders amounted to a classic ``bait and switch'' by Congress,
first inducing taxpayers to pay taxes earlier than they would have had
to with a traditional IRA, calculated on gains they might not even
later realize, in exchange for a benefit that was later taken away.
This unconscionable result could have been easily avoided by
grandfathering the retirement rules, if not for all IRAs, then at least
for existing ROTH IRAs.
Fundamental principles of fairness dictate that no current IRA account
holders (and particularly, no ROTH account holders who have already
early-paid taxes in consideration for a set of benefits), regardless of
how well their investments may have performed, should have the rules of
the game changed in mid-stream. This is inarguably the case regardless
of one's notions about the ``legislative intent'' behind the original
IRA legislation or the desirability of further enhancing the benefits
of retirement legislation for some parties.
Any tinkering with existing retirement laws should have as its first
principle to ``do no harm'' to the incentive to invest for one's
retirement or to existing IRA investors who have relied on existing
retirement rules. The ProPublica release of the information about Peter
Thiel's $5 billion ROTH has reignited discussion about capping amounts
that can be held in an IRA or in what type of investment that an IRA
may invest. Instead of viewing statistical outliers (the relatively few
very large IRAs) as a defect or failure of the current IRA rules,
successful IRA investors should be held out to taxpayers as an
incentive and model for what is possible (and this in no way prevents
an IRS investigation of whether Peter Thiel's original IRA purchases
were properly valued in accordance with existing IRA regulations and/or
an investigation of how Peter Thiel's information could have been
released by the IRS to ProPublica in the first place).
Much has been made about the ``well-heeled elite'' and their access to
investments that the average investor supposedly can't access. While it
is true that it takes considerably more effort, regardless of tax
bracket, to ferret out and to participate in exceptional early-stage
and/or non-publicly traded opportunities, it is far from impossible for
an industrious individual of relatively average investing acumen to
participate in these sometimes very attractive investments. I know this
because I have helped sponsor multi-family real estate investments with
individual investor participation the past 14 years with an overall
annual portfolio return of better than 20%. Many of our individual
investors would, by their own estimation, likely place themselves
outside the ``exceptionally positioned/gifted'' investor category. The
truth of the matter is that most anyone with a middle-class income has
the possibility of ending up with a seven figure IRA provided they
begin investing early in their life, are willing to spend the time
doing diligent investment research and have a bit of luck along the way
during a long-term investment program. There was absolutely nothing
preventing anyone from purchasing the stock of Microsoft, Netflix,
Facebook, Google or any of the many other phenomenally successful
companies listed on the various public stock exchanges after their
initial public offerings, holding those stocks in a long-term portfolio
and having a very comfortable retirement.
And do we really want to be telling the founder of a start-up company,
who is making a big bet with their own resources despite long odds
against them, but who might be the needle in the haystack that ends up
employing thousands of people, that they aren't entitled to have their
IRA benefit from the success of their own start-up company?
Congress should neither reduce the incentive for people to invest for
their retirement nor punish those diligent investors who have relied on
and followed the existing IRA rules and diligently and successfully
invested for their retirement, regardless of the degree of their
success. Congress should also heed the lesson of the Alternative
Minimum Tax which was originally passed to address the perceived abuses
of a few fat cats but mostly ended up hurting many more modestly
situated taxpayers instead.
Placing new caps on the amount an IRA can grow to or adding new rules
about the type of investments in which an IRA can invest will simply
reduce the incentives for all to participate and would be particularly
unfair to existing ROTH IRA holders who have already paid their taxes
in reliance on the existing rules. Please don't again rob Peter
(existing IRA investors) to service Paul (those who may benefit from
any subsequent retirement legislation).
______
Daniel Hemel,* Professor of Law, University of Chicago Law School; and
Steven Rosenthal,* Senior Fellow, Urban-Brookings Tax Policy Center
---------------------------------------------------------------------------
* The views presented here are the authors' own and should not be
attributed to the University of Chicago, the Tax Policy Center, the
Urban Institute, the Brookings Institution, or those organizations'
trustees or funders.
---------------------------------------------------------------------------
The Senate Finance Committee's July 28 hearing spotlighted ``mega-
IRAs'': individual retirement accounts with balances of $5 million or
more. An analysis by the Joint Committee on Taxation (JCT) in advance
of the July 28 hearing found that the number of taxpayers with mega-
IRAs now exceeds 28,000.\1\ The hearing followed a June 2021 report by
the nonprofit investigative journalism organization ProPublica, which
revealed--based on leaked IRS files--that a handful of high-net-worth
individuals had accumulated massive IRA balances.\2\
---------------------------------------------------------------------------
\1\ Memorandum from Thomas A. Barthold to Kara Getz, Tiffany Smith,
and Drew Couch (July 27, 2021), https://www.finance.senate.gov/imo/
media/doc/7.28.21%20JCT%20Mega%20IRA%
20Data1.pdf. The JCT analysis was based on 2019 data. The number of
mega-IRAs has likely increased since then.
\2\ See Justin Elliott, Patricia Callahan and James Bandler, Lord
of the Roths: How Tech Mogul Peter Thiel Turned a Retirement Account
for the Middle Class Into a $5 Billion Tax-Free Piggy Bank, ProPublica
(June 24, 2021), https://www.propublica.org/article/lord-of-the-roths-
how-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-
class-into-a-5-billion-dollar-tax-free-piggy-bank.
The Senate Finance Committee hearing and the ProPublica report
emphasized one way that taxpayers amass mega-IRAs: by ``stuffing'' an
account with undervalued assets such as pre-IPO stock and investment-
fund carried interests. ``Stuffing'' no doubt occurs in some instances,
and Congress could take steps to stop it (e.g., by prohibiting IRAs
from holding non-publicly traded assets). However, it is unlikely that
most mega-IRAs result from abusive stuffing tactics. Individuals
engaged in stuffing would generally want to convert their IRAs from
traditional to Roth accounts quickly. Yet JCT's analysis found that 85
---------------------------------------------------------------------------
percent of mega-IRA owners hold only traditional accounts.
How, then, have tens of thousands of high-income individuals
created mega-IRAs? As our submission shows, existing rules allow high-
income taxpayers to amass mega-IRAs straightforwardly--and legally--by
``maxing out'' 401(k) defined contribution plans, potentially combining
defined contribution plans with defined benefit plans, and investing in
S&P 500 index funds or other publicly traded assets. Mega-IRAs are
indeed a problem, but they are a problem primarily caused by laws that
lavish excessive tax benefits on high-income individuals.
We begin by illustrating how high-income individuals can create
mega-IRAs through entirely legal means. Next, we review the choices
that Congress has made over the last quarter-century that opened a wide
door to mega-IRAs. We then explain why the JCT data and other sources
strongly suggest that most mega-IRAs do not reflect stuffing. We
conclude with concrete policy recommendations to stem the tide of mega-
IRAs and other mega-retirement arrangements, which undermine the
progressivity and revenue-raising potential of the federal income tax
system.
I. How To Create a Mega-IRA: An Illustration
We begin with an example of a high-income professional (e.g., a
law-firm partner) born in 1950 who contributes the maximum amount to a
401(k) defined contribution plan starting in 1990. In addition, the
individual's employer establishes a cash balance defined benefit plan
sometime after the 1996 legislative change that lifted limits on
combined defined contribution and defined benefit plans maintained by
the same employer.\3\ Beginning in 2010, the individual makes
``backdoor'' contributions to a Roth IRA. The individual retires in
2015 at the age of 65 and receives the maximum lump-sum distribution
from the cash balance plan (approximately $2.5 million in 2015).\4\ She
rolls over her 401(k) and deposits her cash balance plan distribution
into an IRA. She invests exclusively in a portfolio tracking the S&P
500 index total return.
---------------------------------------------------------------------------
\3\ Small Business Job Protection Act of 1996, Pub. L. No. 104-188,
Sec. 1452, 110 Stat. 1755, 1816 (repealing I.R.C. Sec. 415(e) for years
beginning after December 31, 1999).
\4\ The maximum lump-sum distribution from a cash balance plan is
determined actuarially based on interest-rate and mortality
assumptions. We use an amount ($2,452,050 for a 65-year-old in 2015)
based on materials posted by the American Society of Pension
Professionals and Actuaries. See Richard A. Block, Sec. 415 and
Multiple Annuity Starting Dates (MASD) and Effects of Different
Crediting Rates on Sec. 415 in Cash Balance Account Plans (2020),
https://www.
asppa.org/sites/asppa.org/files/DOCs/LA_Pension/WS19-
%20MASD%20%26%20Effects.pdf.
Table 1 shows how the individual's retirement savings contributions
would have evolved over her career. The gray shading of pre-2010 IRA
contribution amounts reflects our assumption that a high-income
individual would not have made any IRA contributions until backdoor
contributions to a Roth IRA became possible in 2010.\5\ The bold type
of post-2015 amounts reflects our assumption that the individual would
not have made any contributions after retirement.
---------------------------------------------------------------------------
\5\ A high-income individual who participates in a defined benefit
or defined contribution plan would be precluded from making
nondeductible contributions to a traditional IRA or direct
contributions to a Roth IRA. I.R.C. Sec. Sec. 219(g), 408A(c)(3).
Starting in 2010, an individual at any income level could make
nondeductible contributions to a traditional IRA and then immediately
convert the traditional IRA to a Roth IRA. See Tax Increase Prevention
and Reconciliation Act of 2005, Pub. L. No. 109-222, Sec. 512, 120
Stat. 345, 365-66 (2006) (amending I.R.C. Sec. 408A for taxable years
beginning after December 31, 2009).
Table 1. Tax-Favored Retirement Savings Limits, 1990-2021
------------------------------------------------------------------------
401(k) Plan IRA b
--------------------------------------------
Year All Ages Age 50 Age 50 Notes
a Catchup All Ages Catchup
------------------------------------------------------------------------
1990 $30,000 $2,000
------------------------------------------------------------------------
1991 $30,000 $2,000
------------------------------------------------------------------------
1992 $30,000 $2,000
------------------------------------------------------------------------
1993 $30,000 $2,000
------------------------------------------------------------------------
1994 $30,000 $2,000
------------------------------------------------------------------------
1995 $30,000 $2,000
------------------------------------------------------------------------
1996 $30,000 $2,000 Section 415(e)
limit repealed
(effective 2000)
------------------------------------------------------------------------
1997 $30,000 $2,000 Roth IRAs
established
(effective 1998)
------------------------------------------------------------------------
1998 $30,000 $2,000
------------------------------------------------------------------------
1999 $30,000 $2,000
------------------------------------------------------------------------
2000 $30,000 $2,000 Effective start of
defined benefit/
defined
contribution
combos c
------------------------------------------------------------------------
2001 $35,000 $2,000 Roth 401(k) plans
established
(effective 2002)
------------------------------------------------------------------------
2002 $40,000 $1,000 $3,000 $500
------------------------------------------------------------------------
2003 $40,000 $2,000 $3,000 $500
------------------------------------------------------------------------
2004 $41,000 $3,000 $3,000 $500
------------------------------------------------------------------------
2005 $42,000 $4,000 $4,000 $500
------------------------------------------------------------------------
2006 $44,000 $5,000 $4,000 $1,000 Income limits on
Roth conversions
lifted (effective
2010)
------------------------------------------------------------------------
2007 $45,000 $5,000 $4,000 $1,000
------------------------------------------------------------------------
2008 $46,000 $5,000 $5,000 $1,000
------------------------------------------------------------------------
2009 $49,000 $5,500 $5,000 $1,000
------------------------------------------------------------------------
2010 $49,000 $5,500 $5,000 $1,000 ``Backdoor'' Roth
IRAs open to high-
income individuals
------------------------------------------------------------------------
2011 $49,000 $5,500 $5,000 $1,000
------------------------------------------------------------------------
2012 $50,000 $5,000 $1,000
------------------------------------------------------------------------
2013 $51,000 $5,500 $1,000
------------------------------------------------------------------------
2014 $52,000 $5,500 $1,000
------------------------------------------------------------------------
2015 $53,000 $6,000 $5,500 $1,000 $2.5 million
distribution from
cash balance
defined benefit
plan
------------------------------------------------------------------------
2016 d $53,000 $6,000 $5,500 $1,000
------------------------------------------------------------------------
2017 d $54,000 $6,000 $5,500 $1,000
------------------------------------------------------------------------
2018 d $55,000 $6,000 $5,500 $1,000
------------------------------------------------------------------------
2019 d $56,000 $6,000 $6,000 $1,000 RMD age raised from
70\1/2\ to 72
(effective 2020)
------------------------------------------------------------------------
2020 d $57,000 $6,500 $6,000 $1,000
------------------------------------------------------------------------
2021 d $58,000 $6,500 $6,000 $1,000
------------------------------------------------------------------------
a Figures are for elective deferrals plus employer contributions.
b High-income individuals generally precluded from making tax-advantaged
contributions to IRAs until 2010.
c Prior to the effective date of section 415(e) repeal, defined benefit/
defined contribution combinations were technically permitted but
subject to strict limits on benefits and contributions.
d Illustration assumes no 401(k) or IRA contributions after 2015
retirement.
Figure 1 illustrates how the individual's combined IRA and 401(k)
would have grown over the 1990-2021 period, assuming investments
appreciate at the S&P 500 index total return rate. We show how the
individual's balance (including investment returns) would have grown
based on (a) 401(k) contributions alone, (b) 401(k) contributions plus
backdoor Roth IRA contributions starting in 2010, and (c) both of the
above plus a cash balance defined benefit plan distribution in 2015. We
provide an online data file showing our calculations at bit.ly/megaira.
[GRAPHIC] [TIFF OMITTED] T2821.007
.epsIn our illustration, the individual ends up with a mega-IRA
balance of $13.4 million as of August 2021. If she had made 401(k)
contributions and backdoor Roth IRA contributions (without a cash
balance defined benefit plan), the value of her IRA would be $7.5
million. If she had made 401(k) contributions only and rolled over to
an IRA, her IRA balance would be $7.4 million.
Our illustration understates the amount that an individual could
accumulate in an IRA through legal means. A higher balance would be
feasible with the following modifications:
More years of contributions. If our individual started
contributing to her 401(k) in 1985 at age 35, her IRA balance as of
2021 (including the effect of backdoor Roth contributions and a cash
balance payout) would be $18.7 million (see online data file). If she
had made 401(k) contributions only, the balance would be $12.7 million.
Multiple 401(k) or cash balance plans. We assumed the
individual contributed to only one 401(k) plan and received only one
lump-sum distribution from a cash balance plan. An individual with
income from employment and self-employment could potentially contribute
a combined total of $122,500 in 2021 to an employer-sponsored 401(k)
and a solo 401(k). An individual who switches employers could
potentially receive a lump-sum payout from the first employer's cash
balance plan and participate in the second employer's cash balance
plan.
Inheritances. We assumed the individual did not merge her IRA
with anyone else's. Someone who inherited an IRA, such as a surviving
spouse, could have a total balance much larger than the amount
illustrated.\6\
---------------------------------------------------------------------------
\6\ An individual who inherits an IRA from a spouse can add the
inherited IRA to her own IRA. Under the SECURE Act of 2019, IRAs
inherited from someone other than a spouse generally must be
distributed over 10 years, but IRAs inherited before 2020 are exempt
from the SECURE Act's 10-year rule. See Setting Every Community Up for
Retirement Enhancement Act of 2019, Pub. L. No. 116-94, Sec. 401, 133
Stat. 2534, 3176.
---------------------------------------------------------------------------
Higher rate of return on investments. Although the S&P 500
generated an impressive 10.6 percent annualized return from 1990 to
August 2021 (assuming reinvestment of dividends), some 401(k) plan
participants and IRA owners have likely outperformed the index without
stuffing nonpublic assets into their accounts. For example, Berkshire
Hathaway executive Ted Weschler--who reportedly had $264.4 million in
his IRA at the end of 2018 \7\--states that he has ``invested the
account in only publicly-traded securities.''\8\
---------------------------------------------------------------------------
\7\ See Elliott, Callahan and Bandler, supra note 2.
\8\ Statement from Ted Weschler to ProPublica (June 2021), https://
www.documentcloud.org/documents/20971124-ted-weschler-statement.
---------------------------------------------------------------------------
II. How We Got Here
If pre-1996 laws had remained in effect, the individual in our
illustration could have contributed the $30,000 maximum to her 401(k)
plan each year until retirement in 2015. She could not have taken
advantage of a backdoor Roth IRA, and she could not have participated
in a cash balance defined benefit plan without running into the former
section 415(e) limits. Her IRA balance in August 2021 would be
approximately $6.1 million (see online data file), and she would need
to begin taking RMDs this year.
More than half of the $13.4 million balance in our illustration
($7.3 million, or 54 percent) is attributable to legislative changes
starting in 1996. We summarize the most significant changes in Table 2.
We include, with gray shading in the last row, the Securing a Strong
Retirement Act of 2021, or ``SECURE Act 2.0,'' which was reported out
of the House Ways and Means Committee on May 5, 2021.\9\ If the SECURE
Act 2.0 becomes law, high-income individuals will be able to make even
larger contributions to 401(k) plans before age 65, and owners of mega-
traditional IRAs would be able to delay RMDs for even longer.
---------------------------------------------------------------------------
\9\ Securing a Strong Retirement Act of 2021, H.R. 2954, 117th
Cong., 1st Sess. (2021).
Table 2. Legislative Changes Since 1996 That Have Facilitated the Rise
of Mega-IRAs
------------------------------------------------------------------------
Year Legislation Effects
------------------------------------------------------------------------
1996 Small Business Jobs Repealed section 415(e), which had
Protection Act of 1996 limited the amount that individuals
could save through defined
contribution and defined benefit
plans with the same employer
------------------------------------------------------------------------
1997 Taxpayer Relief Act Established Roth IRAs with no required
minimum distributions (RMDs)
------------------------------------------------------------------------
2001 Economic Growth and Tax Raised IRA and 401(k) contribution
Relief Reconciliation limits; added catchup contributions;
Act of 2001 (EGTRRA) raised maximum allowable benefit
under defined benefit plans;
established Roth 401(k)s
Note: Changes scheduled to sunset
after 2010
------------------------------------------------------------------------
2006 Tax Increase Prevention Lifted income limits on traditional-to-
and Reconciliation Act Roth conversions; opened the door to
of 2005 backdoor Roth IRA contributions
------------------------------------------------------------------------
2006 Pension Protection Act Made key provisions of EGTRRA
of 2006 permanent; removed several remaining
barriers to cash balance defined
benefit plans
------------------------------------------------------------------------
2019 SECURE Act of 2019 Raised RMD age for traditional
accounts and Roth 401(k) plans from
70\1/2\ to 72; repealed age cap on
contributions to traditional IRAs
(thereby allowing high-income
individuals age 70\1/2\ to use
backdoor Roths)
------------------------------------------------------------------------
2021? SECURE Act 2.0 Would raise RMD age to 75; increase
Reported out of House catchup contributions to $10,000 for
Ways & Means Committee 401(k) participants ages 62-64; and
on May 5 allow employees to elect Roth
treatment for employer contributions
to 401(k) plans
------------------------------------------------------------------------
These changes primarily benefited the rich. As Figure 2
illustrates, households in the top decile by net worth have increased
their average retirement account balances by vastly more than the rest
of the population over the past three decades.
[GRAPHIC] [TIFF OMITTED] T2821.008
.epsStuffing. Importantly, ``stuffing'' plays no part in our
illustration. ``Stuffing'' occurs when an individual uses an IRA to
acquire non-publicly traded assets at prices below fair market value.
The ProPublica report indicates that tech entrepreneur Peter Thiel
started on the path to his mega-IRA by purchasing pre-IPO shares of
PayPal at a very low price. An October 2014 report by the Government
Accountability Office suggested that private equity funds and hedge
funds were allowing key employees to use their Roth IRAs to purchase
profits interests (commonly known as ``carried interests'') at
potentially abusive valuations.\10\ The GAO report concluded that
strategies involving non-publicly traded assets are ``likely'' the
cause of mega-IRAs.\11\
---------------------------------------------------------------------------
\10\ U.S. Government Accountability Office, GAO-15-16, Individual
Retirement Accounts: IRS Could Bolster Enforcement on Multimillion
Dollar Accounts, but More Direction from Congress Is Needed, 32-36
(October 2014).
\11\ Id. at 26. The GAO report said that it was ``improbable'' that
an individual could accumulate an account balance above $5 million
through contributions to a 401(k) plan, and it added that ``an
accumulation of more than $5 million looks large in comparison to . . .
the maximum lump sum payable to a 65-year-old DB participant'' (which
GAO calculated to be $2.3 million to $2.6 million in 2011). See id. at
25. However, the GAO report failed to consider the possibility that an
individual could combine a 401(k) defined contribution plan with a cash
balance defined benefit plan. The GAO data also is 10 years old now and
does not factor in the intervening decade of stock market growth.
Stuffing is primarily a problem with respect to Roth IRAs. Stuffing
a traditional IRA with pre-IPO stock or private equity fund carried
interests is generally a questionable tax-avoidance strategy because it
converts what would often be long-term capital gains (taxed at a top
rate of 23.8 percent) into ordinary income (taxed at a top rate of 37
percent).\12\ As Table 3 illustrates, most of the mega-IRAs identified
by JCT are traditional IRAs. According to the JCT data, 85 percent of
all mega-IRAs are traditional IRAs, and at least 79 percent of the
aggregate balance of mega-IRAs lies in traditional accounts.
---------------------------------------------------------------------------
\12\ Stuffing a traditional IRA still may yield modest benefits if
the deferral advantage outweighs the negative rate arbitrage, or larger
benefits if assets otherwise would have generated income taxed at
ordinary rates (e.g., carried interests in some hedge funds). However,
any taxpayer who stuffed an IRA in 2010 or afterwards could convert to
a Roth. The fact that most mega-IRAs are traditional IRAs is evidence
that they do not reflect stuffing.
