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63–011 2011

DEFINED BENEFIT PENSION PLAN FUNDING LEVELS 

AND INVESTMENT ADVICE RULES 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

OCTOBER 1, 2009

Serial No. 111–31 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

CHARLES B. RANGEL, NEW YORK, Chairman 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

CHRIS VAN HOLLEN, Maryland 

KENDRICK B. MEEK, Florida 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

DANNY K. DAVIS, Illinois 

BOB ETHERIDGE, North Carolina 

LINDA T. SA ́ NCHEZ, California 

BRIAN HIGGINS, New York 

JOHN A. YARMUTH, Kentucky 

DAVE CAMP, Michigan 

WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

GINNY BROWN–WAITE, Florida 

GEOFF DAVIS, Kentucky 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

DEAN HELLER, Nevada 

PETER J. ROSKAM, Illinois 

JANICE MAYS, Chief Counsel and Staff Director 

JON TRAUB, Minority Staff Director 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 


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C O N T E N T S 

Page 

Advisory of September 24, 2010, announcing the hearing ............................ 2 

WITNESSES 

Craig P. Rosenthal, Principal, Mercer ................................................................... 6 

Norman Stein, Senior Legislative Counsel, Pension Rights Center .................... 10 

Bill Nuti, Chairman and Chief Executive Officer, NCR, on behalf of the 

American Benefits Council .................................................................................. 18 

Judith F. Mazo, Senior Vice President, Director of Research, The Segal Company, on behalf of the National Coordinating Committee for Multiemployer 

Plans and the Multiemployer Pension Plan Consortium .................................. 26 

Damon Silvers, Associate General Counsel, AFL–CIO ........................................ 34 

Mark Warshawsky, Director of Retirement Research, Watson Wyatt Worldwide, Arlington, Virginia ..................................................................................... 38 

LeRoy Gilbertson, Member, National Policy Council, AARP ............................... 62 

Mark A. Davis, Vice President, CAPTRUST Financial Advisors, on behalf 

of the National Association of Independent Retirement Plan Advisors, 

Westlake Village, California ................................................................................ 73 

Robert G. Chambers, Partner, McGuireWoods, on behalf of the American 

Benefits Council, the Profit Sharing/401k Council of America, and the Society for Human Resource Management Charlotte, North Carolina .................. 79 

Christopher Jones, Executive Vice President of Investment Management and 

Chief Investment Officer, Financial Engines, Palo Alto, California ................ 93 

Edmund F. Murphy, III, Managing Director, Putnam Investments, LLC, Boston, Massachusetts ............................................................................................... 105 

Jim McCarthy, Managing Director, Morgan Stanley, on behalf of the Securities Industry and Financial Markets Association ............................................. 108 

SUBMISSIONS FOR THE RECORD 

American Council of Life Insurers, Statement ...................................................... 132 

Defined Benefit Funding Relief Working Group, Letter ...................................... 134 

Department of Labor’s Advisory Council on Employee Welfare and Pension 

Benefit Plans, Statement ..................................................................................... 138 

Nicholas Paleveda, MBA J.D. LL.M, Statement ................................................... 141 

Girl Scouts of the USA, Statement ........................................................................ 145 

Illinois Education Association, Statement ............................................................. 147 

Independent Sector, Statement .............................................................................. 148 

Investment Company Institute, Statement ........................................................... 149 

Maryland State Education Association, Letter ..................................................... 155 

Matthew D. Hutcheson, Statement ........................................................................ 156 

National Association of Insurance and Financial Advisors, Statement .............. 159 

National Council of Farmer Cooperatives, Statement .......................................... 162 

New Jersey Education Association, Letter ............................................................ 163 

Oklahoma Education Association, Letter .............................................................. 163 

ERISA Industry Committee, Statement ................................................................ 164 

Michigan Education Association, Statement ......................................................... 167 

National Education Association, Statement .......................................................... 168 

North Dakota Education Association, Statement ................................................. 170 

Pennsylvania State Education Association, Statement ........................................ 171 

Investment Advice and Defined Benefit Plan Funding, Statement .................... 173 

United Jewish Appeal–Federation of New York, letter ........................................ 175 

United Jewish Communities of Metro West New Jersey, letter .......................... 176 

YRC Worldwide, Inc., Statement ............................................................................ 178 


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HEARING ON DEFINED BENEFIT 

PENSION PLAN FUNDING LEVELS AND 

INVESTMENT ADVICE RULES 

THURSDAY, OCTOBER 1, 2009 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, DC. 

The committee met, pursuant to call, at 10:12 a.m., in Room 

1100, Longworth The Capitol, the Honorable Charles B. Rangel 

[Chairman of the Committee] presiding. 

[The advisory of the hearing follows:] 


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HEARING ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

Chairman Rangel Announces Hearing on 

Defined Benefit Pension Plan Funding Levels and 

Investment Advice Rules 

September 24, 2009 

By (202) 225–1721 

House Ways and Means Committee Chairman Charles B. Rangel today announced that the Committee on Ways and Means will hold a hearing on the funding 

levels of defined benefit pension plans and the rules that apply to investment advice 

that is provided to participants in defined contribution plans. This hearing will 

take place on Thursday, October 1, 2009, in 1100 Longworth House Office 

Building, beginning at 10:00 AM. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. A 

list of invited witnesses will follow. 

BACKGROUND: 

Congress enacted the Pension Protection Act, Public Law 109–280 (‘‘PPA’’), in 

2006. Among the provisions of the Act were significant revisions to the minimum 

funding rules for defined benefit pension plans. The minimum funding rules specify 

the minimum amount that a sponsoring employer must contribute each year to the 

trust that funds the pension plan. Benefits promised under a defined benefit pension plan are funded through contributions and earnings on those contributions. For 

many plans, the changes made by PPA first became effective in 2008, just prior to 

the world-wide economic meltdown. As a result, employers who sponsor defined benefit pension plans may find themselves simultaneously struggling to navigate an 

economy during a severe downturn with decreased cash flow and less access to credit while having to make up for significant investment losses incurred in the pension 

trusts that fund their workers’ pension benefits. While some relief modifications 

were made to the minimum funding rules in the Worker, Retiree, and Employer Recovery Act of 2008, Public Law 110–458, many employers believe that additional relief is necessary. 

For many Americans, a defined contribution retirement plan (such as a 401(k) 

plan) may be the only retirement savings plan that their employer offers. The benefits provided under such a plan are equal to the participant’s account balance, which 

is increased by contributions made on behalf of the employee and earnings on those 

contributions. Under many plans, employees direct the investment of their account 

balance. This prevalence of employee-directed investments in defined contribution 

plans has underscored the need for investment advice for plan participants. PPA 

provided rules under which entities that were previously prohibited from providing 

investment advice on account of the prohibited transaction rules in the Internal 

Revenue Code and the Employee Retirement Income Security Act of 1974, Public 

Law 93–406 (‘‘ERISA’’), could provide advice, subject to a number of conditions. The 

Bush Administration issued final regulations implementing the PPA investment advice provisions and provided a new class exemption related to investment advice 

from the prohibited transaction rules of the Internal Revenue Code and ERISA. The 

Obama Administration has delayed the effective date of both the final regulations 

and the class exemption to allow for evaluation of the legal and policy questions reflected in the rules. 


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In announcing the hearing, Chairman Rangel said, ‘‘Defined benefit funding 

and the regulation of investment advice are important issues for American 

workers and employers. Defined benefit pension plans have been the bedrock of retirement security for millions of Americans and we must ensure 

that workers continue to have access to stable pension benefits. The pension funding rules are a crucial component of that goal. The millions of 

other American workers in defined contribution plans who are responsible 

for investing their retirement savings accounts need advice when making 

that decision and such advice must be unbiased.’’ 

FOCUS OF THE HEARING: 

This hearing will focus on two issues currently facing employer sponsored retirement plans. First, with respect to defined benefit pension plans, the hearing will 

focus on the impact of the financial crisis on the funding levels of such plans and 

whether additional funding relief is necessary. Second, with respect to defined contribution plans, the hearing will focus on plan participant access to investment advice and whether such advice is unbiased. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://democrats.waysandmeans.house.gov, select ‘‘Committee Hearings’’. Select the 

hearing for which you would like to submit, and click on the link entitled, ‘‘Click 

here to provide a submission for the record.’’ Once you have followed the online instructions, complete all informational forms and click ‘‘submit’’ on the final page. 

ATTACH your submission as a Word or WordPerfect document, in compliance with 

the formatting requirements listed below, by close of business Thursday, October 

15, 2009. Finally, please note that due to the change in House mail policy, the U.S. 

Capitol Police will refuse sealed-package deliveries to all House Office Buildings. 

For questions, or if you encounter technical problems, please call (202) 225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing 

record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission, 

but we reserve the right to format it according to our guidelines. Any submission 

provided to the Committee by a witness, any supplementary materials submitted for 

the printed record, and any written comments in response to a request for written 

comments must conform to the guidelines listed below. Any submission or supplementary item not in compliance with these guidelines will not be printed, but will 

be maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://democrats.waysandmeans.house.gov. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availVerDate Nov 24 2008 00:29 Jun 02, 2011 Jkt 063011 PO 00000 Frm 00007 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\63011.XXX GPO1 PsN: 63011

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ability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

f 

Chairman RANGEL. The hearing will come to order. It has been 

too long since our committee has gotten together, but we will try 

to make up for it. 

The purpose of the hearing today is to hear private sector recommendations on two critical topics confronting our Nation’s retirement plan. 

The administration is not here today; they are developing proposals on these two critical topics, and we will hear from them in 

the future. Meanwhile, we will hear from the private sector on 

these critical issues. 

The first topic is the impact of the financial crisis on the funding 

rules that apply to private sector defined benefit pension plans. 

Today, over 30,000 private sector pension plans provide benefits 

to almost 40 million Americans. The Tax Code contains rules that 

require employers to periodically contribute money to pension 

funds to make sure that promised funds and benefits are paid. 

The impact of the global financial crisis on the level of pension 

funding has been very severe. By some accounts, private sector 

U.S. pension plan assets fell by $734 million in 2008, or about 27 

percent. Employers are faced with the struggle of making up significant pension plan losses while operating their businesses in a 

challenging economy, with reduced cash flow and with reduced access to credit. Unions and employees are worried about the security 

of their retirement benefits and cuts to benefits. 

Today we will hear from private sector stakeholders on the impact of the global financial crisis on pension funding. These witnesses will present data on the impact of the financial crisis on 

pension funding, and these witnesses will also provide recommendations on how to provide relief to employers from the perspective of individuals who participate in plans, unions who negotiate retirement pensions for their workers, and sponsoring employers. 

The second topic of today’s hearings involve defined contribution 

plans, such as 401(k) plans, where participants get to choose how 

to invest their account balances. Today, approximately 460,000 

plans permit investment direction by participants. These plans 

cover an estimated 70 million participants and hold an estimated 

$2 trillion in assets. 

Most participants are not experts on financial investment and 

could use help in selecting their retirement investments. However, 

some industry surveys indicate only 50 percent of the retirement 

plans provide investment advice and assistance to participants. 

The retirement plan rules should encourage employers to offer 

investment advice to plan participants. However, the rules must 

also ensure that the advice is not biased by the financial interests 

of those who provide the advice. 

Today’s hearing will focus on whether the present law rules provide for unbiased advice. We will hear testimony from the perspective of plan participants, employers, and plan service providers that 

want to provide investment advice. 


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Chairman RANGEL. I look forward to hearing from our witnesses and yield to my friend, Ranking Member Dave Camp, for 

any remarks he may wish to make. 

Mr. CAMP. 

Mr. CAMP. Well, thank you, Mr. Chairman. Thank you for yielding, and thank you for holding this important hearing. 

As many know, we enacted many improvements to our Nation’s 

pension laws in 2006. The Pension Protection Act was a bipartisan 

piece of legislation that garnered the support of many current and 

former Democrats on this committee, including that of now White 

House Chief of Staff Rahm Emanuel. I think it is important that 

we continue that bipartisanship as we move forward on an issue 

that is so critical to the retirement security of working Americans. 

Earlier this year, I and several of my Republican colleagues on 

this committee introduced the Savings Recovery Act to help Americans rebuild their retirement, college and savings accounts. Among 

the provisions we offered was an effort to stabilize worker pensions 

and help employers invest in the future by temporarily providing 

a softer glide path for recognizing losses in defined benefit plans 

and provide 2 additional years to resolve pension funding shortfalls. 

The issues surrounding the funding of future retirement benefits 

are complex for employers, for Congress, and certainly for workers. 

Given the severity of the economic downturn, Congress should proceed carefully in order to find the right balance between the concerns of workers, retirees, employers, and taxpayers. 

While giving companies additional breathing room to meet their 

pension obligations may make sense on the surface, we must also 

recognize that too much latitude could erode the likelihood of workers receiving the full benefits they were promised and could further 

expose taxpayers to the cost of bailing out the PBGC. 

On the other hand, a failure to provide temporary relief to these 

plans from the chokehold the global economic downturn and credit 

crisis have placed on American employers could result in more 

bankruptcies and the dumping of pension plans on the Pension 

Benefit Guaranty Corporation, which is already on a precarious financial footing and could easily be pushed over the edge. 

Clearly, we have our work cut out for us. I am sure the excellent 

witnesses today will help us better understand the narrow tightrope we need to walk. 

Before I yield back, I want to take just a moment to discuss the 

issue of investment advice. Access to high-quality professional investment advice is crucial, especially given the recent upheaval in 

the stock market. And while proper safeguards should be maintained to protect against potential conflicts involving the compensation of participants’ financial advisors, Congress should not impose 

unwarranted restrictions that limit the availability of that investment advice. 

According to some estimates, the proposed restrictions on investment advice contained in the Education and Labor Committee’s 

bill, H.R. 2989, could cause as many as 20 million 401(k) participants to lose access to investment advice these working families 

rely on to help them save for the future in this very unsettled economy. 


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So Americans don’t need less help getting through these turbulent times, they need more help; and it is our job to ensure Americans have access to the quality financial advice that they need. 

With that, I yield back the balance of my time. 

Chairman RANGEL. Thank you for your statement. 

Chairman RANGEL. At this time, I ask my friend, Richard Neal, 

who has had hearings and has covered this subject matter for several months, to start the hearing off by introducing our first panel. 

Mr. NEAL. [Presiding.] Thank you very much, Mr. Chairman. 

And thank you for the timeliness of this hearing as well. 

I would like to acknowledge Mr. Craig Rosenthal, Mr. Norman 

Stein, Mr. Bill Nuti, Judith Mazo, Damon Silvers and Mark 

Warshawsky. These individuals will all, I hope, offer a perspective 

to us that will help us in the deliberations for the months and 

years to come. 

You have heard me say many times that given what happened 

here with the Social Security debate a couple of years ago, we need 

to be mindful of what the American people see down the road in 

terms of retirement security. 

So with that, I would like to recognize Mr. Craig Rosenthal to be 

the first witness. 

STATEMENT OF CRAIG P. ROSENTHAL, PRINCIPAL, MERCER 

CORPORATION, NEW YORK, NEW YORK 

Mr. ROSENTHAL. Mr. Chairman and Members of the Committee, thank you for the opportunity to discuss the findings of 

Mercer’s recently completed report on the funded status of defined 

benefit pension plans. 

I am a principal at Mercer, who has advised clients on funding 

issues for more than 20 years. Our report is based on survey data 

from 874 of our clients’ calendar-year plans, and we hope that it 

will be a useful resource to the committee as it considers pension 

plan funding levels. 

We conducted this survey with an eye towards addressing two 

important questions. First, to what extent are required contributions for 2009 higher than they were for 2008? And second, to what 

extent are credit balances available to help meet those 2009 required contributions? 

We have drawn four basic conclusions from the survey analysis. 

First, many calendar-year pension plans are in good position to 

meet their 2009 required contributions after taking into account 

the funding relief already provided by Congress and the IRS, as 

well as available credit balances. 

Second, some calendar-year plans are still facing significantly 

higher required contributions. 

Third, the IRS-provided interest rate relief will not help most 

noncalendar-year plans for 2009. So many of these plans will be 

facing higher required contributions than calendar-year plans. 

Finally, looking forward to 2010, sponsors of both calendar-year 

and noncalendar-year plans are likely to face significant increases 

in their required contributions. 

Regarding the funded status of plans, there were major declines 

in the latter half of 2008 due to both investment market performance and falling interest rates. Looking back to 2008, only about 


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3 percent of surveyed plans had funded ratios below 80 percent, 

which, as you know, is the funding level necessary to avoid benefit 

restrictions under the Pension Protection Act. Without any funding 

relief for 2009, that 3 percent of plans funded below 80 percent 

would have instead stood at 39 percent. However, factoring in both 

the IRS-provided relief and the relief provided by the committee 

and Congress in the Worker, Retiree, and Employer Recovery Act 

of 2008, our survey indicates that only 7 percent, instead of 39 percent, of plans would have funded ratios below 80 percent. 

Despite these improved 2009 funding ratios, however, sponsors of 

many calendar-year plans are still facing significantly higher required contributions. This is the case even if sponsors take advantage of both relief provisions. For example, our survey shows that 

approximately 21 percent of calendar-year plans still face required 

contributions that are substantially—and in many cases more than 

50 percent—higher than the corresponding 2008 amounts. So while 

the relief has been very helpful for many plans, some calendar-year 

plans still face both significant and unanticipated contribution increases for 2009. In addition, most plans that operate on a noncalendar-year basis will not benefit as much from the relief in 2009. 

While we excluded these plans from our survey because full data 

were not available at the time we conducted the survey, most of 

these plans will not be able to use the October 2008 yield curve, 

as October 2008 is beyond the 4-month lookback period for most 

noncalendar-year plans. 

Interest rates during 2009 have been well below their October 

levels, and until just recently, asset values have been below their 

year-end 2008 levels. This suggests that many of these noncalendar-year plans could face both benefit restrictions and sharply 

higher required contributions for 2009. 

Looking at credit balances. As you know, contributions in excess 

of the minimum required amounts can give rise to so-called credit 

balances which can be used to satisfy required contributions in 

later years. These available credit balances have declined significantly since year-end 2007. 

The plans in our survey had approximately $52 billion in credit 

balances at year-end 2007. The amount available for use in 2009 

will be reduced to slightly over $20 billion as a result of the treatment of credit balances under PPA. It is also important to note 

that roughly 25 percent of surveyed plans have no credit balances 

remaining for use towards their 2009 required contribution 

amounts. 

Looking ahead to 2010, we expect that many plan sponsors will 

face substantial increases in their required contributions. While the 

investment returns this year for most plans should be positive, 

they haven’t come close to reversing the dramatic investment losses 

suffered by most plans in 2008. In addition, interest rates are 

much lower than they were in October 2008, which will drive up 

plan liabilities. Plan sponsors are, therefore, likely to face major increases in required contribution amounts for 2010, and, at the 

same time, we expect that plans will have little or no credit balance amounts available to help pay for these contributions. 

Thank you again for the opportunity to discuss these findings 

with the committee. I will be pleased to answer your questions. 


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Mr. NEAL. Thank you very much, Mr. Rosenthal. 

[The prepared statement of Mr. Rosenthal follows:] 

Prepared Statement of Craig P. Rosenthal, Principal, Mercer 

Mr. Chairman and Members of the Committee, thank you for the opportunity to 

discuss with you one of the most important domestic policy issues confronting American workers and employers—the funded status of employer-sponsored defined benefit pension plans. 

My name is Craig P. Rosenthal. I am a Principal in Mercer’s retirement, risk and 

finance business. I am a credentialed actuary who has been practicing in the pension field for more than 20 years, advising a number of Fortune 500 companies on 

a wide variety of funding issues and serving as an internal technical resource for 

other pension consultants. 

Mercer is a leading global provider of consulting, outsourcing and investment 

services. Mercer works with clients to solve the most complex benefit and human 

capital issues. We design and help to manage health, retirement and other benefit 

programs and we are a leader in benefit outsourcing. Mercer investment services 

include investment consulting and multi-manager investment management. Mercer’s 18,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc. which lists its stock 

(ticker symbol: MMC) on the New York, Chicago and London stock exchanges. For 

more information, visit www.mercer.com. 

I am pleased to share with the Committee the findings of Mercer’s recently completed report (‘‘Estimated 2009 Required Contributions and Credit Balances’’) on the 

funded status of employer-sponsored pension plans, which we trust and hope will 

be a helpful resource to the Committee as it considers pension plan funding levels 

and whether additional funding relief is necessary. The report is based on an internal Mercer survey that yielded data from 874 of our clients’ calendar-year plans. I 

ask that the report be inserted in to the hearing record as a part of my statement. 

We conducted this survey with an eye to addressing two important questions: 

first, to what extent are required contributions for 2009 higher than the corresponding required contribution amounts for 2008, and second, to what extent are 

credit balances available to help meet those 2009 required contributions. 

Based on the survey data we collected and our analysis, we have reached the following conclusions: 

• After taking into account the recent economic experience in investment returns, movements in interest rates, and the important funding relief that 

Congress and the Internal Revenue Service (IRS) have already provided, 

many calendar-year defined benefit plans are in a good position (taking into 

account their credit balances) to meet their required contributions for 2009. • Nevertheless, some calendar-year plans face significantly higher required contributions for 2009 even after taking into account their credit balances. • Because the interest rate relief will not help non-calendar plans for 2009, 

many of these plans will face significantly higher required contributions for 

2009 even after taking into account their credit balances. • Based on the data and analysis we’ve already undertaken, many calendaryear and non-calendar-year defined benefit plans will face significantly higher 

required contributions for 2010 even after taking into account whatever credit 

balances remain for next year. 

Funded status. With regard to the surveyed plans’ aggregate funded status, we 

found significant declines in the latter half of 2008 due to lower investment returns 

and falling interest rates. The surveyed plans had an aggregate funded ratio (the 

ratio of total assets to the total funding target of surveyed plans) of about 110% as 

of January 1, 2008 and relatively few had funded ratios under 80%. Our estimates 

suggest that as of January 1, 2009, the aggregate funded ratio will have been 93% 

based on plan sponsor elections in place when we conducted the survey in April of 

2009. Further, about 39% of plans will have 2009 adjusted funding target attainment percentages—or AFTAPs—of less than 80%. 

The funding relief provided to date by Congress and the IRS is substantial for 

most calendar-year plans. 

Many plan sponsors very much appreciate the relief provided by the Committee 

and Congress in the Worker, Retiree and Employer Recovery Act of 2008, which 

made a number of helpful corrections to Pension Protection Act (PPA), including the 

ability to determine the value of pension assets by using asset smoothing that takes 

into account anticipated investment returns. If all sponsors of surveyed calendaryear plans elect to adopt (for 2009) asset smoothing with anticipated returns, but 


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maintain their 2008 interest rate elections, the aggregate funded ratio for the surveyed plans would be 95%. Still, more than 33% of the plans would have 2009 

AFTAPs under 80%. 

The IRS provided a second piece of relief on March 31st of this year when it clarified that plan sponsors may elect to determine their 2009 PPA funding targets using 

the full PPA yield curve with a look-back period of up to four months. This latter 

relief is especially helpful for calendar-year plans for 2009, as bond yields peaked 

in October 2008, and high interest rates translate into lower pension liabilities and, 

in turn, lower required contribution amounts by plan sponsors. 

Assuming all of these plan sponsors adopt both asset smoothing with anticipated 

returns and the yield curve look-back for 2009, the aggregate funding ratio for surveyed calendar-year plans for 2009 would further increase from 95% to 111%, and 

only 7% of plans (instead of 33% of plans) would have AFTAPs below 80%. 

Required contributions. In spite of these improved 2009 funding ratios, sponsors of some calendar-year plans are still facing significantly higher contributions 

in 2009. This is the case even if the sponsors take advantage of both of the relief 

provisions noted above. 

For example, approximately 21% of surveyed calendar-year plans still face 2009 

required contributions that are substantially (in many cases more than 50%) higher 

than the corresponding 2008 contributions. 

The main drivers of higher 2009 required contributions despite the available relief are: 

• the investment losses during 2008 were too significant to be offset by the 10% 

margin in assets (due to permissible asset smoothing) and the approximately 

20% drop in liabilities from using the full yield curve for October 2008, and • the funding rules were changed to require the inclusion of expenses in the 

2009 required contribution calculation. 

So, while the aggregate numbers for calendar-year plans indicate that the relief 

has been very helpful for most of these plans, certain individual calendar-year plans 

still face significant unanticipated contribution increases for 2009. 

Most plans that operate on other than a calendar year basis will not benefit as 

much from the relief in 2009. We excluded these plans from our survey because full 

data were not available when we conducted the survey. These plans won’t be able 

to use the October 2008 yield curve (October 2008 is beyond the four-month lookback period for most non-calendar-year plans) and, since October, interest rates 

have remained well below their October levels. Also, asset values have been below 

their year-end 2008 values for a good portion of 2009, meaning that many of these 

non-calendar-year plans could face benefit restrictions and sharply higher required 

contributions for 2009. 