Table 3. Mega-IRAs by Account Balance Ranges and Type (2019)
----------------------------------------------------------------------------------------------------------------
$5m to $10m to $15m to All Mega-
$10m $15m $25m $25m IRAs (5m)
----------------------------------------------------------------------------------------------------------------
# of Taxpayers 24,990 2,275 853 497 28,615
----------------------------------------------------------------------------------------------------------------
Traditional only 21,682 1,709 557 303 24,251
----------------------------------------------------------------------------------------------------------------
Roth only 2,175 425 237 156 2,993
----------------------------------------------------------------------------------------------------------------
Both 1,133 141 59 38 1,371
----------------------------------------------------------------------------------------------------------------
Aggregate Balance $160,111 $26,917 $15,926 $76,612 $279,566
----------------------------------------------------------------------------------------------------------------
Traditional only $137,725 $20,144 $10,370 $53,111 $221,350
----------------------------------------------------------------------------------------------------------------
Roth only $14,719 $5,602 $4,512 $15,624 $40,457
----------------------------------------------------------------------------------------------------------------
Both $7,667 $1,171 $1,044 $7,877 $17,759
----------------------------------------------------------------------------------------------------------------
Source: Memorandum from Thomas Barthold to Kara Getz, Tiffany Smith and Drew Crouch (July 27, 2021).
Notes: ``Both'' reflects taxpayers with traditional and Roth IRAs whose aggregate balance $5 million.
Stuffing an IRA--even a Roth IRA--provides only a modest benefit to
start-up founders and early-stage investors who have access to other
legal tax-avoidance strategies. For example, individuals who hold
shares of stock or other property until death can qualify for tax-free
stepped-up basis. Since 2010, start-up founders and early-stage
investors who acquire pre-IPO stock and hold it for at least five years
can--in many circumstances--exclude $10 million or more of capital
gains on the sale of the stock under section 1202. These strategies
allow individuals to replicate (roughly) the benefits of Roth IRA
stuffing without legal risk.
III. Takeaways
We see at least three takeaways from our illustration and analysis:
1. High-income individuals can create mega-IRAs by maximizing their
tax-favored savings across multiple plans and then consolidating their
balances into IRAs--all of which Congress expressly permits. We are
encouraged that members of Congress are focusing attention on the mega-
IRA problem. However, rather than revealing mega-IRAs to be an
``abuse,'' our review demonstrates that mega-IRAs are a product of
choices that Congress has made over the last quarter century--choices
that foreseeably allowed high-income individuals to shift eight-figure
sums into tax-favored accounts.\13\
---------------------------------------------------------------------------
\13\ Congress's choice to lift income limits on traditional-to-Roth
IRA conversions (effective 2010) was particularly cynical: lawmakers
characterized the move as a revenue-raiser, even though independent
analysis showed that the change would reduce net long-term federal
revenues by at least $14 billion in present value terms. See Leonard E.
Burman, Roth Conversions as Revenue Raisers: Smoke and Mirrors, Tax
Notes, May 22, 2006, at 953.
2. Cash balance defined benefit plans--especially when combined
with defined contribution plans--put many high-income professionals
within close reach of mega-IRAs even before accounting for investment
growth. The number of cash balance plans has grown dramatically over
the last two decades, from 1,477 in 2001 to an estimated 25,040 in
2019.\14\ These plans are especially concentrated in the medical and
financial sectors and among professional practices such as law firms.
The largest law-firm cash balance plan is now approaching $1 billion in
assets, and cash balance plans in total hold more than $1 trillion.\15\
An estimated 97 percent of cash balance plans are add-ons to existing
401(k) plans.\16\ Mega-IRAs will become increasingly common as long as
Congress allows high-income individuals to pair defined contribution
and defined benefit plans.
---------------------------------------------------------------------------
\14\ FuturePlan Cash Balance Center of Excellence, 2020 National
Cash Balance Research Report 3 (11th ed. 2021).
\15\ Id. at 7-8.
\16\ Chuck Epstein, Q&A: Dan Kravitz on Cash Balance Plans,
BenefitsPro (July 2, 2014), https://www.benefitspro.com/2014/07/02/qa-
dan-kravitz-on-cash-balance-plans.
3. The mega-IRA problem is not limited to Roths--and not even
limited to IRAs. A mega-traditional IRA is simply a mega-IRA that the
owner has not (yet) chosen to convert to a Roth. The owner of a mega-
traditional IRA may delay conversion for any number of reasons. For
example, she may anticipate that top tax rates will go down (as indeed
they did at the end of 2017). She may be planning to change her tax
domicile from a high-tax state (e.g., New York) to a low-tax state
(e.g., Florida). Or she may be planning to stretch a conversion over
several years so that more of her income can be taxed at lower marginal
rates. From a policy perspective, the fact that a mega-IRA owner has
not yet chosen to Rothify her account does not make the existence of
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the mega-IRA any less problematic.
Indeed, it is not clear why--from a policy perspective--we should
care whether a mega-retirement account balance is in an IRA or any
other tax-favored vehicle. The individual in our illustration could
have reaped similar tax benefits if she had left her 401(k) balance in
her employer-sponsored plan rather than rolling over to a mega-IRA. Any
solution that seeks to tackle the mega-IRA problem also must address
mega-401(k)s and other tax-favored mega-accounts.
IV. Policy Implications
1. Mega-IRAs and other mega-retirement accounts are a serious
problem, even when they do not result from abusive stuffing tactics.
Mega-retirement accounts allow high-income individuals to reduce tax
either on the front end (by excluding traditional 401(k) contributions
and defined benefit accruals from income) or on the back end (by
excluding Roth withdrawals), all the while avoiding year-to-year tax on
accumulations.\17\ Whether traditional or Roth, these tax-favored
vehicles deliver a windfall to individuals at the very top of the
income distribution, exacerbating already wide inequalities.
Furthermore, if Congress fails to address the problem of mega-IRAs and
other mega-retirement accounts, revenue losses are likely to grow as
more and more employers offer supersized defined benefit/defined
contribution combinations.
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\17\ For an explanation of the theoretical equivalence between
traditional and Roth IRA benefits (an application of the ``Cary Brown
theorem''), see Christopher H. Hanna, Tax Theories and Tax Reform, 59
SMU L. Rev. 435 (2006).
2. Congress could address the mega-retirement plan problem by
establishing a lifetime limit on all tax-favored retirement benefits--
as proposed by the Obama-Biden administration. Under the Obama-Biden
proposal, the cap would be set such that an individual could retire at
age 62 and purchase a lifetime annuity for herself and her spouse
paying the maximum annual benefit for a defined benefit plan. In 2016,
that amount would have been $210,000 per year, corresponding to a
maximum balance of approximately $3.4 million for a 62-year-old. Once
an individual reached the cap, she could no longer make additional
contributions or receive additional defined benefit accruals, though
her balance could continue to grow with investment earnings.\18\
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\18\ U.S. Department of the Treasury, General Explanations of the
Administration's Fiscal Year 2017 Revenue Proposals, 166-68 (February
2016).
The Obama-Biden proposal, if implemented, would constitute an
important step toward stopping the growth of mega-retirement accounts.
Under the proposal, an individual still could use tax-favored
retirement savings arrangements to ensure a comfortable retirement for
herself and her spouse. But IRAs, defined contribution plans, and
defined benefit plans would no longer be tools for preserving dynastic
wealth. Moreover, the Obama-Biden plan rightly recognized that mega-
IRAs are just one type of mega-retirement plan. Capping only IRAs (or
only Roth IRAs) would arbitrarily penalize individuals who decided to
take rollovers rather than leaving their balances in an employer-
sponsored plan (or who decided to pay tax on a traditional-to-Roth
conversion rather than delaying conversion until a more opportune
time). Worse yet, an IRA-specific or Roth-specific reform would simply
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shift the problem to other accounts that currently feed into mega-IRAs.
3. Supplemental steps. We know of no adequate substitute for the
cross-plan cap proposed by the Obama-Biden administration. However,
Congress could supplement that legislative change with additional
measures:
Mandating RMDs starting at age 72 from all accounts, including
Roth IRAs. Congress created tax-favored retirement plans to support
individuals in their later years. Without RMDs, these plans can quickly
become intergenerational wealth-transmission devices. The SECURE Act
2.0 proposal to raise the RMD age to 75 would exacerbate the mega-
retirement plan problem.
Ending backdoor Roths. Congress created Roth IRAs as savings
vehicles for low- and middle-income Americans--not as mechanisms for
high-income individuals to add onto their other savings. Congress could
shut the Roth ``backdoor'' by barring high-income individuals from
making nondeductible IRA contributions--the first step of the backdoor
two-step.
Prohibiting IRAs and defined contribution plans from holding
non-publicly traded assets. While we do not think that a majority of
mega-IRAs arise from ``stuffing'' strategies, there is no reason for
Congress to allow ``stuffing'' in the first place. A ban on non-
publicly traded assets in IRAs, 401(k)s, and other defined contribution
plans would limit both stuffing and self-dealing (i.e., improper
transactions between an IRA and its owner).
V. Conclusion
We are troubled by mega-IRAs, which undermine the progressivity and
revenue-raising potential of the federal income tax. However, mega-IRAs
are a symptom of an even more serious disease: a retirement savings
system that disproportionately favors the rich. Instead of simply
treating the symptom, Congress could cure the disease--a disease
largely caused by Congress's own choices.
______
ICMA Retirement Corporation (ICMA-RC)
777 North Capitol Street, NE, Suite 600
Washington, DC 20002
May 4, 2021
Senator Ben Cardin Senator Rob Portman
U.S. Senate U.S. Senate
509 Hart Senate Office Building 448 Russell Senate Office Building
Washington DC 20510 Washington DC 20510
Re: ICMA-RC Supports the Retirement Security and Savings Act
Dear Senator Cardin and Senator Portman:
On behalf of ICMA Retirement Corporation (``ICMA-RC''), I am
writing to express our strong support for the Retirement Security and
Savings Act and congratulate you on its recent reintroduction.
ICMA-RC's mission is to help public sector employees build
retirement security. Founded in 1972, ICMA-RC is a non-profit
independent financial services corporation based in Washington, DC,
focused on providing retirement plans and related services for more
than one million public sector participant accounts and more than 9,000
retirement plans. We are dedicated every day to our mission and serving
those who serve our communities.
Enactment of the Retirement Security and Savings Act would
significantly benefit millions of Americans, including public sector
employees, who work hard every day to prepare for their retirement.
ICMA-RC appreciates your longstanding efforts to make it easier for
more Americans to save for retirement and for working to advance the
bipartisan ideas in the Retirement Security and Savings Act.
ICMA-RC strongly supports your provision that would permit 403(b)
plan participants to access lower-cost collective investment funds. We
have long utilized collective investment trusts and have found them to
be effective in reducing the costs for the public sector retirement
savers we support. Additionally, we are very supportive of your
provision to streamline contribution requirements for government
workers in 457(b) plans. Under your bill, public sector employees would
have additional flexibly when making decisions about how much they
would like to save each month by conforming the deferral rules for
457(b) plans with other existing retirement savings vehicles.
We look forward to working with you on our shared goal of enhancing
retirement security for all workers.
Sincerely,
Angela Montez
ICMA-RC
Senior Vice President and General Counsel
______
Insured Retirement Institute
1100 Vermont Avenue, NW, 10th Floor
Washington, DC 20005
Statement of Wayne Chopus, President and CEO
Chairman Wyden, Ranking Member Crapo, and Members of the Senate
Committee on Finance, my name is Wayne Chopus. As the President and CEO
of the Insured Retirement Institute (IRI), I am pleased to provide you
with our perspective on the importance of this Congress enacting
common-sense, bipartisan solutions that will help America's workers,
retirees, and their families build economic equity, strengthen
financial security, and protect income in a manner that can sustain
them throughout their retirement years.
I commend you for holding this hearing, and I welcome the opportunity
to provide this statement for the record to the Committee recommending
several proposals for building bipartisan retirement legislation. The
public policy proposals IRI offers in this statement for the record for
the Committee's consideration will help to shape a stronger and more
inclusive private-sector retirement system by increasing access to
workplace retirement plans, facilitating greater use of lifetime income
options, and making information about past and possibly forgotten
retirement accounts more readily available.
Summary of Testimony
Consistent with our consumer-focused mission, my statement for the
record will address two key points:
1. America's workers and retirees were already facing a looming
retirement income crisis before the onset of the COVID-19 pandemic, and
the economic disruption it has caused further exacerbated already
existing retirement income anxiety.
2. Legislation like the public policy measures contained in IRI's
2021 Federal Retirement Security Blueprint,\1\ eleven of which are
included in recently introduced legislation in the Senate, offer a
solid foundation of common-sense, bipartisan solutions that will help
more of our nation's workers and retirees strengthen and enhance their
retirement security.
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\1\ The ``2021 IRI Federal Retirement Security Blueprint,'' Insured
Retirement Institute, March 2021.
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About IRI
For three decades, IRI has vigorously promoted consumer confidence in
the value and viability of insured retirement strategies, bringing
together the interests of the industry, financial advisors, and
consumers under one umbrella. Our mission is to pursue the following
goals:
Promote a better understanding of the insured retirement value
proposition.
Modernize standards and practices to improve value delivery and
the customer experience within this industry.
Advocate before public policymakers on critical issues affecting
consumers who rely on insured retirement strategies to sustain them
during their retirement years.
IRI is the only national trade association representing the entire
supply chain for the insured retirement strategies industry. Our member
companies include major life insurance companies like Prudential,
Equitable, Pacific Life, Nationwide, Transamerica, Principal Financial
Group, and Jackson National; broker-dealers like Morgan Stanley,
Raymond James, and Edward Jones; and asset management companies like
PIMCO, T. Rowe Price, and BlackRock. Our member companies represent
more than 90 percent of annuity assets and include the top 10
distributors ranked by assets under management. Our member base also
includes financial professionals serving millions of people across the
country. Therefore, we bring a perspective to this discussion that
encompasses both the full supply chain of insured retirement strategies
as well as Main Street America.
America's Growing Retirement Anxiety and Savings Crisis
According to a survey by the Economic Innovation Group,\2\ 82 percent
of voters believe retirement security is a significant problem for our
nation. Workers, retirees, and their families are concerned about their
ability to accumulate sufficient savings to provide sustainable income
to last during their retirement years. This anxiety has significantly
grown in the past year with the COVID-19 pandemic's impact on retirees'
and workers' physical and financial health.
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\2\ The ``Retirement Security and Wealth Attitudes: National Voter
Survey,'' Economic Innovation Group, June 2021.
A survey conducted by the National Institute of Retirement Security \3\
provides insights into the depth of this anxiety. The survey found that
more than two-thirds--67 percent--say the nation faces a retirement
crisis, and more than half--56 percent--are concerned that they will
not achieve a financially secure retirement. The research also found
that 51 percent say their concerns about their ability to achieve
financial security in retirement has increased, 67 percent say that
COVID-19 has changed or is causing them to consider changing their
plans about when they will retire, and 65 percent of current workers
say it is likely they will have to work past retirement age to have
enough money to retire.
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\3\ ``Retirement Insecurity 2021--American Views of Retirement,''
National Institute of Retirement Security, February 2021.
Fidelity Investments recently released its ``2021 State of Retirement
Planning Study''\4\ which further demonstrates the harm inflicted on
workers' and retirees' plans for retirement due to the events of the
past year. The study found that 80 percent of America's workers said
their retirement plans were disrupted in the past year due to actions
such as job loss or retirement account withdrawals. The survey also
found that one in three people estimate that they will need two to
three years to recover financially from the events of the past year.
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\4\ ``2021 State of Retirement Planning Study,'' Fidelity
Investments, March 2021.
Furthermore, a study by Transamerica \5\ found that nearly one in five
workers has reported contributing less to their retirement account now
than before the pandemic, 18 percent have reduced retirement
contributions since the coronavirus crisis started, and 31 percent of
those who are recently unemployed reported they are contributing less
to their retirement. Those who reported contributing less to their
retirement savings can be further broken down generationally, with
about 16 percent being Baby Boomers, 18 percent being Generation Xers,
around 15 percent being Millennials, and about 27 percent identified as
Generation Z.
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\5\ '`Retirement Security Amid COVID-19: The Outlook of Three
Generations,'' 20th Annual Transamerica Retirement Survey of Workers,
May 2020.
As this research demonstrates, retirement security remains an area of
significant concern for America's workers, retirees, and their
families. Additionally, this research confirms what IRI's members hear
from the millions of workers and retirees they work with each day:
workers and retirees are shouldering the burden of accumulating savings
to sustain them during their retirement years. This has caused enormous
pressure for the individual consumer, particularly if they are lower-
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and middle-income workers.
Further adding to this anxiety is a lack of access to workplace
retirement savings plans. According to Transamerica's ``Navigating the
Pandemic: A Survey of U.S. Employers,''\6\ 48 percent of employers do
not offer a 401(k) or similar retirement plan, and 63 percent of those
employers said they are not too likely or not likely at all to start a
plan within the next two years. Even though 65 percent of employers
feel a sense of responsibility in trying to help their employees
achieve a financially secure retirement and nearly three-quarters
believe that offering retirement benefits is essential for attracting
and retaining employees, concerns about plan costs remain a top reason
why employers do not offer a plan.
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\6\ ``Navigating the Pandemic: A Survey of U.S. Employers,''
Transamerica Institute, June 2021.
IRI respectfully submits for your consideration the measures outlined
below to strengthen and enhance retirement security for America's
workers and retirees as the Committee examines how Congress can help to
build upon bipartisan retirement legislation.
Bipartisan, Common-Sense Solutions
Earlier this year, IRI published its 2021 Federal Retirement Security
Blueprint. The Blueprint offers several measures which, if enacted into
law, would do the following:
Measure 1: Expand opportunities for more of our nation's workers
to save in a workplace retirement plan.
Measure 2: Facilitate the use of lifetime income products to
better insure against the risk of outliving savings.
Measure 3: Preserve and promote access that enables retirement
savers to obtain information about their retirement accounts.
Measure 1: Expanding Opportunities for More Workers to Save for
Retirement
To expand opportunities for more of America's workers to save for
retirement, IRI's 2021 Federal Retirement Security Blueprint put forth
several measures that have attracted bipartisan support and have been
introduced in bills during the 117th session of Congress. These include
further increasing the age at which required minimum distributions
(RMDs) must be taken, enhancing automatic enrollment and escalation
features, authorizing the formation of 403(b) pooled employer plans
(PEPs), and clarifying the start up credit available to small
businesses starting a retirement plan. Bills offering additional
opportunities for military spouses to save, help for workers to save
while paying back student loans, increased age requirements and amount
of catch-up contributions allowed for Baby Boomers as they near
retirement, and an enhancement of the current Savers Credit have also
been introduced.
Further Increase the RMD Age and Modernize RMD Rules
Workers and retirees today face an increased risk of outliving
retirement assets because of longer lifespans. Under current law,
workers and retirees must take a required minimum distribution (RMD)
when they reach the age of 72. The Retirement Security and Savings Act
of 2021 (S. 1770--117th Congress) contains a provision which would
increase the RMD age to 75, allowing workers and retirees to have
additional time to keep their savings in tax-deferred retirement
accounts. The bill would also modify RMD rules to exempt certain
annuity benefits and payments from the minimum income threshold test
(MITT) to reflect more current circumstances regarding individuals'
working years and longevity. The proposed changes contained in the bill
would allow more workers to accumulate and grow savings and, thereby,
improve their retirement security.
Increase Automatic Enrollment Contribution Rates and Enhance Automatic
Plan Features
Automatic enrollment in an employer-provided retirement plan has proven
to be an extremely effective tool for encouraging Americans to save for
retirement. Research shows a plan with automatic enrollment features
increases participation rates at least 10 percentage points. When there
is an employer matching contribution, the likelihood an employee will
participate goes up to 50 percent. A June 2021 study by Principal
Financial Group \7\ found that 84 percent of employees automatically
enrolled in a workplace plan say they started saving for retirement
sooner because they were automatically enrolled than if they had to
make that decision independently. The same survey found that 87 percent
of plan sponsors increased plan participation through the use of
automatic enrollment. The Retirement Security and Savings Act of 2021
(S. 1770--117th Congress) would direct the Secretary of the Treasury to
develop regulations to simplify and clarify the rules governing the
timing of participant notifications, specifically for employees who are
enrolled immediately upon hiring and for employers who utilize multiple
payroll and administrative systems. This measure will help workers save
more for their retirement by ensuring they are informed in an effective
manner when automatically enrolled in a workplace retirement plan
unless they opt not to participate.
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\7\ ``Principal Retirement Security Survey: Consumer and plan
sponsor results,'' Principal Financial Group, June 2021.
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Authorize the Formation of 403(b) PEPs
The SECURE Act contained provisions that will make workplace retirement
plans more available to small business employees and reduce barriers
that have discouraged small business employers from offering their
employees a workplace retirement plan. It amended the law governing
multiple employer plans (MEPs) and established pooled employer plans
(PEPs). The changes made by the SECURE Act will enable small employers
to band together and delegate responsibility to a professional
fiduciary while reducing the individual cost of offering a retirement
plan.
A recent study conducted by Transamerica \8\ demonstrates that the
changes made by the SECURE Act will encourage more small business
employers to offer their employees a retirement plan. The study found
that of the employers not anticipating offering a plan within the next
two years, nearly one-third would consider joining a multiple employer
plan MEP or PEP because of their reasonable cost.
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\8\ ``Navigating the Pandemic: A Survey of U.S. Employers,''
Transamerica Institute, June 2021.
Unfortunately, the benefits of a workplace retirement plan that could
be offered by a small business employer through a MEP or PEP in
accordance with the changes made by the SECURE Act is not available to
501(c)(3) nonprofits, public educational organizations, and religious
institutions. The SECURE Act did not authorize employers who offer
their employees a 403(b) retirement plan, which is typically utilized
by nonprofit, public educational organizations, and religious
institutions, to use MEPs or PEPs. Those employers offering a 403(b)
retirement plan still have the barriers in place that the SECURE Act
reduced for employers who offer other types of retirement plans. As a
result of not including 403(b) plans in the SECURE Act, organizations
eligible to offer a 403(b) plan must still assume the financial and
administrative challenges and legal risks when offering a plan.