Credit balances. Whether plan sponsors have enough credit balances to substantially offset their higher required contributions for 2009 has of course been a key 

topic in the debate. As you know, contributions in excess of the minimum required 

amounts in earlier years can give rise to credit balances which can be used to satisfy 

the required contribution amounts in later years. 

The aggregate year-end 2007 credit balance amount for the surveyed calendaryear plans was $52 billion. This amount was reduced to approximately $42 billion 

due to mandatory and voluntary waivers as of January 1, 2008. In addition, an additional $3 billion was utilized to satisfy 2008 required contribution amounts, leaving $39 billion to be carried forward to 2009. 

PPA changed the way credit balances are carried from one year to the next by 

applying the actual asset returns. As such, we estimate that approximately onethird of the remaining 2008 credit balance will be lost to 2008 asset returns, leaving 

only $26 billion to be available at January 1, 2009. After factoring in mandatory 

and anticipated voluntary waivers as of January 1, 2009, we anticipate that depending on the plan sponsor elections, only $20–23 billion would be available to use towards 2009 funding requirements. It is important to note that even if all plans 

make use of the available relief, approximately 25% of surveyed plans will have no 

credit balances remaining for use towards their 2009 required contribution amounts. 

The chart below shows how the aggregate credit balance for surveyed plans is developed. 

Current relief will have little effect in 2010. Looking ahead to 2010—barring 

an enormous market recovery or another spike in interest rates comparable to those 

in October 2008—we expect that many defined benefit plans will face significantly 

increased required contributions. While investment returns through August 31, 

2009 for most plans should be positive, they are far from being sufficient enough 

to reverse the dramatic investment losses suffered by most plans during 2008. In 

addition, current interest rates are substantially lower than they were in October 


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2008, which means that regardless of the interest rate elections made for 2010, it 

is anticipated that most plans will be faced with substantially lower interest rates. 

As such, plan sponsors will likely face significantly higher liabilities and required 

contribution amounts for 2010. At the same time, we expect that plans will have 

little or no credit balance available for use in satisfying these higher 2010 contributions due to mandatory and voluntary waivers that will be made. 

f 

Chairman RANGEL. The Chair would recognize Mr. Norman 

Stein, Senior Legislative Counsel at the Pension Rights Center. 

You are welcome to begin your testimony. 

STATEMENT OF NORMAN STEIN, SENIOR LEGISLATIVE 

COUNSEL, PENSION RIGHTS CENTER 

Mr. STEIN. Good morning, Mr. Chairman, and Members of the 

Committee. My name is Norman Stein, and I teach law at the University of Alabama. Thank you for inviting me here to speak with 

you today on the important subject of defined benefit plan funding. 

I am testifying today on behalf of the Pension Rights Center, a 

nonprofit consumer organization that has been working since 1976 

to promote and protect the retirement security of American workers and their families. 

There is currently an ongoing discussion in the pension community, and today here on Capitol Hill, on whether to grant emergency defined benefit funding relief to some companies, which companies should qualify for any such relief, and what conditions 

should be imposed on such relief. My testimony today presents our 

views on these issues. 

My written testimony also touches on other topics, including the 

PPA provisions that result in automatic cessation of new benefit 

accruals in certain defined benefit plans, the inadequate PPGC 

guarantees to participants in multiemployer plans, and the need to 

prohibit so-called Q–SERP arrangements. Although I will not be 

further addressing these questions in my oral statement, they are 

important issues and deserve consideration from your committee. 

To summarize our position at the outset, we support funding relief for companies that maintain defined benefit plans where workers continue to earn new benefits. While we are sympathetic to the 

financial stresses that other companies are currently facing, we do 

not believe that blanket relief for every company with a frozen defined benefit plan is appropriate. 

As I just noted, we support funding relief for companies that 

sponsor defined benefit plans where employees continue to earn 

benefits. We do so for two related reasons. First, as the economic 

recession has reminded us, defined benefit plans are the best retirement vehicles for assuring a secure source of income in retirement. Such plans provide retirees with a guaranteed stream of income for life and are not subject to the kind of catastrophic failures 

that have decimated the retirement prospects of so many Americans who rely primarily on their section 401(k) plans. It is appropriate and necessary for Congress to take action to ensure the continued existence of these plans. Without funding relief, some companies may freeze or terminate their plans. 

Second, the companies who stood by their defined benefit programs, while others abandoned them, deserve Congress to stand by 


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them now. The type of relief we favor is an extended amortization 

period for losses attributable to the recession. The risk of employer 

default, though, falls on employees and the PPGC. Thus, we support limiting funding relief to companies that, first, agree that participants will continue to receive benefit accruals during the extended amortization period; second, agree to amend their plan to 

prohibit reversion of excess assets if the plan becomes overfunded 

in the future; and third, secure the consent of any unions whose 

members participate in the plan. 

In addition, funding relief should be conditioned on the company 

not contributing new assets to quasi-funded executive deferred 

compensation plans, such as rabbi trusts. Contributions to these 

plans, no less than contributions to qualified plans, result in fewer 

operating assets to the company. Moreover, payments from executive compensation plans strip the company of assets that could help 

fund the company’s qualified plan. We thus would recommend conditioning funding relief on companies amending executive deferred 

compensation plans so that they cannot receive new funding, or 

quasi-deferred compensation plans, so they cannot receive new 

funding, and amending all executive deferred compensation plans 

so that they delay payment of benefits until the company has fully 

funded its qualified plan. 

Funding relief is not free. It is essentially an unsecured debt 

forced upon participants and the PBGC. If the plan is not eventually brought up to fully funded status, it is the participants and 

PBGC who will bear the financial burden of funding relief. Thus, 

we do not believe that emergency funding relief should be made 

available to plans in which employees are no longer earning new 

benefits. 

We know that some have argued that extending relief to such 

plans will save jobs, but there is nothing in any of the proposals 

we have seen that would ensure that the assets freed up by new 

funding relief would be used for preserving jobs. The assets could 

be used for any purpose, including moving jobs overseas, automation, or even executive compensation. 

Also, the argument that funding relief is necessary to preserve 

jobs ignores the fact that pension plans invest company contributions in the capital markets, creating long-term investment capital 

that ultimately is the most effective way to expand the economy, 

preserve jobs, and create new jobs. 

We also note that there are provisions in law that allow employers to request a funding waiver by showing temporary substantial 

business hardship, and a failure to grant a waiver would be adverse to the interest of the plan participants. We would support 

providing the IRS with the resources to streamline the waiver process perhaps by setting up a temporary funding review board and 

requiring that the IRS rule on waiver requests within 60 days. 

Thank you. 

Mr. NEAL. Thank you, Mr. Stein. 

[The prepared statement of Mr. Stein follows:] 


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f 

Mr. NEAL. We recognize Mr. Bill Nuti, who is the Chairman and 

Chief Executive Officer of NCR, on behalf of the American Benefits 

Council. 

Mr. Nuti. 


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STATEMENT OF WILLIAM NUTI, CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF NCR CORPORATION, ON BEHALF OF NCR 

AND THE AMERICAN BENEFITS COUNCIL 

Mr. NUTI. Good morning. My name is Bill Nuti. I am the Chairman and CEO of NCR Corporation. Chairman Rangel and Ranking 

Member Camp, thank you for allowing me to testify today about 

the urgent need for pension relief. 

I am here today on behalf of the American Benefits Council. The 

Council has over 300 member companies, representing a variety of 

sectors, including technology, retailers, manufacturers, energy and 

media, and represents plans that cover or service more than 100 

million Americans. 

NCR is a 125-year old technology company with 22,000 employees worldwide, operating in more than 100 countries. We are the 

worldwide leader in self-service solutions. In the last few days, you 

have probably withdrawn cash from one of our ATMs, checked in 

for a flight at one of our kiosks, checked out of a supermarket at 

one of our self-service checkout systems, scheduled a medical appointment at one of our medical kiosks, or rented a DVD from one 

of our entertainment kiosks. 

I want to state something at the outset; we are fully committed 

to funding our pension plan and meeting our pension obligations. 

The American Benefits Council and NCR are categorically not requesting a bailout; we are requesting a timeout. We need more 

time to deal with an unprecedented market downturn that nobody 

foresaw when the Pension Protection Act was approved, a downturn that has affected pension plan sponsors in every industry. 

Congressman Pomeroy has put forth a legislative proposal that 

would allow more time to amortize losses from the financial crisis. 

This is a reasonable solution to a difficult and rapidly approaching 

problem, and we strongly support it. It would give reasonable and 

responsible companies the tools that they need to support their 

pension funds, without sacrificing current operations. 

I want to make two important points about this legislation. First, 

this isn’t just about pensions, it is about jobs and investing in 

America. Second, we need the legislation now. 

Why is this about jobs? Many companies are going to have to 

make catch-up contributions to their pension funds, in excess of 

$100 million a year, for several years. That is a major drain on any 

company’s resources. In the current economy where growth is more 

difficult to achieve, companies don’t have a lot of financial flexibility. Some companies are going to have to lay off employees or 

cancel investments that would create jobs and help our economy recover. 

These decisions have a snowball effect. If a retailer has to close 

stores, it orders fewer goods from suppliers, it orders less equipment from companies like mine, and there are fewer shipping orders for trucking companies and railroads. If we want the economy 

to grow, we need a solution that allows the employers to bring 

their plans back to full funding, without sacrificing current investments. The Pomeroy bill strikes the right balance. 

Why is it urgent? The recent IRS regulations have helped a great 

deal this year; however, this is still very time-sensitive. Our next 

round of funding obligations, which are going to be very large, will 


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be locked in on January 1, 2010. That is just 3 months away. Even 

though these payments won’t come due until 2011, most plan sponsors are still going to be in a difficult position. 

For instance, NCR’s own pension was 110 percent funded at the 

beginning of 2008, but only 75 percent funded at the beginning of 

this year, purely as a result of the financial downturn. 

Other companies in our coalition are in the same boat. For example, another company’s projected contributions for the next 7 years 

have jumped from $200 million to $1.5 billion due to the economic 

downturn, an astounding increase of 650 percent. 

With unplanned obligations of this magnitude, companies have to 

begin preparing now. Just to give you an idea of the scale we are 

talking about, a $100 million pension obligation is equivalent to 

2,000 workers earning $50,000 a year. 

These are choices nobody wants to make, and the Pomeroy bill 

would allow us to bring our funds back to 100 percent and make 

critical investments to support our businesses and our employees. 

I would like to close by saying a few words about something we 

are doing that I am excited about. NCR is creating a new manufacturing facility in the United States. We are creating approximately 

900 new jobs in Columbus, Georgia, to manufacture our next innovative generation of ATMs. 

This was a huge investment for us, but it is going to help us to 

bring new technologies to market faster and be more responsive to 

our customers. If we had to make a $100 million payment to our 

pension fund this year, we probably wouldn’t have been able to do 

this. That is the kind of tradeoff we are talking about, the kind of 

tradeoffs other companies across the country are going to have to 

make. 

The Pomeroy bill is good and balanced legislation. It will allow 

us to bring our pension funds back to full funding, while ensuring 

all of us stay focused on our pension obligations. That is something 

we are all committed to doing. At the same time, it will give us 

breathing room so we can continue to invest, create jobs, and generate economic growth. 

Although I am sure few CEOs come before you to recommend 

proposals that raise revenue, I was also glad to hear that the CBO 

estimates that Chairman Miller’s bill, which is quite similar to 

Congressman Pomeroy’s proposal, raises $10 billion over the next 

10 years. On behalf of the American Benefits Council and all of our 

member companies, I urge you to act on this this year. Thank you. 

Mr. NEAL. Thank you, Mr. Nuti. 

[The prepared statement of Mr. Nuti follows:] 


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f 

Mr. NEAL. The Chair would recognize Judith Mazo, Senior Vice 

President, Director of Research, Segal Company. 


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STATEMENT OF JUDITH MAZO, SENIOR VICE PRESIDENT, DIRECTOR OF RESEARCH, SEGAL COMPANY, ON BEHALF OF 

THE NATIONAL COORDINATING COMMITTEE FOR MULTIEMPLOYER PLANS 

Ms. MAZO. Mr. Chairman, Ranking Member Camp, Members of 

the Committee, I am very happy to be here today. I am a representative of the Segal Company, which is the largest actuarial 

firm in this country specializing to a great extent with multiemployer plans. I am here on behalf of the National Coordinating 

Committee for Multiemployer Plans—you have to take a breath between the words, so we tend to say NCCMP. But beyond that organization, a multiemployer coalition of employers, employer associations, unions, employee benefit funds, and others in the benefit 

community. That really covers the spectrum to all of whom are 

united, as we were in 2006 and in the years leading up to 2006, 

in looking for some continued solutions for our plans. 

I will give you a little bit of a preview. I think we could use some 

of that $10 billion, so we appreciate that. 

My written statement goes in some detail into what a multiemployer plan is. Many people are not familiar with them although, 

again, you probably run into the results of them, just like NCR’s 

products, on a daily basis. They are union-negotiated plans covering, by definition, people working for at least two employers, 

often could be 20 employers, could be 100, could be 1,000 employers. They range very dramatically in size. They represent, often, 

people in very mobile employment, working for companies that are 

very small. And without banding together to provide these benefits 

as a group, as a pool, they couldn’t provide them at all, particularly 

in the construction trades, in trucking, in retail trades, in entertainment. The actors you see on television, Harry and Louise, are 

covered by multiemployer plans, as well as others. 

There are, I think, probably three very important key principles 

about multiemployer plans to keep in mind. One is they are not 

single-employer plans, they are stand-alone plans covering a lot of 

employers. They are not directly hooked into any employer’s database to help keep track of who the participants are. And every 

nickel spent on running the plans comes from the money that is 

contributed by all of the employers and earned when we earn it in 

the market otherwise to pay benefits. 

The second really important thing is it is collectively bargained. 

And we say this over and over again. That means it is not discriminatory. There is no concern about a lot of the money being targeted 

primarily to highly paid people within the group? These are egalitarian groups. There is no tax manipulation going on. No employer 

is trying to put extra money into a trust fund that the employer 

will have no control over and can’t get any of it back. They are not 

trying to manipulate or increase tax deductions by giving money to 

cover their union-represented people. They are really benefit trusts 

and funds designed to take care of working people. 

They are jointly trusteed. They are often called union plans, but 

in fact they are employer-union plans because the law requires that 

they be run by boards that are jointly employer and union. So 

there is a lot of counterweight and counterpoise and check and balVerDate Nov 24 2008 00:29 Jun 02, 2011 Jkt 063011 PO 00000 Frm 00030 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\63011.XXX GPO1 PsN: 63011

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1The NCCMP is the premier advocacy organization for multiemployer plans, representing 

their interests and explaining their issues to policy makers in Washington since enactment of 

ERISA. Its more than 200 affiliates include pension and health plans as well as employers and 

labor unions whose workers and members participate in multiemployer plans. 

ance going on in the design and operation of the plan. They kind 

of have, to a great extent, built-in oversight going on. 

I want to give you just a few facts about where multiemployer 

plans as a group stand as a result of the investment catastrophe 

that we encountered last year. They are the same investors in the 

same market as the single-employer plans. But over time—in 1980, 

there were about 2,200 multiemployer defined benefit plans. In 

2008, there were about 1,500 of them. Where did they go; did they 

all terminate? No. In fact, in 1980, there were about 8 million participants in these plans, and now there are 10 million of them. 

What they did was merged. The multiemployer plans kind of take 

care of one another, and if a small plan falters it has, at least in 

the past, been able to be taken care of by the bigger ones. 

One other important number, the median actual investment return for multiemployer plans, based on a survey of 400-some plans 

covering 6 million people, for 2007 the median investment return 

was about 8 percent. For 2008, the median was about minus-21 

percent. That is really what we are here to talk about today or to 

answer your questions about today. 

We can live with PPA, we just need some help in two ways; getting over some of the hard places, just as the single-employer plans 

do, and for some plans, there may not be any recovery without 

more dramatic help, and we need to focus on those as well as the 

majority that will continually help thrive. Thank you. 

Mr. NEAL. Thank you, Ms. Mazo. 

[The prepared statement of Ms. Mazo follows:] 

Prepared Statement of Judith F. Mazo, Senior Vice President, 

Director of Research, The Segal Company, on behalf of the National 

Coordinating Committee for Multiemployer Plans and the 

Multiemployer Pension Plan Consortium 

Mr. Chairman and Members of the Committee, it is an honor to speak with you 

today. I am Judith F. Mazo, Senior Vice President of The Segal Company, an actuarial and benefits consulting firm with the country’s largest concentration of multiemployer plan clients. I am here on behalf of the National Coordinating Committee 

for Multiemployer Plans (the ‘‘NCCMP’’) 1 and the Multiemployer Pension Coalition, 

a broad group that comprises employers, employer associations, multiemployer pension funds, and unions from across the spectrum of the multiemployer community. 

The Multiemployer Pension Coalition, which is coordinated by the NCCMP, came 

together early in this decade to harness the efforts of all multiemployer-plan stakeholders toward the common goal of benefit security for the working people who rely 

on these plans. We pressed for the multiemployer funding rules that were adopted 

in the Pension Protection Act of 2006, because we know that benefit security rests 

on rules that demand responsible funding and discipline in promising benefits. And 

now we are here again to talk with you about the multiemployer funding challenge, 

as the plans work to reconstruct their reserves after last year’s universal investment 

catastrophe. 

Sophisticated funding requirements, by themselves, will not pay workers’ pensions. For that, the industries that sponsor the plans must survive and be strong 

enough to provide the support needed to meet those obligations. What we are seeking now is the temporary infusion of a little more flexibility in the multiemployer 

funding rules, to enable the employers and unions to muster the resources that the 

plans need to recover and flourish once again. 

To understand what we need and why it is not the same as what single employer 

pension plan sponsors are seeking, it may help to go back to basics. 


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I. What Are Multiemployer Plans and Why Do They Need Special Rules? 

The core definition is straightforward: a multiemployer plan is one to which two 

or more employers are required to contribute, under one or more collective bargaining agreements. 

Beyond that simple statement lies a world of variations. The funds may range, 

for instance, from 50–100 workers and 2–4 contributing employers in a locality to 

hundreds of thousands of participants and thousands of employers covering large 

geographic regions. Similarly, assets may range from, say, $25 million to $20 billion. 

The typical size is probably in the range of 1,000–5,000 participants, with assets of 

about roughly $100 to $250 million. 

Ordinarily the covered workers are all represented by the same Local Union, or 

by Locals affiliated with the same International Union. Multiemployer plans are 

found throughout the economy, notably in the construction industry, entertainment, 

trucking and transportation, longshore, retail, mining and manufacturing, food service, hospitality, health care, building service, communications and the garment 

trades. More than half of the funds are in the construction trades, which, according 

to PBGC data, cover roughly 35% of the participants. 

Understanding that there are exceptions at each general point, here are some general characteristics of multiemployer funds that have led to the development of special rules to accommodate their special circumstances: 

• Virtually all multiemployer plans are set up as trusts structured under the 

Taft-Hartley Act, operated by a joint management-labor Board of Trustees as 

stand-alone entities that are independent of the contributing employers and 

the unions that represent their participants. The Trustees, as plan sponsor, 

have full responsibility for managing the assets and administering the benefits, including the duty to make sure the plan meets all applicable legal requirements. • Typically, the employers contribute the amounts negotiated under their bargaining agreements, say $2 for each hour that participants work in covered 

service. The trustees, working with their professional advisors, determine and 

set the benefits, while the unions and employers independently negotiate over 

the flow of contributions. • While the employers’ most salient obligation is to contribute as defined in 

their labor contracts, because the plans promise a fixed benefit these are classified as defined benefit plans under ERISA and the Internal Revenue Code. • The contributing employers are often small businesses that could not provide 

pension or health coverage on their own, whose employees often work for 

short periods before moving on to similar jobs with different contributing employers. They compete with each other and with non-contributing companies 

for contracts and customers. • Regardless of which or how many employers a participant worked for, his or 

her pension is owed by the plan, backed by the industry. Contributing employers may come and go, but whoever is obliged to contribute in a given year 

is funding a portion of the plan’s accumulated liabilities to all of its participants over time, not just the benefits being earned by its own workers. • Benefits are rarely based on employees’ pay. The pension is a specified dollar 

amount per year of covered service, or a specified percentage of the contributions required on the participant’s work, say $80/month times year of service, 

or a monthly benefit equal to 2% of total contributions. Few multiemployer 

plans pay benefits before early retirement age or offer a lump sum as an alternative to a life annuity. • Most multiemployer groups have defined benefit plans, many also have defined contribution plans (called ‘‘annuity funds’’) and a fairly small subset of 

those are 401(k) plans. Many multiemployer pension plans facing financial 

problems have reduced future benefit accruals, but so far very few have frozen accruals. 

Several pertinent points emerge from this overview: 

1. Because multiemployer plans are creatures of collective bargaining, the funding and other regulatory requirements must accommodate bargaining realities, where stability in pension costs is paramount. Thus: 

a. Since employers cannot be compelled to contribute beyond what they 

have agreed to in collective bargaining, the required funding cannot 

change during the term of a collective bargaining agreement; 

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sion funding demands over time is essential beyond the standard 3-year 

duration of a single bargaining agreement, and 

c. When the parties negotiate pension contributions, the amounts are explicit alternatives to increases in wages, health contributions or other 

elements of compensation, so the employees often view the contributions 

as ‘‘their money.’’ If they do not believe the trade-off is worth it, they 

might reject the agreement, which could throw the plan’s funding arrangements into disarray. 

2. The fact that the plans are run for union-represented groups also means 

that: 

a. There is little or no opportunity for tax manipulation by contributing 

employers—they have no opportunity to benefit from the plan’s assets 

(except, of course, by having the plan meet their employees’ needs); 

b. The plans are egalitarian, providing essentially the same benefits for all 

employees with the same patterns of service under the plan, so there is 

no question of discrimination in favor of the highly paid, and 

c. Due to the Taft-Hartley structure, with an independent operation run by 

a Board on which the employers and the employees have equal representation, the entire cost of plan administration must be paid out of the 

plan’s assets, with funds that would otherwise be dedicated to paying 

benefits. 

3. Multiemployer plans are typically far more stable than single employer plans 

because of their broader contribution bases: they do not depend on the fortunes of one company. Often when a local multiemployer plan does begin to 

falter it is merged into a larger, stronger plan covering people represented 

by the same International Union. On the other hand, if a multiemployer plan 

fails that tends to be because of the failure of the industry that has supported it, and the losses to participants and to the pension guarantee system 

can be very large. 

II. How Do the Pension Funding Rules Address This Now? 

Distinctions for multiemployer plans have been part of the ERISA minimum funding rules and termination insurance program since the start. As experience under 

ERISA has developed, the differences between the regimes governing single employer and multiemployer plans have broadened. That history can be instructive. 

1974–1980: ERISA. From the start, the Internal Revenue Code has included special rules to allow multiemployer plans to function as pools rather than a cluster 

of individual employers, and to rely on negotiated contribution rates for funding and 

deduction purposes, see, e.g., IRC s. 413(b). 

Although pension plan termination insurance was at the core of ERISA’s retirement income security promise, Congress was initially uncertain whether it was 

needed by or appropriate for multiemployer plans. When ERISA was passed, no 

multiemployer plan had ever terminated, and, because of their broad contribution 

bases, they were expected to be able to cover all of the benefits they promised. Accordingly, the initial multiemployer guarantee program was an experiment: from 

1974–77, the PBGC had discretion to insure benefits under terminated multiemployer plans, and very little financing for it ($0.50/participant annual premiums, vs. 

$1.00/participant for single employer plans). 

Early Experience. Then three multiemployer plans sought PBGC protection (compared with several hundred terminated single employer plans). They were from 

three failed industries, covering milkmen in New York, milkmen in New Jersey, and 

cap makers in St. Louis. This made clear that there was a role for a government 

guarantee of multiemployer pensions, and although it was rarely likely to be invoked the pension claims would be large. Experience during that discretionary period also disclosed one of most serious threats to the plans’ survival and to the guarantee program: like the employers sponsoring single employer plans, employers contributing to multiemployer plans could be liable to the PBGC for the underfunding 

of a terminated plan that PBGC took over, so it was in an employer’s interest to 

leave a multiemployer plan when its funding first showed signs of weakening. This, 

of course, would aggravate the plan’s problems as fewer and fewer employers were 

left to carry the funding load. It would also stress established labor relations, as employers had only three ways to get out of a multiemployer plan: with the union’s 

agreement (which was likely to mean an agreement to close out the pension plan 

and substitute a defined contribution plan), by ousting the union, or by going out 

of business. 