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Therefore, many do not offer a retirement plan to their employees.
The SECURE Act should be amended to encourage employers who would
typically use a 403(b) plan to offer a retirement plan to their
employees by authorizing these organizations to form and use 403(b)
PEPs in the same manner as other small businesses are permitted to do
so under the SECURE Act. This change would relieve nonprofit, public
educational and religious institution employers of the burdensome
administration challenges that now discourage them from offering their
employees a workplace retirement plan and give them access to the same
economies of scale now available to other small businesses. This
measure was included in the Improving Access to Retirement Savings Act
(S.1703--117th Congress).
Clarifying the Start-Up Credit for Small Businesses Joining a PEP
While the improvements made in the SECURE Act to enhance the tax credit
available to small businesses offering their employees a retirement
savings plan by joining a MEP or PEP, the start-up credit is not
available to a small business joining a MEP or PEP after the plan's
first 3 years of operation. The Improving Access to Retirement Savings
(S. 1703--117th Congress) will clarify that the 3-year start-up credit
will apply to small businesses for three years from the time the small
business joins the MEP or PEP and not from the time the MEP or PEP
begins operations. This clarification will encourage more small
businesses to offer a retirement plan and facilitate greater use of
MEPs and PEPs as the means to provide employees a workplace retirement
plan.
Enhance the Start-Up Tax Credit to Encourage Small Business to
Establish Plans
Current law allows small employers to receive a tax credit equal to
half of the cost associated with starting a workplace retirement plan.
Although the SECURE Act increased the annual cap allowed for this tax
credit, the increased percentage has not had its desired effect of
encouraging more small employers to offer their employees the
opportunity to save for their retirement at their workplace. The
Retirement Security and Savings Act of 2021 (S. 1770--117th Congress)
will further increase the tax credit to 75 percent of startup costs for
small businesses with 25 or fewer employees. The increase to 75 percent
of qualified start-up costs will serve to encourage more small business
employers to establish workplace plans to benefit their workers.
Establish Tax Incentives for Offering Retirement Savings to Military
Spouses
Due to frequency of moves made due to their partners' assignments to
new billets, military spouses often change jobs. Further compounding
the problems associated with frequent changes in duty stations and
retirement preparedness of military spouses is the fact that 92 percent
of military spouses are women,\9\ who due to a confluence of factors--
wage disparity, time out of the workforce, and competing priorities--
have retirement account balances which are on the aggregate more than
50 percent smaller than their male counterparts.\10\ The Retirement
Security and Savings Act of 2021 (S. 1770--117th Congress) will offer a
tax credit to an employer who enrolls a military spouse in a retirement
plan within 2 months of their hiring. This new tax credit would
encourage small business employers to provide military spouses with an
opportunity to participate in a workplace retirement plan and would
also increase military spouses' savings rate by requiring that they be
made eligible for any matching or non-elective contributions like those
available to employees with two or more years of employment.
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\9\ ``Women Versus Men in DC Plans,'' Vanguard, January 2019.
\10\ ``Women's Perspectives on Savings, Investing, and Retirement
Planning,'' Insured Retirement Institute, November 2015.
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Help Employees Save for Retirement While Repaying Student Debt
Student loan debt is a major challenge for America's workers who are
trying to manage competing financial priorities. Individuals who have
student loan debt have lower workplace retirement balances than those
who do not. In fact, IRI's own research found that of 46 percent of
Millennials are not saving for retirement, and nearly 10 percent
specifically cite wanting to pay off debts as their reason for not
contributing to a retirement account.\11\ The Retirement Security and
Savings Act of 2021 (S. 1770--117th Congress) will better position
America's workers who have incurred student loan debt to start building
their retirement nest eggs by permitting employers to make matching
contributions into employees' retirement accounts based on the amount
of workers' student loan payments.
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\11\ ``Millennials and Retirement 2020--Understanding, Saving, and
Planning,'' Insured Retirement Institute, January 2020.
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Increase Catch-Up Contributions Limits for Baby Boomers
Current law allows workers who reach age 50 to make additional catch-up
contributions to retirement plans up to an amount set by the Internal
Revenue Service each calendar year. Current research demonstrates
dramatic retirement anxiety among Baby Boomers. A study conducted by
the Center for a Secure Retirement \12\ found that 52 percent of non-
retired Baby Boomers are worried that the impact the COVID-19 pandemic
had on their financial lives has been so severe they will never be able
to retire. More than half (53 percent) report having to tap into
savings to pay for daily expenses during the pandemic, and 41 percent
have been financially supporting family members. This has led to 75
percent not being able to save as much for their retirement as needed.
It is not surprising then that 61 percent of non-retired Baby Boomers
came to the realization that they will need more savings to be secure
in retirement. This is further compounded by IRI's own research that
found that 45 percent of Baby Boomers have zero retirement savings.\13\
The Retirement Security and Savings Act of 2021 (S. 1770--117th
Congress) increases the catch-up contribution limits to $10,000 for
retirement savers who have attained the age of 60 by the close of a tax
year. With a third of employed Baby Boomers saying they will be
postponing retirement,\14\ this measure will give them a chance to
enhance their nest eggs and achieve greater financial security for
their retirement years.
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\12\ ``Pandemic Forces Boomers to Financially Support Family,
Greatly Impacting Their Own Retirement Plans,'' Center for a Secure
Retirement, July 2022.
\13\ ``Boomer Expectations for Retirement 2019, Ninth Annual Update
on the Retirement Preparedness of the Boomer Generation,'' Insured
Retirement Institute, April 2019.
\14\ Ibid.
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Increase the Amount Allowable Under the Saver's Credit
Under current law, certain lower-income retirement savers are eligible
for a non-refundable tax credit for contributions made to IRAs and
workplace retirement plans up to $2,000. Section 102 of the Retirement
Security and Savings Act of 2021 (S. 1770--117th Congress) would make
this credit refundable and would contribute the credit into a Roth
account as part of a retirement plan or into a Roth IRA. The provision
would increase the number of savers eligible for the 20 percent credit.
The bill also directs the Department of the Treasury to promote the
Saver's Credit to increase public awareness to help more workers
utilize the credit.
Measure 2: Facilitate the Use of Protected Lifetime Income Solutions
IRI's 2021 Federal Retirement Security Blueprint includes several
measures to facilitate the use of protected lifetime income solutions
to insure consumers against the risk of outliving one's savings during
their retirement years. Several of these proposals have been introduced
in bills during the 117th session of Congress. We offer these policy
solutions for the Committee's consideration as it conducts its
examination of how Congress can help to build upon bipartisan
retirement legislation.
Allow for the Broader Use of QLACs
Qualifying Longevity Annuity Contracts (QLACs) are valuable tools in
retirement income planning because they are an investment vehicle that
can be used as longevity insurance to help address the fear of growing
older and outliving the funds an individual has accumulated to use
during their retirement years. Current Treasury Department regulations
have created a barrier that limits the amount a retirement saver can
save when purchasing a QLAC. This regulation reduces their ability to
insure against outliving their savings throughout their retirement
years. The Retirement Security and Savings Act of 2021 (S. 1770--117th
Congress) amends the current law to allow for more than 25 percent of a
retirement plan or IRA to be rolled over into a QLAC and increases the
dollar limitation on premiums from $135,000 to $200,000. Additionally,
the provision would authorize a diverse slate of indexed and variable
annuity contracts with guaranteed benefits to be offered as QLACs.
Increasing the dollar limitation on premiums and authorizing QLACs to
be offered through a diverse slate of indexed and variable annuity
contracts with guaranteed benefits are critical reforms needed to make
QLACs more available to workers and retirees. Increased access to QLACs
benefits consumers who are seeking the opportunity to insure against
the risk of outliving their accumulated retirement savings by keeping
more of their tax-deferred savings longer with a protected, guaranteed
monthly income throughout their lifetime.
Facilitate the Use of Low-Cost ETF Investments in Variable Annuities
Currently, exchange-traded funds (ETFs) are widely available through
retirement plans, IRAs, and taxable investment accounts but generally
are not available within variable insurance products. The reason why
they are not available is that Treasury Department regulations, which
pre-date ETFs, have created a technical gap that prevents ETFs from
being included on the menu of investment options offered in variable
insurance products. The Retirement Security and Savings Act of 2021 (S.
1770--117th Congress) directs the Treasury Department to amend its
regulations to allow ETFs to be offered within variable insurance
products. This would allow for ETF structured annuity offerings which
would provide consumers with lower-cost investment options and allow
for more consumers primarily in the fee-based advisory market to
utilize and benefit from variable insurance products by obtaining
protected lifetime income for their retirement years.
Measure 3: Promote Greater and Easier Access to Information About
Retirement Plans
To promote greater and easier access to information that can help guide
retirement savers as they plan for retirement, IRI's 2021 Federal
Retirement Security Blueprint included several measures that have
attracted bipartisan support and have been introduced as bills in
previous sessions of Congress. One of the measures included in the
Retirement Security and Savings Act of 2021 (S. 1770--117th Congress)
would aid individuals in planning for their retirement by providing
them with an opportunity to obtain information more readily about past
and possibly forgotten accounts.
Establish a National, Online Lost and Found for Americans' Retirement
Accounts
Today, workers in America change jobs more frequently, and they often
leave retirement savings in plans maintained by their previous
employers. Over the past decade, 25 million workplace retirement plan
participants changed jobs and left behind a retirement savings plan.
Millions more have left two or more accounts resulting in roughly $8.5
billion in ``lost'' retirement savings. To facilitate workers planning
for their retirement, Congress should provide the tools and resources
necessary for retirement savers to locate employer-sponsored retirement
accounts. A national, digital database utilizing information already
provided to the Department of Treasury should be established. This
database would enable retirement savers to search and locate their
former employer-sponsored retirement savings accounts to ensure they
are not leaving retirement savings behind.
The creation of this one-stop-shop database will help workers--
especially Generation Xers, Millennials, and future generations--to
track their past and possibly forgotten workplace retirement accounts.
By making it easier to track past or forgotten retirement savings
accounts, workers will have additional opportunities to roll over their
found savings into a new account of into their current retirement
savings account, thereby increasing their retirement savings. Creating
a national, online lost and found database will also allow workers to
keep better track of their employer-sponsored retirement savings and
not leave thousands of dollars on the table. This measure was included
in the Retirement Security and Savings Act of 2021 (S. 1770--117th
Congress).
Conclusions
IRI appreciates the opportunity to submit this statement for the record
to the Committee. The enactment of the SECURE Act in late 2019 was a
big step forward that has put workers and retirees on a path towards
relieving some of the anxiety they are feeling about how they will be
able to have a secure and dignified retirement.
However, there is still much more that needs to be done. IRI is
respectfully submitting this statement for the record in which we are
expressing our support for several measures included in the Retirement
Security and Savings Act of 2021 (S. 1770--117th Congress) and the
Improving Access to Retirement Savings Act (S. 1703--117th Congress).
These bills will help to strengthen and enhance our nation's
private-sector retirement system. The bills will also offer help to
those individuals whose long and short-term retirement security has
been impacted by the economic consequences stemming from the pandemic
and those who are affected by America's long-standing, looming
retirement savings crisis.
The proposals we expressed support for included in the Retirement
Security and Savings Act of 2021 (S. 1770--117th Congress) and the
Improving Access to Retirement Savings Act (S.1703-117th Congress) will
all help to enhance retirement savings opportunities, increase access
to lifetime income solutions, and increase plan participants access to
information to reconnect them with ``lost'' savings. IRI believes these
solutions will provide workers and retirees with the opportunity to
build economic equity, strengthen their financial security, and protect
their income in a way that can sustain them throughout their retirement
years.
______
National Association for Fixed Annuities
1717 Pennsylvania Avenue, NW, Suite 1025
Washington, DC 20006
414-332-9306
https://nafa.com/
July 28, 2021
The Honorable Ron Wyden
Chairman
U.S. Senate
Committee on Finance
221 Dirksen Senate Office Building
Washington, DC 20510
The Honorable Mike Crapo
Ranking Member
U.S. Senate
Committee on Finance
239 Dirksen Senate Office Building
Washington, DC 20510
Dear Chairman Wyden and Ranking Member Crapo:
On behalf of NAFA, the National Association for Fixed Annuities, I want
to thank you for your ongoing leadership to achieve critical retirement
policy reforms for Americans and for holding this important hearing
today. NAFA appreciates the opportunity to submit this letter in
support of S. 1770, the Retirement Security and Savings Act, offered by
Senators Ben Cardin and Rob Portman.
In 2019 Congress took a significant step forward for retirement savers
by passing into law the Setting Every Community Up for Retirement
Enhancement Act (SECURE Act). This overwhelmingly bipartisan measure is
helping create new savings opportunities for millions of Americans.
While NAFA lauded the enactment of the SECURE Act, now more than ever,
especially as Americans work to recover from the adversities of the
COVID-19 pandemic, additional robust retirement options are needed.
NAFA supports the many positive policy changes contained in S. 1770,
including facilitating catch-up contributions, providing for expanded
auto enrollment, and helping small businesses provide savings plans for
workers. Additionally, NAFA is pleased that there are provisions to
address longevity risk. In particular, we strongly support increasing
the requirement minimum distribution (RMD) age to 75 and expanding
opportunities for greater savings in qualified longevity annuity
contracts (QLACs). Regarding QLACs, the Retirement Security and Savings
Act would allow for greater contribution levels and provides for
expanded annuity product choices.
We hope the Finance Committee will pass this legislation this fall and
that the Senate and House will work together to present a comprehensive
retirement package to the President for signature later this year.
Sincerely,
Chuck DiVencenzo
President and CEO
______
National Association of Government Defined Contribution Administrators
201 East Main Street, Suite 1405
Lexington, KY 40507
(859) 514-9161
Fax: (859) 514-9188
www.nagdca.org
July 28, 2021
The Honorable Ron Wyden The Honorable Mike Crapo
Chairman Ranking Member
U.S. Senate U.S. Senate
Committee on Finance Committee on Finance
Washington, DC 20510 Washington, DC 20510
Re: Building on Bipartisan Retirement Legislation: How Can Congress
Help?
Dear Chairman Wyden and Ranking Member Crapo:
The National Association of Government Defined Contribution
Administrators (NAGDCA) thanks you for your leadership on retirement
issues affecting the public and private sectors. We appreciate today's
hearing and look forward to future legislation arising out of it.
NAGDCA governmental members oversee plans for participants from 60
state and territorial government entities and 146 local government
entities, including counties, cities, public safety agencies, school
districts, and utilities. NAGDCA's members administer governmental
deferred compensation and defined contribution plans, including Section
457(b), 401(k), 401(a), and 403(b) plans. The association provides a
forum for working together to improve defined contribution plan
operations and outcomes by sharing information on investments,
marketing, administration, and the federal laws and regulations
governing these plans.
With as many plans as NAGDCA represents, our legislative priorities are
manifold. We outline some of our key priorities below.
Allow 403(b) Plans to Invest in Collective Investment Trusts
Under current law, private sector 401(k) plans are permitted to invest
in collective investment trusts (``CITs''), an innovative investment
option that utilizes unique asset classes and lifetime income options.
CITs often have lower costs than the mutual funds and annuity contracts
that many governmental 403(b) plans are currently restricted to
investing in. Governmental plans serve the workers who are the backbone
of our society: teachers, firefighters, police, and otherpublic
servants. Allowing 403(b) plans to invest in CITs would correct the
inequitable treatment of governmental employees and allow these public
servants to access the innovative solutions and potentially lower costs
that CITs offer to their private sector counterparts.
Eliminate the ``First Day of the Month'' Requirement in 457(b) Plans
Under current law, deferral election changes in 457(b) plans must be
made prior to the first day of the month in which the change is to
begin. This provision was enacted as an administrative convenience
prior to the advent of modern record keeping technology, but now it is
an administrative inconvenience that delays requested changes and
creates an unnecessary impediment to participants' ability to manage
their retirement assets. This restriction is not imposed on other
retirement savings plans and should no longer apply to 457(b) plans.
Allow Roth IRA Assets to Roll into 401(k), 457(b), and 403(b) Roth
Plans
If a plan permits it, participants may roll Roth account assets from an
employer-sponsored plan into a Roth account in another employer-
sponsored plan, but current law does not allow them to roll Roth IRA
assets into Roth accounts in employer-sponsored plans. Allowing Roth
IRA rollovers to Roth accounts in employer-
sponsored governmental DC plans would help participants achieve
consolidation, enhanced portability, and administrative simplicity.
Maintain the Special Catch-Up Provision in 457(b) Plans
Under current law, a governmental 457(b) plan may include a special
catch-up contribution provision allowing a participant to make
additional contributions to their plan in the last three years before
retirement. This provision is widely used because government employees
often are not in a financial position to save extensively in their
early years in public service, so employees nearing retirement often
make every effort to save extra contributions. The provision is also
frequently used by retiring governmental employees to defer significant
payments made to them upon their severance for accumulated vacation,
sick leave and compensation time benefits. Without the special catch-
up, these employees would have to recognize the additional income in
the year of payment and assume a significant tax burden. We request
that this special catch-up for 457(b) plans be retained to allow public
servants to continue to save for retirement.
Preserve Unique Plan Features, Generally
NAGDCA believes that the existing unique plan features of the different
types of governmental DC plans should not be changed merely for the
sake of creating consistency with other plan types (e.g., merely for
streamlining or consolidation). Changes to the existing plan structure
are likely to be confusing to participants, creating risks of lower
participation and savings. In addition, changes could introduce
potentially significant costs for modifying recordkeeping systems, and
those costs would likely then fall on plan participants. In addition,
plan providers may need to maintain the existing infrastructure for any
grandfathered assets, resulting in more administrative complexity and
participant communications challenges.
Preserve Both Pre-Tax and Roth Savings Options
NAGDCA supports maintaining both pre-tax and after-tax savings options.
Mandating a shift in retirement incentives toward after-tax savings
could have adverse unintended consequences that have not been studied
and could result in reduced retirement savings and decreased retirement
security overall. NAGDCA's 2018 Benchmarking Survey found that while 62
percent of plans offered a Roth option, only .3 percent of reported
assets were Roth assets. Roth contributions are an option that are not
fully understood or fully utilized by governmental defined contribution
plan participants. Furthermore, Roth contributions appeal to some but
not all of our participants. The immediate tax advantage created by
pre-tax saving is an effective incentive for employees to enroll and to
save. Losing or reducing that incentive would be detrimental to the
goal of early enrollment and future retirement security. Therefore,
retaining both pre-tax and Roth savings options provides the
flexibility to be supportive of and responsive to the diverse needs of
our participants and support their retirement readiness.
We appreciate your longstanding attention to retirement policy and are
happy to be a resource to you in any way. Please call David Levine
(202-861-5436), Brigen Winters (202-861-6618), or Matt Petersen, NAGDCA
Executive Director (859-469-5789) if you have any questions.
Sincerely,
Joshua Luskin
Board President
______
Pew Charitable Trusts
My name is John Scott, and I direct the Retirement Savings Project
(https://www.pewtrusts.org/en/projects/retirement-savings) at the Pew
Charitable Trusts. Pew is a nonpartisan, nonprofit research
organization dedicated to applying evidence-based solutions to today's
pressing public policy problems. I want to thank Chairman Wyden and
Ranking Member Crapo for holding this hearing and considering how
Congress, building on its long history of bipartisanship on retirement
policy, can help improve retirement security for older Americans.
Pew's involvement with retirement security extends back to 2004 when it
funded the retirement security project at the Brookings Institution,
which among other activities generated key proposals on automatic
enrollment that has significantly boosted participation in employer-
sponsored retirement savings plans as well as provided the foundation
for today's state-facilitated auto-IRA programs. In 2014, Pew initiated
the retirement savings project to understand the barriers that workers
face in trying to save for retirement; the challenges to small business
in offering retirement benefits to workers; and feasible solutions to
these issues. In the course of our work, we focused on state auto-IRA
programs as a feasible solution that would boost participation and
savings among groups of workers that have historically not had access
to retirement savings plans.
I'd like to focus this statement on three areas: the Chairman's
proposed expansion of the Saver's Credit that could significantly
improve retirement security; the development of state facilitated auto-
IRA programs, especially the positive effects on employers and the
private market for retirement plans; and a need to develop a coherent
national retirement security policy.
Expanding the Saver's Credit
There are many proposed legislative initiatives that have been
introduced in this Congress, but in the interests of brevity, I would
like to limit this statement to the proposed expansion of the Saver's
Credit that, based on Pew's work, could significantly improve
retirement security for many low to moderate income workers.
I am especially appreciative of Chairman Wyden's leadership in
proposing an expansion of the Saver's Credit in the Encouraging
Americans to Save Act (https://www.congress.gov/bill/116th-congress/
senate-bill/5035?s=1&r=9), an idea that has bipartisan appeal as
evidenced by a similar proposal from your colleagues Senators Ben
Cardin (D-MD) and Rob Portman (R-OH). As you know, the Saver's Credit
currently provides a nonrefundable tax credit of 50%, 20%, or 10% of
the first $2,000 of contributions to a retirement account during the
year (up to a maximum of credit of $1,000), depending on a household's
adjusted gross income. As currently structured, the Saver's Credit does
not have a direct impact on retirement accounts. The credit is
nonrefundable so it can reduce any required tax repayment to zero but
not below. Moreover, the Saver's Credit is also reduced for households
with children because it is applied after the nonrefundable Child Tax
Credit.\1\
---------------------------------------------------------------------------
\1\ The Center for Retirement Research at Boston College has an
excellent issue brief that provides helpful illustrations of the
Saver's Credit and its shortcomings: Alicia Munnell and Anqi Chen,
``Could the Saver's Credit Enhance State Coverage Initiatives?'', Issue
Brief Number 16-7, April 2016.
Chairman Wyden's proposal would revise the Saver's Credit in three
ways. First, the proposal expands eligibility for the credit by
increasing the income maximum to $32,500 for individuals and to $65,000
for couples, with the maximums indexed for inflation. This increase in
income limits would increase the pool of savers eligible for the
---------------------------------------------------------------------------
credit.
Second, the Chairman would also make the credit refundable so low to
moderate income workers, who often do not have an income tax liability
to offset with a credit, could receive a direct benefit. Third, and
most critically, the credit would be deposited directly into the
retirement account, including an individual retirement account (IRA),
of the saver.
The Chairman's legislation also provides for a coronavirus recovery
bonus credit. The bonus credit is an additional 50% credit on the first
$10,000 in retirement savings made during a five-year period beginning
in 2023--for a maximum additional credit of up to $5,000
Participation boost: The proposal could boost retirement security in
two ways. First, the revamped Saver's Credit could act as a quasi-
matching contribution that would encourage greater participation by
working Americans who need to save for retirement. Like many other
research organizations, Pew has found that the presence of a matching
or employer contribution increases participation by workers. In our
2016 national survey of workers (https://www.pewtrusts.org/en/research-
and-analysis/reports/2017/09/survey-highlights-worker-perspectives-on-
barriers-to-retirement-saving) at small to mid-sized firms, for
example, fulltime employees were more than twice as likely to
participate when employers contribute to their retirement accounts than
workers whose employers do not contribute. When we asked workers their
reactions to a hypothetical auto-IRA program, the least favorable
reaction was to the lack of an employer contribution. And according to
Pew's analysis (https://www.pewtrusts.org/en/research-and-analysis/
issue-briefs/2016/09/employer-sponsored-retirement-plan-access-uptake-
and-savings) of the Survey of Income and Program Participation (SIPP),
take-up rates rise by 18 percentage points when employers match worker
contributions.
Today, approximately 68% of eligible workers, almost 400,000, are
saving in the three operational state auto-IRA programs, but if a
contribution in the form of a refundable tax credit has the same effect
as found in the SIPP, that participation rate could jump to nearly 86%
with more than 100,000 additional savers in just those three states.
Beyond just the jump in overall participation, a refundable tax credit
acting as a matching contribution could induce younger workers to start
saving earlier in their careers, which would be an especially impactful
benefit as their savings would have more time to grow through
investment returns.
Increase in retirement savings: The other benefit of an expanded
Saver's Credit is the increase in savings. If a saver put away $2,000 a
year over a 30-year career and earned a real rate of return of 5% per
year, that person would have $139,522. If that saver qualifies for the
full $1,000 Saver's Credit each year by saving under the same
assumptions, they would have $209,282 by year 30. In other words, an
expanded Saver's Credit could increase retirement savings by nearly
$70,000.
Given that the median private sector retirement account balance for
households in their late 50s and early 60s is less than $100,000,\2\
the proposed expansion of the Saver's Credit would lift many older
households out of a situation of financial vulnerability. The
additional funds would enable retiring workers to delay claiming of
Social Security (https://www.pewtrusts.org/en/research-and-analysis/
issue-briefs/2021/03/how-auto-iras-help-retirees-delay-claiming-social-
security), boosting their benefits by 7 to 8% for each year that
claiming is delayed. The additional savings would also provide a
critical buffer for unexpected financial shocks in retirement, not
least of which are medical bills that are not covered by Medicare or
private insurance and that are a leading cause of debt in old age. The
expanded Saver's Credit might also make annuities, whether life or
delayed/longevity insurance, more meaningful and thereby provide an
additional income stream to supplement Social Security.
---------------------------------------------------------------------------
\2\ Vanguard, How America Saves, 2021, https://
institutional.vanguard.com/content/dam/inst/vanguard-has/insights-pdfs/
21_CIR_HAS21_HAS_FSreport.pdf, Figure 52: The median account balance
for participants between the ages of 55 and 64 is $84,714.
Streamlining the process: Depositing a tax credit directly into a
saver's retirement account will involve some technical work, and I
would encourage the Congress to work with the administration in making
this process even more efficient. Currently and under the proposals for
expansion, the saver must file a tax return to claim the Saver's
Credit. The problem with this requirement is that some citizens do not
file a return and even for those that do file, they may not know about
the Saver's Credit. The Earned Income Tax Credit is often given as an
example of a benefit that is not claimed by as many as 20 percent of
eligible taxpayers (https://www.
eitc.irs.gov/eitc-central/participation-rate/eitc-participation-rate-
by-states). But it might be possible to streamline the process for
depositing the Saver's Credit given that financial institutions
managing and holding retirement savings track and report contributions
and that the Social Security Administration as well as the IRS have
data on wages and salaries. At the direction of Congress, for example,
the Treasury Department and the Social Security Administration could
explore ways to make the depositing of the Saver's Credit as efficient
as possible.
State-facilitated Auto-IRA Programs (Auto-IRAs)
As a precursor to the discussion on a national retirement policy, I'd
like to summarize what we know about the biggest innovation today,
state-facilitated automatic enrollment programs also known as auto-
IRAs. As discussed above, auto-IRAs are extending coverage to a new
class of workers who largely have not saved for retirement. Auto-IRAs
were intentionally designed with automatic enrollment, a feature of
some private sector plans that increases employee participation and
savings.
The idea of an automatic enrollment, payroll deduction IRA program took
hold at the state level with California passing legislation for a
market study in 2012 and eventually program enactment in 2016. Today, 9
states in total have enacted auto-IRAs. Three states--California,
Illinois, and Oregon--are active and enrolling savers.
The metrics so far are impressive. According to the consulting firm
Massena Associates (https://myemail.constantcontact.com/Retirement-
Security-Matters---July-15--
2021.html?soid=1133778904165&aid=swvPsJGI6cI), combined assets are now
over $275 million--a quarter of a billion dollars saved across the
three programs. Program assets are up almost 60% since the start of the
year. Funded accounts are over 346,000--up 31% year to date double
where they were at the end of September 2020. Average account balances
are at $770, which includes many new accounts. Average contributions in
each of the programs are running at or over $115 a month. As noted
above, participation is approximately 68%.
Effects on employers: An important aspect of the discussion about auto-
IRAs is the effect on employers, an issue that Ranking Member Crapo
raised during the hearing. Across the three programs in operation, more
than 34,000 employers have now registered, and over 14,000 have started
payroll deductions for their employees.
In Oregon, Pew surveyed participating employers (https://
www.pewtrusts.org/en/research-and-analysis/articles/2020/07/30/
employers-express-satisfaction-with-new-oregon-retirement-savings-
program) in 2019 and 2020 to assess how they experienced the initial
registration and ongoing payroll contribution processes. Nearly 3 in 4
(73%) said they were either satisfied or neutral about the program.
OregonSaves does not charge businesses any participation fees, and 79
percent said that they have not experienced any related out-of-pocket
costs. Those that have faced additional costs said office supplies and
payroll processing time were the most common. Eighty percent also said
that they are hearing only ``a little'' or ``no questions at all'' from
their employees about OregonSaves. One reason for that may be that
workers are helped directly from the program's client service team.
This positive reaction among employers to a no-cost retirement benefit
can also be seen in California. As of August 31, 2020, before any
enrollment deadline, 2,249 firms employing nearly 100,000 workers had
enrolled. More than 700 companies had started processing payroll
contributions, and the program had amassed over $8.7 million in assets.
Why the positive response? According to Pew's 2017 survey (https://www.
pewtrusts.org/en/research-and-analysis/issue-briefs/2017/06/employer-
barriers-to-and-motivations-for-offering-retirement-benefits), many
employers want to offer retirement benefits to their workers but say
they cannot because of high startup costs and limited administrative
capacity. Some said they see offering retirement benefits to attract
and retain workers, but 67% of those who supported auto-IRAs said they
felt such a program simply ``would help my employees.''
In the more recent survey in Oregon, responses to an open-ended
question reflect similar sentiments about OregonSaves. Among the
answers were:
``It has been an easy and transparent method for our employees
to begin saving for their future. As a very small business it has been
so appreciated as other options seemed out of reach for us.''
``It is great having a free option for savings for our
employees. We eventually want to offer our own program, but this is
nice for the time being.''
``I do appreciate the program overall. It helps younger staff
start saving early. From a small business that can't afford to have a
retirement plan it is a nice option for our team.''
The work of Pew and others show that there is significant small
business support for a public-private partnership that can help
employers facilitate a benefit at no cost that helps workers build a
secure retirement.
State auto-IRA effects on private sector market: As more states enact
auto-IRAs for private sector workers who can't save through their jobs,
policymakers and analysts have speculated about the potential impact on
employers: Would these state programs ``crowd out'' the private market
for plans such that businesses would not adopt their own 401(k)s or
comparable alternatives? Would some employers decide to no longer offer
their own plans? Or, alternatively, could these programs encourage new
plan growth?
These questions are rooted in earlier surveys. In 2017, Pew published
the results of national survey of small-business owners (https://
www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/01/small-
business-views-on-retirement-savings-plans) and benefits managers that
detailed their views of hypothetical auto-IRA programs. Among those
with retirement plans and five to 250 workers, only 13% said they would
drop theirs and enroll in such a program if launched in their state.
Among small and midsize employers without plans, 52% said that they
would start their own plan rather than enroll workers in the state-
sponsored program. That survey also suggested one reason that these
employers might be prompted to adopt their own plans: Most of them
won't offer retirement benefits until they are financially stable and
already offering other benefits. The availability of a statewide auto-
IRA might encourage those employers that have the means but have not
decided to sponsor their own plans.
Preliminary data from annual filings to the U.S. Department of Labor by
employer-sponsored plans suggests that in states that have created
auto-IRAs, employers with plans continue to offer them and businesses
without plans are still adopting new ones at similar or higher rates
than before the state options were available.
Since 2013, before the first state auto-IRA programs were introduced,
the percentage of new plans as a share of all employer-sponsored plans
increased nationwide from roughly 6% to nearly 8% by 2019.
The three states implementing state auto-IRA programs show a similar
trend--with the proportion of new plans holding steady or increasing in
each. In 2019, for example, Oregon and California had some of the
highest proportions of new plan adoption, with Illinois' proportion
just slightly lower than the national average (Figure 1).
During the same period, the proportion of employer sponsors terminating
or ending their plans was consistently about 4% of all plans, both
nationwide and in the states implementing auto-IRA programs (Figure 2).
The share of plans that were ended began to trend down slightly toward
the end of the period: The U.S. average and the proportion of plans
terminated in California, Oregon, and Illinois fell to just 3% in 2019.
This early evidence from California, Oregon, and Illinois indicates
that auto-IRAs appear to complement the private sector market for
retirement plans such as 401(k)s. Some employers may be moving toward
plan sponsorship in response to the state auto-IRA programs. Meanwhile,
those that cannot afford their own plans can take advantage of a no-
cost, basic savings program for their workers.
Steps Toward a Comprehensive National Retirement Policy
The interaction between auto-IRA programs and the private market for
retirement plans just discussed provides a segue to the topic of
national retirement policy. In just 3 years, we will reach the 50th
anniversary of the passage of the Employee Retirement Income Security
Act (ERISA). While enormous progress has been made in retirement policy
since 1974, much more needs to be accomplished, and in some areas we
may have slid backwards in terms of ensuring employee retirement income
security.
Employees amass the bulk of their retirement savings through workplace
plans. After the IRS released regulations implementing the 401(k) plan
in 1981, we have seen a large increase in the number of savers because
of employers adopting these plans. However, that progress was offset by
the decrease in the number of defined benefit (DB) plans.
[GRAPHIC] [TIFF OMITTED] T2821.009
.eps[GRAPHIC] [TIFF OMITTED] T2821.010
.epsMoreover, this shift from DB to defined contribution (DC) plans
like 401(k)s has meant more decision-making burdens for workers, who
are not up to performing so many complicated tasks such as deciding how
much to save, how to invest savings, and how to spend down savings in
retirement. For example, our own research (https://www.pewtrusts.org/
en/research-and-analysis/issue-briefs/2017/11/many-workers-have-
limited-understanding-of-retirement-plan-fees) has shown that many plan
participants do not read fee disclosures or even when they do, they do
not understand them, potentially exposing their savings to high fee
investments. The shift of burdens from employers and the government too
workers has meant that workers are not as well prepared for retirement
as they could be even with behavioral-based tools like automatic
enrollment and automatic escalation of contributions.
While the auto-IRA programs exhibit innovation and an increase in
coverage in a way that complements the voluntary, employer-based
system, they suffer from the same shortcoming as employer plans: the
burden is on workers to achieve their retirement security. Moreover,
the development of auto-IRA programs has been haphazard across the
states, and while programs are similar from state to state, there are
differences in terms of coverage and scope.
Social Security also is showing signs of aging as it faces a funding
shortfall. Without action by Congress, retirees face a significant
benefit cut. We all assume that Congress will act in time, but
continued inaction erodes the faith in the system and narrows options
for a long-term solution.
All these forces taken together suggest that we need to revisit
national retirement policy as we approach ERISA's 50th anniversary.
ERISA promised to create a coherent policy that would support a decent
standard of living in retirement. As I discussed above, the state auto-
IRA programs appear to complement the private
employer-sponsored retirement system, but despite these and other
innovations, retirement policy is developing in a piecemeal and halting
fashion with a consequent and ongoing erosion in retirement security
except for a privileged minority. The goals of access to retirement
plans, high participation, and credible income security in old age
should be revisited and reformulated as a shared responsibility among
workers, employers, and the government.
Congress might consider a national commission on retirement security
for private sector workers as a step towards a national savings
program. Any commission should address the whole scope of retirement
preparation, the tax structure supporting retirement security, the role
of the key stakeholders, and the need for legislative action including
revisiting the key assumptions underpinning ERISA.
* * *
Thank you for holding this hearing and providing an opportunity to
submit our views. I would be happy to supplement this statement with
additional information.
John Scott, Project Director, Retirement Savings, The Pew Charitable
Trusts
Email: jscott@pewtrusts.org
______
Retirement Clearinghouse
1916 Ayrsley Town Blvd., Suite 200
Charlotte, NC 28273
Phone: 704-295-1234
Fax 704-295-1202
July 28, 2021
The Honorable Ron Wyden The Honorable Mike Crapo
Chairman Ranking Member
U.S. Senate U.S. Senate
Committee on Finance Committee on Finance
Washington, DC 20510 Washington, DC 20510
Re: Building on Bipartisan Retirement Legislation: How Can Congress
Help?
Dear Chairman Wyden and Ranking Member Crapo:
Retirement Clearinghouse (``RCH'') thanks you for your leadership
on retirement issues and your commitment to helping Americans retire
with dignity. Today's hearing is critically necessary to highlight the
importance of access to retirement vehicles for all citizens.
RCH is a financial technology services organization uniquely
focused on the issues that arise because of the proliferation of small
retirement accounts. We work every day with plan sponsors and service
providers to deal with those issues and have pioneered solutions, like
Auto Portability, that are proven to deliver unprecedented benefits to
America's defined contribution system.
Auto Portability is the routine, standardized, and automated
movement of a retirement plan participant's 40l(k) savings from their
former employer's plan to an active account in their current employer's
plan. Cashing out is one of the most detrimental choices a person can
make when it comes to retirement readiness. A hypothetical 30-year-old
worker who cashes out a $5,000 401(k) savings account today will
forfeit the $30,000 that the balance would have accrued by age 65.
Fortunately, RCH has developed Auto Portability to specifically
reduce the risk of people cashing out their retirement savings when
they are involuntarily moved from an employer's plan into an IRA. Using
new technology, RCH searches the databases of retirement account record
keepers and looks for duplicate accounts. When RCH finds a match, we
contact the account holder and ask if they would like to roll over
their old account into their new account. The account is then
automatically transferred unless the participant opts out. Extensive
privacy safeguards are in place to ensure personal data is never
compromised.
We are proud to have recently partnered with Alight Solutions to
make Auto Portability available to their 5 million plan participants by
the end of 2021, and we look forward to bringing Auto Portability to
more Americans in the future. Expanding Auto Portability is good
policy: under a scenario where Auto Portability is implemented over the
course of 10 years and stays in effect for a generation, we estimate
that more than 125 million workers would avoid cashing out their small-
balance accounts and, instead, preserve their savings in their current-
employer plans. Furthermore, $1.5 trillion would be added to Americans'
retirement savings (measured in today's dollars).
Auto Portability is just one piece of the retirement puzzle. We
appreciate your commitment to improving retirement security for all
Americans and your attention to this critical issue. Should you have
any questions or require additional information, please do not hesitate
to let us know.
Sincerely,
J. Spencer Williams
President and Chief Executive Officer
swilliams@rch1.com
Phone: 704-248-1131
Fax: 704-353-9800
______
Retirement Solutions, LLC
235 Main St., #158
Madison, NJ 07940
Phone: 973-796-4230
E-Mail: jane@retirement-solutions.us
What's the Best Way to Address Our Nation's Retirement Shortfall?
There is no doubt this nation is confronting a retirement crisis.
According to the Government Accountability Office's 2015 report, ``Most
Households Approaching Retirement Have No Savings,'' about 55 percent
of households age 55-64 have less than $25,000 in retirement savings,
including 41 percent who have zero.\1\
---------------------------------------------------------------------------
\1\ Government Accountability Office's 2015 report, ``Most
Households Approaching Retirement Have No Savings.''
Nearly three-quarters of Americans surveyed by SimplyWise, a financial
technology firm, in their July 2020 Retirement Confidence Index said
they were worried about retirement and another 20% said they intend to
delay their Social Security benefits.\2\
---------------------------------------------------------------------------
\2\ ``More Americans are worried about retirement now and their
plans have changed,'' Allessandro Malito, MarketWatch, July 14, 2020.
---------------------------------------------------------------------------
Ghilarducci's Proposals Have Ranged from Including Hedge Funds and
Private Equity in the Plans to Making Them Closer to A Low-Cost, Less
Risky Index Fund
Teresa Ghilarducci, an economics professor at the New School for Social
Research has proposed that the Thrift Savings Plan (https://
www.tsp.gov/), or TSP, which is available to federal employees and
members of the military (https://www.
militaryonesource.mil/military-life-cycle/new-to-the-military/getting-
connected/thrift
-savings-plan-options-making-your-retirement-dollars-work-for-you/
#::text=The%20
best%20way%20to%20get,to%20sock%20away%20some%20cash.&text=Any%20contri
butions%20you%20make%20are,or%20stay%20in%20until%20retirement.),
should be offered to low-income workers who aren't covered by a
plan.\3\ Employees and employers would each contribute 5% of the
employee's salary to the account. However, there are no proposals to
cover middle and upper-class workers with no plan--according to the
GAO's 2015 report about half of ALL workers over 55 have no retirement
savings.\4\
---------------------------------------------------------------------------
\3\ ``Everyone should have the retirement plans federal employees
enjoy,'' Teresa Ghilarducci and Kevin Hassett, Washington Post, March
29, 2020.
\4\ GAO Report. Ibid.
However, while the TSP is admired by many for offering low-cost index
funds to its members, it wasn't until 2014 when most of the default
assets owned by federal workers switched from G Funds, which invest in
low-performing government securities, to the age-appropriate, lifecycle
``L Fund'' (also known as a target-date fund) with higher returns due
to investments in stocks. That switch was the result of the passage of
the Smart Savings Act, which was introduced by Senators Elizabeth
Warren (D-MA) and Rob Portman (R-OH).\5\
---------------------------------------------------------------------------
\5\ ``Congress passes `Smart Savings Act' to Strengthen Retirement
Savings for Federal Employees,'' Congressional Documents and
Publication, December 15, 2014.
While her proposal is a good start to getting 401(k) plans on track to
deliver a solid retirement, there should be concerns about
Ghilarducci's collaborator on the current proposal, Kevin Hassett, a
visiting fellow at the Hoover Institution. When Hassett was working for
the Trump administration on health matters his response to the COVID-19
panic was to downplay the danger of it and push the administration to
re-open the economy amid lockdowns and social distancing.\6\ Hassett
built a model that indicated that COVID-19 deaths would drop off to
near zero, contradicting assessments by public health experts, and was
widely panned by academics and commentators; the predictions of his
model failed.\7\,\8\ What's more, as chairman of the White
House Council of Economic Advisors, Hassett released analysis in 2018
indicating that real wage growth under Trump was higher than reported,
despite figures indicating that wage growth had not picked up.\9\
---------------------------------------------------------------------------
\6\ ``34 Days of Pandemic: Inside Trump's Desperate Attempts to
Reopen America,'' By Philip Rucker, Josh Dawsey, Yasmeen Abutaleb,
Robert Costa and Lena H. Sun, Washington Post, May 2, 2020.
\7\ ``No Virus Deaths by Mid-May? White House Economists Say They
Didn't Forecast Early End to Fatalities,'' Jim Tankersley, New York
Times, May 4, 2020.
\8\ ``The Trump Administration's `Cubic Model' of Coronavirus
Death, Explained,'' Mathew Yglesias, Vox, May 8, 2020.
\9\ ``White House Says Wages Are Growing When Measured
Differently,'' Jim Tankersley, New York Times, September 15, 2018.
It's a relief that Ghilarducci has seen the light when it comes to
investment strategy because her previous proposal called for a riskier
investment strategy and a lower employer contribution rate. In 2018 as
President Biden's pension adviser she teamed up in with Tony James of
the Blackstone Group to propose The Retirement Savings Plan, which
would require workers and their employers to contribute at least 3
percent of the employee's salary each year into a ``Guaranteed
Retirement Account'' that ``could be invested in opportunities
typically reserved for institutional investors--less liquid, higher
return asset classes. These include high-yielding and risk-reducing
alternative asset classes like real estate, hedge funds, managed
futures and commodities.''\10\
---------------------------------------------------------------------------
\10\ The Retirement Savings Plan by Tony James and Teresa
Ghilarducci, October 21, 2015, http://teresaghilarducci.org/blog/333-
the-retirement-savings-plan-by-tony-james-and-teresa-ghilarducci.