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Multiemployer Funding Reform, Version 1.0. Congress extended the discretionarycoverage period to allow for the in-depth study of multiemployer pension plans that 

had not been done in the lead-up to enactment of ERISA. It concluded that adapting 

the PBGC guarantee program to fit multiemployer plans would be futile unless the 

law also addressed the ‘‘last-man’s-club’’ psychology that was propelling employers 

to exit multiemployer plans or press for their termination. 

Accordingly, the Multiemployer Pension Plan Amendments Act of 1980 

(‘‘MPPAA’’) introduced the concept of withdrawal liability. Highly complex and highly controversial—for obvious reasons—in general this imposes liability on an employer that withdraws from a multiemployer plan for a pro rata share of the plan’s 

underfunding. The more underfunded the plan is when the employer leaves, the 

higher its withdrawal liability is likely to be. 

Withdrawal liability created a major incentive for the employers to push to get 

their multiemployer plans well funded and to keep them there. MPPAA also revamped the pension guarantee program for those plans, to make PBGC the financier of very last resort. Instead of guaranteeing unfunded benefits when a multiemployer plan terminates, the PBGC does not step in with financial support until 

the plan becomes insolvent and does not have enough cash to pay benefits at the 

guaranteed level. 

The multiemployer benefit guarantees themselves were redefined and re-set at a low level. Initially this was a maximum of $234/year for each year of service, or an 

annual pension of $7020 for a retiree who had worked under the plan for 30 years. 

This is not indexed for inflation. Congress has increased the guarantee level once, 

and now the maximum is $429/year for each year of service, or $12,870 a year for 

someone with a 30-year career under the plan. 

The other especially notable MPPAA change was the introduction of special funding rules for multiemployer plans nearing or at bankruptcy (IRC ss. 418–418E), 

which authorized benefit reductions and required that benefit payments be cut down 

to guaranteed levels. As it turned out, this plan reorganization concept hardly ever 

came into play. When multiemployer plans started running short of funds, it was 

for reasons other than those identified in MPPAA. 

1980–2006: MPPAA. While the single employer funding and guarantee programs 

were changed repeatedly over the next quarter century, the multiemployer rules 

stayed essentially the same. The 1976 ERISA rules still governed multiemployer 

plans’ minimum funding requirements. After a flurry of protest and litigation, including several trips to the U.S. Supreme Court, employers adapted to withdrawal 

liability and learned to take it into account in business planning. Only a few small 

plans applied for PBGC assistance and the multiemployer guarantee fund consistently ran a surplus. During the 1990s, most plans faced the challenge of overfunding, and looked for ways to be sure the employers could take a tax deduction 

for their pension contribution. 

MPPAA helped establish this period of repose. After the intensity of the 1979– 

1980 legislative battles, neither Congress nor the Administration had much appetite 

for re-igniting the withdrawal liability controversy, so multiemployer plans were 

routinely exempted from whatever funding changes were enacted. But the real reason why the MPPAA reforms seemed to work so well was that multiemployer plans 

were prominent among those benefiting from the general prosperity of the 1990s. 

In the main, plans’ investments were doing well, there was plenty of work for participants and profits for their employers, so neither withdrawal liability nor statutory minimum funding requirements drew much attention. 

This era of general contentment came to an abrupt stop when the investment 

markets crashed in 2000 and 2001. Mature multiemployer plans with many retirees 

and declining numbers of active participants, had been living off the earnings from 

the very considerable reserves they had built up. When those investment gains 

turned into losses, funding levels declined and withdrawal liability flared back up, 

reawakening employer suspicions. Some plans saw funding deficiencies looming and 

turned to IRS for help, but it was swamped with pleas from troubled single employer plans and relatively unfamiliar with the intricacies of multiemployer funding. 

The Pension Funding Equity Act of 2004 provided a little breathing room for single employer plans but not for multiemployer plans. Because they seemed to be 

treading water well enough to avoid the catastrophic terminations that workers and 

the PBGC had faced in the airline and steel industries, they could not command 

the policy makers’ immediate attention. 

And so the multiemployer community pulled together, establishing the Multiemployer Pension Coalition to work in concert with the NCCMP for a substantive update to the multiemployer funding rules. The need to would protect the employers 

from ruinous contribution obligations and tax penalties was becoming urgent, as 

was the community’s conviction that multiemployer plans could not survive under 


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the kinds of rules that were being considered for single employer plans. The Coalition’s work with Congress led to the development of the multiemployer provisions 

of the PPA. 

2006–Present: PPA’06. As in 1980, the PPA made few changes in the mechanics 

of the ERISA funding standard account and related rules, which continue to apply 

to multiemployer plans. New benefits and benefit increases must now be amortized 

over 15 rather than 30 years, and short-term benefit increases must be funded as 

quickly as they will be paid. Unlike single employer plans, multiemployer pension 

plans can continue to use long-term interest assumptions chosen by their actuaries 

and actuarial methods of smoothing changes in asset values to temper the impact 

of investment market fluctuations. PPA also increased the limits on deductible contributions, to help pension plans can build reserves without penalizing contributing 

employers. 

Longer-Term Perspective: The Zones. For multiemployer plans, the PPA’s principal 

innovation was to impose a clear requirement that the trustees and bargaining parties look past the plan’s financial status as of a given valuation date, to take the 

measure of where it is headed. If the funding is projected to deteriorate to specified 

levels, they are required to adopt a formal corrective plan, with annual monitoring 

and adjustments required if needed to stay on course. The law provides new tools 

to help bring plan liabilities and assets into balance. Additional reporting to participants and employers, as well as to the government, provides extra accountability. 

Specifically, the law characterizes a multiemployer plan as ‘‘endangered’’ if its 

funding percentage is below 80%, or if it is projected to have a funding deficiency 

within 7 years. If both are true, the plan is ‘‘seriously endangered.’’ ‘‘Critical status’’ 

indicates more serious problems: a projected funding deficiency within four or five 

years or pending cash-flow difficulties. Colloquially, endangered status is called the 

‘‘yellow zone’’ and critical status is the ‘‘red zone.’’ Following this Homeland-Security 

theme, a plan that is neither endangered nor critical is said to be in the ‘‘green 

zone,’’ although there is no official classification for a plan that looks healthy. 

When a plan goes into the yellow zone, contribution reductions and benefit increases are restricted. The trustees must come up with a Funding Improvement 

Plan (‘‘FIP’’) designed to improve the plan’s underfunding by at least 30% over a 

ten-year period (for most seriously endangered plans, the goal is a 20% improvement over 15 years). This has to include schedules of benefit cuts and, if necessary, 

contribution increases, to be presented to the employers and unions so that they can 

choose a solution for their group through collective bargaining. The FIP must be reevaluated each year, and adjusted if needed to stay on schedule. 

The red zone indicates a more serious problem, and may be addressed with more 

serious solutions. When a plan goes into the red zone, in addition to enforcing restrictions on reducing contributions and increasing benefit, the plan must stop paying lump sums and similar front-loaded benefits to new retirees. The trustees must 

adopt a Rehab Plan that, like the FIP, aims at getting the fund out of critical status 

over a 10-year period. This includes offering the bargaining parties schedules of benefit cuts and contribution increases that are calibrated to achieve this improvement, 

for them to select through bargaining. 

Benefit reductions under a Rehab Plan can include the reduction or elimination 

of recent benefit increases, early retirement subsidies and other benefit features— 

other than the accrued benefit payable at normal retirement age—that are ordinarily protected from cutbacks. These benefit reductions are ignored when computing withdrawal liability. For active workers, future accrual rates cannot be cut 

below 1% of contributions unless the union and employers negotiate a deeper reduction as part of a package that is acceptable to the trustees. 

The employers that contribute to a red-zone plan are subject to a 5% contribution 

surcharge (going up to 10% after the first year) until they agree to an acceptable 

schedule of contributions and related benefit adjustments under the Rehabilitation 

Plan. However, there are no penalties on employers if a red zone plan actually has 

a funding deficiency, as long as the parties are living up to their red-zone obligations and the fund makes progress as expected under the Rehab Plan. The Rehab 

Plan benchmarks can be revised if it turns out that the original program was too 

ambitious, but the ultimate goal remains the same: financial recovery by the end 

of the rehabilitation period. 

If the trustees determine that, after exhausting all reasonable measures, the plan 

will not be able to recover within the statutory time frame, they must adopt recovery program that may take longer but is likely to work. If they believe that nothing 

will turn the situation around, they must design a plan to forestall insolvency. 


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2The published results of these surveys are attached to this statement. 

3The proposal is described in an attachment to this statement. 

III. How Is PPA Working? Why Do Multiemployer Plans Want More Relief? 

Early Results. PPA became law late in August of 2006. Its funding changes took 

effect at the start of the 2008 plan year, which was January 1 for most plans. For 

the most part, trustees and bargaining parties whose plans had been struggling 

were alerted by their actuaries that they should expect to be in endangered or critical status, and many had already come up with a way to deal with by the time 

it became official. The resulting additional sacrifices imposed on the participants 

and employers were not pleasant, and the many ambiguities in the law left many 

important questions open for interpretation and dispute, but through the first half 

of 2008 the process was working fairly smoothly. 

Among Segal Company multiemployer pension clients, the actual zone determinations were a little better than had been predicted. Through July 2008, about 80% 

were green, 12% were yellow and 8% were in the red zone. Then the September 

market crash hit. For all of 2008, the breakdown for about 400 multiemployer plans 

whose zone status was determined by The Segal Company was 78% green, 12% 

yellow and 10% red. The severity of the impact of the asset losses really began to show up when calendar-year plans’ zone status was re-certified for 2009. The pattern has completely 

reversed. By late March 2008, The Segal Company had determined that 83% of its 

multiemployer clients that operated on a calendar-year basis were in the green zone, 

10% were yellow and 7% were red. By the same point in 2009, after a number of 

those plans that were in a zone had begun carrying out their correction programs 

and others that were on the brink had cut benefits or requested contribution increases in an effort to avoid troubled status, the breakdown was 39% green, 29% 

yellow and 32% red. This covers about 230 plans; determinations made later in 2009 have shown consistent results.2

From January 1, 2008 to January 1, 2009, multiemployer plan assets dropped an 

average of more than 20%, most of it in the last 3 months of 2008. Suddenly, problem plans that were on their way to recovery were knocked back farther than before; traditionally strong plans that had been fully funded for decades were faced 

projected funding deficiencies, critical status and, for the first time ever, benefit reductions. None were prepared for such an abrupt and dramatic reversal. 

WRERA. Like other financial institutions, pension plans called for help. In its second special session after the Presidential election, Congress threw them a rope—the 

Worker, Retiree, and Employer Recovery Act of 2008 (‘‘WRERA’’)—to stay afloat 

while more substantial solutions could be developed. WRERA offered multiemployer 

plans two options for short-term relief: for the 2009 plan year, they could either 

keep the zone status they had had for 2008 (a ‘‘freeze’’) or, if their status was already endangered or critical, add three more years to their recovery period. 

Both approaches give the plans’ stakeholders some extra time to sift through the 

components of their dilemmas and look for ways to resolve them. Ironically, the 

challenge is often hardest for those plans that have been the strongest, whose trustees and bargaining parties have little experience in working through financial adversity. On the other hand, the severe asset losses may have closed off the avenue 

to recovery for some plans in shrinking industries with high proportions of retirees. 

PPA gives multiemployer plan stakeholders a clear mission: to monitor their 

plans’ financial outlook and take action to counter emerging problems. But after the 

2008 market meltdown, even PPA is not flexible enough to enable them to devise 

and implement approaches that could work for their specific problems. 

IV. What Is Needed Now? 

At this point what worries multiemployer stakeholders most is that the yellow 

and red zone mandates could force them to cut benefits or raise contributions—or 

both—beyond what their industries can tolerate. Once a contribution increase or 

benefit reduction is put in place for an endangered or critical plan, it cannot be undone until the plan recovers, so acting too quickly could cause years of unnecessary 

loss for employers and participants. 

The Goldilocks recommendation—do not do too much or too little, make sure it 

is just right—is not practical. What the multiemployer community is looking for now 

is some tweaking of the funding rules to make them more forgiving, on the one 

hand, and, for plans with little chance of growing their way out, financial assistance 

to contain and minimize the damage. The Coalition has proposed a two-pronged approach to help multiemployer plans facing these two quite different sets of difficulties, plus some general program clarifications and improvements.3


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4 Because plan partitions could assign vary large liability amounts to the PBGC’s multiemployer guarantee fund, the proposal calls for this to be financed with funds outside of the premiums paid by multiemployer plans. 

In brief, for plans that are basically solvent but need some help to get through 

this especially rough patch, we are asking for some temporary tweaks to the funding 

rules to give them more time to absorb the 2008–2009 losses. The proposal includes 

a list of options, to deal with the variety of technical issues that different plans face. 

These include: 

• starting new 30-year amortization periods, either for all of the outstanding 

charges and credits to the funding standard account, or just for the 2008– 

2009 market value losses; 

• further buffering the impact in any single year by allowing the asset losses 

incurred in those two years to be smoothed over 10 years (instead of than the 

current 5) before amortization, as long as the asset values taken into account 

are no more than 30% above or below current market value; 

• lengthening to 10 years (from the current 5) the automatic amortization extensions introduced in PPA and clearing away bureaucratic barriers so they 

can be used efficiently, and preserving pre-PPA IRS-granted relief notwithstanding the recent investment losses, and 

• For all plans that are or become endangered or critical, extending the recovery periods by 5 years, or 2 years on top of the 3-year extensions that some 

plans elected in 2009. 

More direct financial help is proposed for severely troubled plans: 

• To promote the rescue of troubled plans through mergers as long as participants’ benefits are not put at risk, clarify the applicable fiduciary standards; 

create a new type of multiemployer plan merger called an ‘‘alliance’’ that 

would insulate the stronger plan from the weaker plan’s funding problems, 

and direct the PBGC to facilitate productive mergers, including by contributing seed money; 

• Turn the existing concept of plan partition into an active vehicle for saving 

multiemployer plans that are in sharp decline because of employer bankruptcies and uncompensated withdrawals, by giving those plans the right to 

transfer the liabilities that those departed employers left behind to the 

PBGC,4 and 

• Provide a short-term federal tax credit to help employers cover the incremental contributions required under the Funding Improvement or Rehabilitation Plan for a seriously endangered or critical-status multiemployer plan. 

Generally applicable improvements for multiemployer plans endorsed by the Coalition’s proposal are: 

• An increase in the maximum PBGC guarantee for multiemployer plan benefits, from the current $429 a year times years of service to $669 a year for 

each year of service (raising the guarantee for someone with 30 years of service from less than $13,000/year to slightly more than $20,000); 

• Federal guarantees for pension compliance bonds issued by employers, the 

proceeds of which would be earmarked for contribution to a multiemployer 

plan to retire its outstanding unfunded liabilities, and 

• Several technical adjustments to the endangered plan rules, to resolve inconsistencies and ambiguities. 

* * * * * 

We know that this is an ambitious agenda and that the subject matter looks both 

complex and arcane. But underlying the algorithms, actuarial notations and tax jargon is the retirement security of real rank-and-file workers. With them in mind, we 

hope that you will consider these proposals seriously. The Multiemployer Coalition 

will be happy to answer any questions or provide any additional information available to it that might help you with this task. 

f 

Mr. NEAL. The Chair would recognize Damon Silvers, who is associate general counsel, AFL–CIO. 


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STATEMENT OF DAMON A. SILVERS, 

ASSOCIATE GENERAL COUNSEL, AFL–CIO 

Mr. SILVERS. Good morning, Chairman Rangel, Ranking Member Camp, Congressman Neal. My name is Damon Silvers, and I 

am an associate general counsel of the AFL–CIO. Our 55 member 

unions and 12 million members participate in both single and multiemployer plans. I obviously appreciate the opportunity to appear 

before the committee. 

Defined benefit pension plans have a number of features that 

make them particularly effective structures for providing retirement income security. The first of them is significant sustained employer funding of these plans. Features additionally include insurance against longevity—outliving your benefits, insurance against 

investment risk, professional investment management, and economies of scale. 

You are going to be taking up the problems that are associated 

with plans that don’t have these features in the second half of this 

hearing. 

The Pension Protection Act, however, has at its heart a fundamental misunderstanding about the nature of defined benefit pension plans. That act is built on the assumption that a pension plan 

is like a deposit-taking institution where all funds can be withdrawn at any time, and thus the plan must be in the position to 

meet most or all of its benefit obligations at any moment. The PPA 

undid a funding regime that was based on averaging assets over 

time and spreading funding obligations and replaced it with one 

based on arbitrary snapshots. 

Now, the PPA’s approach adds volatility to pension funding requirements, even in relatively favorable market conditions, as do 

recent changes to the pension accounting rules by FASB. In conditions such as we have seen in the last 24 months that the other 

witnesses have referred to, this volatility is so extreme that it 

threatens the very survival of what remains of the private sector 

pension system. 

During market downturns, PPA requires employers to radically 

increase their funding to make up for large, unrealized market 

losses. Employers must make these payments just at the moment 

when employers themselves are likely to be weakest. While some 

tightened funding requirements may be necessary to prevent a 

downward spiral in weaker plans during a market crisis—Judy alluded to this a moment ago—funding obligations should not be 

based on one-time asset valuations or one-time discount rates. 

In this environment, employers that are providing retirement for 

their employees’ retirement security—responsible employers—are 

under great pressure to cease doing so from multiemployer plans. 

Each employer that does so creates greater pressures on the next 

employer to follow suit. 

The long-term implications for the provision of retirement security across our economy and the ability of retired Americans to contribute to our consumer economy are very serious. 

Consequently, the AFL–CIO urges Congress to address the retirement security crisis in two steps. First, pension funds need immediate relief from the provisions of the PPA that force funds to 

behave as if they had to pay out all benefits at any one time. This 


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relief should generally take the form of a return to a smoothing approach to pension valuation. This return should be understood as 

a return to the proper approach to pension valuation, not as a deviation from that approach. 

We should also recognize the extent to which interest rates, 

which are driving the liability side in a negative direction against 

funds, interest rates since 2008 are in fact a product of public policy, of Federal Reserve interventions, for good reasons, to protect 

our banking system and our housing markets; but they have the 

consequence of inflating the liability side, just as the asset side is 

collapsing. 

At the same time, Congress should consider a number of more 

temporary measures to ease the procyclicality of the current pension regulatory system, to preserve active plans, and prevent pension fund weakness from contributing to downward pressure on the 

economy as a whole. 

Here, as has been indicated by a prior witness, Congress should 

provide relief only to those plans where participants are accruing 

benefits, and should require continued benefit accrual during the 

period the relief is in effect. 

However, undoing the destructive aspects of the PPA will not be 

sufficient to stabilize America’s private pension system. For that, 

Congress should look in the long term to the principle of universal 

shared responsibility for retirement security; government, through 

Social Security; individuals through savings; and employers 

through minimum retirement benefit funding obligations for all 

employers. 

Congress should act and act fast, as a prior witness has stated, 

to ensure that the system of pension regulation does not act as one 

more headwind retarding economic recovery. 

I hope I have given in this testimony broader context for understanding this action as part of an approach to regulating pension 

funds for what they are: financial intermediaries with long-term 

time horizons. 

Thank you very much for the opportunity to appear before you 

today and I welcome your questions. 

Mr. NEAL. Thank you, Mr. Silvers. 

[The prepared statement of Mr. Silvers follows:] 

Prepared Statement of Damon Silvers, Associate General Counsel, AFL–CIO 

Good morning Chairman Rangel and Ranking Member Camp. My name is Damon 

Silvers, and I am an Associate General Counsel of the American Federation of Labor 

and Congress of Industrial Organizations (AFL–CIO). On behalf of the AFL–CIO, 

our 55 member unions and 12 million members, I appreciate the opportunity to appear before this Committee to discuss the critical issue of pension funding in the 

context of the current economic and financial crisis and the long term crisis of declining retirement security for American workers. 

In this testimony, I hope to give the Committee a framework for taking up the 

issue of pension funding in the midst of the economic crisis. I want to make two 

basic points. First, the last thing we should be doing now is shutting down viable 

retirement vehicles. Absent funding relief, plan sponsors may have no alternative 

but to freeze viable pension plans, cutting retirement incomes just when our economy is most vulnerable to demand side shocks. Second, and more profoundly, putting pressure on what remains of the defined benefit pension system will worsen 

the long-term retirement security crisis by removing plan structures without proposing any viable replacement. The short term approach the Pension Protection Act 

takes to the valuation of pension assets is both mistaken as an analytical matter 

and is a powerful accelerant to these fundamentally destructive trends. 


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I’d like to begin with a brief survey of the recent history of retirement in the 

United States. Prior to World War II, pensions were unusual, and generally only 

managers, relatively privileged white-collar employees, and public sector workers received them. Following World War II and the growth of the labor movement, pension coverage increased dramatically. By 1980, 50% of the private sector workforce 

was covered by a defined benefit pension plan. In the public sector, pension coverage 

was close to universal, as it remains today. 

This growth in pension coverage, combined with the creation of Social Security 

and Medicare, created retirement as a time of life the typical American could look 

forward to, rather than fear. 

Defined benefit pension plans have a number of features that make them particularly effective structures for providing retirement income security. 

1) Funding levels: In the United States, defined benefit pension plans have typically been funded at levels averaging around 8% of payroll. Funding at this level 

provides a retirement benefit that, when combined with Social Security, is enough 

to maintain a pre-retirement standard of living. 

2) Insurance against longevity: Defined benefit pensions typically pay a lifetime 

benefit. They are structured with an insurance feature that protects retirees from 

outliving their income. 

3) Insurance against investment risk: Defined benefit pension plans function as 

financial intermediaries for the participants. While the plans are exposed to investment risk, they provide a guaranteed benefit, sheltering individuals from the timing 

risk associated with volatile assets, regardless of investment performance. 

4) Professional investment management and economies of scale: Defined benefit 

plan assets are professionally invested as a pool under a prudent expert standard. 

As a result, participants benefit from greater expertise and economies of scale not 

associated with individual accounts. Not surprisingly, defined benefit plans have 

generally been found to outperform self-directed individual account plans by significant margins. 

Despite these benefits, private sector employers have retreated from providing defined benefit pension plans since Congress created the 401(k) plan in the late 1970s. 

While employers often cite the regulatory burdens associated with defined benefit 

plans as a reason for their interest in other plan types, I believe the real issue is 

simply the substantial cost savings employers may realize by moving from defined 

benefit plans, where employer contributions average 8% of payroll, to defined contribution plans where employer contributions are in the range of 0–3% of payroll. 

This employer retreat from responsibility coincides with the decline of trade union 

bargaining strength in the private sector. 

In this environment, it is hardly surprising that those employers maintaining defined benefit plans have looked for ways to minimize contributions to them. In particular, the period of explosive 401(k) growth in the 1990s coincided with a prolonged bull market during which plan sponsors generally did not make cash contributions. Here, public policy played a destructive role. In a misguided effort at preventing employers from sheltering profits from taxes through pension contributions, 

Congress prevented employers from making tax deductible contributions to funds 

that appeared to be overfunded. 

Alarmingly, the growth in 401(k) and other defined contribution plans and the decline in defined benefit coverage in the private sector have not increased overall retirement plan coverage. Nor have the retirement assets of American workers increased. Even before the 2008 stock market crash, median 401(k) account balances 

for families with income earners in their fifties were less than $60,000. Consequently, the private sector workforce today is significantly less well prepared for 

retirement than it was in 1980. Of course, this decline in secure retirement income 

has happened as the baby boomers approach retirement age. With the passage of 

time, if no action is taken, we will almost certainly be living in an aging society 

where retirement security is out of reach for more and more of our fellow citizens, 

with serious consequences for the strength of our consumer economy. 

It was against this backdrop that Congress sought in 2006 to strengthen pension 

funding by passing the Pension Protection Act (PPA). While well intentioned, the 

Act, at its heart, reflects a fundamental misunderstanding about defined benefit 

pension plans. The Act assumes that a pension plan is like a deposit-taking institution, where all funds can be withdrawn at any time, and thus the plan must be in 

a position to meet all of its benefit obligations at any one time. The PPA undid a 

funding regime based on averaging assets over time and replaced it with one based 

on arbitrary snapshots. 

The result is a regulatory structure fundamentally at odds with the institutions 

being regulated. Modern pension funds, as financial intermediaries, invest in a mix 

of assets—some of these assets, such as high grade corporate bonds, are relatively 


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stable, income producing assets. But, a pension fund’s real value to participants 

from the perspective of managing investment risk, is its ability to invest in more 

volatile, and thus higher yield investments, most importantly public equities or 

stocks. While returns on stocks, historically, have been significantly higher than returns on bonds, stocks go through periods, even long period, of low returns—such 

as the period that began in 2000 and continues today. 