Two problems with the proposal: First, the 3% employer-employee
contribution rate is LOWER than the current typical combined employee
contribution of 5 percent of pay and employer contribution equal to 3
percent of pay. And by including hedge funds along with private equity
as investments the proposal would have moved the retirement funds into
riskier investments than those typically featured in 401(k) plans,
which are low-cost passive index mutual funds that typically outperform
managed funds--the same funds that are featured in the Thrift Savings
Plan--contrary to Ghilarducci's assertion that most 401(k) investments
are in ``pretty crappy products.''\11\
---------------------------------------------------------------------------
\11\ ``She wants to kill your 401(k),'' Emily Cadei, USA Today,
March 16, 2015.
In fact many mutual funds managed by Vanguard are ranked at the top of
the list of U.S. mutual funds by assets under management (https://
en.wikipedia.org/wiki/
List_of_US_mutual_funds_by_assets_under_management). Along with
BlackRock (https://en.wikipedia.org/wiki/BlackRock) and State Street
(https://en.wikipedia
.org/wiki/State_Street_Corporation), Vanguard is considered one of the
Big Three index funds that dominate corporate America. What's even more
puzzling is her switch to supporting the TSP investment model since
---------------------------------------------------------------------------
most, if not all of its investments are in index funds.
Ghilarducci's previous approval of private equity is concerning, given
that many consumer advocates have denounced it. Ghilarducci told
Investment News in June of 2020 ``Most 401(k)s are not well-managed and
are often used for short term purposes. Private equity in 401(k)s is a
half-step towards solving the fatal flaws in the voluntary, individual
directed, for profit 401(k) system.''\12\
---------------------------------------------------------------------------
\12\ ``DOL encourages use of private equity funds in retirement
plans,'' Investment News, Mark Schoeff, June 3, 2020.
Consumer advocates couldn't disagree more. When Eugene Scalia was the
Secretary of Labor in the Trump administration and said private equity
investments will help Americans ``gain access to alternative
investments that often provide strong returns'' Dennis Kelleher, chief
executive of Better Markets, rebutted him: ``The last thing the DOL and
the SEC should be doing is directing more investment money from
---------------------------------------------------------------------------
transparent public markets to high-risk dark private markets.''
Barbara Roper, director of investor protection for the Consumer
Federation of America, wrote a letter to Scalia denouncing the idea.
``Far from providing the benefits touted without any supporting
evidence by the private equity industry, these investments are likely
to saddle middle-class retirement savers with high costs and lock them
into unnecessarily complex investments that under perform publicly
available alternatives.'' Roper's letter was co-signed by 14 advocacy
groups and five labor unions, including the AFL-CIO, the United
Steelworkers and the National Education Association.\13\
---------------------------------------------------------------------------
\13\ Group sign on letter urging withdrawal of DOL-PE Guidance,
Consumer Federation of America, June 2020.
---------------------------------------------------------------------------
A Blueprint for Retirement Reform
Do we need 401(k) reform? Absolutely.
Compare the nest eggs of Americans nearing retirement with those of
their counterparts in Australia. According to the GAO's report about
29% of households 55 or older have no retirement savings from a defined
benefit plan OR a 401(k) plan. Among those with some savings the median
amount saved is about $104,000 for those aged 55 to 64 and $148,000 for
those aged 65 to 74. Given that the formula for retirement adequacy is
to have accumulated 10 to 14 times your salary nearing retirement and
the median income for that age group is around $76,000 attention must
be paid.\14\
---------------------------------------------------------------------------
\14\ GAO Report. Ibid.
On the other hand, Australians are scheduled to retire with nest eggs
of $500,000 to $700,000--more than four times that of their American
counterparts. The reason why Australians' nest eggs are fuller than
those of their American counterparts? Very simply: Australian employers
are REQUIRED to contribute to their version of a 401(k) account--the
current contribution rate is equal to 9.5% of salary, increasing to 12%
in 2027, compared to the measly 3% matching contribution rate typically
offered by American employers.\15\
---------------------------------------------------------------------------
\15\ Superannuation in Australia, https://en.wikipedia.org/wiki/
Superannuation_in_Australia.
What's more, the Ozzie employer contribution is made regardless of
whether the employee contributes--it's not simply a ``matching
contribution.'' Thirty nine percent of the Vanguard Group's client's
workers don't participate in their employer's plan and end up with
nothing, according to their 2020 How America Saves report.\16\
---------------------------------------------------------------------------
\16\ Vanguard Group, How America Saves 2020.
---------------------------------------------------------------------------
The Problems: Our Economy Isn't Trickling Down
to the Average Joe and Jane
The kind of 401(k) reform the country desperately needs involves
including benefit-deprived part-timers in the plan--whether they are
part-time college professors or ``Task-Rabbiters''--mandating more
generous contributions along with ensuring that employees ``own'' the
employer contributions as soon as they are made so that they don't lose
out once they change jobs.
Most of the job growth in the 21st century has been in low-wage jobs
without benefits--including workers with a college degree AND student
loan debt. When it comes to measuring economic health, most economists
are ``econ-nitwits'' because they only measure unemployment and not
under-employment. In the decade between 2005 and 2015, literally all of
the net U.S. job growth was in nonstandard, contingent--AKA part-time--
work, according to economists Lawrence Katz and Alan Krueger, as Robert
Kuttner observed in his book, ``Can Democracy Survive Global
Capitalism.'' While total US employment during that decade increased by
9.1 million jobs nonstandard employment grew by 9.4 million. In other
words, during a decade that included a steep recession followed by what
appeared to be a strong recovery, all of the net job growth--and more--
was in jobs that most people would take only as a last resort.
CEO Pay Is Through the Roof in the U.S.--
More Than 9 Times What It Was In 1980
In the not-so-old days U.S. companies valued their workers over their
shareholders and compensated them well--the ratio of CEO-to-worker pay
in the S&P 500 was 42 to one in 1980 compared to 380 to one in 2011,
according to ``The CEO File,'' in the June 2012 issue of Reuters
Magazine. This is the highest ratio (https://usatoday30.usatoday.com/
money/companies/management/2008-06-29-europe-ceo-pay_N.htm) in the
world; the CEO/worker ratio in France is 23 to one, 20 to one in
Germany and 26 to one in Italy.\17\
---------------------------------------------------------------------------
\17\ ``As CEO pay in Europe rises, so does talk of curbing it,''
Jeffrey Stinson, USA Today.
---------------------------------------------------------------------------
Some of the Wealthiest Companies With Plans Are
Short-Changing Their Employees
401(k) plans essentially replaced defined benefit pensions, even though
their creation in 1978 by retirement consultant Ted Benna was meant to
IMPROVE DB plans rather than replace them. In 2014 Bloomberg's ranking
(https://www.
bloomberg.com/news/articles/2014-07-22/conocophillips-best-among-401-k-
plans-with-facebook-last) of 401(k) plans at the 250 biggest companies
found that some of the least generous companies are among the richest:
Facebook, Amazon and Whole Foods Market, which was subsequently
acquired by Amazon. The natural-foods grocer offered a measly employer
annual maximum 401(k) contribution of $152, when it was a stand-alone
company.\18\
---------------------------------------------------------------------------
\18\ ``ConocoPhillips Proves Best Among 401(k) Plans, With Facebook
Last,'' Margaret Collins and Carol Hymowitz, Bloomberg, July 22, 2014.
Not only does Amazon, founded by the world's richest man, Jeff Bezos,
require employees to wait three years after they join the company to be
eligible for a matching contribution but they only match up to 2
percent of employees' salaries if they contribute 4 percent compared to
the typical employer match of 50 cents on the dollar for up to 6% of
pay. To make matters worse, the match is made entirely in company
stock, which is surprising given that many other companies who used to
offer a stock match switched to the more-liquid and less-volatile cash
match after Enron's collapse.\19\
---------------------------------------------------------------------------
\19\ ``Amazon's 401(k) plan is pretty brutal, too,'' Suzanne
Woolley, Margaret Collins, Spencer Soper, Benefits Selling, August 25,
2015.
Facebook, worth a whopping $97 billion-plus in 2018, finished last in
the Bloomberg rankings, which were based on 2012 data, the latest
available for all companies. Founded in 2004, Facebook offered NO
matching contribution until 10 years later in 2014. It currently
matches 50% up to 7 percent of pay. Anyone who thinks that Facebook's
employees can afford to fund their own retirement is in denial; most of
Facebook CEO Mark Zuckerberg's generation can barely make ends meet. A
recent Wells Fargo study of millennials between the ages of 22 and 32
indicated that 87 percent didn't have enough money to save for
retirement--81 percent were paying off other debts, most likely college
loans. Because of these loans, fewer of them can qualify for
mortgages--which isn't just bad for the mortgage industry but bad for
millennials since home equity is a major retirement asset.\20\
---------------------------------------------------------------------------
\20\ ``A Paradox: Optimistic Millennials Burdened by Debt,''
Houston Style Magazine, Jim Chapman, July 23, 2013.
Part-time Workers Who Must Have Multiple Jobs--Whether They Are Uber
Drivers or Adjunct Professors--Deserve a Retirement Plan
Task Rabbit's company website calls it ``a marketplace dedicated to
empowering people to do what they love.'' It's hard to believe that
lovable jobs include cleaning garages, painting apartments, or
assembling Ikea products. There are a whopping 75 million gig workers
in America according to the Federal Reserve.\21\ What economists call
``contingent'' workers--or casual labor--generally don't get
unemployment insurance, workers' comp, or fringe benefits; they fully
fund their Social Security benefits and can't organize unions. As
Robert Kuttner observes in his article in The American Prospect, ``The
Task Rabbit Economy,'' employers should at least be required to provide
the same benefits to temps and part-timers that full-time workers
receive, to discourage the strategy of redefining normal jobs as
contingent ones. The Dutch version of ``flexicurity'' accords part-
timers the same labor rights as full-
timers, with the result that most part-time jobs in the Netherlands are
considered good jobs.
---------------------------------------------------------------------------
\21\ ``Number of gig workers from Contingent Workers Could be
Eligible for Social Security Disability Benefits,'' Selig Law Group,
May 16, 2019.
The good news is that thanks to President Biden's labor secretary,
Marty Walsh, Uber and Lyft drivers may get unionized. ``In a lot of
cases gig workers should be classified as employees,'' Walsh told
Reuters in an interview (https://www.reuters.
com/world/us/exclusive-us-labor-secretary-says-most-gig-workers-should-
be-classified-2021-04-29/). ``These companies are making profits and
revenue and I'm not (going to) begrudge anyone for that because that's
what we are about in America but we also want to make sure that success
---------------------------------------------------------------------------
trickles down to the worker.''
Cherri Murphy, an organizer with Bay Area-based Gig Workers Rising,
said ``It's refreshing to have a Department of Labor that does not turn
a blind eye to the plight of gig workers. Misclassification of gig
workers is rampant and the pandemic has exacerbated inequality for app-
based workers.'' She called employee classification an ``important
first step to critical reform we need.''\22\
---------------------------------------------------------------------------
\22\ ``U.S. Labor Secretary supports classifying gig workers as
employees,'' Nandita Bost, Reuters, April 28, 2021.
---------------------------------------------------------------------------
The Majority of College-Degreed Professors Are Struggling
And it's not just part-time working-class folks who would be helped by
an improved system but part-time professors--the folks who are stuck
with the burden of making payments on the student loans that were
supposed to prepare them for a well-paying jobs.
Elite private colleges have saved money by increasing the number of
adjunct professors. Incredibly, the majority of professors in the U.S.
are benefit-deprived. According to the American Association of
University Professors, 70 percent (https://www.chronicle.com/article/
adjuncts-build-strength-in-numbers/) of college faculty work outside
the tenure track.\23\ What's more, nearly 25 percent of adjunct faculty
members rely on public assistance, and 40 percent struggle to cover
basic household expenses, according to a 2020 report, ``An Army of
Temps,'' from the American Federation of Teachers. Nearly a third of
the 3,000 adjuncts surveyed for the report earn less than $25,000 a
year, putting them below the federal poverty guideline for a family of
four.\24\
---------------------------------------------------------------------------
\23\ ``Adjuncts Build Strength in Numbers,'' Audrey Williams June,
Chronicle of Higher Education, November 5, 2012.
\24\ ``An Army of Temps,'' American Federation of Teachers, 2020.
Many professors are taking matters in their own hands and forming
unions.\25\ Overall, about a fourth of the nation's full-time faculty
members and about a fifth of its part-time faculty are now represented
(https://www.chronicle.com/article/part-time-faculty-are-catching-up-
to-full-timers-in-union-representation/) by collective-bargaining
units.
---------------------------------------------------------------------------
\25\ ``Part-time Faculty Are Catching Up to Full-Timers in Union
Representation,'' Peter Schmidt, Chronicle of Higher Education,
November 18, 2011.
It was Anne McLeer's own experience as an adjunct professor at George
Washington University that inspired her to not only start a union but
help lead one: SEIU's Local 500's Higher Education Work.\26\ ``Before I
started teaching I was a grad student with a 20-hour a week job as an
administrative assistant to one of my dissertation advisers. I was
considered ``permanent part-time staff'' and had access to a retirement
plan and health plan. The day I gave up that job and I started
teaching, which you would think is closer to the mission of the
university, I became a `temporary part-time person' with absolutely
nothing.''
---------------------------------------------------------------------------
\26\ ``Ann McLeer's Experience Is From Rich Colleges, Poor
Professors,'' Jane White, Huffington Post, May 4, 2013.
McLeer's Local 500 now represents part-time faculty at George
Washington University, American University, Montgomery College and
Georgetown University. At GWU and American they've achieved much higher
rates of pay and created more job security by making it more difficult
for management to dismiss adjuncts for no reason.
The Solution: Require Employers to Provide Benefits
ALL the Workers Deserve
Step One: Mandate Portable Benefits for Gig Workers: All workers, from
Uber drivers to adjunct professors, must be covered by a retirement
plan, along with other benefits.
A plan for these gig workers, The Shared Security System, was created
by entrepreneur Nick Hanauer, who co-formed the Seattle-based venture
capital company, Second Avenue Partners and David Rolf, the founder and
President Emeritus of SEIU 775 and a former Vice President of SEIU
International. Under their Shared Security System workers would earn
portable benefits, with every worker having a retirement account along
with having vacation time, sick time and health insurance.\27\
---------------------------------------------------------------------------
\27\ ``Portable Benefits for an Insecure Workforce,'' Nick Hanauer,
David Rolf, The American Prospect, Winter 2017.
As the authors point out, strong economies are completely compatible
with high wages and labor standards--fast-food workers make a minimum
of $20 an hour in Denmark, and the average autoworker in Germany made
more than $67 per hour including salary and benefits--compared to the
$34 average in the United States. Compare the $20 minimum wage hour in
Denmark to ours, which is a measly $7.25 an hour--with fast-food
workers earning a paltry $8 to $10 an hour.\28\
---------------------------------------------------------------------------
\28\ Minimum wage from https://www.dol.gov/agencies/whd/minimum-
wage.
Step Two: Require Companies to Provide ADEQUATE Nest Eggs for Their
---------------------------------------------------------------------------
Employees.
1. Replicate Australia's Superannuation system by mandating
employer contributions to 401(k) accounts equaling 9% of pay for
Fortune 500 companies such as Facebook and Amazon.
2. Non-Fortune 500 companies with 10 or more employees that have
been in business for 5 years or more must contribute the equivalent of
6% of pay--twice the typical current contribution. And that includes
gig companies like Uber and Lyft, who are laughing all the way to the
bank. Those employers who contend that a 6% contribution rate is too
burdensome should consider that the U.S. has one of the least generous
pension systems in the advanced world. According to the OECD's 2019
Pensions at a Glance report, six of the eight OECD countries that have
a mandatory 401(k) style system feature employer contribution rates
that are more generous than ours. Chile's is 10%, Denmark's is 12%,
Israel's is 12.5%, Norway's is more than 18%, Sweden's is more than 14%
and Poland's is 19.5%.\29\
---------------------------------------------------------------------------
\29\ ``Pensions at a Glance 2019,'' OECD.
3. Employees working in companies with fewer than ten employees
that have been in business less than five years would be enrolled in a
Universal 401(k) featuring a government matching contribution
equivalent to 6% of pay, similar to what Ghilarducci proposed. A
---------------------------------------------------------------------------
clearinghouse akin to the TSP would receive all deposits.
4. All new employees must be automatically enrolled in a company
plan, as is the case when a company offers a pension (although they
will likely forfeit those benefits if they change jobs less than 5
years later.) Vanguard Group's 2020 How America Saves report notes that
half of employers don't offer automatic enrollment.\30\
---------------------------------------------------------------------------
\30\ Vanguard Group. Ibid.
5. What's more, employer matching contributions must start when
the employee is hired, not after one year AND they must be ``owned''
immediately. As of 2020 22% of employers surveyed by the Vanguard Group
required employees to have one year of service before the match starts
in order to ``minimize compensation costs.''\31\ However, this practice
results in ``minimizing nest eggs'' since it could deprive someone who
changed jobs every 4 years of a total of 11 years of employer
contributions and investment returns. What's even worse, many 401(k)
plans require workers to wait up to six years before they can ``own''
these contributions, according to a 2017 report from the Government
Accountability Office.\32\
---------------------------------------------------------------------------
\31\ Vanguard Group. Ibid.
\32\ ``Most Households Approaching Retirement Have Low Savings,''
U.S. Government Accountability Office, 2015.
6. Employees need to be told what percentage of their salaries to
contribute based on their years to retirement. Even if workers are
lucky enough to work for an employer who offers a 6% matching
contribution they still have to kick in 7% of pay at age 25, 10% if
they wait to start saving at age 30, 14.25% at age 35, 20.25% at age 40
and 45% at age 50. What's mind-boggling is that the vast majority of
mutual fund providers offer a vague contribution rate of 10 to 15
percent of pay regardless of the worker's age when they start saving,
even though those who postpone saving need to cough up more, which is
why the concept of ``catch-up'' contributions was created.
Unfortunately, according to Vanguard's findings, the median employee
deferral rate is 6%; only 21% of workers contribute more than 10%.\33\
---------------------------------------------------------------------------
\33\ Vanguard Group. Ibid.
7. Get rid of the low ceiling on contributions. The limits are
$19,500 for those under age 50 and $6,500 for those over age 50,\34\
indexed to inflation. Allegedly these limits are in place to prohibit
wealthy employees from contributing too much but the vast majority of
middle- AND upper-class workers are falling behind. And if a middle-
class worker gets a decent inheritance or wins the lottery why can't he
or she sock away that money for retirement? Baby Boomer Australians can
sell a home and add the proceeds to their accounts: those over age 60
can make after-tax contributions of $150,000 a year or $450,000 over
three years.\35\
---------------------------------------------------------------------------
\34\ https://www.irs.gov/retirement-plans/plan-participant-
employee/retirement-topics-401k-and-profit-sharing-plan-contribution-
limits.
\35\ Narrative on Australians is from ``Individuals' Super
Contributions Beat Those of Employers,'' The Australian, September 28,
2007.
Step Three: Make Sure that Workers Keep Their Eggs in No More Than Two
---------------------------------------------------------------------------
Baskets by Encouraging Rollover to an IRA When They Change Jobs.
8. All employees should be encouraged to open an IRA for two
reasons: it's highly likely they'll change jobs frequently and will not
be able to move their old 401(k) balances to their new employer because
they won't be able to join the plan right away and unlike 401(k) plans
there are no ``ceilings'' on the amount that can be contributed by the
rollover.
Why Rollovers Matter: The Average Joe or Jane Works for 10 or More
Employers During a Career. The average person changes jobs \36\
(https://www.the
balancecareers.com/how-often-do-people-change-jobs-2060467) 10 to 15
times (with an average of 12 job changes) during his or her career. The
Bureau of Labor Statistics (https://www.thebalancecareers.com/bureau-
of-labor-statistics-bls-2059767) reports that people born between 1957
and 1964 held an average of 11.7 jobs from ages 18 to 48.\37\ Among
jobs started by workers age 25 to 29, 87 percent had an average length
of employment of fewer than five years as compared to 83 percent of
workers age 30 to 34. What's more, almost 15 million Americans with
401(k) accounts change jobs ANNUALLY, according to Retirement
Clearinghouse LLC, a company that assists (https://www.wsj.com/
articles/labor-department-clears-path-for-automatic-401-k-transfers-
1542045512) in transferring old balances to new plans.
---------------------------------------------------------------------------
\36\ Bureau of Labor Statistics Career Information, Alison Doyle,
Thebalancecareers.com, October 15, 2019.
\37\ How Often Do People Change Jobs During a Lifetime, Alison
Doyle, Thebalancecareers.com, June 15, 2020.
---------------------------------------------------------------------------
Problem with Brokers: Why You Should ALWAYS Do a Rollover to an
IRA and Not the New Employer's Plan
Unfortunately, even if a worker were immediately able to transfer money
from an old 401(k) account to one at a new employer, there's a chance
that a broker will steer them to an annuity--because the costs may be
lower to the employer but ``hidden costs'' are higher to the employee.
Former President Obama took on the brokerage industry \38\ in 2015 by
supporting a Labor Department proposed regulation that would subject
those advising 401(k) participants to a fiduciary standard that makes
them liable for putting client money into a mutual fund that pays the
broker a commission whose annual returns are lower than a fund that
pays no commission. The conservative cost of broker conflicts is $8
billion to $17 billion a year, according to Obama's Council of Economic
Advisers.
---------------------------------------------------------------------------
\38\ ``Obama Could Make Broker Kickbacks Disappear,'' Paula Dwyer,
Bloomberg.com, January 26, 2015 (https://www.bloomberg.com/opinion/
articles/2015-01-26/obama-wants-broker-kickbacks-to-disappear-from-
wall-street).
---------------------------------------------------------------------------
The Rollover Solution: Employees Should Select Their Rollover
Preference as Soon As they Start Working to Keep All Their Eggs in No
More Than Two Baskets
9. Workers should choose to have their balances rolled over to an
IRA rather than a new employer plan for three reasons: their new
employer will probably not allow them to move their balances to an
account at the new job because they won't be eligible to join the plan
as soon as they start the job. And there is a strong possibility that
if their next job is at a small business the new employer will either
offer no plan (https://www.transamericacenter.org/docs/default-source/
retirees-survey/tcrs2018_sr_retirees_survey_financially_faring.pdf)
--21% of companies offer no plans--according to the Transamerica Center
for Retirement Studies,\39\ or the company will only offer a plan that
features brokers pushing high-fee annuities that are hard to
understand. What's more, the worker will have a better sense of his or
her retirement assets if most of them are in one mutual fund than if
the balances are left at multiple employers. The only challenge may be
that many mutual funds require a minimum balance before the account can
be opened--for the Vanguard Group it's $3,000--so some workers may not
have the option to roll lower balances over.
---------------------------------------------------------------------------
\39\ ``A Precarious Existence: How Today's Retirees Are Financially
Faring in Retirement,'' Transamerica Center for Retirement Studies,
December 2018.
Conclusion: Does retirement reform pose a challenge? Absolutely. But
President Biden has an ambitious agenda to rebuild America's middle
---------------------------------------------------------------------------
class.
President Biden has an impressive track record after his first 100 says
in office. He signed into law the American Rescue Plan Act of 2021
(https://en.wikipedia.org/wiki/American_Rescue_Plan_Act_of_2021) to
help speed up the United States' recovery from the economic (https://
en.wikipedia.org/wiki/Economic_impact_of_the_
COVID-19_pandemic_in_the_United_States) and health effects of the
COVID-19 pandemic (https://en.wikipedia.org/wiki/COVID-
19_pandemic_in_the_United_
States). Biden's orders also reversed several Trump administration
policies, including rejoining the Paris Agreement (https://
en.wikipedia.org/wiki/Paris_Agreement) on climate change (https://
en.wikipedia.org/wiki/Climate_change), reaffirming protections for
Deferred Action for Childhood Arrivals (https://en.wikipedia.org/wiki/
Deferred_Action_for_Childhood_Arrivals) recipients, halting
construction of the Trump border wall (https://en.wikipedia.org/wiki/
Trump_wall) and ending the Trump travel ban (https://en.wikipedia.org/
wiki/Trump_travel_ban) imposed on predominantly Muslim countries.\40\
---------------------------------------------------------------------------
\40\ https://en.wikipedia.org/wiki/Joe_Biden.
What's more, President Biden plans to sign an executive order to create
a task force that would aim to make it easier for workers to unionize.
The task force will facilitate collective bargaining by the federal
workforce; wielding federal policies to pave the way for other workers
to organize; aiding workers in jurisdictions with restrictive labor
laws, along with marginalized workers such as women and people of
color.\41\
---------------------------------------------------------------------------
\41\ ``Biden to launch pro-union task force,'' Eleanor Mueller,
Politico, April 26, 2021.
``One thing that I will say is that I do think that the Biden
administration and President Biden have exceeded expectations that
progressives had,'' Representative Alexandria Ocasio-Cortez said during
a virtual town hall. ``I'll be frank, I think a lot of us expected a
lot more conservative administration. Biden announced that he plans to
cut emissions by half by 2030. I don't think it's an exaggeration to
say that two years ago it was almost unthinkable to think that Joe
Biden would be making an announcement like that.''\42\
---------------------------------------------------------------------------
\42\ ``AOC praises Biden Administration, says it has surpassed
progressives' expectation,'' Sarah Elbeshibishi, USA Today, April 24,
2021.
I think we can be confident he'll be willing and able to take the first
---------------------------------------------------------------------------
step at addressing our retirement crisis.
______
401(k) Reform: A Secure Retirement Plan for Life for ``The 99%''
Introduction: How We Became So Pension Poor
Mention the word Australia and the images that come to mind are
``shrimps on the barbie,'' Koala bears and kangaroos. We'd like to add
another image: people who can actually afford to retire. Australians
between the ages of 30 and 34 are projected to have more than $540,000
in today's dollars in their version of our 401(k) accounts, known as
Superannuation, by the time they are ready to retire; those between 20
and 24 will have nearly $700,000.\1\
---------------------------------------------------------------------------
\1\ Australians between narrative is from ``The AMP Superannuation
Adequacy Index Report,'' Access Economics Pty Limited, 2008.
How do those six-digit projected nest eggs for the typical Australian
---------------------------------------------------------------------------
compared with of a typical American approaching retirement?
_______________________________________________________________________
Australians are scheduled to retire with nest eggs of $500,000
to $700,000--more than five times that of their American
counterparts. The reason? Employers are required to contribute
three times as much to Australian retirement accounts.
Here's the bad news: according to the Federal Reserve Board's Survey of
Consumer Finances, the median amount saved in account and rollover
balance forthose age 55 to 64 was around a measly $86,600 in 2009 when
the median wage for that age group is about $65,000. But even before
the market slump in 2007 when the median balance was $103,600, that low
six-figure number is less than twice the median Boomer salary when it
needs to be 10-13 times that amount.\2\ In other words, if you're 65
and earning $65,000 $650,000 in retirement savings isn't a windfall--
it's the goal.
---------------------------------------------------------------------------
\2\ Survey of Consumer Finance, Federal Reserve Board, 2007 and
2009 is from conversation with Ken McDonnell of EBRI, October 14, 2011.
Here are our findings--corroborated by leading pension actuaries--about
34 million people who can't retire. Unless they work in the public
sector or are the tiny percentage of the private sector workforce that
has long job tenure at a company that still offers an old-fashioned
pension or in academia, most of those 38 million Boomers born between
1946 and 1956 who are scheduled to turn 65 between 2011 and 2020 will
have to stay on the job another eight to 10 years to achieve adequate
401(k) savings. And that's if reform takes place. This means that a big
chunk of nearly 40 million young adults born between 1989 and 1998--a
larger Baby Boom--who are graduating during that period will very
likely not be able to find jobs. If reform DOESN'T place those nearing
retirement age will have to work another 20 years. To make matters
worse, 53% of the population in the private sector isn't covered by any
---------------------------------------------------------------------------
plan.
The reason why Australians' nest eggs are fuller than those of their
American counterparts? Very simply: Australian employers are REQUIRED
to contribute to their version of a 401(k) account--the current
contribution rate is 9% of salary up to a salary ceiling of $137,880 up
to age 75.\3\ In addition, the employer contribution is made regardless
of whether the employee contributes--it's not simply a ``matching
contribution.'' One in four Americans whose employers offer a plan
don't contribute to a 401(k) account and therefore ends up with
nothing. While the Obama Administration has supported ``automatic
enrollment'' to get non-participants saving in these plans, the typical
``default'' employee contribution is only 3%, less than one-third of
what is needed. The reform that's needed is not to get non-savers to
participate in their employer's plan at an insufficient savings rate
but rather to require employers to contribute more generously to
employee accounts.
---------------------------------------------------------------------------
\3\ Australian employers are required narrative is from ``A Super
Guide,'' National Information Centre on Retirement Investments Inc.,
2007.
---------------------------------------------------------------------------
_______________________________________________________________________
Baby Boomers are also faced with greater financial burdens than
their parents in the Greatest Generation--from mortgages to
college costs for their kids.
While some retirement reformers might instead want to consider
requiring all employers to offer conventional pensions, a more generous
401(k) plan is the right plan for a mobile 21st century workforce
because portability is crucial. Employees reap absolutely no benefit
from a generous defined benefit plan if they don't work at a company
long enough to be vested in it.
My prediction is that most Boomers will run out of money in less than 5
years. Why? They have more expenses than their parents, the post-World
War II ``Greatest Generation.'' Whether it's because they postponed
buying their first home or because they ``traded up'' to McMansions,
more than 50% of Boomers between the ages of 55 and 65 were still
making mortgage payments in 2007--on average owing more than $140,000,
according to the Federal Reserve Board's Survey of Consumer Finances.
That amount is nearly three times what was owed by that age group in
1989, when only 34% were still making mortgage payments.\4\ Boomers are
also likely to be paying off college loans for their kids. According to
a 2007 Ameriprise survey of 1,000 affluent boomers, 74% said they were
helping adult children with college loans.\5\ Again, this financial
burden was not as great a generation ago. While federal grants
subsidized 70% of the cost of a degree 30 years ago, loans are now
needed to cover 64% of the cost.\6\
---------------------------------------------------------------------------
\4\ Boomers with a mortgage narrative is from http://www.money-
zine.com/Financial-Planning/Retirement/Retiring-With-a-Mortgage/.
\5\ Helping adult children with college loans narrative is from The
Ameriprise ``Financial Money Across Generations Study,'' Ameriprise
Financial, September, 2007.
\6\ The 70% of a cost of degree narrative is from ``Going Broke by
Degree/Why College Costs So Much,'' The AEI Press, Washington, DC,
2004, p. 8.
What follows are proposed reforms that would increase benefits, improve
coverage and portability and lower fees and ``leakage,'' or tapping
into savings for retirement.
Action Plan: The 401k Security Act: Retirement Plan for Life
Part I: Boost Employer Contributions to Accounts
1. Mandate employer contributions to 401(k) accounts equaling 9% of pay
for Fortune 500 companies. While some may claim this mandate would be
too burdensome in these recessionary times, America's largest
corporations are doing just fine. In 2011 the Fortune 500 saw an 81%
jump in profits--the third largest gain in the group's history; Apple
boasted a 145% jump in profits and moved up 21 places to number 35.\7\
The nation's high unemployment rate is driven by the fact that rich
companies are offshoring or outsourcing jobs. Take Apple, which is
sitting on $80 billion in cash: for every Apple worker in America there
are 10 in China.\8\
---------------------------------------------------------------------------
\7\ 81% jump in profits, Apple narrative is from ``Fortune 500,''
by John Berman, Nightline, May 4, 2011.
\8\ For every worker narrative is from ``Make it in America'' by
Andrew Liveris, Kindle Edition, Location 468.
---------------------------------------------------------------------------
_______________________________________________________________________
Only six member nations of the Organization for Economic
Cooperation and Development have lower pension wealth than the
U.S.
2. Non Fortune 500 companies with 10 or more employees that have been
in business for 5 years or more must contribute the equivalent of 6% of
pay. Those employers who contend that a 6% contribution rate is too
burdensome should consider that the U.S. has one of the least generous
pension systems in the advanced world; only six member countries of the
OECD have lower pension wealth. What's more, seven of the eight OECD
countries that have a mandatory 401(k) style system feature employer
contribution rates that are more generous than ours. Denmark's is
11.8%, Hungary's is 8%, Mexico's is 6.5%, Poland's is 7.3% and the
Slovak Republic's is 9%.\9\
---------------------------------------------------------------------------
\9\ Narrative on U.S. pension generosity versus other countries is
from ``Pensions at a Glance: Public Policies Across OECD Countries,''
Paris, France, OECD, 2007.
3. Any company that currently offers only a regular pension--known as a
defined benefit plan--must convert to a generous 401(k) plan by first
freezing the pension and using any assets to contribute more generously
to an existing or new 401(k) plan. Why? While defined benefit plans
have traditionally been more generous than 401(k) plans, their vesting
rules--typically requiring that employees work for the employer for at
least 5 years to be eligible for a benefit--make it impossible for the
majority of American job-hoppers to end up with a sufficient retirement
assets. (Employers are free to offer a supplementary defined benefit
---------------------------------------------------------------------------
plan in conjunction with a 401(k) plan if they wish.)
_______________________________________________________________________
A more generous 401(k) plan is better than a regular pension
because it usually takes 5 years to ``own'' benefits in a
pension.
4. Employees working in companies with fewer than ten employees in
business less than 5 years would be enrolled in a Universal 401(k)
featuring a government matching contribution equivalent to 6% of pay. A
new entity, a clearinghouse akin to the Federal Thrift Savings Plan
(TSP), which manages very low-cost 401(k)-style accounts invested in
index funds for three million federal military and civilian personnel,
would receive all deposits.
Part II: Turn 401(k) Plans Into One-Stop Retirement Plans for Life
1. Retirement Plans for Life: Along with requiring more generous
employer contributions to 401(k) accounts, we want to improve
investment performance and lower costs AND ``leakage'' by pooling the
assets of multiple employees at a mutual fund company. This will also
make it possible to keep track of retirement assets--and therefore
adequacy--throughout an individual's career, which is currently
impossible for most Americans.
_______________________________________________________________________
Employees should be able to choose a ``mutual fund for life''
that employers are required to contribute to--lowering the risk
of constantly having to replacean underperforming fund.
Pick a fund for your entire life that outperforms the others: While
employers can continue to offer a ``menu'' of options in their plans,
typically resulting in employees selecting three or more funds--
employees must be given the option of choosing a ``mutual fund for
life,'' so that they don't have to select new investments each time
they change jobs, which will lower the risk of making bad investment
decisions.
Not only will a high-performing plan-for-life help frequent job-
changers, it will help the minority of Americans who stay at the same
employer throughout their careers because their employers often select
inferior funds that they wind up replacing--forcing employees to sell
their shares and invest in new funds--which likely will be replaced
again. According to Deloitte's 2009 401(k) Benchmarking Survey, 62% of
employers replaced an underperforming fund within the previous 2 years
and 39% did so within the previous year.
More than likely this Plan for Life will be an index fund, because
years of research have demonstrated that actively managed funds
underperform benchmark index funds. For the 20-year period ending in
December 2010, 72% of managed funds underperformed index funds.\10\
What's more, this Plan for Life fund must include international stocks
as a reflection of the fact that ``the world is flat'' when it comes to
investing. Not only are two thirds of the world's largest publicly held
companies based overseas but that's been the case since Fortune
magazine launched its Global 500 ranking 22 years ago. My preference is
to choose an index fund that replicates Fortune magazine's Global 500--
the closest match would be the Vanguard Global Equity Fund (VGEF),
comprised of 854 securities from 22 countries; 40% of them U.S.-based.
While Americans who only invested in the S&P 500 during the last
decade--also known as the ``lost decade''--saw near-inflation-rate
returns of 2.71%, the 10-year return for the VGEF fund was 6.89%.
Unfortunately, while most of Vanguard's clients offer international
funds, only 30% of participants invest in them.\11\ What's more,
international investing is typically viewed as a currency hedge, as
opposed to an investment strategy that reflects the 21st century
economy.
---------------------------------------------------------------------------
\10\ 72% of managed funds is from ``Why 401(k)'s Should Offer Index
Funds,'' by Ron Lieber, New York Times, May 13, 2011.
\11\ Only 30% of participants invest is from ``How America Saves
2011,'' Vanguard Group.
Offering employees a one-stop-savings vehicle isn't a radical change
from recent investing trends in 401(k) plans; in the last few years
virtually all mutual fund companies have started to offer one- stop
investing funds known as target date funds, which automatically
decrease exposure to equities as participants approach retirement age.
However, the pooled asset approach would outperform target-date funds
because such a shift away from stocks wouldn't be necessary (although
the funds would need to keep 5-10% of assets in cash to meet
redemptions, which for the most part would only occur when individuals
---------------------------------------------------------------------------
retire.)
By continuing to receive employer contributions at the same fund
(unless they choose a different one), it will also make it easier for
workers to keep track of retirement assets and to see if they are on
track to a secure retirement, which very few Americans have the tools
to figure out and most of them desperately need. Why is this necessary?
Americans are job-changers; the average American born in the latter
years of the baby boom worked for more than 10 employers between the
ages of 23 and 44 alone, according to the Bureau of Labor
Statistics.\12\
---------------------------------------------------------------------------
\12\ Americans Are Job Changers is from ``Number of Jobs Held,
Labor Market Activity, and Earnings Growth Among the Youngest Baby
Boomers: Results From a Longitudinal Survey,'' Bureau of Labor
Statistics, September 10, 2010.
Unfortunately, when I asked selected mutual fund companies whether they
offer software that enables participants to ``aggregate'' 401(k) assets
at rollover accounts and at previous employers spokespeople for
Vanguard Group and Principal Financial said they did not. And while
Fidelity Investments, the industry leader, does offer this software,
only about 6% of its participants use it and based on my own experience
it's very likely that users frequently encounter error messages when
---------------------------------------------------------------------------
they attempt to enter account data.
_______________________________________________________________________
Americans are job-changers; the average American born in the
latter years of the baby boom worked for more than 10 employers
between the age of 23 and 44 alone, according to the Bureau of
Labor Statistics.
2. Even those employees who choose not to select a fund-for-life would
be encouraged to roll over existing account balances either to the new
employer or to single rollover account at a mutual fund rather than
having multiple rollover accounts, making it difficult to keep track of
their assets.
Part III: Employer Contributions Must Be Immediate, Consistent and in
Cash
_______________________________________________________________________
More than half of employers make employees wait up to 6 years
until they ``own employer contributions,'' depriving the
majority of Americans--who are job changers--of retirement
benefits.
1. Employer matching contributions must start when the employee is
hired, not after 1 year. As of 2010 25% of employers surveyed by the
Vanguard Group require employees to have 1 year of service before the
match starts in order to ``minimize compensation costs.''\13\ However,
this practice results in ``minimizing nest eggs'' since it could
deprive someone who changed jobs every 4 years of a total of 11 years
of employer contributions and investment returns.
---------------------------------------------------------------------------
\13\ Vanguard narrative on employer matching contributions is from
``How America Saves 2011,'' page 8.
2. Employee ``ownership'' of employer contributions--otherwise known as
``vesting''--must be immediate. According to How America Saves 2011,
54% of Vanguard's clients make their employees wait between 1 to 6
years before they are completely vested in employer contributions.\14\
---------------------------------------------------------------------------
\14\ Vesting practices are from Ibid., page 13.
3. Employers would not be permitted to ``suspend'' contributions during
economic downturns as many of them did in 2002-3 and 2008-9. This
practice both deprives employees of retirement assets but frequently
results in not being fully invested in the stock market once it
rebounds, so employers wind up buying fewer shares of stock once they
---------------------------------------------------------------------------
resume contributing.
4. All employer contributions must be in cash, not company stock. As
was the case with Enron employees, a stock match carries the risk that
the contribution will be worthless if the company goes out of business.
While the Pension Protection Act has resulted in employees being able
to divest out of employer stock, 11 million of the nation's more than
52 million 401(k) participants have more than 20% of their balances in
company stock, revealing a lack of understanding of the risks of not
diversifying\15\ (Either that or employees figure that a stock match is
better than no match.) Unlike a traditional defined benefit plan, or
pension, in which no more than 10% of plan assets can be in company
stock the Pension Protection Act doesn't place any restrictions on
company stock in 401(k) plans. The law only requires that employers
send employees a warning that their savings ``may not be diversified''
once more than 20% of their assets are in company stock.\16\
---------------------------------------------------------------------------
\15\ Percentage of participants with company stock is from ``Remove
exemption for company stock, 4 academics urge,'' by Phyllis Feinberg,
Pensions and Investments, February 21, 2005.
\16\ Invest more than 20% of their assets narrative is from ``Some
plans company-stock heavy,'' by Robert Steyer, Ibid., July 12, 2010.
---------------------------------------------------------------------------
_______________________________________________________________________
Despite the destruction of Enron employee's 401(k) savings,
which were exclusively in company stock, it's still ``legal''
for employers to match in company stock--more than one in five
Americans have more than 20% of their 401(k) assets in it.
Part IV: Boost Retirement Savings By Defining the Contribution Rate,
Removing Contribution Limits, etc.
1. Mutual fund managers must communicate the necessary employee
contribution, or ``co-pay,'' depending on participant's investment time
horizon, to achieve at least ``10 times final'' in their accounts.
Based on calculations by pension actuary James Turpin, even with the
implementation of the contribution equivalent to 9% of salary by
Fortune 500 employers, 401(k) participants need to sock away 4% of pay
if they start contributing to their accounts at age 25, 7% of pay if
they wait until age 30, 11.25% at age 35, 17.25% at age 40, and 42% at
age 50 to achieve a minimum next egg of 10 times their final pay.
Employees at smaller companies with the less generous 6% employer
contribution rate would have to cough up even more: 7% if starting at
age 25, 10% at age 30, 14.25% at age 35, 20.25% at age 40 and 45% at
age 50.
[GRAPHIC] [TIFF OMITTED] T2821.011
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.eps___________________________________________________________________
Employees must be given the most important investment advice
they're currently not getting--how much to save in their
accounts based on when they started participating in the plan.
2. Unfortunately the necessary employee contribution rates aren't
``legal'' under the current system because of counterintuitive
``ceilings.'' We need to remove the low ceiling on employee
contributions along with the ceiling on ``catch-up'' contributions for
those over 50, which currently don't enable a single American to catch
up--a fact that apparently hasn't registered with any of the companies
advising these plans. The limits in 2011 were $16,500 for those under
50 and $22,000 for those over 50 and they only increase by a measly
$500 in 2012--as a result, most employees aren't allowed to contribute
enough to afford to retire. On the other hand, baby boomer Australians
can sell a home or another asset and add the proceeds to their
accounts; workers over age 60 can make after-tax superannuation
contributions of $150,000 a year, or $450,000 over 3 years.\17\
---------------------------------------------------------------------------
\17\ Baby Boomer Australians is from ``A Super Guide,'' Ibid., page
16.
---------------------------------------------------------------------------
_______________________________________________________________________
All employees must be offered the Roth option--because
otherwise they're paying income taxes when they can least
afford them, at retirement.
3. Get rid of ``non-discrimination testing.'' If highly paid people
have waited too long to start saving, they should have the opportunity
to save. (What's more, testing would no longer be necessary because
employer contributions would no longer be voluntary.)