During these periods, pension fund assets must be sufficient to pay benefits and 

to avoid a downward asset spiral. However, it is simply inconsistent with the nature 

of defined benefit pension funds to require full funding at all times for pension plans 

with a healthy demographic profile. Such a requirement amounts either to a requirement to invest exclusively in short term fixed income obligations or to be so 

over-funded that the real rate of return on funds set aside for retirement in terms 

of benefits paid will be uncompetitively low. Such an approach forfeits one of the 

core strengths of defined benefit plans. It is also at odds with the federal courts’ 

interpretation of trustees’ fiduciary duties under ERISA in relation to investment 

management. 

The PPA adds volatility to pension funding even in relatively favorable market 

conditions (as do recent changes to the pension accounting rules by FASB). In conditions such as we have seen in the last twenty-four months, this volatility threatens 

the very survival of what remains of the private sector pension system. Under PPA, 

during market downturns, employers are required to radically increase their funding to make up for large unrealized market losses. Employers must make these payments just at the moment when employers themselves are likely to be weakest. 

While some tightened funding requirements may be necessary to prevent a downward spiral in weaker plans during a market crisis, funding obligations should not 

be based on one-time asset valuations. 

The effect of the PPA is to shorten the investment time horizons of pension funds. 

This fundamentally is not in the national interest. A wide range of commentators 

have noted that the short term orientation of our capital markets and our financial 

institutions was a major contributor to our current economic crisis. Recently, the 

newly elected President of the AFL–CIO, Richard Trumka, joined with Warren 

Buffett, Pete Peterson, and a number of business leaders in calling for public policy 

measures that would lengthen the time horizons of America’s capital markets. 

There is no question that even with a more rational approach to regulating funding levels, defined benefit pension plans are under serious economic pressure. Such 

pressure is inevitable when there are no effective minimum requirements for employers, generally, to contribute to their employees’ retirement security. 

In this environment, employers that are providing for their employees’ retirement 

security are under great pressure to cease doing so—to freeze single employer plans 

or to withdraw from multiemployer plans. Each employer that does so creates greater pressures on the next employer to follow suit. 

The AFL–CIO urges Congress to address the retirement security crisis in two 

steps. First, pension funds need immediate relief from the provisions of the Pension 

Protection Act that force funds to behave as if they had to pay out all benefits at 

any one time. This relief should take the form of a return to a smoothing approach 

to pension asset valuation. This return to a smoothing approach should not be understood as a temporary adoption of a less appropriate approach, but rather a return to a more appropriate approach to pension asset valuation that should be made 

permanent. 

At the same time, Congress should consider a number of more temporary measures to ease the procyclicality of the current pension regulatory system to preserve 

active plans and prevent pension fund weakness from contributing to downward 

pressure on the economy as a whole. Here, Congress should provide relief to those 

plans where participants are accruing benefits. To protect participants, Congress 

should condition such relief on participants’ continued accrual of benefits during the 

period of relief. 

However, the undoing of the destructive aspects of the Pension Protection Act will 

not be sufficient to stabilize America’s private pension system. For that Congress 

needs to look to the principle of universal shared responsibility for retirement security—government through Social Security, individuals through savings, and employers through minimum retirement benefit funding obligations. Such an approach 

would not require that employers all participate in any particular plan, just that 

they set aside enough for funds for all their employees to accumulate sufficient retirement assets to be able to achieve modest financial security in retirement. 

Variants of this type of approach to broad based retirement security are currently 

in place in Australia, the Netherlands and Switzerland. A recent GAO study that 

looked in particular at the Dutch and Swiss experiences found their programs for 

universal private pension coverage should be of interest to policy makers seeking 


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1Government Accountability Office, Alternative Approaches Could Address Retirement Risks 

Faced by Workers but Pose Trade-offs, July, 2009, revised September, 2009. Found at http:// 

www.gao.gov/new.items/d09642.pdf. 

to address the lack of meaningful private retirement plan coverage for American 

workers.1

I have attached to this testimony a more lengthy paper submitted to the University of Pennsylvania’s Wharton School addressing in more detail the challenges of 

risk management in the context of retirement security provision. This paper contains detailed sources for this testimony. 

Other witnesses before you today will address in more detail specific forms of relief needed to protect what remains of the private pension system, and to ensure 

the system of pension regulation does not act as one more headwind retarding economic recovery. I hope on behalf of the AFL–CIO through this testimony to give a 

broader context for why it makes sense conceptually to regulate pension funds for 

what they are—financial intermediaries with long term time horizons. Thank you 

for the opportunity to appear before you today and I welcome your questions. 

f 

Mr. NEAL. I would like to recognize now Mr. Mark Warshawsky, 

Director of Retirement Research at Watson Wyatt Worldwide. 

STATEMENT OF MARK J. WARSHAWSKY, PH.D., DIRECTOR OF 

RETIREMENT RESEARCH, WATSON WYATT WORLDWIDE 

Mr. WARSHAWSKY. Chairman Rangel, Ranking Member Camp, 

and Members of the Committee, I appreciate the opportunity to 

present testimony on funding relief for single-employer defined 

benefit pension plans. 

Although single-employer pension plans have declined in importance over recent years, they still represent an important source of 

retirement benefits to millions of workers and retirees. They are 

also a significant financial responsibility for major employers. 

If there is to be a good chance of a renewal of interest in defined 

benefit plans, which I know is supported by many committee members—and here, in particular, I commend Representative Pomeroy 

for his leadership—it is important that there be a supportive public 

policy environment for their continuation and creation. 

Perhaps of more immediate impact at this sensitive time in the 

economic cycle when weakness is still widespread, particularly in 

the job market, and the recovery apparently is just coming forth, 

we must be sensitive to the broad economic implications of the timing and amount of pension funding requirements. 

From 2004 through 2006, I was Assistant Secretary for Economic 

Policy at the Treasury Department, and I participated actively in 

the Bush administration’s formulations of policies in this area, ultimately leading to the passage of the Pension Protection Act. Although not perfect and somewhat incomplete, we believe that PPA 

is an important improvement over old law in many ways; in particular, to lead to fuller plan funding and more accurate measurement. 

PPA provided plan sponsors with some of the tools and incentives to ultimately better manage their funding risks, either to go 

with a liability-directed investment approach and smaller exposer 

to equities, or to build an asset cushion to reduce the need to make 

sudden large contributions and pay increased PBGC premiums. 

These are good ideas, and in more normal times will improve benVerDate Nov 24 2008 00:29 Jun 02, 2011 Jkt 063011 PO 00000 Frm 00042 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\63011.XXX GPO1 PsN: 63011

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efit security for workers and retirees, and also reduce risk exposure 

at the PBGC. 

Yet, at the exact time that the somewhat stricter funding regime 

of PPA was coming online, we experienced an almost unprecedented financial meltdown and deep recession. If the financial troubles had come later, I believe that corporate plans would have been 

in a better position, with new investment policies, or perhaps larger asset cushions; but the timing could hardly have been worse, 

and huge funding contributions would have been required when 

corporate cash flows were low and capital markets closed. 

So it was appropriate and timely that Congress passed last year, 

on a bipartisan basis, the Worker, Retiree and Employer Recovery 

Act, and that the IRS and Treasury provided this year some pieces 

of guidance that reduced the funding burden for the 2009 plan 

year. 

Our estimate is that for the 2008 plan year, the average regulatory funded status was about 96 percent, and required funding 

payments for all single-employer defined benefit plans was just 

under $40 billion. With no changes, the average funding status 

would have declined to 75 percent, and required funding payments 

would have increased to $110 billion for the 2009 plan year. But 

because of the combined impact of legislative and regulatory relief 

through September 25, we now estimate that the funding status 

will be nearly 94 percent and required funding payments of about 

$32 billion for the 2009 plan year. That required funding will decline in 2009 from 2008 is a good result for the economy, giving 

plan sponsors some breathing room. 

But the 2010 plan year is upon us, and corporate plan sponsors 

are considering its implications. Our estimate, even considering 

some recovery in the stock market thus far this year, is that the 

funding status will decline to 84 percent, and required funding payments will increase to almost $90 billion in 2010 under current 

law. 

And the 2011 plan year looks worse, even assuming some positive returns, as the funding status is projected to decline to 77 percent and the required funding payments will increase to $146 billion, a heavy burden by any measure and consideration. So it is, 

again, appropriate and important that Congress is considering further relief. 

In my written testimony, I have some details about our estimates 

of modeling the three legislative proposals which are before Congress: Representative Miller’s bill, approved by the Education and 

Labor Committee; key aspects of Representative Pomeroy’s bill, circulated in draft discussion form; and House Minority Leader Representative Boehner’s bill. Although they employ different technical 

mechanisms, each of the bills would reduce required funding payments somewhat in both 2010 and 2011. Over the 3 years, Representative Boehner’s bill gives the most relief, but the overall approach in all three bills of increasing requirements over time is 

reasonable. 

As a simple suggestion, in the spirit of all three bills but with 

the intent to give more relief, a cap could be imposed on current 

law required funding payments for the 2010 and 2011 plan years 


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1See Mark J. Warshawsky, ‘‘The New Pension Law and Defined Benefit Plans: A Surprisingly 

Good Match,’’ Journal of Pension Benefits, Spring 2007, 14(3), pp. 14–27. 

of progressively increasing percentages based on the 2009 required 

contributions. 

In closing, we believe that further legislative relief for single-employer defined benefit plans is both good economic and retirement 

plan policy. In particular, we want to emphasize that funding relief 

is not just a pension issue, but with cash flows still tight and borrowing difficult, for many plan sponsors it is a matter of jobs and 

even survival. 

I would be happy to answer your questions. And also, on behalf 

of Watson Wyatt Worldwide, I offer our technical assistance to the 

committee if you decide to pursue funding relief. 

In that regard, the committee acting quickly and positively on 

this important issue, on a bipartisan basis, would send the most 

positive signal to the plan sponsor community. 

Mr. NEAL. Thank you, Mr. Warshawsky. 

[The prepared statement of Mr. Warshawsky follows:] 

Prepared Statement of Mark Warshawsky, Director of Retirement 

Research, Watson Wyatt Worldwide, Arlington, Virginia 

Gaobo Pang and Brendan McFarland of the Research and Innovation Center at 

Watson Wyatt Worldwide provided valuable input in helping to prepare the analyses upon which most of this testimony is based. 

Chairman Rangel, Ranking Member Camp and Members of the Committee on 

Ways and Means, I appreciate the opportunity to present testimony on funding relief for single-employer defined benefit pension plans. The testimony represents the 

views of Watson Wyatt Worldwide, a global firm focused on providing human capital 

and financial management consulting services, doing business in the United States 

and in 32 other countries. 

Although they have declined in importance over recent years as the primary retirement vehicle for active workers in the private sector in the United States, singleemployer defined benefit pension plans still represent an important source of retirement benefits to millions of workers and retirees. They also are a significant financial responsibility for major employers. Moreover, as experienced in the recent financial meltdowns and market volatility, the main alternate retirement plan type—defined contribution such as 401(k) plans—did not perform so well in providing retirement security and peace-of-mind to retirees and workers, or, by preliminary indications, a smooth and orderly flow of retirements for employers. 

If there is to be a good chance of a renewal of interest in defined benefit plans, 

for the mutual advantages of employers, workers, retirees, and society, it is important, at a minimum, that there be a supportive public policy environment for their 

continuation and creation. Perhaps of more immediate impact, at this sensitive time 

in the economic cycle, when weakness is still widespread, particularly in the job 

market, and the recovery, apparently, is just coming forth, we must be sensitive to 

the broad economic implications of the timing and amount of pension funding requirements. 

From 2004 through 2006, I was Assistant Secretary for Economic Policy at the 

Treasury Department. Because of my long and extensive research background in retirement plans in prior positions, at the Federal Reserve Board, the IRS, and TIAA– 

CREF, I participated actively in the Bush Administration’s formulation of policies 

in this area, ultimately leading to the passage of the Pension Protection Act of 2006 

(‘‘PPA’’). Although not perfect and somewhat incomplete, we believe that PPA is an 

important improvement over old law in many ways, in particular, to lead to fuller 

plan funding and more accurate measurement. 

In the funding area, my modeling results indicate that, across many different economic circumstances, PPA would produce less volatile outcomes than old law.1 Old 

law was based on a knife-edge funding approach and Treasury bond yields which 

tended to go quite low in recessions, increasing pension liabilities somewhat artificially. Also, PPA provided plan sponsors with some of the tools and incentives to 

ultimately better manage their funding risks—either to go with a liability-directed 

investment approach, and smaller exposure to equities, or to build an asset cushion, 


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to reduce the need to make sudden large contributions and pay increased PBGC premiums. These are good ideas and in more normal times will improve benefit security for workers and retirees, and also reduce risk exposure at the federal guaranty 

agency, the PBGC. 

Yet, at the exact time that the somewhat stricter funding regime of PPA was coming on line, we experienced an almost unprecedented financial meltdown and deep 

recession. If the financial troubles had come later, I believe that corporate plans 

would likely have been in a better position—with new investment policies or perhaps larger asset cushions. But the timing could hardly have been worse, and huge 

funding contributions would have been required when corporate cash flows were low 

and capital markets closed. 

So it was appropriate and timely, that Congress passed, last year, on a bipartisan 

basis, the Worker, Retiree and Employer Recovery Act of 2008, and that the IRS 

and Treasury provided this year some pieces of guidance that reduced the funding 

burden for the 2009 plan year. Our estimate (see the attached article and sources 

indicated in the footnotes there for more details) is that for the 2008 plan year, the 

average regulatory funded status was about 96 percent and required funding payments for all single-employer defined benefit plans just under $40 billion. With no 

changes, the average funded status would have declined to 75 percent and required 

funding payments increased to around $110 billion for the 2009 plan year. Because 

of the combined legislative and regulatory relief through September 25, 2009, we 

now estimate that the average funded status will be nearly 94 percent and required 

funding payments about $32 billion for the 2009 plan year. That required contributions will decline in 2009 from 2008 is a good result for the economy, giving plan 

sponsors some breathing room. 

But the 2010 plan year is upon us, and corporate plan sponsors, with their long 

planning and budgeting horizons, are considering its implications. Our estimate, 

even with some recovery in the stock market thus far this year, is that the average 

funding status will decline to 84 percent and required funding payments increase 

to almost $90 billion in 2010, under current law and regulations. And the 2011 plan 

year looks worse, even assuming positive returns in the stock and bond markets, 

as funding status is projected to decline to 77 percent and required funding payments to increase to $146 billion, a heavy burden by any measure and consideration. 

So it is again appropriate and important that Congress is considering further relief. We have modeled three legislative proposals—Representative Miller’s bill approved by the Education and Labor Committee, keys aspects of Representative 

Pomeroy’s bill circulated in draft discussion form, and House Minority Leader Representative Boehner’s bill. Although they employ different technical mechanisms, 

each of the bills would reduce required funding payments somewhat in both 2010 

and 2011 plan years. Representative Boehner’s bill would also reduce 2009 funding 

payments significantly, while Representative Pomeroy’s approach would increase 

them somewhat. The funding status of plans would improve significantly in 2009 

under Representatives Pomeroy’s and Boehner’s bills, but would not change much 

thereafter in any of the bills. 

More specifically, our estimate is that under the Education and Labor Committee 

bill, funding payments would be $30 billion for the 2009 plan year, $71 billion for 

2010, and $130 billion for 2011. Under Representative Pomeroy’s approach, funding 

payments would be $41 billion in 2009, $79 billion in 2010, and $121 billion in 2011. 

Under Representative Boehner’s bill, funding payments would be $10 billion in 

2009, $71 billion in 2010, and $125 billion in 2011. Over the three years, Representative Boehner’s bill gives the most relief, but the overall approach in all three bills 

of increasing the requirements over time is reasonable. I should note that these estimates are based on a particular assumed set of future asset returns and interest 

rates; with more time, we could produce estimates for a few other sets to determine 

sensitivity to different economic conditions. 

As a simple suggestion, in the spirit of all three bills, but with the intent to give 

more relief, a cap could be imposed on current law required funding payments of 

increasing percentages of the 2009 required contributions for the 2010 and 2011 

plan years, respectively. 

Because of its many features, we did not model all of the provisions of Representative Pomeroy’s draft discussion bill. For example, his bill would offer employers an 

alternative amortization approach of funding recent shortfalls over 15 years, a good 

idea. But the maintenance of effort provisions contained in the bill represent a 

tricky challenge to modelers because we do not know whether they would cause plan 

sponsors to pass on the funding relief to avoid the burdens and intrusions of the 

retirement plan benefit requirements. More fundamentally, it is an open question 

whether the twin purposes of temporary economic relief for plan sponsors and govVerDate Nov 24 2008 00:29 Jun 02, 2011 Jkt 063011 PO 00000 Frm 00045 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\63011.XXX GPO1 PsN: 63011

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2See Gaobo Pang and Mark Warshawsky, ‘‘Reform of the tax on reversions of excess pension 

assets,’’ Journal of Pension Economics and Finance, 2009, 8(1), pp. 107–30. 3See ‘‘New Relief From IRS Reduces Required DB Plan Contributions for 2009, but Large Increase Looms for 2010,’’ Watson Wyatt Insider, 19(4), 1–3, April 2009. 4For details of the original model, see ‘‘The Future of DB Plan Funding Under PPA, Recovery 

Act and Relief Proposals,’’ Watson Wyatt Insider, 19(1), 1–6, January 2009. 5 Employee Plans News, Special Edition, IRS, Sept. 25, 2009. 

6See the Appendix. 

ernmental support of defined benefit plans are well-served by the maintenance of 

effort provisions. 

If other than temporary narrowly drawn provisions are to be considered now, a 

supportive stance to consider to encourage full and ample funding for defined benefit plans in the long run and to discourage freezes and closes would be to reform 

the punitive asset reversion tax, with due protections for plan participants and the 

PBGC, as I have proposed and modeled elsewhere.2 In a more administrative vein, 

it would help policymakers and budget experts if the PBGC’s financial statements 

and projections used the law’s corporate bond market yield curve in valuing pension 

liabilities rather than a survey of group annuity prices that cannot be audited. 

In closing, we believe that further legislative relief for single-employer defined 

benefit pension plans is good economic and retirement plan policy. In particular, we 

want to emphasize that funding relief is not just a pension issue, but with cash 

flows still tight and borrowing difficult, for many plan sponsors it is a matter of jobs 

and even survival. 

I would be happy to answer your questions. On behalf of Watson Wyatt Worldwide, I also offer our technical assistance to the Committee if you decide to pursue 

funding relief. In that regard, the Committee acting quickly and positively to this 

important issue on a bipartisan basis would send the most positive signal to the 

plan sponsor community. 

Attachment: An article forthcoming in the Watson Wyatt Worldwide Insider newsletter. 

Funding for DB Pension Plans in 2010 and 2011 Under Relief Proposals 

While recent legislative and regulatory measures have given defined benefit (DB) 

plan sponsors some funding relief for 2009, required contributions for 2010 and 2011 

have loomed large.3 In this analysis, Watson Wyatt projects funded status and required contributions for single-employer DB plans using an updated version of its 

comprehensive and realistic model of plan funding.4 It considers five scenarios: (1) 

the law prior to Sept. 24, 2009, including the Pension Protection Act of 2006 (PPA), 

the Worker, Retiree and Employer Recovery Act of 2008 (WRERA) and the March 

2009 IRS guidance; (2) current law, including the IRS guidance released on Sept. 

25, 2009; (3) House Education and Labor Committee bill (H.R. 2989) introduced in 

June 2009; (4) the main provisions of Representative Earl Pomeroy’s (D–N.D.) discussion draft released in August 2009; and (5) House Minority Leader John 

Boehner’s (R–Ohio) bill (H.R. 2021) introduced in April 2009. 

Our results indicate that the most recent IRS guidance eases the DB funding 

schedule through 2010. The legislative relief proposals further lighten the DB funding schedule and extend it into 2011, freeing up financial resources—currently in 

short supply generally—for other corporate purposes, including jobs and investment 

in plant and equipment. 

Relief proposals 

Figure 1 summarizes the major provisions in current law and the relief proposals. The Sept. 25 IRS Employee Plans News confirms that ‘‘the final regulations 

will provide automatic approval for a new choice of interest rates for the first plan 

year beginning in 2010.5 Two of the relief proposals also provide this relief. Sponsors that have the option of electing a liability valuation method will likely switch 

from mark-to-market methods to smoothed-value methods for 2010—the latter approaches are more advantageous for 2010 and 2011 plan years under the normal 

economic and financial conditions assumed.6

All three legislative proposals include a ‘‘2+7’’ rule, which allows sponsors to make 

up any 2009 and 2010 shortfalls with interest-only payments in the first two years, 

followed by normal seven-year amortization of the shortfall amount. Representative 

Pomeroy’s discussion draft additionally mandates that contributions for 2009, 2010 

and 2011 must exceed 2008 minimum contributions by specified percentages increasing over time. A wider asset smoothing corridor in the proposals from Representatives Pomeroy and Boehner would make the smoothing method more attractive for asset valuation and cushion market losses. 


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7The Appendix gives a brief description of the methodology and assumptions. 

Figure 1: Summary of funding relief proposals 

Law 

prior to 

Sept. 24, 2009 

Current law 

as of 

Sept. 25, 2009 

Education 

and Labor 

Committee 

bill 

Rep. Pomeroy’s 

discussion draft 

Rep. Boehner’s 

bill 

Amortization 

relief 

Generally 7- 

year amortization 

Generally 7- 

year amortization 

2+7 rule: interest-only 

for 2 years, 

then 7-year 

amortization 

of the 2009 

and 2010 

shortfalls 

2+7 rule; additionally, the 

minimum contributions for 

2009, 2010 and 

2011 must be 

at least 105%, 

110% and 

115% of 2008 

minimum contributions, respectively 

2+7 rule 

Asset 

smoothing 

corridor 

10% 10% Current law 20% for 2009 

and 2010 

20% for 2009 

and 2010 

Interest rate 

elections 

IRS allowed 

changes in 

2009. The 

rule for 2010 

was unknown prior 

to Sept. 24, 

and ‘‘not allowed’’ is 

modeled 

here 

Allow a 

switch from 

spot yield 

curve for 

2009 to segment rates 

for 2010 

Proposed to 

allow a 

switch from 

spot yield 

curve for 

2009 to segment rates 

for 2010; 

current law 

in effect 

Proposed to 

allow a switch 

from spot yield 

curve for 2009 

to segment 

rates for 2010; 

current law in 

effect 

Not addressed; 

current law in 

effect 

Note: Representative Pomeroy’s discussion draft allows plan sponsors to choose between applying the 2+7 

rule and amortizing the shortfalls over 15 years under various conditions. The latter is not modeled here. The 

draft also includes various ‘‘maintenance of effort’’ plan requirements, opposed by the employer community. 

Source: Watson Wyatt summary and assumptions. 

Funding model results 

Average regulatory funded status is projected to decline from 96.4 percent in 2008 

to 93.8 percent in 2009 (see Figure 2).7 The modest decline, despite horrific investment losses, is attributable to the asset value smoothing provided under WRERA 

and use of the most favorable spot rate for liability valuation allowed by the March 

2009 issue of the IRS’s Employee Plans News (the composite corporate bond rate, 

CCBR, which is used as a proxy for spot yield curve, peaked in October 2008). Without the Sept. 25, 2009, IRS guidance allowing interest rate election, average funded 

status, however, would have plummeted to about 78 percent in 2010 and to 77 percent in 2011, thereby driving required contributions up to roughly $121 billion in 

2010 and to $145 billion in 2011. Moreover, some sponsors would contribute more 

to avoid benefit restrictions at the 80 percent funded threshold—the model conservatively projects another $7 billion and $12 billion extra contributions for 2010 and 

2011, respectively. 

The IRS’s automatic approval of interest rate elections in 2010 is projected to 

boost average funded status to nearly 84 percent in 2010 and 77 percent in 2011. 

This scenario lowers required contributions to $89 billion for the 2010 plan year but 

requires $147 billion of contributions for 2011. 

The Education and Labor Committee bill would increase measured funded status 

in 2009, reduce required contributions in 2009 and 2010, and postpone a large part 

of the funding obligations to 2011. Compared with the Sept. 25 IRS guidance, the 

two-year interest-only rule here provides further funding relief in terms of lower 

contributions for the 2009–2011 plan years. 

Representative Pomeroy’s discussion draft would afford the biggest gains in funded status for 2009 and 2010, both because the draft permits a wider asset smoothing 

corridor and because contributions for new plan years must exceed 2008 minimum 

contributions by certain margins. Note that contributions in 2009 exceed current 

law requirements. In this scenario, contributions for 2009–2011 jump from roughly 

$41 billion to $121 billion, the funded status of nearly 77 percent in 2011 remains 


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8One criticism of our model has been that, in the absence of data and plan-specific information, credit balances are ignored. Market value declines, past use and forfeitures (both voluntary 

and required) have likely significantly reduced credit balances outstanding. Moreover, from the 

perspective of employers making job decisions, credit balances are largely as valuable as cash, 

so reducing credit balances should have essentially the same economic impact as making cash 

contributions. 

close to the level produced by current law, and fewer plans face the 80 percent funding threshold for benefit restrictions. 

Representative Boehner’s bill provides the greatest funding relief for 2009—total contributions would be only around $10 billion. In later years, the bill results in 

higher contributions and funded status similar to the other legislative proposals. 

Note that the interest rate elections and/or the proposed wider asset corridors reduce the shortfalls recognized for 2009 and 2010 plan years. This in turn would 

make the amortization payment significantly smaller than otherwise in 2011 when 

the 2+7 rule reached its seven-year amortization component for these specific shortfalls. 

Figure 2: Measured funded status and contributions under 

current law and proposals 

Plan 

year 

Law prior 

to Sept. 24, 2009 

Current 

law as of 

Sept. 25, 2009 

Education 

and Labor 

Committee 

bill 

Rep. 

Pomeroy’s 

discussion 

draft 

Rep. 

Boehner’s 

bill 

Average measured 2007 95 .9 95 .9 95 .9 95 .9 95 .9 

funded status (%) 2008 96 .4 96 .4 96 .4 96 .4 96 .4 

2009 93 .8 93 .8 93 .8 102 .3 102 .3 

2010 77 .7 83 .8 83 .7 84 .5 82 .5 

2011 77 .4 76 .8 75 .7 77 .1 74 .5 

Contributions 2007 53 .1 53 .1 53 .1 53 .1 53 .1 

($b) 2008 37 .9 37 .9 37 .9 37 .9 37 .9 

2009 32 .4 32 .4 30 .4 40 .8 10 .4 

2010 120 .5 89 .0 70 .9 79 .0 71 .4 

2011 145 .2 146 .5 130 .0 120 .8 124 .9 

Extra contributions 

($b) 2008 0 .5 0 .5 0 .5 0 .5 0 .5 

2009 0 .9 0 .9 0 .9 0 .2 0 .2 

2010 7 .0 3 .1 3 .4 4 .0 7 .5 

2011 11 .7 11 .6 4 .2 6 .7 3 .9 

Notes: Contributions are the minimum required by law. Extra contributions by certain plans are to avoid 

benefit restrictions at the 80 percent funded status level. 

Source: Watson Wyatt calculations. 

These results indicate that the funding relief in the September 2009 IRS guidance 

enables DB plan sponsors to avoid burdensome contribution obligations for 2010. 

The 2011 funding obligations, however, remain large. These obligations could divert 

financial resources that companies would otherwise spend on hiring workers—or 

continuing to employ them—and on increasing their compensation and paying for 

other benefits,8 thus escalating the risk of a jobless economic recovery. The funding 

relief proposals would further alter the schedule and magnitude of DB contributions, 

in varying patterns. Like past relief actions, further relief would signify bipartisan 

congressional and administration support for keeping DB plans viable for American 

workers and employers. 

Appendix: Methodology and assumptions 

We use a comprehensive model to simulate the dynamics of DB plans. The model 

codes in the shortfall amortization schedules of the PPA, the provisions of WRERA 

and IRS guidance. It uses 2007 initial funded status, 2007 aggregate liabilities of 


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$1.857 trillion, matrices of asset allocations by funded status and plan size for 

2007–2009 as data allows, and market conditions as of Sept. 15, 2009. This analysis 

assumes that by the end of 2011, market interest rates will have reached year-end 

2007 levels. The data sources include the IRS, Form 5500 and Global Financial 

Data. Average returns for equity and bond assets in 2010 and 2011 are based on 

the forward-looking projections of Watson Wyatt Investment Consulting (WWIC), 

which incorporates higher market volatilities in the near term and assumes a gradual convergence to equilibrium over a five-year period. Figure A–1 lists the basic 

economic and financial assumptions. 

Figure A–1: Economic and financial assumptions at 

end of calendar year (%) 

2007 2008 2009 2010 2011 

Equity return 5 .5 –37 .0 18 .7 9 .7 9 .5 

Bond return 5 .2 1 .8 15 .5 4 .4 4 .3 

CCBR 6 .28 7 .90 6 .03 6 .16 6 .28 

2nd segment rate 5 .90 6 .38 6 .73 6 .29 6 .16 

3rd segment rate 6 .41 6 .68 6 .82 6 .29 6 .16 

Notes: 

1. The most favorable CCBR (as a proxy for spot yield curve) for the 2009 plan year was 7.90 

percent in October 2008, while December 2008 had the highest segment rates. 

2. CCBR and segment rates for 2009 are as of August and September 2009, respectively. The 

end-of-2011 CCBR is set to the year-end 2007 level, the 2nd and 3rd segment rates (assumed to be equal in 2010 and 2011) are correspondingly calculated as 24-month moving 

averages. 

3. Asset returns for 2009 are based on S&P500 and Dow Jones corporate bonds total return 

indexes as of Sept. 15, 2009. Annual equity and bond returns for 2010 and 2011 are based 

on WWIC forward-looking (July 2009) projections. Monthly returns are log-linearly interpolated. 

Source: Watson Wyatt calculations and assumptions. 

f 

Mr. NEAL. I would now like to recognize Chairman Rangel. 

Chairman RANGEL. Before I turn the panel back over to you, 

I would like to ask Mr. Nuti if he would describe the expected size 

of your company’s expected minimum contribution for the 2009 

plan year and the 2010 plan year. How do these minimum contributions vary from your company’s contribution in 2008 and earlier years? 

Mr. NUTI. The best way to think about this, Chairman Rangel, 

is over the next—NCR is approximately $1 billion underfunded 

today, based on the market downturn, the third worst market 

downturn in the last nearly 100 years that we have suffered over 

the last 12 months. That $1 billion, if you just used straight-line 

amortization, would be approximately $150 million a year of additional cash we would need to use to fund the plan over that time 

period. That breaks down for us, using the simple math I used before at $50,000 per employee, to about 3,000 employees that we 

may need to lay off as a result of that issue alone. So that gives 

you a sense of the magnitude. 

And if you looked at the other companies in the ABC that we are 

talking about, some are significantly larger and have even larger 

burdens than our own significant burden I just discussed. 

Chairman RANGEL. Thank you. 

Mr. Neal. 

Mr. NEAL. Thank you very much, Mr. Rangel. 

The Chair would now recognize Mr. Camp from Michigan. 

Mr. CAMP. Thank you very much. I appreciate that. 


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Mr. Warshawsky, as we think about relief for defined benefit 

plans, obviously balancing the competing interests we have heard 

other people mention today—workers, retirees, employers and taxpayers—we need to make sure pension plans are fully funded so 

workers can be confident they get the benefits they are entitled to, 

and we need to protect the financial health of the PBGC; but at the 

same time, with this lingering recession and the credit crisis, declining stock prices and other items, it is appropriate to provide 

some temporary relief from the stricter funding rules Congress enacted in 2006. 

How can Congress best strike this balance? 

Mr. WARSHAWSKY. Mr. Camp, I believe the best way of striking a balance is to give temporary relief in the context of the preservation of PPA. I think that is the right balance in terms of the 

competing interests which you correctly noted. 

Mr. CAMP. So your view is that, given that some relief should 

be necessary, that it makes more sense to provide temporary relief 

from those 2006 rules as opposed to permanently changing the 

rules themselves? 

Mr. WARSHAWSKY. Yes. And I would note that we probably 

will need more relief—some of the bills indicate the relief as applied to the 2009 and 2010 plan years, but unfortunately the depth 

of the problem indicates that it might be necessary to include the 

2011 plan year as well. 

Mr. CAMP. Last Friday, the Treasury Department announced 

that it will be providing guidance regarding interest rates that 

plans may use going forward. Can you discuss the significance of 

the Treasury’s announcement on plan funding requirements? 

Mr. WARSHAWSKY. The Treasury has been very helpful in this 

area, both earlier in the year in March, and recently. In particular, 

it relates to the use of interest rates that are used to measure liabilities for plans. And both for 2009 and 2010, they provided flexibility within the context of PPA and within the context of the regulations, which have a major impact in reducing 2009 contributions. 

Mr. CAMP. Smoothing allows plans to deal with unusually large 

declines in asset values by adjusting those values in a particular 

range. Can you describe for the committee in laymen’s terms how 

each of the major proposals—Boehner, Miller and Pomeroy—deal 

with that issue of smoothing and the merits of each approach? 

Mr. WARSHAWSKY. That is a tall order to describe in laymen’s 

terms. Maybe the one way of approaching it is there are different 

technical aspects of each of the bills. In both Representative 

Boehner’s bill and Representative Pomeroy’s bill, if my memory 

serves me correct, one way in which they accomplish the temporary 

relief is by allowing a wider corridor of asset smoothing for the 

losses in 2009 and 2010. There are a lot of ways of accomplishing 

that. I would almost characterize those as technical matters. I 

think the important thing is that there be the relief, and that it 

be temporary. And there are a lot of ways of accomplishing that. 

Mr. CAMP. Are you familiar with the Miller bill on that issue? 

Mr. WARSHAWSKY. The Miller bill does not expand the asset 

smoothing corridor. 

Mr. CAMP. All right. Thank you very much. 

Mr. NEAL. Thank you, Mr. Camp. 


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Mr. Warshawsky, let me drill down a bit with you on some of the 

assumptions that you discuss in your study. If we were sitting here 

2 years ago, I presume that your assumptions would have been 

very different than the assumptions you would offer today for the 

next 2 years. Do you want to talk a little bit about the assumptions 

in your study for the next couple of years? 

Mr. WARSHAWSKY. We used the assumptions that Watson 

Wyatt uses for its investment advice. For 2009, basically we assume market advance through September 15, and no further advance through the remainder of the year. And then for 2010 and 

2011, we assume about an 8 to 9 percent positive return. So not 

gangbuster returns, but neither a decline, sort of a middle-of-theroad approach. And on interest rates, we assumed a gradual decline in interest rates that are used to value liabilities as conditions, as the economy settles down. 

So those are middle-of-the-road assumptions. I think it would be 

very valuable, if you have an interest, to do a little bit of sensitivity 

testing of the model, and we could easily do that. 

Mr. NEAL. How does this compare to assumptions that have 

been made in the past, considering this atmosphere? 

Mr. WARSHAWSKY. I think these are very standard assumptions and would have been made in the past as well. 

Mr. NEAL. Mr. Rosenthal, you have indicated in your testimony 

that the IRS relief provided earlier this year has been fairly helpful. I understand that businesses have flexibility in selecting the 

relevant discount rate which can impact the present value of their 

liabilities. 

Does that mean that the true financial picture of private pension 

plans in the United States could be worse than your testimony has 

suggested? 

Mr. ROSENTHAL. The IRS relief allowed companies to look back 

to interest rates that were in effect in October 2008, which are substantially higher and, therefore, derived lower liabilities than interest rates in effect at the beginning of 2009. So that lookback, while 

very helpful for plans, did reduce plan liabilities by approximately 

10 to 20 percent, based on our study. 

Mr. NEAL. Let me recognize the gentleman from Michigan, Mr. 

Levin, to inquire. 

Mr. LEVIN. Thank you very much. 

You know, as we read the materials, and now hearing your testimony, it did bring back some memories of our debate of a few years 

ago, and it involved real technical issues. I think the bottom line— 

and some of us objected to parts of the legislation as being too 

stringent. 

I take it from the testimony of most, if not all of you, it is turning 

out that in retrospect, what was written then is not working now. 

And there is a serious problem facing these pension plans. 

Mr. Warshawsky, when I read your testimony, I kind of came to 

that conclusion. You essentially said what was done a few years 

ago was better than what was replaced, but we face a basic issue 

today. And I think all of you agree we have to do something; is that 

right? Does anybody think we should do nothing? I know there is 

disagreement as to under what conditions, but I think all of you 

agree we need to act; is that true? When you nod—yes. So in other 


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words, what was done several years ago isn’t meeting the requirements of today. 

But none of the bills, at least what we have before us, doesn’t 

make a basic change in the structure. Mr. Pomeroy’s bill, which is 

still in the process of being worked out, I think more effectively addresses some of these issues. So the difference of opinion, I think, 

is under what conditions this relief for these years should be provided; is that correct? And we then get into the important issue as 

to what should be done with plans that have frozen benefits, reduced benefits, or frozen out people from being covered; is that 

true? 

So to try to boil this down in this important but somewhat technical area, what we are facing is not whether, but how much and 

under what conditions. I have just a couple minutes. 

Mr. Stein, you take the position that there are conditions that 

should apply here, right, relating to frozen plans? 

Mr. STEIN. Yes. 

Mr. LEVIN. And that is where your disagreement is. 

Mr. Silvers, you talked about some of the basic issues, so spend 

a couple minutes telling us what you think the disagreements are 

in terms of what we do right now, not redoing this. And I think 

the administration is taking some time because it faces this dilemma of a bill that is not adequate for yesterday, today, and near 

tomorrow, right? So they are trying to wrestle with this. 

So, Mr. Silvers, in the minute or two I have, why don’t you—because I think you talk about something a little more basic. 

Mr. SILVERS. Yes. Congressman, I think there are two longerterm agendas, and then there is the immediate. And you asked 

what the disagreement was here. I think that the disagreement is 

whether or not we ought to craft the relief not just to prevent a 

catastrophe immediately, but to ensure the continued health of the 

actual provision of benefits to employees. The business community 

would like the relief to be unconditional to any plan, regardless of 

whether the plan continues to be a living plan. 

I think the position of the advocates here for American workers 

and for pension participants is that we should not be giving relief 

to companies who are essentially withdrawing from, retreating 

from the obligation to provide retirement security to their employees. That is the disagreement. 

Now, more longer term, I think there is a disagreement about 

whether or not there needs to be ongoing change to the Pension 

Protection Act. 

And finally, I am sure there would be a disagreement, if we got 

into it, as to whether or not employers really ought to be responsible, in part, for the retirement security of their employees. 

Mr. LEVIN. I hope there would not be much disagreement about 

that. We have enough to disagree about. 

My time is up, so I think it would be helpful, as we proceed, that 

we try to flesh out where we are and what the issues are in terms 

of immediate action so that we can act. Since all of you agree we 

need to act, we need to act. 

The administration, I think, Mr. Chairman, is going to come to 

forth with some recommendations in the near future. Thank you. 

Mr. NEAL. [Presiding.] Thank you, Mr. Levin. 


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Consistent with that suggestion, this committee has received a 

letter signed by almost 200 companies and trade organizations representing employers, asking for immediate relief on the pension 

funding issue. 

I would like to enter it into the record at this point—without objection—and ask that the staff continue to distribute a copy to the 

Members of the Committee. 

With that, I would like to recognize the gentleman from California, Mr. Herger, to inquire. 

Mr. HERGER. Thank you very much, Mr. Chairman. 

[The information follows:] 

******** COMMITTEE INSERT ******** 

Mr. HERGER. Mr. Warshawsky, some have proposed that additional funding relief be conditioned on employers accepting a maintenance of effort obligation or certain limitations on executive compensation. I understand that employer groups view additional funding relief as absolutely imperative, so much so that some of them 

are willing to accept these kinds of conditions in exchange for this 

relief. 

Is it possible that some employers might be unwilling to accept 

relief tied to these kinds of conditions, effectively limiting the 

breadth of relief that Congress is considering? 

Are you concerned that linking these kinds of conditions to funding relief for the first time may set a precedent for the future, possibly undermining the voluntary nature of employer-sponsored retirement plans? 

Mr. WARSHAWSKY. Mr. Herger, I am concerned on both counts. 

First of all, the maintenance of efforts and provisions do undercut the economic relief that funding relief represents because $146 

billion for 2011 is a massive number, and would have very bad implications for the broad economy. 

When we talk about relief, you know, in general terms—certainly 

the stimulus package earlier in the year—generally, we do not do 

a lot of conditioning because we are interested in the economic impact, and if that is the main purpose here, which I believe it should 

be, there really should not be a lot of conditioning. 

The second point relates to more of a pension policy issue, which, 

of course, takes time to consider, and it therefore, in and of itself, 

I think, delays the immediacy of what relief is needed. I think the 

quicker we act on this, the stronger signal it sends, and therefore, 

doing a lot of conditioning, leads to unnecessary delays, and it also 

represents a very significant policy change. 

Mr. HERGER. Again, Mr. Warshawsky, I believe that, as we consider defined benefit funding relief, we need to carefully balance a 

number of competing interests—those of workers, retirees, employers, and taxpayers. 

On the one hand, it is important for Congress to ensure that pension plans are fully funded so that workers and retirees can be confident that they will receive their promised retirement benefits. It 

is also important to protect the financial health of the PBGC, 

which ensures private pension plans, to avoid a situation where 

American taxpayers are forced to bail out the PBGC. 


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At the same time, given the lingering recession, the ongoing credit crisis and a decline in stock prices as compared to pre-recession 

levels, it may be appropriate to provide employers some temporary 

relief from the stricter funding rules Congress enacted in 2006. 

Can you, please, share your thoughts about how Congress should 

strike this balance? 

Mr. WARSHAWSKY. Mr. Herger, as I said in my testimony, I 

think the problem here is the matter of timing, that the onset of 

PPA and the somewhat stricter regime that it represented came exactly at the time that the stock market declined in almost an unprecedented manner, not just the level but the rapidity of it, and 

therefore, the temporary relief is necessary. 

Even with as large a decline as what we saw, if we had had more 

years in the development of response to PPA, either in terms of investment changes or a development of funding cushions by employers, we would have been in a much better position to deal with this 

event. 

Mr. HERGER. I thank you. 

Thank you, Mr. Chairman. 

Mr. NEAL. Thank you, Mr. Herger. 

The gentleman from Georgia, Mr. Lewis, is recognized to inquire. 

Mr. LEWIS. Thank you very much, Mr. Chairman. 

Mr. Chairman, I want to thank you for holding this hearing 

today on this very important issue. 

I want to thank all of the members of this panel for being 

present and for your contribution. We all know and understand 

that one of the main reasons companies offer pension plans is to 

stay competitive and to attract employees, but for many employers, 

it is more than just the business reasons. 

Can you tell us more about the moral obligation of an employer 

to offer retirement benefits to their workers? 

Any of you may respond. 

Ms. MAZO. Mr. Chairman, I would like to talk a little bit from 

the perspective of the multi-employer community that I am representing and, first of all, take the time to just point out that the 

issues that we are raising about funding and the temporary assistance that we are asking for is quite different than what the community needs. 

In part, that is because PPA was, in some ways, more adaptable 

for the multi-employer plans than it was for the plans, but the 

multi-employer plans represent a commitment by the employers 

and the unions that represent the workers. They are part of a 

package. Typically, they are part of a package that includes health 

benefits and retirement benefits and sometimes other benefits 

where, because these promises are being made by everybody in the 

industry, they do represent a moral commitment by the entire industry to take care of the people who have been generating the 

wealth within that industry. 

These groups are remaining committed to defined benefit plans, 

committed to ongoing defined benefit—not to freezing the plans if 

they can possibly afford not to—and committed to keeping the employers viable to avoid not having plans and their pension and 

health commitments be so strenuous that they strangle the employVerDate Nov 24 2008 00:29 Jun 02, 2011 Jkt 063011 PO 00000 Frm 00054 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\63011.XXX GPO1 PsN: 63011

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ers who are the lifeblood of the industry, the jobs and the future 

of the workers who are covered by the plans. 

Mr. LEWIS. Yes, sir. 

Mr. SILVERS. Congressman Lewis, first, let me just say that it 

is an honor to discuss moral issues with you, sir, and that my written testimony goes into this issue in some detail. 

We inherited in the postwar world a pension system that provided coverage through defined benefit plans that leveraged an employer’s capacity to be able to manage money expertly, and that involved substantial employer contributions. We had defined benefit 

pension funds covering 50 percent of the American workforce. Since 

1980, that number in the private sector has declined to under 20 

percent. 

The consequence of that decline has been the wholesale deterioration of retirement security for American workers such that the 

typical defined contribution balance for families in their 50s is 

around $60,000. It was that before the collapse of 2008. That represents a societal moral failing. 

We are here today—and the substance of the disagreement that 

exists between the employee advocates and the employers here is 

a disagreement about whether or not there is a moral obligation on 

the part of the Congress to ensure that, in the course of providing 

the relief, we bolster pension plans that can actually provide retirement security or whether we essentially provide relief to employers 

who are running away from that moral obligation. That is the fundamental issue facing the Congress. 

Mr. LEWIS. Thank you. 

Mr. NUTI. Congressman Lewis, I will be short, but I want to be 

clear as well with you with regard to how we at NCR and, candidly, the members of the American Benefits Council view pensions. We view them as a moral obligation and very important. 

Over the last 10 years, my company has paid benefits of $1.5 billion into our pension plan, and we were fully funded as of the 1st 

of January 2008. The Pomeroy bill also holds us accountable to 

fully funding that plan on schedule and on time and maintaining 

our commitments to our employees—our pensioners—and that 

moral obligation. 

The 2 and 7 method that is being recommended—what it does is 

recognizes that, over the past year to a year and a half, there has 

been an incredible event in the marketplace that has occurred and 

with respect to the global economic crisis and the impact it has had 

on our return on assets and on our pension portfolios, and it allows 

us simply to recover but does not allow us to disregard our commitment in that same time period to fully funding the pension plan, 

which we intend to do and which all of the members of our council 

intend to do. 

Mr. LEWIS. Thank you very much. 

Mr. NEAL. Thank you, Mr. Lewis. 

Let me advise our members and witnesses that we have three 

votes on the House floor. The committee will recess until after the 

last vote, and I think that we can speed this up so that we can resume testimony very quickly. 

[Recess.] 


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Mr. NEAL. With that, the gentleman from Texas, Mr. Johnson, 

is recognized to inquire. 

Mr. JOHNSON. Thank you, Mr. Chairman. 

Mr. Rosenthal, are you ready? 

Mr. ROSENTHAL. I am, sir. I will even turn the microphone on. 

Mr. JOHNSON. In your testimony, you claim many ‘‘defined benefit plans are going to face significant higher required contributions 

in 2010.’’ Absent any legislative relief, would you know what percentage would be able to meet their requirements in 2010? 

Mr. ROSENTHAL. That I do not know, sir. I do know that interest rates are well below where they were in October 2008, which 

will make liability significantly higher for plans come 2010. 

Mr. JOHNSON. Okay. In your testimony, you contend ‘‘ . . . 

many calendar year defined benefit plans are in a good position to 

meet their required contributions for 2009.’’ 

In terms of investment return and legislative and regulatory relief, what has helped these plans the most in being in a ‘‘good position’’? 

Mr. ROSENTHAL. Mostly the ability to use that October 2008 

full yield curve where interest rates, in a sense, peaked in 2008 

back in October. So the ability to look back, which came from the 

IRS guidance provided in March of this year, helped most of those 

plans. 

Mr. JOHNSON. Notwithstanding the extra percentage we gave 

them? 

Mr. ROSENTHAL. Of course. 

Mr. JOHNSON. Yes. Thank you, sir. 

Mr. Warshawsky, compared to defined benefit plans, you state 

defined contribution plans, such as 401(k)s, ‘‘did not perform so 

well in providing retirement security and peace of mind to retirees 

and workers’’ during the recent downturn. 

With that in mind, do you have any suggestions or ideas in terms 

of what can be done to provide a more secure retirement for workers who have defined contribution plans as their primary retirement vehicle? 

Mr. WARSHAWSKY. Mr. Johnson, I think there are a number 

of elements that can be put together that would make defined contribution plans more effective. 

One is the steady stream of contributions over a worker’s life. I 

think that is an important element. Certainly, an important aspect 

is the investment strategies that workers use, and also, as workers 

approach retirement, they need to consider that that money that 

they have accumulated is not just a lump sum, but is something 

that they will then need to support them in retirement as an income flow. 

So, although, you know, a lot of people have talked about 

annuitization, I think it is a little more sophisticated than that. Basically, they need help in getting strategies for distributing assets 

in a regular and steady way into their retirement. 

So those are elements of a package, which need to be added to 

defined contribution plans, which a lot of plans do not have right 

now. 

Mr. JOHNSON. Well, that kind of leads into our next deal; but 

investment advice, in your opinion then, is important? 


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Mr. WARSHAWSKY. Well, I think there are a lot of elements— 

both the investment advice and also the products and services that 

are offered to both the participants and the plan sponsors. 

Mr. JOHNSON. Thank you. 

Thank you, Mr. Chairman. 

Mr. NEAL. Thank you, Mr. Johnson. 

The Chair will recognize the gentleman from North Dakota, Mr. 

Pomeroy, to inquire. 

Mr. POMEROY. Mr. Chairman, thank you. 

I want to begin by saying how much I am enjoying this hearing. 