4. Remove the tax deductibility feature from the plans--or at least
give every employee the option of investing in a Roth, which forces you
to ``get taxes over with.'' Otherwise, people don't have an accurate
picture of how much they've accumulated. Rather than ``incentivizing''
participants to participate, the ability to deduct contributions from
taxes results in deferring tax obligations to retirement, when people
can least afford to pay them. While a 30-year old who contributes
$5,200 a year to a Roth 401(k) could accumulate $870,000 by age 67, all
tax free, in a ``deductible'' account that person would owe more than
$261,000 to Uncle Sam at retirement, assuming a 25% tax rate and a 5%
state income tax. What's more, tax deductions are an overrated tactic
to ``incentivize'' Americans to save, as opposed to doing so to avoid
pension poverty; fewer than 5% of Americans contribute to a deductible
IRA. Finally, switching to a ``get taxes over with'' approach would
also put a dent in our federal deficit.
5. There should be no loans, hardship withdrawals, or ability to ``cash
out'' of account balances when changing jobs. (The temptation to do so
will also be lowered because the money will likely stay at the same
mutual fund when changing jobs.) Currently nearly half of job changers
surveyed by Hewitt Associates cashed out of at least part of their
account balances rather than leaving money in the plan or ``rolling it
over'' to an IRA or new plan. Not only is it self-destructive to spend
your nest egg, but half of the proceeds could be owed to Uncle Sam;
someone in the 25% tax bracket living in a state with a 5% income tax
who cashes out a $20,000 account balance is left with $12,000.
Part V: Ensure That Workers Don't Retire too Early, Help Protect Their
Nest Eggs
1. Fund managers must communicate to workers that unless they have
other sources of retirement savings they most likely cannot afford to
retire unless they have accumulated AT LEAST 10 times their salary--13
times for those with six-figure salaries--because they should only
spend 4% of their assets each year in retirement.
2. Workers who have accumulated enough that they can afford to retire--
at most 10% of the private sector population--should be encouraged to
invest in a managed payout account or an annuity. However, while
annuities offered at the workplace are likely to be fixed-rate
commission-free products, buyers should be warned that once they leave
the workplace they should avoid retirement seminars in which they may
be convinced to buy a new (most likely variable) annuity, an example of
``churning,'' in which a broker attempts to sell annuity holders a new
product in order to generate commissions.
_______________________________________________________________________
All employees must be advised that they cannot afford to retire
until they've accumulated AT LEAST ``10 times final pay'' in
their accounts and rollover accounts.
Here are just a few of the examples of questionable practices by
annuity sellers. A federal judge ruled in 2009 that Allianz Life
Insurance used deceptive practices in selling an equity-indexed annuity
to about 340,000 people nationwide. In 2008 Allianz Life paid $10
million to settle charges it had sold unsuitable annuities in
California.\18\ In Texas AARP criticized then-Governor Rick Perry for
vetoing a bill that would establish new safeguards for buying
annuities.\19\
---------------------------------------------------------------------------
\18\ Allianz narrative re federal jury and California example is
from ``A split decision in Allianz Life annuity lawsuit,'' by Chris
Serres, Star Tribune, October 14, 2009.
\19\ Texas annuity narrative is from ``AARP blasts Texas Gov. Rick
Perry's veto,'' by Terrence Stutz, Dallas Morning News, June 24, 2009.
In 2008, Florida Governor Charlie Crist signed a law increasing
penalties on annuity salespeople who pressure clients to buy annuities.
In 2006, then-New York Attorney General Eliot Spitzer announced an
agreement in which the Hartford Financial Services Group would pay $20
million in fines for improper annuity sales. In 2005, New Jersey
enacted a law that limits how long annuity sellers can impose surrender
charges in the event the annuity owner wants to sell the product.\20\
Finally, the fact that the Dodd-Frank financial reform legislation did
not include language that permitted the SEC to have oversight over
annuities was regarded as one of the ``battles that we lost'' by
Barbara Roper, director of investor protection for the Consumer
Federation of America.\21\
---------------------------------------------------------------------------
\20\ Narrative on reforms in Florida, New York and New Jersey is
from, ``America, Welcome to the Poorhouse'' (FT Press 2009), pages 29,
30.
\21\ Barbara Roper quote re financial services reform is from ``For
consumers, federal protection with some teeth,'' by Tomoeh Tse,
Washington Post, June 26, 2010.
3. The Department of Labor should include tips on its website that
guide workers on issues they should consider while contemplating
retirement. These might include: how much do people need to save if
they have a working spouse versus a non-working spouse or what is the
impact of divorce, disability, etc. The website also should include
---------------------------------------------------------------------------
information about annuities.
_______________________________________________________________________
Employees must be warned of the risks of buying an annuity--
that they will likely be sold a new one in order to generate
commissions for a broker.
About Retirement Solutions
Retirement Solutions LLC is an advocacy and educational organization
dedicated to the retirement adequacy of 401(k) participants. Retirement
Solutions president and founder Jane White is a regular blogger on
retirement and other personal finance issue for the Huffington Post and
has appeared on Fox Business News, CNN and CNBC, and is the author of
``America, Welcome to the Poorhouse,'' (FT Press, 2009), which has been
favorably reviewed by the New York Times, Newsday and other
publications.
With the input of pension actuary James E. Turpin of the Turpin
Consulting Group, White developed formulas for contribution rates
required based on the current typical employer match of 3%. At the
invitation of the U.S. Department of Labor's (DOL) ERISA Advisory
Council White offered recommended contribution rates based on
participant starting ages to the in the fall of 2007. As a result, the
Working Group recommended to the DOL that employers communicate to
employees how much 401(k) participants need to contribute to achieve a
multiple of their salary nearing retirement.
A Congressionally appointed delegate to the 2002 National Summit on
Retirement Savings, White first observed the 401(k) crisis in 1993 as
the associate editor of Standard and Poor's ``Your Financial Future,''
distributed to half a million 401(k) participants at Fortune 500 firms.
Previously she was a syndicated personal finance columnist for Gannett
News Service and her articles have appeared in The New York Times,
Barron's, Working Woman, Newsday, Employee Benefit News, Contingencies
and The ASPPA Journal.
Acknowledgements: I could not have completed this research without the
vital input of James Turpin and Ken Steiner, EA, FSA, MAAA, retired
resource actuary for Watson Wyatt Worldwide (now Towers Watson).
Steiner has testified before the House Committee on Education and the
Workforce regarding pension security and defined benefit plans and has
served on several committees at the American Academy of Actuaries. He
is the creator of a vital website that enables users to figure out how
much money they can spend from their nest egg: http://
howmuchcaniaffordtospendinretirement.webs.com/.
______
Small Business Council of America
4800 Hampden Lane
Bethesda, MD 20814
(202) 951-9325
The Small Business Council of America (SBCA) appreciates the
opportunity to submit this statement. The SBCA is a national nonprofit
organization which has represented the interests of privately-held and
family-owned businesses on federal tax, health care and employee
benefit matters since 1979. The SBCA, through its members, represents
well over 100,000 small business enterprises in retail, manufacturing
and service industries, virtually all of which provide health insurance
and retirement plans. The positions and priorities expressed in this
statement were developed through a survey of SBCA members conducted the
week prior to this submission.
The SBCA applauds this Committee's commitment to pursuing
bipartisan solutions to help American workers more easily and
effectively save for retirement.
First and foremost, the SBCA believes that, while there is
certainly room for improvement, the present qualified retirement plan
system has been very successful in providing retirement security.
Unfortunately, most of the data used to measure the success of
retirement plans makes it hard to get a clear picture of how the small
business retirement plan system is performing for a few reasons. First,
traditional analysis fails to distinguish between new and established
small businesses. Approximately half of all new small businesses fail
in their first 5 years--before most small business owners have even
considered sponsoring a qualified retirement plan or other employee
benefits.\1\ The inclusion of these infant-stage, and typically
smaller, businesses depresses the data. Moreover, most analyses ignore
the fact that not all employees meet the retirement plan eligibility
requirements. Part-time employees, employees under age 21 and transient
employees are generally ineligible to participate in a retirement plan.
The statistics cited for the low retirement plan coverage, however,
most often include the entire workforce and do not differentiate
between the entire workforce and that percentage of the workforce that
is actually eligible to participate in a retirement plan based upon
current law. When these ineligible employees are excluded, the coverage
numbers improve significantly.
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\1\ See U.S. Small Business Administration, Office of Advocacy,
Frequently Asked Questions About Small Business, August 2018, available
at https://www.sba.gov/sites/default/files/advocacy/Frequently-Asked-
Questions-Small-Business-2018.pdf.
A 2015 study,\2\ which used actual data from employees' W-2 forms,
found that 80% of all employees who work in companies with 10 or more
employees are offered a retirement plan and that of these employees,
65% made 401(k) contributions.\3\ The predecessor study to the 2015
study which was conducted in 2011,\4\ revealed that, when asked, only
49% of employees who worked for companies with 10 or more employees
thought they were participating in a retirement plan, whereas the W-2
data indicated that 62% of employees were actually participating in a
plan. This means that 13% of all employees making 401(k) contributions
through payroll deduction did not even realize that they were making
401(k) contributions.
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\2\ Dushi, Iams and Lichtenstein, Social Security Bulletin, Vol. 75
No. 2, 2015, Retirement Plan Coverage by Firm Size: An Update.
\3\ The size of the company makes a significant difference. W-2
data, which is accurate only to 401(k) plans and 401(k) contributions,
reflects that 51% of small businesses with more than 10 employees but
less than 25 offer a retirement plan. The same data reflects that 63%
of small businesses which employ 25 employees but less than 50 offer a
retirement plan. 73% of small businesses which employ 50 employees but
less than 100 offer a retirement plan. 87% of businesses with more than
100 employees offer a retirement plan. There is no further breakdown
given for over 100 employees so we do not know how many small to mid-
size businesses--often defined as up to 500 employees--offer plans
compared to the large businesses.
\4\ Dushi, Iams and Lichtenstein, Social Security Bulletin, Vol. 71
No. 2, 2011, Assessment of Retirement Plan Coverage by Firm Size, Using
W-2 Tax Records.
The foregoing numbers reflect that while there is room for
improvement the small business retirement plan system is far more
successful in delivering benefits for small business employees than the
data most often cited reflects. This success has been largely dependent
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on federal tax laws.
A qualified retirement plan, whether small or large, creates
significant rights for the plan participants and generates significant
costs for the sponsoring entity. Funds in a retirement plan are not tax
sheltered, rather they are tax deferred until the participants receive
them, at which time they are brought into the participant's gross
income. Retirement plan assets are not subject to favorable capital
gains treatment, nor do they receive a step up in basis at the owner's
death. Most small business plans are adopted to provide a tax-
advantaged way for the owners to save for their and the other key
employees' retirement. The rules of retirement plans force the owners
to make significant contributions for the non-highly compensated
employees and it is important to note that this is not the result of
the top-heavy rules. Thus, in the small business qualified retirement
plan world, it is not unusual for the company (in addition to
contributions made by the employee) to make contributions for its
employees in the 3% to 8.5% of compensation range.
Tax Incentives in the Retirement Plan System Are the Primary Motivation
for Small Business Owners to Sponsor Retirement Plans and Must be
Maintained
Despite common misperceptions, considered as a whole, the tax
treatment of retirement plans is not particularly attractive since all
retirement plan funds are eventually subject to ordinary income.
Retirement plan assets do not receive a step up in basis upon the death
of the owner. Further reducing the tax advantage of sponsoring a
retirement plan will incentivize small business owners to freeze or
terminate their plans while, conversely, reducing burdens and
increasing contributions will encourage the maintenance and formation
of small business retirement plans. Because of this, it is important
that all existing tax incentives for retirement plans be preserved and
administrative burdens be reduced. This includes, but is not limited
to:
- Maintaining or increasing existing contribution levels--The
SBCA members strongly supported the 2020 version of the SECURE
Act 2.0 which would have allowed additional catch-up
contributions for older employees. However, the SBCA and its
members believe that the provision contained in the 2021
version of the SECURE Act 2.0 is too restrictive. The SBCA
suggests reducing the additional $10,000 limit to say $5,000 or
$7,500 and increasing the age corridor from ages 60 to 70 or
the Required Beginning Date, rather than just 3 years from ages
62, 63 and 64. These changes would significantly improve the
ability of older employees to ``catch up'' for earlier years
when they could not afford to make significant contributions
for themselves. This would be an important change for small
businesses and their employees. However, the provision as
written would be of little help for the vast majority of
employees of small businesses since it is so narrowly drafted.
- Allowing for pre-tax catch-up contributions--Requiring all
catch-up contributions to be Roth contributions would be a very
negative change for small businesses. First, there are so many
provisions of the SECURE Act 2.0 which, while somewhat helpful,
are not worth the cost of this single provision. Unfortunately,
this provision was not considered in light of how many small
business retirement plans operate. Many small businesses have
deliberately chosen not to include a Roth option because of the
extra in-house administrative work it generates. Thus, this
type of provision will force some of these plans to choose not
to include catch-ups and others to increase the amount of
burdens imposed upon them in order to add the Roth provision.
It is also likely that employees who might have made the catch-
up contributions while pre-tax will decide against it when
forced to make them after tax. The SBCA suggests that this
provision should be changed so that at most only the additional
contributions after age 60 would be subject to the new Roth
provision. As a general comment, the SBCA finds the 2020
version of the SECURE Act 2.0 to be far more preferable to
small business retirement plans than the 2021 version.
The Laws Governing Retirement Plans Can Be Simplified
There is still much room for simplification with the goal of
reducing or eliminating complexities that are unnecessary or that
result in burdens that outweigh the desired policy objectives. This is
often best achieved by providing plan administrators with the
opportunity to take advantage of optional simplification such as the
401(k) safe harbor provisions. This allows companies to weigh the
advantage of reducing complexity with the costs of possible plan
amendments, required contributions, redoing employee communications and
software and educating plan participants, if necessary.
The SBCA suggests that the following proposals would encourage
small and mid-size employers (and assist larger plans as well) to
establish qualified plans by simplifying the rules and reducing
unnecessary administrative burdens:
Eliminate Top-Heavy Rules for Defined Contribution Plans
The SBCA was disappointed to see that repealing the top-
heavy rules for defined contribution plans was not included in
the latest version of SECURE Act 2.0. When first enacted, the
top-heavy rules imposed additional minimum contributions and
accelerated vesting on small and mid-size retirement plans,
which were virtually always top-heavy due to the mathematical
tests used to determine such status. Over the years, the
contribution rules and the discrimination tests have changed so
significantly that the top-heavy rules are now an archaic
appendage similar to that of the appendix in the human body--
they do nothing but cause problems. Nevertheless, those who are
not immersed in the technicalities of retirement plan law
insist that the top-heavy rules in the defined contribution
world still operate so as to benefit non-highly compensated
employees. This outdated view has resulted in inertia on the
Hill when it comes to repealing these unnecessary and
complicated rules.
Simplify the 401(k) Discrimination Testing Referred to as
the ``ADP'' Tests
The anti-discrimination rules for 401(k) plans (the ADP
tests) are more complicated than needed. For instance, the
tests set forth in the proposal referred to as the ``ERSA''
(Employer Retirement Savings Accounts--see below) would satisfy
the policy goals of the ADP while reducing some of the
complexity currently inherent in these tests. This could be an
optional ADP test so that companies who are able to deal with
the current ADP tests are not required to change retirement
plan documents, software and procedures.
The ERSA proposal called for the contribution percentage for
eligible highly compensated employees (HCEs) for the plan year
not to exceed 200% of such percentage for the non-highly
compensated employees (NHCEs) if the contribution percentage of
the NHCEs does not exceed 6%. If the contribution percentage of
the NHCEs exceeds 6%, then no testing would be required. The
proposal also has two safe harbors to avoid the simplified
nondiscrimination test which are similar to the current 401(k)
safe harbors.
Eliminate Yearly Safe Harbor Notices for 401(k) Safe Harbor
Match
This notice required by statute is costly and burdensome.
The match safe harbor notice does serve a policy purpose in
that it can affect the amount of 401(k) deferrals an employee
may choose to make in order to receive the match. However,
rather than yearly notices, the notice could stay in effect
unless and until revoked. The notice could be part of the
Summary Plan Description.
Reduce Extensive, Burdensome and Unnecessary Reporting to
Participants and Employers
The SBCA would recommend that the retirement plan system be
rid of unnecessary notices that are not conveying timely or
worthwhile information as follows:
- Amend ERISA to eliminate summary annual reports.
- Eliminate the requirement for quarterly investment
statements (and make an annual notice) if participants have
Internet access to their investment account information.
- Reduce the number of required notices by consolidating and
simplifying existing notices. The SBCA welcomes the provision
to simplify and reduce redundant and unnecessary disclosures in
the SECURE Act 2.0.
Change the Law so that All or a Portion of a Retirement
Plan Distribution Is Subject to Capital Gains Tax
In order to induce employers to provide qualified retirement
plans that are inherently costly to administer and
administratively burdensome, the final tax consequences should
be as advantageous as possible. Today, some owners either balk
at putting in a plan because they believe that it is easier and
just as cost-effective to take an after-tax bonus and invest it
in the market where it will ultimately receive favorable
capital gains treatment or they are told by advisors that it is
better to invest in insurance or other assets. Retirement plans
are not tax shelters; rather, they are trusts that simply defer
taxation for a time. If a portion of the distribution from a
retirement plan was subject to capital gains rather than income
tax, it is likely that contributions going into small business
retirement plans would significantly increase.
Additional Changes Will Further Help Promote Retirement Security
Modify the Required Minimum Distribution Rules (RMD)
The SBCA supports the concept of extending the Required Beginning
Date but suggests that the transition to age 75 in the current version
of SECURE 2.0 is phased in too slowly. For individuals, particularly
small business owners who are still working, being forced to take out
money from the retirement plan or IRA before it is needed, can often
reduce the amount of retirement income available in later years when it
is essential for these senior citizens. Presently, the law requires
small business owners (and only small business owners) to start
receiving RMDs while they are working. The demographics of the group
comprised of small business owners are such that money saved in a plan
or an IRA will be crucial to their retirement security. The SBCA
suggests that this provision be changed so that the age 75 is made
effective within a few years. The SBCA also suggests that the 2020
version of the SECURE Act 2.0, which exempted retirement plan
accumulations of $150,000 or less from the required minimum
distribution rules, be brought into the final 2021 version of the
SECURE Act 2.0. This again would be a welcome change by reducing
administrative burdens while at the same time allowing these
individuals with these relatively smaller accumulations to remove the
money from the retirement plan or IRA when most needed.
Auto Enrollment and Auto Escalation Provisions
While forcing new plans to adopt auto enrollment and auto
escalation is definitely more burdensome to small business retirement
plans, the data clearly reflects that these provisions increase
participation in retirement plans. Thus, the additional burdens that
will be imposed are outweighed by the increased participation that will
result. The SBCA applauds the SECURE Act 2.0 for including provisions
for helping small businesses with the inevitable mistakes that occur
with these provisions.
Maintaining and Strengthening ERISA Preemption
ERISA preemption is essential to the proper working of the entire
qualified retirement plan system. This is particularly true where a
small business is operating in different jurisdictions which have
imposed new rules regarding retirement plan coverage.
Expanding Cafeteria Plans Will Help Individuals Obtain the Benefits
Necessary to Be Cared for During Their Retirement and Make
Their Savings Last
The SBCA supports the recommendation made to this Committee by The
ERISA Industry Committee (ERIC) that cafeteria plans be expanded to
allow for additional pre-tax benefits--such as long-term care insurance
and disability insurance. The SBCA would add a critical missing element
to this which is to allow small business owners of pass-through
entities to participate in the cafeteria plans that they sponsor.
While employees of large businesses, mid-size employers, non-
profits, schools, universities and the federal, state, and local
governments can take advantage of the valuable benefits provided by
cafeteria plans, only small business owners are not allowed to
participate in a cafeteria plan. Under current law, cafeteria plans can
be utilized by common-law employees, but not by sole proprietors,
partners in a partnership, S-corporation shareholders holding an
interest of 2% or greater (and by attribution, their family members)
and members in a limited liability company which has elected to be
taxed as an S Corporation or as a partnership.
As a result, because most small business owners are not able to
participate in cafeteria plans, employees of small businesses are often
not offered this valuable employee benefit at all or are only offered
the health premium option. This is true discrimination against small
business owners, which additionally harms the employees employed by
that business. This rule is bizarre in that small business owners are,
of course, allowed to participate in qualified retirement plans. It
should be noted that there are many more employees of small businesses
in qualified retirement plans than in cafeteria plans, indicating that
by disallowing most small business owners from participating in a
cafeteria plan, their rank-and-file employees are at a significant
disadvantage.
Because IRC Section 125 does not specifically include self-employed
individuals in its definition of ``employee,'' the Internal Revenue
Service decided that Congress had intended to prohibit small business
owners as ``employees'' for purposes of IRC Section 125. We doubt that
Congress intended any such result since at the time Section 125 was
enacted, small business owners, regardless of whether they were working
in a pass-through entity or not, were deemed employees for purposes of
qualified retirement plans (IRC Section 401(c)). There is no good
reason to think they should be treated otherwise for a similar type of
employee benefit--the cafeteria plan and their underlying plans (IRC
Sections 79, 105, 106, 125, 129, and 132), particularly given that
everybody else can be covered by a cafeteria plan. As a result of IRS'
interpretation of Section 125, as mentioned above sole proprietors,
partners, shareholders owning 2% or more in S-corporations, and members
of most limited liability companies are all unable to participate in
cafeteria plans. This creates a significant disincentive for small
business owners to provide cafeteria plans which can offer a variety of
qualified benefits from which their employees can choose those most
needed.
Since IRS has been unwilling to change its interpretation, the SBCA
urges Congress to pass a law which specifically calls for small
business owners of pass-through entities to be deemed ``employees'' for
Section 125 and the relevant underlying Code Sections (79, 105, 106,
129, and 132). We also agree with ERIC that this is an appropriate time
to expand the list of qualified benefits, particularly benefits such as
long term care and supplemental insurance benefits which will become
increasingly important to our more senior citizens to help them live
comfortably in their retirement years.