I believe that the issue of pensions is urgently important, and I 

just think the panel has been terrific relative to bringing important 

information about the need for funding relief to our Ways and 

Means Committee. 

I want to begin, I think, with Mr. Nuti. Am I pronouncing that 

correctly? I want to thank you for being here. Often we have the 

HR department’s representative or some other department’s representative, but to have the CEO of a global company come to talk 

about the importance of pension funding issues relative to employment ramifications across your firm or across the marketplace is 

extremely valuable information, and because it has been a while 

since your initial testimony, I would like to get you back to essentially what you have already covered so well, but let’s emphasize 

it some more. 

This is a jobs issue, Mr. Nuti, is it not? 

Mr. NUTI. It is, indeed. It is a very serious jobs issue, and I 

think it is important that we understand the implications of your 

decisions relative to jobs. 

The reality is—and I said this before—if we do not move forward 

with pension reform, we and hundreds of other companies are 

going to have to cut jobs. Let me be very clear on that. There is 

no other way for us to cover the cost of providing the pension benefits we will need to, which, by the way—I want to be clear on this— 

will be amortized over, you know, 30 years. 

So the money we are putting into a pension today or next year 

or the year after is to pay benefits over a 30-year period while, 

now, we sit here today, making a very critical decision on this, 

knowing full well, with the stimulus ending in 2010, coming to a 

halt, at a time when jobs will be a much more important issue to 

our country. 

We have a very uncertain economy we are still navigating, and 

that all of our CEOs are navigating through. This has to be of 

paramount concern to you because you will see jobs eliminated, and 

you will see investment eliminated in this country, which impacts 

our competitiveness, U.S. competitiveness, in the marketplace. 

Mr. POMEROY. Importantly, right across the panel, there seems 

to be agreement that some funding relief is appropriate. We have 

got different ways of doing it. Some would revise a bit the provisions of the Pension Protection Act. Some would give temporary relief. There seems to be agreement across the panel that some relief 

is appropriate. 

Mr. Warshawsky, you have spoken to that very clearly. I want 

my friends on the other side of the dais to hear you clearly. Some 


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pension funding relief is appropriate under these extraordinary circumstances; is that correct? 

Mr. WARSHAWSKY. Yes, Mr. Pomeroy, because of the extraordinary circumstances in asset markets. 

Mr. POMEROY. Thank you. We have to take that agreement and 

really internalize it. We have got some work to do as a committee. 

Jobs and retirement security are at stake. 

For purposes of argument now—we do not see the world entirely 

similarly—Mr. Warshawsky would have temporary relief. That is 

better than nothing; but I believe the prospect is, if you do temporary relief, well, maybe you have to do temporary relief again, 

and maybe you have to do temporary relief again; and pretty soon 

you have got companies that face extraordinary funding exposure, 

and they do not know whether the temporary relief is going to 

come or not. They really need to know what the rules are on a permanent, going-forward basis. 

Mr. Nuti, as a CEO, what is your comment on that? 

Mr. NUTI. The predictability is critical to us. We must have it. 

If I can just divert your attention to another important matter 

that is similar in scope, it is the issue of—because I think this is 

on the table—whether or not you do this for companies who have 

a defined benefits program in place today, or for one who has been 

frozen, and I think, to make that choice is a difficult one. 

First of all, I do not think that would be prudent in terms of your 

decision, because the impact it would have on the supply chain on 

an overall basis would be massive. To penalize those companies 

who have frozen defined benefit plans penalizes those employees, 

those companies and those companies’ supply chains. Let me give 

you an example: 

If you chose, as an example, to not give pension relief to a company who has frozen their defined benefits plan as a retailer, let’s 

remember that retailer also buys clothing, garments and general 

merchandise from a supply chain. They also have truckers working 

for them who truck this supply around the world. They have employees who work for the company who will be greatly impacted, 

and there are hundreds of companies who have chosen this as a 

method to control costs, particularly at a time when this economy 

is so uncertain and has damaged our companies. 

Let’s not forget that, while profits over the course of the last few 

quarters have improved, they have improved based on cost-cutting, 

not based on growth. Further cost-cutting would only damage this 

economy further, in my view, and that is exactly where we are 

headed if pension reform is not passed. 

Mr. POMEROY. If I hear you correctly, with credit remaining 

tight, if you take cash out of a business to fund under an extraordinarily conservative funding regimen, the pension plan, there are 

consequences—— 

Mr. NUTI. Huge. 

Mr. POMEROY [continuing]. The investment in a business, the 

layoff of the existing workforce, and that occurs relative to whether 

the plan is still present or whether the plan is frozen. Now, I did 

notice that, even though you indicated you would have to freeze 

your plan at NCR, as you took that step, you also froze the accruals 

for the exempt plan, for the executive suites plan. 


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Mr. NUTI. That is correct, we did. We froze our senior executive 

retirement plans at the same time. 

Mr. POMEROY. Another area—and I know my time is up, Mr. 

Chairman. I will just conclude with this statement, and we can 

ponder this in the future—is whether or not some maintenance of 

effort provisions would be appropriate. 

I would think that NCR, representing best practices, set out in 

their executive suite: what our employees live with, the executive 

suite lives with, and I think that is just matter of fundamental 

fairness. 

Thank you, Mr. Chairman. I yield back. 

Mr. NEAL. We thank the gentleman for his many years of good 

work on this issue. As I told him earlier this morning, Congressman Pomeroy is the only Member of Congress I know who can excite a crowd of actuaries. 

With that, I would like to recognize the gentlelady from Florida, 

Ms. Ginny Brown-Waite. 

Ms. BROWN–WAITE. Thank you very much. 

First of all, Mr. Nuti, I want to thank you. It was very refreshing 

to hear you start off your statement by saying you are not here for 

a bailout. That was very, very refreshing. Believe me, having 

served on the Financial Services Committee prior to Ways and 

Means, it was like, oh, yes, I have not heard that in the 6 years 

I served on Financial Services. 

I appreciate each and every one of you who came here today to 

testify. I do have a question, however, for Ms. Mazo. 

By the way, Ms. Mazo, I find, when there is a group of males testifying, the female very seldom gets asked any questions, so I am 

going to ask you a question. 

At a May 2007 Education and Labor hearing, you stated that a 

major achievement of the PPA was the recognition of the special 

context—and I am going to read this because I do not want to misquote you. Believe me, everyone sitting up here and probably those 

of you testifying have been misquoted in your lifetimes. 

You said: The major achievement of the PPA was the recognition 

of the special context of multi-employer plans and accommodating 

the collectively bargained framework in which the plans operate. 

The distinctive funding rules that were established by PPA will, we 

think, allow our plans to flourish. That is the end of your quote. 

Well, we all know that the economy has changed a whole lot 

since May of 2007; but could you provide any additional insight as 

to why multi-employer plans continue to struggle rather than flourish even as compared to single-employer DV plans that are facing 

the same, very tough economy. 

Ms. MAZO. Thank you, ma’am. It is a pleasure, with the committee largely full of men, to have a question from a woman. 

The answer is very simple. The money that they thought would 

be there is not there because it disappeared somewhere in the market. Nobody can flourish when they have lost 20 percent of their 

assets. Nobody who is made up of just being a big fund full of invested money to be paid out to people in the future can survive— 

can flourish readily by losing that amount of money. 

The one thing that was really insightful, as I said—and I completely believe this, and I think I emphasized it here, too was recVerDate Nov 24 2008 00:29 Jun 02, 2011 Jkt 063011 PO 00000 Frm 00059 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\63011.XXX GPO1 PsN: 63011

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ognizing the special collectively bargained context for the multi-employer plans was crucial. We are hearing how fundamental it is for 

single-employer plans, whether the plan year begins or ends in 

time to take advantage of interest rates in October, a 1-month’s difference or a 3-months’ difference could make all the difference in 

terms of what the cost could be for a company. 

What PPA did for multi-employer plans was, to a very great extent, allow them to avoid that sort of, if you will pardon the expression, arbitrary and abrupt, sudden and volatile demand for funding 

so that they could negotiate out, work out the needs for benefits 

and the needs for assets. One of the things PPA does for multi-employer plans if they are in serious trouble is it allows them to cut 

benefits more deeply than they would ever be allowed to before or 

they would under any other circumstances—to take away the vested benefit rights of people. That is something nobody wants to do 

if they can possibly avoid it, but they have that as a tool, too. 

The problem was, in many plans which were working their way 

towards a, really, kind of hopeful solution, they designed very careful recovery plans based on assuming they would make, maybe, 6 

or 7 percent per year, something conservative. All of a sudden, they 

lost 20 percent, and when you lose 20 percent and you have built 

a long-term plan assuming you are going to make 7, what you have 

lost is 27 percent that you have to make up. So it was basically 

they got knocked back on their heels. It was not PPA’s fault. 

What we are looking at now are some adaptations to PPA to give 

the plans the chance under this chain of circumstances to bring 

themselves back to soundness so that they can continue on 

that—— 

Ms. BROWN–WAITE. So is it because you have all of these differing years that you are working with and contracts as opposed 

to a single-employer type benefit? 

Ms. MAZO. Thank you for helping me clarify that. 

It is because the employers contribute what they have agreed to 

contribute in their bargaining agreement. They negotiate an 

amount. That is their deal. 

One of the things PPA did was enable the employers in the union 

to live up to their deal otherwise, if there were a big crash, we 

could not live up to that. If employers who had built their business 

plan around a promise to the union to pay $2 an hour suddenly 

had somebody call up and say, Oh, it is going to have to be $40 

an hour, even if they call up and say it is going to be $2.50, that 

is not the basis on which the employer made other contracts, built 

their business plans, made bids on contracts, et cetera. We are 

talking about small employers here. 

I think, you know, in listening to the concern about jobs and to 

Mr. Nuti’s explanation of how this translates in a very large company, something like in the construction trades that these plans 

cover, 80 percent or more of the employers have less than 15 employees. They would not lose jobs. They would not have to lay people off if the funding had to increase dramatically. They would just 

go out of business. So workers would lose their jobs. Owners would 

lose their jobs. Families would lose their businesses if they had to 

quickly adapt to the kind of dramatic changes that PPA lets us 


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avoid. We are asking for a little bit more room, in light of what 

happened last year, to work through. 

Ms. BROWN–WAITE. So, just as a follow-up question, Mr. 

Chairman, even if Congress does decide to grant the very substantial and somewhat unprecedented relief that the multis are requesting, does this crisis suggest that maybe the multi rules ought 

to be thoroughly reviewed as we move forward? 

Ms. MAZO. Well, that was another, actually, very good thing 

that PPA recognized. 

The answer is I think that the whole pension system deserves a 

very careful and thorough reexamination because I share the goals 

of a number of us here that we can find a way to keep the defined 

benefit system going. PPA calls on the Internal Revenue Service, 

PBGC and Labor Department to conduct a thorough study of the 

multi-employer funding rules, to report back to you all in 2012 and 

to impose discipline on Congress by making the multi-employer 

rules sunset in 2014. So I think they will get the thorough study 

that is worthwhile and that will develop useful information for all 

of us about what we really need to carry it forward. 

Ms. BROWN–WAITE. Thank you. 

Mr. NEAL. I thank the gentlelady. 

The gentleman from North Carolina, Mr. Etheridge, is recognized 

to inquire. 

Mr. ETHERIDGE. Thank you, Mr. Chairman. 

Let me thank you for the hearing and our panelists for being 

here this morning. 

I do not know if anything could be more timely given the current 

situation we find ourselves in in this economy and the nervousness 

that people have as it relates to not only their income but to their 

retirement income. Depending on their age, the intensity goes up, 

obviously, because they are closest to retirement. So let me follow 

up on a line of questioning—and I will just have one question—that 

Mr. Pomeroy touched on because I think it is critical. 

We really are talking about a system that we want to keep 

healthy, but at the same time, we want to make sure that we have 

health in the business sector, because I bump into people every 

day. My neighbor is one. I just talked to him over the weekend. He 

is still working, but his hours have been cut back, which means his 

income has been cut back. It tells me that business has got the 

same problem. 

If I understood you correctly—and I think I understand the bill 

Mr. Pomeroy has in—this is a temporary fix to a long-term problem; is that correct? 

Mr. NUTI. That is correct. Think about it as a time-out and not 

a bailout. 

Mr. ETHERIDGE. I think that is important for folks to understand, that you are really asking not to be taken out of the game. 

Mr. NUTI. Indeed. 

Mr. ETHERIDGE. It is like you are playing a basketball game. 

You need just a little time to take a break—— 

Mr. NUTI. Indeed. 

Mr. ETHERIDGE [continuing]. And then you are going to come 

back in, and we are going to have a full court press after that because we do need to make sure that these systems are healthy, 


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that they are there for workers over the long run and that the business community is going to continue to do their part but that they 

need those revenues now to employ people and expand this economy and get it going. 

Mr. NUTI. Congressman Etheridge, let me just give you a little 

more perspective because I think you have hit the nail right 

squarely on the head on the issue. 

None of us want to find ourselves in a position where we are not 

obligating our pensions. We intend to fully fund our pensions in the 

same time frame we originally intended to fully fund them. The difference is, over the course of the first few years, given the unprecedented drop in the markets—and one other item we did not discuss, which was interest rates, which have a more material impact 

on our cash flows—and giving us time to adjust to the realities of 

what has happened in this unprecedented market downfall, and 

giving interest rates an opportunity to adjust, it allows us to, in effect, smooth somewhat that cash exposure we all have and to enhance the impact it has on our ability to fund new investments 

and, most importantly, to fund the creation of new jobs. 

Mr. ETHERIDGE. Thank you. I think we all understand what 

you are doing is trying to take the spike out of it and do it over 

the long haul. 

Thank you. I yield back, Mr. Chairman. 

Mr. NEAL. I thank the gentleman. 

The gentleman from Nevada, Mr. Heller, is recognized to inquire. 

Mr. HELLER. Thank you, Mr. Chairman. I appreciate the opportunity for a few minutes to raise some questions. 

I want to also thank all of the panelists for being here and for 

being patient as we run back and forth from the Capitol building. 

I want to raise a couple of questions. I will be brief. 

Ms. Mazo, I have been just going through some of your testimony 

and through the comment that you made that, as an organization, 

you guys pressed for the multi-employer funding rules that were 

adopted under the PPA in 2006 because we know that benefit security rest on rules that demand responsible funding and discipline 

and promising benefits. I am sure you are aware of that. 

Ms. MAZO. Yes, sir. 

Mr. HELLER. Let’s talk about green zone plans because you 

have some multi-employer pension plans like the Western Conference plan that is considered a green zone plan based on their 

asset to benefit ratios; whereas, there are other groups—and I believe it is the Central States or the Central Conference multi-employer pension plan that does not meet the criteria classification of 

a green zone plan. 

Can you explain to us how one can be so successful while the 

others are not? 

Ms. MAZO. Without going into specific plans, first of all, I appreciate—the changes that were made for multis in PPA were to create flags—a yellow flag, basically, and a red flag. If you are heading towards trouble, you are called endangered, or in the yellow 

zone, and you have to start doing certain things. If you head further into trouble, you are in the red zone—and this is based on 

Homeland Security—and you have to do more dramatic things. 


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I think, from what I understand about those two different plans, 

they have had different sorts of governance over the years, but the 

Central States fund had lost a much—again, I do not know as 

much about the Western Conference, but a large number of their 

employers have gone out of business. Of the ones that they started 

with in ERISA, from what I gather of their 70 largest employers 

in 1980, there is only one such company still left, and it was due, 

in part, to trucking deregulation, which also, of course, affected the 

trucking industry in the West as it did in the Midwest. I suspect 

it was largely due as well to the fact that they were in the Midwest, and they were serving the rust belt markets where the whole 

economy of the region was declining. 

So, as Mr. Nuti said, the things to truck that come from the 

manufacturers—the auto manufacturers in Michigan and whatever—that the whole economy, I suspect in that area, just declined 

for their market. Central States built up a very large fund of assets, and during the 1990s—and I believe that certainly by around 

2000, the Central States and the Western Conference were kind of 

alternating—in one year, one was the largest of the pension funds 

by assets. In another year, the other one was. They both had very 

large—$20 billion to $24 billion worth of assets. 

The Central States investments are run by independent fiduciaries who are appointed by a court and overseen by a court. So, 

to the extent there is any difference in investment philosophy, I 

suppose we’d have to blame the Federal courts in Illinois; but as 

they lost employers and as they lost active workers, they needed— 

and they were very well-funded until just a few years ago, but like 

a number of multi-employer funds, not just them, they needed their 

earnings on their assets in order to pay benefits. They are like a 

giant retiree. Just as anybody who is no longer earning enough 

money but has a lot of savings put aside, they need that savings 

to live on. Then because they were so heavily dependent on their 

assets and their earnings, the big asset losses knocked them much 

harder, I gather, than the Western Conference. I do not know as 

much about Western Conference because, frankly, their fortunes 

over the past 15 years or so have not been as colorful, and so they 

haven’t gotten quite as much attention. 

Mr. HELLER. So was it the loss of participating groups in that 

region or was it the loss of assets and earning power? 

Ms. MAZO. Well, the loss of participating groups in that region 

led to a severe dependence on investment earnings—we do not 

have employers to come up with the money if we have a hole, so 

we had better build up as much in terms of our assets and as much 

in terms of our earnings as we can because they have a very—I 

think they have—cannot say this for sure, but they have something 

like—now they have 70,000 active workers, and they may have 

150,000 or 200,000 retirees. There is no way they can increase contributions on the employers left and the employees to make up the 

hole that they need from their investments. 

I gather just—the Western Conference, among other things, services goods that are coming in from over the Pacific, and they just 

have had, I assume, other opportunities to replenish what is going 

on. I do not know that life is happy for them, but it is just not as 

stressful. 


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Mr. HELLER. Ms. Mazo, thank you. 

I yield back. 

Mr. NEAL. We thank the gentleman. 

With the cooperation of the Members of the Committee and with 

our witnesses, given the fact that there are three votes coming up 

on the House floor, we can send this panel on their way after recognizing Mr. Meek and Ms. Sa ́nchez for testimony. 

Mr. Meek is recognized to inquire. 

Mr. MEEK. Thank you, Mr. Chairman, and I am glad that you 

are holding this hearing. 

Being from Florida, I have a number of constituents who are 

very concerned and worried about the future of their life-long investments. Hearing Mr. Etheridge from North Carolina in his basketball analogy, we do know that basketball is alive and well in the 

great State of North Carolina. He kind of really boiled down why 

we are here and what you are asking for. You know, with my being 

Baptist, I feel like a singing pastor who is getting ready to deliver 

the message, and the minister got up and talked about the Scripture before I even hit the podium. 

Let me just say very quickly—and, Mr. Rosenthal, I have a question for you. As we start to look at this, do you feel extending the 

period of time in a single-employer pension plan can make up any 

shortfalls and that you think that is a solution to what we are dealing with here today? 

The second part of that is, since we are crunched for time and 

I want these other members to ask questions, you are aware of the 

time period being extended from 7 to 9, which, I believe, Education 

and Labor is looking at right now. I want to get your feelings on 

that piece of legislation also. 

Mr. ROSENTHAL. Yes, I do think an extension of period of time 

would be one of appropriate measures to help plans meet their obligations, starting this year or even in 2010. We have not measured 

the impact on the particular bills and what they would mean to individual plans, so I cannot really say that we have quantified anything with regards to the impact that that would have. 

Mr. MEEK. Well, let me just ask you this: As to the extension 

of time from 7 to 9, talk to me a little bit about it. Will that help? 

Will that not help? 

Mr. ROSENTHAL. It certainly would help, and it would be very 

helpful in that the first 2 years, as I understand the bills, would 

be an interest-only amortization. So with the payments, rather 

than being level over a period of 7 years normally under PPA, 

there would be 2 years of interest only but no principal, and then 

the full amortization would be the remaining 7-year period. So, yes, 

it would be very helpful, most helpful the first 2 years, but the payments would return to their, I will say, pre-relief levels starting in 

year 3. 

Mr. MEEK. Does anyone on the panel have an opposite or opposing view? I just want to kind of get a feel for it because I am paying attention to that legislation. 

Mr. Chairman, I also have H.R. 721 that is dealing with public 

workers and firefighters and their pension plans. I have been looking at all of this, but I am paying very close attention to what Education and Labor is doing, and I want to make sure that what we 


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find as a ‘‘solution’’ or as a response to the present situation that 

we are talking about here today is actually a solution and is not 

creating a bigger problem or issue. 

With that, Mr. Chairman, I yield back my time. 

Mr. NEAL. We thank the gentleman. 

The gentlelady from California, Ms. Sa ́nchez, is recognized to inquire. 

Ms. SA ́ NCHEZ. Thank you, Mr. Chairman. 

In light of the fact that we have votes that have been called, in 

the interest of time, I will submit my questions in writing, and will 

allow the panelists to respond in kind. 

I yield back. 

Mr. NEAL. Thank you very much, Ms. Sa ́nchez. 

Mr. Tiberi is not here. Mr. Camp has asked that he might take 

Mr. Tiberi’s time for the purpose of inquiry. 

Mr. CAMP. Just quickly, Ms. Mazo, in your testimony on page 

10, one of the relief proposals you suggest is to turn the existing 

concept of plan partition into an active vehicle for saving multi-employer plans that are in sharp decline because of the employer 

bankruptcies and uncompensated withdrawals by giving those 

plans the right to transfer the liabilities that those departed employers left behind in the PBGC. 

If I understand this correctly, it would put liability for the departed plans on the PBGC; but then in footnote number 4 on the 

bottom of page 10, you state, because partitioning these plans off 

to the PBGC, in turn, taking the burden off the other companies 

remaining in the multi-employer plan, would have a large cost, this 

would need to be financed with funds outside the premiums paid 

by the multi-employer plans. 

Where, in your mind, would these funds come from? 

Ms. MAZO. Well, that is something that we are working on looking at. I was encouraged to hear that the changes might save just 

about enough or more money for the Federal Government, which 

would then translate into all of this being a package that could 

help these, actually, maybe, support what we are talking about. 

Mr. CAMP. Thank you very much, Mr. Chairman. 

Mr. NEAL. Thank you, Mr. Camp. 

Before we close on this panel, I want to note for the record that 

the nonprofit community has filed testimony today with their concerns about pension funding rules. Mr. Lewis and I share those 

concerns. 

With that, I want to thank our panelists for their very thoughtful 

commentary today. We have three votes scheduled on the House 

floor, and we will recess until the completion of those votes, and 

I would hope that Members of the Committee would return quickly 

so that we can move on to the next panel. 

Again, thanks to our panelists. 

[Recess.] 

Mr. NEAL. Let me welcome our panelists. 

First, LeRoy Gilbertson, who is a member of the National Policy 

Council at AARP; Mark A. Davis, who is the vice president of 

CAPTRUST Financial Advisers on behalf of the National Association of Independent Retirement Plan Advisers; Robert G. Chambers, a partner of McGuireWoods, on behalf of the American BeneVerDate Nov 24 2008 00:29 Jun 02, 2011 Jkt 063011 PO 00000 Frm 00065 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\63011.XXX GPO1 PsN: 63011

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fits Council; Christopher Jones, executive vice president of Investment Management, and chief investment officer, Financial Engines; 

Edmund F. Murphy, managing director, Putnam Investments, Boston, Massachusetts; and Jim McCarthy, managing director of Morgan Stanley, on behalf of the Securities Industry and Financial 

Markets Association. 

To the members of our committee and to our panelists, we are 

going to have one more vote in about an hour, and I would like as 

best we can to move the proceeding along. 

With that, I would like to recognize Mr. Gilbertson to offer testimony, sir. 

STATEMENT OF LEROY GILBERTSON, MEMBER, 

NATIONAL POLICY COUNCIL, AARP 

Mr. GILBERTSON. Mr. Chairman, my name is LeRoy Gilbertson. I am a member of the AARP National Policy Council. I want 

to thank you for convening this hearing. AARP appreciates the opportunity to discuss the important issues surrounding investment 

advice. 

A majority priority for AARP is to assist Americans in accumulating and effectively managing adequate assets in addition to supplement their Social Security benefits. Because the growth of the 

401(k) plans places significant responsibility on individuals to 

make appropriate investment choices, AARP shares the goal of increasing access to investment advice so that the participants may 

achieve those goals. To that end, we have consistently asserted that 

such advice must be subject to the Employee Retirement Income 

Securities Act, or ERISA, as you know, fiduciary rules based on 

sound investment principles and protected from conflicts of interest. The recent financial turmoil scandals on Wall Street underscore, once again, the imperative that such investment advice be 

independent and non-conflicted. 

As a result of the shift to individually directed accounts, more to 

the individuals than before, we are responsible for investment decisions that will ultimately determine whether they have accumulated the savings necessary to ensure an adequate level of retirement benefits. Unfortunately, many individuals are simply not prepared to handle this investment responsibility and risk. Many 

plans, therefore, provide investment education to plan participants, 

including asset allocation examples, to inform them of available investment strategies in general and under the particular plan. Too 

often, however, this information has fallen short for many participants. To address this problem, some plans have begun to make 

available independent investment advice to the plan participants. 

In this regard, AARP has consistently believed that two important 

goals are necessary: 

First, the advisers should be qualified to provide the investment 

advice, and equally as important, the advisers should be independent, that is, free from financial conflict. ERISA has long recognized the financial conflict that investment advice will not be based 

on the sole interest of the participant. This is particularly relevant 

in the current uncertain financial environment where financial advisers may feel the greatest pressure to act solely in the best interest of individuals. Indeed, at the very heart of the financial scanVerDate Nov 24 2008 00:29 Jun 02, 2011 Jkt 063011 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\63011.XXX GPO1 PsN: 63011

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dals that have now rocked the Nation, scandals which began with 

Enron and Worldcom and have penetrated through much of Wall 

Street today are conflicts of interest. 

Although ERISA generally prohibits transactions between plans 

and parties, there are inherent conflicts of interest. The Pension 

Protection Act, unfortunately, carved an exemption to permit plan 

fiduciaries to other conflicted investment advice arrangements 

under certain circumstances. AARP consistently argued that this 

exemption was unnecessary and undercut ERISA’s protections to 

ensure that all fiduciaries act solely in the interest of plan participants. 

Conflicts of interest are particularly disturbing when they impact 

a participant’s retirement account. A review of the recent market 

upheaval and scandals should make it obvious that conflict-driven 

advice should be avoided and that common sense compels far more 

substantial and significant participant protection than PPA provides. The PPA leads us down a road of conflict of interest—the 

very problems that ERISA has long sought to prevent by ensuring 

that fiduciaries act solely in investment of plan participants. 

In addition, AARP submits that disclosures of conflicts of interest 

to a plan participant alone is no remedy. As a financial planner’s 

standards of conduct states: Individual consumers possess substantial barriers resulting from behavioral biases to the provision of the 

informed consent even after full disclosure. 

Moreover, not only marketers who are familiar with behavioral 

research manipulate consumers by taking advantage of weaknesses 

in human comprehension, and competitive pressures almost guarantee that they will do so. Much of the literature suggests that investment advisers often push investments that may be suitable and 

risky for investors, and even sophisticated investors purchase investments which they claim not to have fully understood. Consequently, AARP submits that either the provisions of the PPA on 

investment advice should be repealed or the PPA should be significantly modified to make clear that, under the definition of an ‘‘investment adviser,’’ only independent, non-conflicted advice may be 

provided to the participants. 

In conclusion, AARP looks forward to continuing to work with 

Congress to promote independent investment advice in a way that 

insurance participants and beneficiaries are adequately protected 

from conflicts of interest. We prefer an approach that encourages 

plan sponsors to provide quality investment advice without the potential for conflicts of interest to increase the likelihood that plan 

participants have adequate income to fund their retirement years. 

Mr. Chairman, I want to thank you again for this opportunity for 

us to testify. 

Mr. NEAL. Thank you, Mr. Gilbertson. 

[The prepared statement of Mr. Gilbertson follows:] 


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Mr. NEAL. Mr. Davis is recognized to offer testimony. 


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STATEMENT OF MARK DAVIS, VICE PRESIDENT, CAPTRUST FINANCIAL ADVISORS, ON BEHALF OF THE NATIONAL ASSOCIATION OF INDEPENDENT RETIREMENT PLAN ADVISORS 

Mr. DAVIS. Thank you, Mr. Chairman and Members of the Committee, for the opportunity to speak with you today. 

My name is Mark Davis. I am from Los Angeles, and I am vice 

president and financial adviser with CAPTRUST Financial Advisers, which is headquartered in Raleigh, North Carolina. CAPTRUST is an RIA. We are fiduciary to over 450 plans, $22 

billion in assets, something over 800,000 participants in our care. 

We provide fiduciary investment advisory services both to sponsors 

of qualified plans and to many participants within those plans. We 

are fully independent, and we fully disclose all fees. 

I speak to you today on behalf of the National Association of 

Independent Retirement Plan Advisers, or NAIRPA, an association 

of independent registered investment advisers who focus on delivering independent, conflict-free advice both at the plan sponsor and 

participant levels. It means our fees are the same regardless of the 

investments that are selected. Our members provide advice to 

plans covering millions of participants. 

I, personally, have practical experience on both sides of the independent investment advice issue, having worked as an education 

specialist for both a major mutual fund company and a major 

broker-dealer, and I also have served as an independent adviser for 

10 years now. 

While most companies are highly ethical and most education specialists are true professionals, it is not wise to rely on a regulatory 

or legislative framework that presumes that these employees will 

always separate themselves completely from doing what is in the 

best interest of their employers. That is contrary to human nature. 

It is asking for trouble. It is why I am a strong supporter of independent investment advice. 

One of the basic problems with the current state of advice is that 

there really is not a clear set of laws and regulations. What we 

have are advisory opinions, prohibited transaction exemptions, information bulletins that leave room for practices, I think, that 

should be of concern to members of this committee. We have advice 

deliverers who are subject to multiple and very different compliance regimens and oversight. An example of the current confusion 

is the difference between the services plan sponsors think are being 

provided to their participants and what the deliverers of those 

services say they are giving. 

Based on the results of the 2007 annual survey of the Profit 

Sharing Council of America, more than 40 percent of small business retirement plan sponsors think advice services are being delivered to their participants as ‘‘one-on-one counseling (in person).’’ In 

reality, most of this counseling is provided by brokers who are not 

permitted to give advice because they are not independent. The 

brokers are meeting with participants, relying on DOL IB 96–1 

which permits education or guidance to be provided without violating the fiduciary rules even though they cannot legally give advice. 

Whatever the reason, the outcome is that plan sponsors think 

participants are being advised; participants think they are being 


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advised, but the vendors responsible for the service deny that advice is being provided. 

Many participants who do receive investment advice get it 

through a computer model based on the SunAmerica opinion. Independent computer model providers, such as Financial Engines, 

which is here today, provide cost-effective, unconflicted advice to 

plan participants, and the availability of this kind of service should 

be encouraged. However, the rules are sometimes stretched to the 

limit, and that, combined with a lack of clear guidance, leads to 

some questionable practices in the name of SunAmerica. 

We have heard of situations where all of the funds available 

under a plan are not included in the advice provided by a computer 

model when it is applied to the plan. The argument is that this 

limited set of funds in a model is permitted by SunAmerica. To me, 

it seems obvious that, when the funds that are included are proprietary and the excluded funds are not or when included funds pay 

for shelf space and omitted funds do not, the advice produced by 

the model is not independent. There is clearly a conflict in the selection of the funds, and that conflict carries through to the output 

of the model, and of course, it is the participant who is harmed by 

the conflict. Simply, that should not be permitted. 

The investment advice provisions in PPA did not help bring order 

to the chaos of rules and regs governing the provision of investment advice. If anything, it may have added to the confusion. The 

prohibited transaction exemption that was included in the PPA advice regulation would permit conflicts that even the authors of the 

regulation acknowledge went beyond PPA. 

With the new administration and this new Congress, we are 

hopeful that now is the time for new policy to be made. This Congress has a great opportunity to protect the interests of the American retirement investor. We need a set of clear rules that cannot 

be bent too far, rules that protect non-ERISA plans, like some 

403(b) and 457 plans, as well as ERISA arrangements. NAIRPA 

urges this committee to act in support of conflict-free investment 

advice. 

Mr. NEAL. Thank you, Mr. Davis. 

[The prepared statement of Mr. Davis follows:] 


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Mr. NEAL. Mr. Chambers is recognized to offer testimony. 

STATEMENT OF ROBERT CHAMBERS, PARTNER, 

MCGUIREWOODS, ON BEHALF OF THE AMERICAN BENEFITS 

COUNCIL, AND SOCIETY FOR HUMAN RESOURCE MANAGEMENT 

Mr. CHAMBERS. Thank you. 

My name is Robert Chambers, and I am a partner in the international law firm of McGuireWoods. 

While I have advised sponsors and financial service providers 

with respect to 401(k) issues since section 401(k) became law in 

1978, I am also testifying today as a plan sponsor. McGuireWoods 

sponsors a defined contribution plan for about 2,600 participants, 

and it has provided them with access to investment advice since 

2005. 

Again, I appreciate the opportunity to testify today. 

The events of the past year have highlighted the importance of 

increasing the availability of sound investment advice to the millions of Americans who rely on their defined contribution plans for 

their retirement security. There has been an active public policy 

discussion of the investment advice provisions enacted in the Pension Protection Act of 2006. The Department of Labor has issued 

regulations under those provisions and a correlative class exemption. More recently, the Education and Labor Committee approved 

a bill that would have a powerful impact on both PPA and pre-PPA 

unconflicted advice arrangements. 

Now, interestingly, the PPA investment advice provision and the 

Education and Labor Committee’s bill seem to share the same 

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ment advice to participants, but the approaches that they took are 

dramatically different. 

Other members of this panel are going to speak on the preservation of the investment advice of those provisions in the PPA, but 

my focus today is different. I am going to make six pretty simple 

points regarding the preservation of pre-PPA investment advice alternatives, and here they are: 

Number one, plan participants need investment advice now 

more than ever. 

Two, all investment advice programs must avoid conflicts of 

interest, and also must adhere to the prohibited transaction 

rules developed by the Department of Labor and the IRS. 

Third, pre-PPA rules that have been approved by the Department of Labor are not conflicted. They provide valuable assistance for millions of Americans. 

Fourth, if legislation is enacted with respect to the PPA investment advice provision, it is crucial that the legislation neither change nor eliminate the pre-PPA rules. 

Fifth, our plan sponsor members have made things very 

clear. If the legislation invalidates existing pre-PPA advice programs or adds materially to their cost, plan sponsors will abandon their programs rather than revise them. They currently 

have neither the resources nor the inclination to engage in the 

expensive redesigns of these voluntary programs. Millions of 

Americans will lose access to investment advice at a very inopportune time. 

Finally, the bill extends its reach to the provision of investment advice to plans. Now, this was very surprising. It is a significant issue, but it was not addressed by either the PPA or 

the 2009 class exemption. It has not been the subject of extensive public policy debate, so we believe that additional constraints should not be added under these circumstances. The 

pre-PPA rules were carefully drafted to avoid conflicts of interest and to ensure that all advice programs operate in the interests of participants, and as I mentioned, they are highly utilized. 

We understand that approximately 20 million participants in defined contribution plans are offered advice products based on the 

SunAmerica advisory opinion alone. Unfortunately, in the context 

of repealing the PPA investment advice provisions, the Education 

and Labor Committee approved a bill that goes much further. The 

bill’s broad reach would reduce a sponsor’s ability to provide sound, 

unconflicted advice by invalidating the pre-PPA arrangements, and 

this, of course, will harm plan participants. The bill would prohibit 

or make much more expensive several different types of pre-PPA 

investment advice. It is important to preserve all of them, and we 

discuss the impact of the bill on each of the individual ones in our 

written materials; but please remember this: Without them, there 

will be more expense or less advice with no corresponding benefit 

to employees. 

One way to gauge the soundness of any proposed change is to list 

the winners and the losers. Here is our assessment of the results 


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of the Education and Labor Committee’s bill if it is passed with the 

current provisions regarding pre-PPA advice. 

Mr. CHAMBERS. Here are the winners; investment advisors 

who currently have a small enough footprint to avoid disqualification as the term plan investment providers under the Advisors Act 

of 1940. Second, those firms that will provide the newly mandated 

audits and certifications, and of course—and I speak personally as 

to this—lawyers who are going to be drafting copious disclosure 

materials. 

But more important, here are the losers under this bill: 

Number one, participants whose employers discontinue access to investment advice under a pre-PPA method, of whom 

there will be many. 

Number two, participants whose employers discontinue access to investment advice under PPA, of whom there are currently rather few. 

Third, investment advisors who are displaced under the final 

interpretation of that term ‘‘plan investment provider.’’ 

And finally, and maybe most important, plan sponsors, investment advisors, and participants who have relied on 30 

years of well-reasoned DOL exemptions and advisory opinions. 

So please, consider the winners and the losers. Our assessment 

causes us to question the soundness of the bill as long as it continues to invalidate pre-PPA investment advice. 

[The prepared statement of Mr. Chambers follows:] 


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Mr. NEAL. Thank you, Mr. Chambers. 

Mr. Jones is recognized to offer testimony. 


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STATEMENT OF CHRISTOPHER JONES, EXECUTIVE VICE 

PRESIDENT OF INVESTMENT MANAGEMENT AND CHIEF INVESTMENT OFFICER, FINANCIAL ENGINES, PALO ALTO, 

CALIFORNIA 

Mr. JONES. Thank you, Mr. Chairman, Congressman Camp, and 

Members of the Committee. 

My name is Christopher Jones, and I am the Chief Investment 

Officer with Financial Engines. 

On behalf of my fellow employees at Financial Engines, we greatly appreciate your continuing efforts to make quality, independent 

investment advice broadly available to those who need it most and 

to protect retirement investors from conflicts of interest. 

Today, I would like to make three simple points in my remarks. 

First, through its innovative and powerful technology, Financial 

Engines has made personalized, independent investment advice 

broadly accessible to millions of people in the United States. Our 

company was founded on the belief that the best practices from 

modern economic theory and institutional money management 

should be available to all investors, even those with a few thousand 

dollars in their accounts, not merely the affluent and the privileged. This is critical to the success of 401(k) participants whose 

median account balance today is only about $32,000. Without expert help, most of these people are unlikely to achieve retirement 

security. 

Today, Financial Engines provides independent advisory services 

to more than 7.6 million employees at over 115 Fortune 500 companies. We give individuals specific recommendations on what to do 

with their retirement accounts, and we recommend the best combination of funds for them, selecting from the investment choices 

available from their employer. 

My second point is that from the beginning we have carefully 

structured our business to ensure that we have no conflicts of interest which could compromise the objectivity of our investment advice. Under ERISA and the Investment Advisors Act, we have a 

strict fiduciary obligation to the employees we serve. Our independence is critically important to the employers who hire us to provide 

advice to their employees. 

What does independence mean? Specifically, we do not sell any 

investment products of any kind. We do not receive differential 

compensation based on the investments we recommend. We do not 

receive commissions on any of the investments that we recommend. 

We do not vary our investment methodology across any of our customers. We are not affiliated with or controlled by any bank, 

broker-dealer, or any other type of company. And we play no role 

in the selection of a particular retirement plan fund lineup, nor do 

we accept any kind of compensation to recommend prospective 

funds to employers. 

What we do provide is personalized, independent, and consistent 

investment advice to millions of individuals of modest means who 

would otherwise not receive it. In fact, I have described this consistent methodology in great detail in a book I authored which was 

published by John Wiley and Sons in 2008 titled, ‘‘The Intelligent 

Portfolio: Practical Wisdom on Personal Investing from Financial 

Engines.’’ 


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My third and final point is that getting effective investment advice into the hands of those who need it requires convenient and 

cost-effective access for employees. Today, Financial Engines 

reaches its customers in two different ways. In the first method, Financial Engines is directly hired by the employer, the plan sponsor, 

to advise its employee population. For example, we have been hired 

by such companies as Delta Airlines, IBM, Motorola, and PG&E 

under this structure. 

In the second method, Financial Engines is hired as a sub-advisor, working with plan record keepers such as Vanguard or 

JPMorgan. We provide our services under the criteria defined by 

the Department of Labor’s 2001 SunAmerica ERISA Advisory 

Opinion. This ruling permits the provision of investment advice 

based on an objective computer model developed and maintained by 

an independent financial expert. The SunAmerica ruling is important because record keepers are the portal to the 401(k) and play 

an important role in reaching plan participants. Employees benefit 

when investment advice is fully integrated into their 401(k) plan 

communications. 

More than 5 million employees, particularly those working for 

smaller organizations, have access to our independent advisory 

services through the SunAmerica model. It is important to emphasize that under either structure our investment advice is truly 

independent and completely consistent. 

We understand that some questions have been raised regarding 

the SunAmerica model. However, the SunAmerica structure provides substantial protections against conflicts of interest, and we 

strongly support the rigorous enforcement of these protections. 

It is important to preserve the ability to provide independent investment advice under the SunAmerica structure. And accordingly, 

we do not support passage of H.R. 2989 in its current form because 

it would eliminate this important method of providing independent 

investment advice to those who need it the most. Without the 

SunAmerica structure, we believe that employees will have fewer 

options for cost-effective personalized investment advice to help 

them reach their retirement goals. 

We thank you for your time. 

[The prepared statement of Mr. Jones follows:] 


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f 

Mr. NEAL. Thank you very much, Mr. Jones. 

Mr. Murphy, you are recognized to offer testimony. 


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STATEMENT OF EDMUND F. MURPHY, III, MANAGING DIRECTOR, PUTNAM INVESTMENTS, LLC, BOSTON, MASSACHUSETTS 

Mr. MURPHY. Thank you. Good afternoon, Chairman Neal, 

Ranking Member Camp, and Members of the Committee. Thank 

you for inviting me to appear before you today. 

I am Edmund Murphy, Managing Director and Head of Defined 

Contributions at Putnam Investments, a leading global money 

management firm with $110 billion in assets under management. 

Prior to joining Putnam, I spent 17 years with Fidelity Investments 

in a variety of senior management roles in the defined contribution 

business. 

Putnam has long been a leader in the business of retirement 

through investment products to help individuals prepare for retirement, through bundled, open-architect 401(k) plans that offer investments from Putnam and other fund complexes, and through 

services we provide to plan sponsors and independent advisors. 

Today, I would like to offer my views on the provision of investment advice to participants in defined contribution plans, a service 

which we believe is vitally needed. 

With traditional pension plans and Social Security likely to provide a declining share of post-retirement income for America’s 

workers in the future, it is critical that defined contribution plans 

be able to make up the difference. To do so, workers must make 

a lifetime of sound investment decisions. Many, if not most, workers require judicious, unbiased and professional advice and guidance to make such decisions. Investment managers, service providers, and others can and do provide such unbiased advice today, 

notably under the kinds of arrangements made possible by the 

SunAmerica advisory opinion. 

In our view, that model has provided a large number of plan participants with robust proven protection against conflicted advice. 

However, some proposals currently under discussion intended to 

ensure that investment advice is unbiased could have the unintended effect of ending many such existing advice arrangements. 

Moreover, by restricting who can provide professional investment 

advice, they might also have the effect of raising costs and limiting 

expansion of coverage in the future. 

The proposals under consideration would restrict the provision of 

advice to participants to fee-based financial advisors. They would 

bar asset managers and service providers who might offer cost-effective and scalable advice and package solutions to workplace savers unless that advice is solely generated by a computer program 

meeting detailed and potentially costly requirements. 

Blocking access to well qualified and capable competitors is apt 

to raise cost in any market; workplace savings is unlikely to be an 

exception. Among the surely unintended results could be to actually curb the rate of adoption services for advice to plan sponsors 

and lower the share of plan participants who have access to professional advice. 

Some of the language currently under discussion, in fact, would 

be a step backwards in that it could prohibit the kinds of advice 

that had been available before the passage of PPA. We at Putnam 

believe that sufficient safeguards already exist in the PPA and 


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other laws and regulations. Rigorously enforced, they can provide 

workers with the protection they need. We do not believe that 

privileging a specific advice model and excluding whole classes of 

firms from the advice market are necessary to ensure unbiased advice. Instead, we believe that any new legislation or regulations 

should, number one, reaffirm the pre-PPA level advice rule, which, 

by definition, is non-conflicted. 

Two, reaffirm the use of non-conflicted managed accounts in a 

way to provide advice. 

Three, permit the use of outside computer models, support the 

SunAmerica opinion, which enables service providers to offer advice 

to plan participants through an affiliated advisor if the investment 

advisors use an independently developed computer model. The 

SunAmerica opinion could be bolstered through rigorous disclosure, 

auditing, and monitoring developed in concert with the industry. 

Four, enable appropriate use of in-house computer models. Permit asset managers and service providers to continue offering unbiased advice based on in-house computer models independently certified as unbiased in accordance with the key Pension Protection 

Act requirements. 

Five, avoid any blanket dismissal of existing Department of 

Labor class and individual exemptions, letting the Department review exemptions on a case-by-case basis if it is so inclined. 

And finally, avoid any new limitations on non-conflicted advice to 

plans. 

We believe these measures, taken together, could provided adequate protection to investors while expanding access to affordable, 

unbiased, professional advice that America’s workplace savers so 

clearly need. We would also be receptive to other proposals to protect participants’ interests, provided they serve to expand competition and access to advice, not contract it. 

I have submitted a written statement which extends my remarks. I want to thank the committee for letting us share our 

views. 

[The prepared statement of Mr. Murphy follows:] 

Prepared Statement of Edmund F. Murphy, III, Managing Director, 

Putnam Investments, LLC, Boston, Massachusetts 

I am Edmund Murphy, Managing Director and Head of Defined Contribution at 

Putnam Investments. I am testifying on behalf of Putnam, a global money management firm and leader in the retirement industry. 

Prior to joining Putnam, I spent 17 years with Fidelity Investments in a variety 

of senior management roles within the defined contribution business. Those assignments included leading Fidelity’s small market 401(k) business and serving as Executive Vice President of distribution and client management for Fidelity’s entire 

401(k) business. 

Putnam Investments and Retirement 

Putnam Investments is a global money management firm with more than 70 years of investment experience. As of August 31, 2009, the firm had $110 billion 

in assets under management. Putnam has long been a leader in the business of retirement, through investment products aimed at helping individuals prepare for retirement; through bundled, open-architecture 401(k) plans that offer investments 

from Putnam as well as other fund complexes; and through services we provide to 

retirement plan sponsors and independent financial advisors. 

Putnam currently offers a fully-bundled 401(k) plan solution to small, medium 

and large companies. This solution includes an open architecture investment platform with funds from Putnam and other fund complexes; plan sponsor communications; employee education and communications; and plan record-keeping services. 


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Putnam sells into the 401(k) plan market through financial intermediaries including financial advisors and 401(k) consultants. These intermediaries work on behalf 

of the plan sponsors and generally act in a fiduciary capacity. They are not affiliated 

with Putnam. 

Investment Advice in Defined Contribution Plans 

I appreciate the invitation of the Committee to testify. I would like to offer my 

views on the provision of investment advice to participants in defined contribution 

plans—a service which we believe is vitally needed by the nation’s workers. 

Defined contribution plans will play an even more central role in the future as 

defined benefit plans decline and Social Security’s ability to replace pre-retirement 

incomes is reduced by changes built into current law. For DC plans to successfully 

fill an expanded role, the amounts in worker retirement portfolios must grow— 

which means that workers must make a lifetime of sound investment decisions. 

Many, if not most, workers require judicious, unbiased and professional advice and 

guidance to make such decisions about complex investments—a need that last year’s 

market events only underscored. 

Investment managers, service providers and others can and do provide such unbiased advice today. Several of these were codified under the SunAmerica advisory 

opinion, which the U.S. Department of Labor issued in 2001. About 20 million participants in 401(k) plans or similar savings vehicles are currently offered advice 

based on the SunAmerica opinion. 

In our view, the model originated by the SunAmerica opinion, as enhanced by 

subsequent Congressional legislation and regulatory guidance, provides plan participants with the investment advice they need for sound decisions and strong, robust 

and proven protection against conflicted advice and with no significant issues regarding lack of independence. 

Impact of Alternative Proposals under Consideration 

However, some legislative and regulatory proposals currently under discussion in 

Congress and at the Department of Labor could have significant impacts on institutions’ ability to provide advice to 401(k) plan participants. 

Among the specific impacts of the proposed changes would be the effective repeal 

of the PPA’s investment advice provisions (i.e., both the level-fee rule and the computer model rule); the elimination of most SunAmerica-based advice arrangements; 

the elimination of most managed accounts, whereby advice is automatically implemented in accordance with a participant’s prior authorization; the elimination of 

many pre-PPA level-fee arrangements; the elimination of all or most class and individual exemptions granted by the Department of Labor; and the elimination of most 

plan-level advice, which is provided not to individuals but instead to plan sponsors 

such as small business owners about, for instance, which investment options should 

be offered to participants. 

Ironically, the proposals under consideration, meant to ensure that investment advice is unbiased, could have the unintended effect of ensuring that no investment 

advice is provided at all. They could have the effect of ending existing arrangements, including pre-PPA arrangements, that provide investment advice. 

The proposals under consideration would restrict advice to participants and employers to one of two types. First, ‘‘fee-only’’ advice—advisors cannot offer investments on the plan’s menu and cannot receive any compensation from someone who 

manages or sells plan investments. Or second, advice provided solely through a computer model meeting requirements that are much more detailed than currently required by the Department of Labor’s guidance. 