Other Provisions Which Would be Helpful Include:
- Changing the family attribution rules
- Increasing the time to adopt beneficial discretionary
retirement plan amendments
- Adding a new tax credit for employers encouraging
contributions by small businesses with up to 50 employees
- Expanding the ability of plans to self-correct plan errors
by expanding EPCRS and VFCP
- Allowing self-certification for deemed hardship
distributions
- Increasing the small business plan start-up credit
- Treating student loan payments as elective deferrals for
the purpose of matching contributions.
The SBCA appreciates the Committee's consideration of these
important issues and stands ready to lend its expertise and assistance
to the members of the Committee and their staff members.
______
South Carolina Small Business Chamber of Commerce
1717 Gervais Street
Columbia, SC 29201
803-600-6874
fknapp@scsbc.org
Statement of Frank Knapp Jr., President and CEO, National Coordinator,
``Reform the SBA: BIGGER Mission, Authority and Resources''
On behalf of the of the national, state, and local business
organizations listed at the bottom of this statement, I want to thank
you for your attention to this issue. We support the federal
government's efforts to encourage Americans to save for retirement.
This hearing, ``How Can Congress Help?'' is of particular interest to
our national campaign that addresses the country's 40-year low in new
business startups, a small business and economic crisis that has
received bipartisan recognition.
Our recommendations are for reforms at the federal level that will
serve to break down the barriers to entrepreneurs starting businesses.
We believe that one of those barriers to entrepreneurs making the
decision to leave their existing jobs is the issue of retirement. If
the entrepreneur's current job offers a retirement program, how will
they affordably replace such a program for themselves and offer the
same to future employees. The latter is especially problematic as
offering employee benefits can be critical to competing with bigger
businesses for talent.
While legislation such at the Encouraging Americans to Save Act seek to
encourage retirement savings by providing government matching
contributions for low- and middle-income workers, it does not address
the most important reason for Americans not saving for retirement--a
convenient, portable, and automatic retirement program through their
employers.
AARP has long promoted their Workplace Retirement Plans at the state
level. Their research clearly shows that employees are far more likely
to participate in a retirement plan if it is offered through payroll
deduction. AARP's state efforts seek to address the cost and
administrative efforts of small businesses implementing a 401(k) type
plan or IRA, barriers that cause most small businesses to not offer
retirement programs even if doing so would enable them to better
attract employees.
Unfortunately, even the concerted professional efforts of AARP to gain
the cooperation of state legislatures have met with very limited
success over the years. Millions of small businesses and their
employees can no longer wait for their individual states to address
this issue.
The federal government should create a universal, portable retirement
program that every small business can opt into. A defined contribution
plan administered at the national level would encourage employees to
save via payroll deduction. Employers would also be eligible to
participate in the plan and have the option of contributing to their
employees' plans.
In 1986 Congress passed the Federal Employees' Retirement System Act
which has provided Federal employees and members of the uniformed
services an easy payroll deduction method of saving for retirement. The
Federal Retirement Thrift Investment Board has shown how to effectively
manage a national retirement savings program.
Saving for retirement should be everybody's responsibility. We can make
it easier with a universal, payroll deduction retirement program. In
this way we also promote entrepreneurship and a more level playing
field for small businesses to compete with larger businesses for
employees.
Thank you for your consideration of our recommendation. Please let me
know if there are any questions. We would be happy to further discuss
this issue.
American Independent Business Alliance
American Sustainable Business Council
Gullah Geechee Chamber of Commerce
Latin American Chamber of Commerce--Charlotte (LACCC)
Latino Communications Community Development Corporation
Local First Arizona
North Carolina Business Council
Sumter Black Chamber of Commerce
South Carolina Hispanic Chamber of Commerce
South Carolina Small Business Chamber of Commerce
Triad Local First
U.S. Green Chamber of Commerce
______
SPARK Institute, Inc.
9 Phelps Lane
Simsbury, CT 06070
July 28, 2021
The Honorable Ron Wyden The Honorable Mike Crapo
Chairman Ranking Member
U.S. Senate U.S. Senate
Committee on Finance Committee on Finance
Washington, DC 20510 Washington, DC 20510
Re: Senate Committee on Finance Hearing ``Building on Bipartisan
Retirement Legislation: How Can Congress Help?''
Dear Chairman Wyden and Ranking Member Crapo,
On behalf of the SPARK Institute, I would like thank you for holding
today's hearing on the critical issues involved in improving retirement
security for millions of Americans. Our members deeply value your
leadership and look forward to working with you and the Committee to
advance solutions that improve, simplify, and modernize retirement
savings.
The SPARK Institute believes that retirement security is the shared
responsibly of individuals, employers, government, and the providers,
consultants, and advisors who serve them. We represent the interests of
a broad-based cross section of retirement plan service providers and
investment managers, including banks, mutual fund companies, insurance
companies, third-party administrators, trade clearing firms and
benefits consultants. Collectively, our members serve approximately 100
million employer-sponsored plan participants.
Today's hearing underscores that the work to enhance retirement
security is not finished. As Congress reflects on recent enactment of
the Setting Every Community Up for Retirement Enhancement (SECURE) Act,
we are excited to share with you a number of suggestions for additional
improvements and enhancements. Attached you will find the SPARK
Institute's Legislative and Regulatory Agenda which was the product of
extensive input from our members. We are pleased that a number of these
proposals have been included in various introduced bills.
In the Senate, SPARK has endorsed the Retirement Security and Savings
Act of 2021 introduced earlier this year by Senator Ben Cardin and
Senator Rob Portman. SPARK is especially supportive of a number of
provisions in Retirement Security and Savings Act that have been
identified by our members as key improvements such as expansion of the
small business start-up credit, increasing the required beginning date
to 75 and additional catch-up contributions for certain older
employees. SPARK noted our support for a provision to integrate student
loan repayment solutions into workplace savings plans. SPARK also
commended the provisions in Retirement Security and Savings Act that
will streamline and simplify retirement plan operations, including
expanding self-correction, limiting notices for unenrolled
participants, and permitting 403(b) plans to invest in collective
investment trusts (CITs).
SPARK is committed to working with Congress to continue advance the
many improvements contained in the Retirement Security and Savings Act
of 2021 and to incorporate additional improvements and simplifications
as the Finance Committee develops its comprehensive retirement savings
legislation. For example, SPARK has long championed the expanded use of
default electronic delivery for retirement plan documents because it
simplifies plan administration, reduces costs, and provides retirement
savers access to online tools and real-time information on their
retirement benefits. SPARK believes the 2020 Department of Labor E-
Delivery Rule struck an appropriate balance between expanding default
e-delivery and protecting the rights of retirement savers who prefer
paper documents. We strongly encourage Congress to advance legislation
that would harmonize e-delivery rules across the federal agencies,
including at the Treasury Department and IRS.
We greatly appreciate your interest in and commitment to these
important retirement security issues. As retirement savings reforms and
enhancements advance through the legislative process, we look forward
to working with the Committee to ensure the retirement reforms are as
effective as possible to help all Americans achieve a financially
secure retirement.
Sincerely,
Tim Rouse
Executive Director
______
Legislative and Regulatory Agenda 2021
The SPARK Institute represents the interests of a broad-based cross
section of retirement plan service providers and investment managers,
including banks, mutual fund companies, and insurance companies.
Collectively, our members serve approximately 95 million participants
in 401(k) and other defined contribution plans. We focus on promoting
the important benefits of employer-sponsored retirement plans, which
are critical to the financial security of Americans saving for
retirement.
The SPARK Institute believes that retirement security is a shared
responsibility of individuals, employers, government, and the
providers, consultants, and advisors that serve them. Building on the
successful enactment of the Setting Every Community Up for Retirement
Enhancement (SECURE) Act in 2019, the SPARK Institute is committed to
working with Congress and federal regulators to advance solutions that
implement the five pillars of the SPARK Institute's Legislative and
Regulatory Agenda detailed below.
w PRESERVE AND EXPAND INCENTIVES FOR RETIREMENT SAVINGS
The SPARK Institute seeks to preserve the current tax incentives for
retirement savings and opposes financial transaction taxes that would
harm retirement savers. The SPARK Institute supports efforts to
increase coverage through expanded tax incentives so that more workers
have access to, and utilize, employer-sponsored savings vehicles, like
401(k), 403(b), and 457(b) plans.
w ELECTRONIC DELIVERY & ADMINISTRATION:
MODERNIZING RETIREMENT PLAN COMMUNICATIONS
The electronic delivery of retirement plan documents empowers employees
by providing them access to real-time information on their retirement
benefits and online tools to assist them with retirement planning. The
2020 Department of Labor E-
Delivery Rule struck an appropriate balance between expanding default
e-delivery and consumer protections. Additionally, the ongoing pandemic
has highlighted the value of electronic delivery and the need for other
modernizations to facilitate the greater use of technology for
notarizations and other plan operations.
The SPARK Institute supports the expansion of default e-delivery. We
will continue to work for the harmonization of e-delivery rules across
the federal agencies, including at the Treasury Department/IRS. The
SPARK Institute will advance a nationwide remote notarization standard.
w FINANCIAL WELLNESS & LITERACY: MEETING THE HOLISTIC FINANCIAL NEEDS
OF RETIREMENT SAVERS
Retirement savings are part of the holistic financial needs and
challenges that plan participants face. With sensible changes to
federal rules, employers and service providers can do more to help
improve the financial wellness of all employees and implement policies
that support an employee's participation in retirement savings plans
while meeting their existing obligations, such as student loans.
The SPARK Institute supports legislative and regulatory solutions to
integrate student loan repayment solutions into workplace savings
plans. The SPARK Institute encourages efforts to expand access to
financial wellness programs inside and outside of retirement savings
plans and the growth of financial literacy programs. The SPARK
Institute will advance emergency savings solutions to address the
economic needs and concerns of employees and supports the expansion of
workplace savings programs to include other non-retirement savings
priorities.
w SIMPLIFICATION: ADVANCING REFORMS TO MAKE RETIREMENT SAVING EASIER
AND ENHANCE OUTCOMES
Simplifying and modernizing the rules and regulations that govern
retirement plans will make it easier and less expensive for employers
to offer retirement plans so all Americans can enjoy a financially
secure retirement.
The SPARK Institute supports efforts to streamline retirement plan
operations, including plan design simplification, notice consolidation,
testing relief, and streamlined reporting requirements. The SPARK
Institute also supports changes that would permit 403(b) plans to
invest in collective investment trusts (CITs). The SPARK Institute will
work to advance missing participant solutions and expand access to
self-correction for plan errors.
w LIFETIME INCOME: ENCOURAGING INNOVATIVE WAYS TO GENERATE INCOME IN
RETIREMENT
To ensure that retirees have the lifetime income they need to enjoy a
comfortable retirement, more should be done to ensure that retirement
savers have access to lifetime income options in their retirement
plans. This means offering lifetime income investments during the
accumulation phase and offering lifetime distribution options at
retirement. We believe not in supporting one product, but rather in
supporting a robust market where plan fiduciaries can choose what best
meets the needs of participants. We need rules that support, not
impede, innovative solutions.
The SPARK Institute supports legislative and regulatory changes that
would facilitate the inclusion of annuities and other lifetime
guarantees during the accumulation phase and through retirement.
______
State Street Global Advisors
The Honorable Benjamin Cardin The Honorable Rob Portman
509 Hart Senate Office Building 448 Russell Senate Office Building
Washington, DC 20510 Washington, DC 20510
May 18, 2021
Dear Senators Cardin and Portman:
I am writing to thank you for your leadership on retirement policy and
in particular for your bipartisan efforts to ensure that Americans are
able to retire with dignity. State Street Global Advisors (State
Street) is one of the largest asset managers working with U.S. Defined
Contribution (DC) plans today. With nearly 40 years of experience in
the DC market, we manage more than $650 billion in DC assets around the
world, of which over $496 billion belong to participants in the U.S.\1\
Given our industry depth, we have a unique appreciation for the
opportunity the Setting Every Community Up for Retirement Enhancement
(SECURE) Act of 2019 holds for employers and participants and the
foundation it affords subsequent measures, namely the newly introduced
Retirement Security and Savings Act of 2021 (RSSA). We applaud this
policy progress as being requisite for Americans' retirement security.
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\1\ As of March 31, 2021.
The last year has seen tremendous upheaval in our country and its
impact on Americans' employment and financial situation has been
significant. Weathering this crisis has been of paramount importance;
however, we must also consider the long-term impact this crisis has had
on retirement savings. As such, your legislation would significantly
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improve the financial standing of many workers.
We believe there are four main areas that need to be addressed in order
to ensure that working Americans can retire when and how they would
like: (1) having access to an employer-sponsored retirement plan; (2)
saving sufficiently in that plan; (3) having mechanisms in place that
ensure that retirement savings will last throughout retirement; and (4)
ensuring financial wellness through vehicles that address other
critical financial needs. The SECURE Act contained many provisions
addressing all four of these areas and we are already seeing progress
being made to implement those provisions. The RSSA takes more critical
steps to address these issues and we strongly support those efforts.
While backing the bill as a whole, we have identified six priority
provisions that represent meaningful avenues for retirement industry
progress:
Enhanced catch-up contributions for workers over age 60;
The changes to the qualified longevity annuity (QLAC) rules that
will enhance lifetime income opportunities;
An increase in the age at which required minimum distributions
must commence from 72 to 75;
Permitting employers to match student loan repayments;
Allowing 403(b) plans to invest in collective investment trusts
which, in many cases, are a more cost-effective investment vehicle; and
Allowing 403(b) plan sponsors to participate in multiple
employer plans.
By extending employer options and broadening individual horizons, we
believe that together we can ensure Americans retire with dignity. We
look forward to and are committed to working with you as you move this
legislation forward.
Sincerely,
David Ireland
Global Head of Defined Contribution
State Street Global Advisors
______
XY Planning Network
24 E. Main Street
Bozeman, MT 59715
Statement of Michael Kitces, Co-Founder and Executive Chairman; and
Alan Moore, Co-Founder and CEO
Introduction
On behalf of our 1,500 independent financial advisors, XY Planning
Network thanks Chairman Wyden, Ranking Member Crapo, and members of the
Senate Committee on Finance for holding this important hearing.
XY Planning Network (``XYPN'' or the ``Network'') is a national network
of fee-for-service financial advisors that provides them with
technology, compliance, and business consulting services. XYPN
represents state-registered investment advisers in all 50 states.
Network members serve primarily working-age Generation X and Generation
Y consumers, providing financial advice for which they receive fee-only
compensation for their services, without asset minimums or product
sales. Our professional advisors take a fiduciary oath as a condition
of membership, which includes an agreement not to sell products for
commissions or engage in other, more opaque compensation arrangements
in the financial services industry. The majority of our members hold
the CFP' certification, an intensive program covering all
aspects of financial planning, including a special focus on retirement
planning.
General Statement in Support
For many of the same reasons that you heard from witnesses in the July
28, 2021, hearing on retirement legislation, XYPN is supportive of
bipartisan initiatives such as legislation introduced recently by
Senators Cardin and Portman,\1\ and referred on May 20, 2021 to this
Committee. XYPN is also supportive of other related legislative efforts
to enhance the current U.S. retirement system by encouraging additional
worker participation, increased savings, as well as tax credits that
encourage the creation of new qualified plans by small businesses.
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\1\ See S. 1770, Retirement Security and Savings Act (``RESA'').
One of the primary areas of advice that is sought by the approximately
75,000 clients of XYPN members is retirement planning advice. Inasmuch
as XYPN members typically are compensated by hourly, project, or
retainer fees, and not for the amount of the client assets under
professional management, the Network's client base is generally
comprised of lower-to-moderate income workers, couples, and family
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households, not high-net worth clients.
As such, XYPN in particular supports expanding coverage to the part-
and full-time workers without access to retirement plans, whether it is
the state-sponsored automatic IRA programs that fill an important gap
in this effort, and similar legislative initiatives at the federal
level. Moreover, since numerous studies \2\ confirm that competent and
ethical financial planning advice can boost savings and expected
returns by investors in the securities markets, we strongly urge this
Committee to add a tax credit (as opposed to a tax deduction) which
would more likely be used by the lower- and moderate-income workers who
most need professional assistance to ``stay the course'' in meeting
their long-term retirement goals.
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\2\ See, e.g., David Van Knapp, ``What Is the Value of An
Advisor?'', Seeking Alpha, February 13, 2017, reviewing research
published by Vanguard estimating that investors gain about 3 percent
per year in value for their investments by working with an advisor
compared to self-
directed investing. Another research paper, ``Alpha, Beta, and Now . .
. Gamma,'' by David Blanchett and Paul Kaplan of Morningstar evaluated
the financial outcomes of retirees that indicated good financial
planning decisions increase retirement income by 29 percent, or the
equivalent of an additional 1.82 percent per year of higher returns.
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Statement in Opposition to Sec. 112 of RESA
While sec. 112 of RESA ostensibly supports increased savings and
investment returns by allowing workers in a private sector, defined
contribution plan to be able to receive individualized retirement
planning advice (on both their employer retirement plan, and
investments held in outside accounts) as an employer-paid fringe
benefit, XYPN believes this benefit is highly discriminatory by: (1)
only being available to those who work for companies that choose to
offer the benefit (rather than empowering workers to make their own
decision to seek financial advice); (2) being unavailable to those who
are unemployed, part-time employed, or partially retired, and who may
still need access to retirement advice; and (3) limiting the ability of
employees to only choose financial advisors associated with their
employee benefits provider or other specific firms their employers
select, rather than allowing employees to choose their own advisor.
In essence, the issue is that by attaching a tax deduction for
retirement advice solely to the benefits programs offered by employers,
then employees themselves would be unable to work with independent
financial advisors who are not connected to the employer's payroll/
benefits systems administering workers' fringe benefits. Nor would
there be an administratively feasible way for employers sponsoring a
plan--particularly in the large ``mega-plans'' with thousands of
participants and beneficiaries--to have the flexibility to allow them
to connect with any advisor of their preference. Instead, most plan
sponsors would be compelled to rely on their recordkeepers (``RKs'') to
furnish this advisory service, given that the employer would need to
negotiate the engagement en masse for all employees when structured as
an employee benefit and route payments through their existing benefits
systems to ensure proper tax reporting. In fact, many RKs already offer
their own in-house advice solutions to plan sponsors using their
recordkeeping services, leading to both a limitation on advice choice
for workers, and conflicted advice to those workers as the RK is a
party in interest (thereby necessitating an additional safe harbor
under ERISA).
In other words, while sec. 112 can be read in one way as suggesting a
401(k) plan sponsor can retain ``any'' registered investment adviser
offering retirement planning advice (which is technically correct), in
practice not any advisory firm will have access to provide that advice
and be compensated for its services due to the aforementioned system
constraints. Recordkeepers with dominant market-share would not only
serve as de facto gatekeepers controlling access to advice-givers, but
also have a direct and conflicted interest to only or primarily offer
their own advisors in lieu of any other the worker might have
independently selected.
This structure is also concerning because ERISA imposes exacting duties
on the fiduciaries of retirement plans by requiring the principal
fiduciary (namely the plan sponsor) to prudently select and monitor its
service providers, and to discharge this duty ``solely in the interest
of the participants and beneficiaries'' of the plan.\3\ In practice,
tying financial advisors at the hip to the recordkeeper, by providing a
tax incentive only to such arrangements that are structured as an
employee benefit, will make it that much more difficult for the plan
sponsor to make a prudent selection, and for the individual advisor to
provide objective advice in assisting workers in meeting their
retirement goals.
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\3\ 29 U.S.C. Sec. 1104(a)(1)(A).
As such, XYPN recommends that this advice-gap issue can be resolved by
eliminating the fringe benefit approach to expanding retirement advice,
which both limits consumer choice, favors more conflicted advice
channels, and provides potentially outsized deductions to the most
highly-compensated employees (where fees for retirement advice services
can reach $100,000/year \4\ and would become fully deductible under the
current proposal). Instead, the Committee should consider more
inclusive approaches to broaden access to professional, unbiased
financial planning advice, which might include either: (a) reinstating
the IRC Section 212 expense deduction for investment advice as an
itemized deduction for individual consumers who select and pay for
financial advice (where both workers covered by an employer retirement
plan, and anyone else seeking retirement advice, can obtain the
deduction with the advisor of their choosing on an equal footing); or
(b) expanding the Saver's Tax Credit--intended for use by low-and-
moderate-income taxpayers--by adding an Advice Tax Credit for the same
demographic (which again would not necessitate obtaining an advice-
provider through an employer's recordkeeper).
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\4\ See, e.g., Bill Dillhoefer, ``Equity Compensation Planning as a
Niche: Market Opportunity and Differentiated Value,'' referencing the
types and range of compensation paid to advice-
providers offering retirement planning services in the employer
channel, available at https://www.kitces.com/blog/equity-compensation-
planning-executives-stockopter-option-grants-share-grants-valuation-
analysis-modeling/.
To ensure that the advice is provided by a competent and unbiased
financial intermediary, and minimizes the risk of conflicted advice,
the criteria could require advice-givers to hold a nationally
recognized professional certification like the CERTIFIED FINANCIAL
PLANNER (``CFP'') designation, and to sign a fiduciary oath to ensure
loyalty of the advisor to the client's best interests.
Conclusion
In summary, the XY Planning Network supports the bipartisan efforts of
this Committee to enhance the efforts of workers nationwide to work
toward financial independence in retirement. One way to help retirement
savers reach this goal is to amend and broaden the tax incentives
available to all workers by making competent and unbiased investment
advice more accessible to all workers.
Thank you again for this opportunity to share our perspective on ways
to ``level the playing field'' for financial advice in the U.S.
workplace. If you have any questions, please do not hesitate to contact
me at michael@xyplanningnetwork.com.
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