As a result, these proposals would effectively bar asset managers and service providers who might offer highly cost-effective and scalable advice and packaged solutions to workplace savers, unless that advice is solely generated by a computer program meeting detailed and potentially costly requirements. 

Blocking access to well-qualified and capable providers is apt to raise costs within 

any market, and workplace savings is unlikely to be an exception. Among the surely 

unintended results could be to actually curb the rate of adoption of advice services 

by plan sponsors; lower the share of plan participants who have access to professional advice; and limit the coverage of workplace savings plans. 

Some of the language currently under discussion, in fact, would be a step backwards in that it could prohibit the kinds of advice that had been available before 

passage of the PPA. 

Recommendations 

We at Putnam believe that sufficient safeguards already exist in the PPA and 

other laws and regulations. Rigorously enforced, they can provide workers with the 

protection they need. We do not believe that privileging a specific advice model and 


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excluding whole classes of firms from the advice market are necessary to ensure unbiased advice. Instead, we believe that any new legislation or regulations should: 

1. Reaffirm the pre-PPA level-fee advice rule, and strengthen it by requiring an 

ethical wall to insulate investment advisors from undue influence attributable to variable fees received by other parts of their organization. Such an 

ethical wall could be similar to the internal policies and procedures that investment bankers adopted in 2003 to provide unbiased research by insulating their researchers from their underwriters. 

2. Reaffirm the use of non-conflicted managed accounts as a way to provide advice. 

3. Permit the use of outside computer models by supporting the SunAmerica 

opinion, which enables service providers to offer advice to plan participants 

through an affiliated advisor if the investment advisors use an independently 

developed computer model. Because such advice is provided by an independently designed computer model, and because that advice cannot be modified 

by the plan advisor, the advice is not conflicted and there is no violation of 

the ‘‘prohibited transaction’’ rule. The SunAmerica opinion could be bolstered 

through rigorous disclosure, auditing and monitoring developed in concert 

with industry. 

4. Enable appropriate use of in-house computer models. Permit asset managers 

and service providers to continue offering unbiased advice based on in-house 

computer models independently certified as unbiased in accordance with the 

key Pension Protection Act requirements (e.g., independent third-party certification, annual audits and disclosure). 

5. Avoid any blanket dismissal of existing Department of Labor class and individual exemptions, letting the Department review exemptions on a case-bycase basis if it is so inclined. 

6. Finally, avoid any new limitations on non-conflicted advice to plans and plan 

sponsors, as opposed to individual plan participants. 

Conclusion 

We believe these measures, taken together, could provide adequate protection to 

investors while dramatically expanding the availability of the affordable, unbiased, 

professional advice that workers need to make the right investment decisions for 

their retirement. 

We also would be receptive to other proposals to protect participants’ interests, 

provided they serve to expand competition and access to advice—not contract it. 

Financial institutions are well-equipped and ready to help provide plan participants and plan sponsors with such advice, and have been doing so successfully 

under existing legislation and regulatory guidance. I hope that Congress and the nation’s regulators will take positive steps that ensure the provision of needed professional investment advice continues. 

f 

Mr. NEAL. Thank you, Mr. Murphy. 

Mr. McCarthy is recognized to offer testimony. 

STATEMENT OF JIM MCCARTHY, MANAGING DIRECTOR, MORGAN STANLEY, ON BEHALF OF THE SECURITIES INDUSTRY 

AND FINANCIAL MARKETS ASSOCIATION 

Mr. MCCARTHY. Thank you. 

Chairman Neal, Ranking Member Camp, Members of the Committee, I am Jim McCarthy, the Managing Director of Retirement 

Services at Morgan Stanley Smith Barney, and I am testifying on 

behalf of the Securities Industry and Financial Markets Association. 

SIFMA’s member firms are engaged in every aspect of the retirement plan industry, including plan creation, investment management, record keeping, and advice and education. 

Morgan Stanley Smith Barney is a global financial services firm 

providing brokerage, custodial, and investment-related services to 

approximately 3.4 million retirement accounts, and approximately 


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$370 billion in assets. Like many firms, Morgan Stanley Smith 

Barney advisors are actively engaged in helping plan sponsors select and monitor retirement plans, as well as assisting our 5 million individual clients with their savings and investment concerns. 

We do not manufacture record keeping, but rather we use a consultative approach to market the services of approximately 30 manufacturers of retirement platforms. 

Let me say at the outset that not a single 401(k) program that 

we sell has a proprietary fund requirement in favor of one of our 

affiliated asset managers. 

The policy proposals being discussed today would have a significant effect on 401(k) plan sponsors, plan participants, and potentially IRA owners in how they access professional advice to establish plans for their employees, help their employees navigate those 

plans, and obtain investment guidance. 

The need for advice is well-documented. Individuals who do not 

have access to advice are too risk adverse when they are young and 

take too much risk when they are nearing retirement. Studies have 

indicated that workers with access to investment advice earn higher returns and tend to save more. 

I hope we can agree that access to more investment advice and 

getting it into the hands of more workers is an important goal. The 

Pension Protection Act and the DOL guidance would increase the 

number of people who are getting investment advice. I would also 

encourage all types of financial services firms to offer personalized 

investment advice with appropriate safeguards and accountability 

and controls to make sure that the advice is competent and focused 

on the client’s needs. 

Many participants seek in-person advice rather than just Webbased delivery systems, which work well for a portion of the population, but not for everyone. The PPA was a step in the right direction. It allowed a flexible system for not only 401(k) plans, but 

IRAs, and carried with it a significant safeguard disclosure and accountability to protect plan participants. It puts the lion’s share of 

the burden of ensuring compliance where it belonged, on the shoulders of the advisors seeking to provide advice, not on the employers 

who want to do what’s best for their employees by hiring advisors, 

and imposes significant penalties on those entities for any failures. 

The DOL has been thorough in its consideration of the perspectives and open to the views during the comment period, is carefully 

calibrated to minimize conflict, disclose potential conflict, and audit 

conflict as an added protection. Repealing the PPA provisions before they have been given a chance to work and tested and practiced is misguided. We think this is bad policy, especially in light 

of the record and the need for participants to have greater availability to advice. 

Policymakers should not rush to discard the PPA, the regulations, or the class exemption out of a belief that stamping out all 

conflicts, even potential conflicts, is warranted absent finding that 

the advice coverage ratio is not growing—as we are confident it will 

under PPA and the related regulations—or finding that conflicts 

have moved beyond the theoretical possibility and are in fact manifesting themselves. 


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So if H.R. 2989 moves forward, what gets thrown out in the process? As others have mentioned, not just the PPA, but the possibility of having tens of thousands of trained advisors actually take 

the accountability and provide specific advice in the setting sought 

by the participants with the proper compliance safeguards. If this 

is adopted, our own 18,000 financial advisors who are continually 

trained, backed up by systems for compliance, lawyers, overseen by 

auditors, risk managers and other controlled personnel, and are the 

subject of over $30 million a year in professional development 

spending, are effectively stopped from providing any advice to participants and IRA owners. 

What is also eliminated is the protection that employers want in 

hiring a competent PPA-governed advisor, the assurance that they 

are not a co-fiduciary with the advisor for every investment recommendation made. 

If enacted as defined, H.R. 2989 would create a totally new 

framework which would automatically disqualify hundreds of firms 

from providing advice, even those that had no financial conflicts. 

Banks, for example, would be categorically disqualified. As a result, 

plan sponsors, instead of a competitive market, may only be able 

to select from advisors from thinly capitalized companies which 

don’t have the capacity and personnel and geographic diversity, let 

alone the resources to address problems when they occur. 

The PPA included a significant number of safeguards. The DOL 

added additional safeguards as part of its regulatory process. Yet, 

these provisions have not been allowed to take effect, and we have 

not seen the positive result that would have been delivered. 

We are concerned that the provisions of H.R. 2989 would vastly 

reduce the number of professionals able to provide one-on-one investment advice and to discourage plan sponsors from delivering 

any advice at all. Surely, this will not create more educated and 

confident plan participants, nor will it strengthen workers’ retirement security. 

We urge the committee to reject the approach taken in 2989 and 

carefully monitor the actions that the DOL will take in the coming 

weeks with respect to the final regulations in the class exemption, 

which would expand advice to millions of more workers. 

Thank you to the committee for inviting us to testify today. 

[The prepared statement of Mr. McCarthy follows:] 


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f 

Mr. NEAL. Thank you, Mr. McCarthy. I want to thank our panelists. 


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Mr. Murphy, you state in your testimony that pending legislation 

on investment advice may have the unintended effect of ensuring 

no investment advice is provided at all. Why is this? Is it the complexity or the cost of the rules contemplated by the legislation, or 

perhaps the time lag in transitioning to a new system of regulating 

advice? 

Mr. MURPHY. I would say it is both, Congressman. I certainly 

believe that with the requirements that would be placed on the 

plan fiduciary, and with the added burdens that would come back 

to providers to provide advice, I just think it is one of those situations where you are going to have less advice players or participants in the marketplace to give advice at a time when clearly 

right now we need more advice being given in the marketplace, not 

less. 

Mr. NEAL. As you know, that was the answer I was looking for. 

Mr. Gilbertson, you mention in your testimony that an investment advisor chosen by an employer assumes an air of credibility 

for the employee. Some advocate disclosure of any conflicts cures 

the conflict. 

What do you think the average participant reaction would be to 

such a disclosure when the participant is coming to the advisor for 

expertise in an area that the participant may not fully understand 

in the first place? 

Mr. GILBERTSON. I think most plan participants appreciate 

any investment advice that they can get, but they have to have 

some confidence that that advice is coming, first of all, from someone that is qualified to give that advice, and then secondly, to make 

sure that there is no conflict of interest going on between the person giving the advice and the advice that is being given. So I think 

overall, the more advice that you can give to plan participants, the 

better off in the long run they are going to be. But like I said, it 

has to be unbiased and free from any kind of a conflict. 

Mr. NEAL. Thank you, Mr. Gilbertson. 

The Chair would recognize the gentleman from California, Mr. 

Herger, to inquire. 

Mr. HERGER. Thank you, Mr. Chairman. 

Mr. Gilbertson, as you are aware, health care is a major component of retirement security for senior citizens and those nearing retirement. Many seniors in my district have expressed to me their 

concern that AARP is not advocating for their interests in the 

health care legislation currently being debated in Congress. Let me 

ask you about some of the positions included in AARP’s policy book 

for 2009 and 2010. 

It is my understanding that AARP uses the policy book recommendation as a guide for staff and its advocacy efforts. Page 39, 

chapter 7, states that ‘‘Congress should limit increases in out-ofpocket costs, including increases in Medicare’s overall cost-sharing 

requirements and premiums for current benefits.’’ 

The Congressional Budget Office estimated that under H.R. 

3200, seniors’ Medicare Part D premiums will increase by 20 percent and their Part B premiums will increase by $25 billion. Mr. 

Gilbertson, do you view these significant premium increases as violating AARP’s policy of limiting increases in premiums for current 

benefits? And based on your background in pensions, do you think 


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such increases would be viewed as significant for seniors on fixed 

incomes? 

Mr. GILBERTSON. Mr. Chairman, Congressman, the National 

Policy Council of AARP is broken down into three distinct areas. 

One is economics, which I serve on, another is health care, and 

then a third component that deals with community living and so 

on. So I am not prepared to answer your question because I have 

been placed on the Economic Council to give that kind of advice to 

the AARP board, but I will convey your concerns to the board and 

to my counterparts on the Health Policy Committee. 

[The information follows:] 

******** COMMITTEE INSERT ******** 

Mr. HERGER. And Mr. Gilbertson, if this is an area that you feel 

you don’t have the expertise, I would appreciate maybe in writing 

an answer, if we could, from AARP. 

My next question is, AARP’s policy book for 2009. When analyzing Medicare Advantage cuts found in the House Democrats’ 

bill, H.R. 3200, the CBO stated that the cuts ‘‘could lead many 

plans to limit the benefits they offer, raise their premiums, or withdraw from the program.’’ Similarly, MedPAC stated that these 

Medicare Advantage cuts would rob one in five seniors of the choice 

to receive Medicare benefits through a Medicare Advantage plan, 

and that the value of additional benefits seniors receive through 

Medicare Advantage would be cut by $252 per year. Yet, again, 

AARP’s Web site claims that it is a myth that health care reform 

will hurt Medicare, and that it is a fact that ‘‘none of the health 

care reform proposals being considered by Congress would cut 

Medicare benefits or increase your out-of-pocket costs for Medicare 

services.’’ 

Mr. Gilbertson, is AARP suggesting that CBO and MedPAC are 

spreading falsehoods or lies about the Democrats’ health care reform bill? 

Mr. GILBERTSON. Congressman, once again, I was selected to 

testify on investment-related issues, investment advice, and I don’t 

feel qualified to even attempt to answer your question. But I will 

relay your concerns to the board, the AARP board and staff, to get 

back to you answers on those. 

Mr. HERGER. In writing. Thank you very much, Mr. Gilbertson. 

Thank you, Mr. Chairman. 

[The information follows:] 

******** COMMITTEE INSERT ******** 

Mr. NEAL. Thank you, Mr. Herger. 

With that, I would like to recognize Mr. Pomeroy. 

Mr. POMEROY. Thank you, Mr. Chairman, for this very interesting hearing. 

I want to acknowledge Mr. Gilbertson, who was the Director of 

State Investment Funds back when I was on the State Investment 

Board, a long, long time ago back in the State of North Dakota. We 

haven’t seen one another for more than a decade. It is good to see 

you again, Leroy. 

I believe that AARP has not appropriately reflected upon the fiduciary standard that attaches in the providing of investment advice under the PPA language. Now, in that situation, I believe 


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there is a clear legal obligation to provide advice solely in the interest of plan participants, and a means to take action against someone that would not do that. I would encourage AARP to reflect 

upon that language and would love to visit further with you and 

AARP personnel if they find that language wanting. 

It seems to me—and I want to be to polite about this—that the 

Ed and Labor bill is a solution in desperate search of a problem. 

I simply have not seen from this panel, including advocates of repeal of PPA language relative to investment advice, a demonstration of massive abuses occurring. And Mr. Davis, let’s talk specifically about your testimony. You indicate that economic self-interest 

inherently is going to skew advice. Well, I might observe that there 

is an economic interest to you and the members of your organization if a lot of the advice presently occurring under the fiduciary 

standards of PPA would go away. So I believe that you have a financial interest at stake relative to the testimony you have provided us. That doesn’t mean the testimony is not completely honest 

as you see the world, but it certainly reflects a standard as you 

note those standards should apply otherwise. 

In your testimony you note that there have been rules proposed 

by the Labor Department that may have gone beyond what was envisioned by the PPA language, those rules pulled back now by the 

existing Labor Department. You indicate that is a problem with the 

statute. I believe it is a natural part of administration. One administration was stretching. They didn’t get it in place. If they had, 

they would have been sued. This administration pulled that language back, and I guarantee you are not going to see language like 

the prior administration advanced under investment advice as they 

sought to expand SunAmerica to my view of inappropriate dimensions. 

So let’s really get down to the crux of it. Under defined contribution retirement savings, people have been given an awful lot of responsibility for their own fate, but I don’t believe we have taken 

sufficient steps to make sure they have the information so they can 

exercise that new responsibility well. This is a very important point 

in time. 

Today’s U.S. News and World Report captures the cover, Yes, 

you can still retire. Your portfolio took a hit, here is how you can 

get back on track. I believe the cover of this major news magazine 

reflects we are in a major national teachable moment. 

My 401(k) took a hit, a hellish hit. I rebounced somewhat ignorantly, I am now wondering what to do. I need help. This is the 

cry of millions across the marketplace. And wouldn’t it be unfortunate if, in the means of protecting—for the goal, and sincere goal 

by advocates of the Ed and Labor legislation, the goal of protecting 

people, we were to snatch away the very advice they need to figure 

out what they do in light of what the market has been through. 

I would like to ask, I guess, Mr. Chambers, representing the 

Benefits Council, and Mr. Jones’ Financial Engines—and I see I 

have probably filibustered most of my time here, so we are going 

to have to be brief about it—will moving forward with the kind of 

legislation proposed by Ed and Labor dramatically impact the 

availability of advice that the marketplace presently offers to plan 


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participants? And what do you think would be the consequence if 

that would occur? 

Mr. CHAMBERS. Thank you for the question. 

In the interest of time, I think that there will be a significant adverse effect if this legislation, in its current form, goes through. 

And I see the progression in the following way: As I mentioned in 

my oral testimony, and also in the written testimony, our advice 

from our members of all three organizations who I am representing 

today is that there will be a significant number of employers who 

will decide to back off from providing access to investment advice 

for their participants. There is just too much else going on in their 

worlds. You heard that in the first panel today from the CEO of 

NCR. There is just too much going on. This is not something that, 

frankly, is high on their agendas. 

So what is the result of that? It seems to me that as employers 

back away, the natural sort of—there are two choices. You have a 

participant who once again is back being responsible for investing 

his or her own assets among a panorama of different investments 

without any investment advice, or they have to go out and they 

have to find someone on their own—which, by the way, they are 

free to do today—but they are going to have to go out and find 

someone on their own who also will be subject to all of the fairly 

draconian rules that the proposed legislation would provide. 

Now, in my view, if you are really concerned about conflicted advice, and if there are people here who think that every rock has 

people under it who will have nefarious intentions of harming participants, these are people from the employer’s perspective who 

have been vetted. There are presumably sophisticated people at the 

employer who have been vetting one provider versus another, and 

who are fiduciaries and have a responsibility to monitor that. But 

if you put the individual out on his or her own, who is going to be 

in the marketplace and who, in my case, would go to my brotherin-law—God help me—what would happen, now my brother-in-law 

is, in theory, supposed to be subject to the same rules, and I guarantee you there is going to be a lot more conflict under those circumstances than there is today. 

One final point if I may, which is this, which is we have an existing set of rules. And we have heard discussions today from other 

people on this panel that say, well, we hear rumors of conflicts out 

there. Well, we also have a Department of Labor that is very interested in hearing about those conflicts. My suggestion is that rather 

than create a whole new series of additional layers of compliance, 

let’s try to focus on what we already have and get compliance from 

that perspective. If there is somebody who is out there who is 

stretching beyond this, they are outside of the bounds of the exemption, bring them to the attention of the Department of Labor 

and then other people who might be similarly inclined are not 

going to be following that course. 

Mr. JONES. I would just add a couple of points. I would agree 

with my co-panelist on many of the major points there. 

We do believe that if this legislation were to proceed in its current form, that it would have a negative impact on the availability 

of advice. One of the things that we are very concerned about in 

the current environment is the lack of legislative and regulatory 


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clarity on hiring investment advisors, whether they are conflicted 

under the PPA model or unconflicted, is causing paralysis among 

plan sponsors, even large ones, where people are saying we are just 

not sure how the world is going to turn out, we are going to pause 

and see what happens. This is clearly restricting the availability of 

advice to folks who really need it. And as you point out, the current 

point in time is very important in terms of getting advice into the 

hands of those folks. 

I would say that on the margin, the people that are likely to suffer the most are individuals that work for smaller organizations. 

The big, sophisticated plan sponsors have been hiring independent 

advisors for many years. I would say it is unlikely that they will 

choose not to do so even if the legislation were to proceed. However, there are many plan sponsors that receive advice under the 

SunAmerica model, and if that were to go away, I think the net 

effect would be a substantial reduction in the amount of advice 

available. 

Mr. POMEROY. Mr. Chairman, thank you for allowing the extension of time. 

Basically, as I see it, the SunAmerica model allows a platform for 

the delivery of independent advice comporting with fiduciary standards to the planned participant. And those with an understanding 

of the marketplace know this is simply the cheapest way to get a 

lot of advice out there. Now, some would prefer a one-to-one sitdown model—much more expensive, and there are an awful lot of 

employers that are not going to do it. So is SunAmerica better than 

no advice through that kind of platform? In my opinion, clearly yes. 

Thank you, Mr. Chairman. 

Mr. NEAL. We thank you, Mr. Pomeroy. 

We recognize the gentleman from Michigan, Mr. Camp. 

Mr. CAMP. Thank you, Mr. Chairman. 

Thank you all for your testimony; it is very helpful today. 

Mr. Chambers, I think clearly you said we don’t want to back off 

investment advice, we certainly want to make sure that people 

have an opportunity to get and receive investment advice. 

Mr. CHAMBERS. Correct. 

Mr. CAMP. In fact, I think in your testimony you say that today 

more than ever participants need advice to get them back on course 

toward retirement security. And I think from what I hear from 

your testimony, your opinion is basically, with regard to 

SunAmerica, that if it ain’t broke, don’t fix it. But you believe Ed 

and Labor Committee’s version would really hurt the goal of having 

access to investment advice. Can you just elaborate why you think 

that is the case? 

Mr. CHAMBERS. Sure. As I mentioned a few minutes ago, I 

think that the problem with this particular legislation, as drafted— 

and remember, I am here focusing really exclusively on the prePension Protection Act, SunAmerica and other level fee issues that 

are out there—I believe that this is going to cause a lot of employers to draw back from providing the opportunity for their employees from vetting providers of that advice. And therefore, that is 

going to put people in a position where they will either not be getting advice or they will be doing it on their own. 


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Furthermore, for those employers who do decide that this is a 

very significant thing for them to do, I actually think that it is 

going to limit the number of people that are out there who they can 

actually bring in to provide advice for their plan. 

Mr. CAMP. Thank you. 

Mr. McCarthy, I think at some place in your testimony you say 

that as many as 20 million participants in 401(k) plans could lose 

their access to professional investment advice if the Ed and Labor 

bill were to become law. Why do you think that is a cause for concern given the recent upheaval in the stock market? 

Mr. MCCARTHY. The 20 million number comes from a PSCA— 

Profit Sharing Council of America—study about the number of people covered currently under SunAmerica arrangements. 

So our belief is, as has been echoed by others, that with the invalidation of SunAmerica, you will create a freeze in the marketplace where people will not be willing to move forward, employers 

will say I have many more things on my plate, and I will put this 

off at a time where volatility—it is not just that markets are down, 

they have recovered somewhat, but volatility and the demography 

that we are facing right at the age wave needs to be dealt with. 

The number of people whose decision making needs to be good because they have less runway to make corrective action before they 

leave the workforce and have to be entirely reliant on their accumulated savings is growing. 

The last point I would make is, to echo Mr. Chambers’ comments, if the belief is that all of the conflicts—and I am not saying 

that the conflicts are not potential conflicts and they don’t exist, 

but if the belief is that those conflicts are resulting in some conspiratorial plan that is manifesting itself in harm—the harm that 

Mr. Pomeroy does not see—I would agree with Mr. Pomeroy that 

the harm is not happening. So Mr. Murphy, to my right, is a vendor of which we distribute his product. We have approximately 

$270 million between our two firms in that product. And to his chagrin, we have 4/100ths of 1 percent of that asset base in an affiliated asset manager, which is significantly lower than our overall 

market share in the asset management business. And the only 

thing I could say to cheer him up is, we have other providers who 

are actually doing worse, so his 4/100ths isn’t even the bottom of 

the list. So if we were running this conspiracy, you should sleep 

tight because we are incredibly inept at actualizing the harm. 

Mr. CAMP. Thank you. 

Thank you, Mr. Chairman. 

Mr. NEAL. Thank you, Mr. Camp. 

Let me recognize the gentleman from North Carolina, Mr. 

Etheridge, to inquire. 

Mr. ETHERIDGE. Thank you, Mr. Chairman. And I will be brief. 

I just have one question. 

Let me thank all of you for being here. This is a critically important issue, and a lot of people depend on this. And as you have 

heard today, employees really do need access to help with investment advice. You have heard that from a Member of Congress— 

I suspect if you ask every Member of Congress, they would probably say they need it too, it would be helpful after what we have 


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been through. But we need to make sure that the advice that they 

receive is unbiased. I think we can all agree with that. 

So Mr. Davis, let me ask you a question, if I could, please, sir. 

Can you elaborate on your testimony regarding plan sponsors who 

may think they are receiving advice, but actually are not. My question is, could this issue be addressed by requiring a plan service 

provider to disclose in plain English—that the average person can 

read—whether they are acting as a fiduciary to the plan sponsor 

when giving investment options? 

Mr. DAVIS. Thank you, sir. That would absolutely be a positive 

step in the right direction. 

What I was directly commenting on in my comments with those 

proportions was the disconnect and the different rules that govern 

different parts of our business that create confusion. ERISA won’t 

let a fiduciary give conflicted advice, yet a broker in a typical situation dealing with a participant doing education is incented to recommend one thing rather than another. So, by definition, the 

broker-dealer for whom that broker works is going to say we are 

not giving advice, while the employer hired that person thinking 

that is exactly what they are doing. That dysfunctionality is simply 

a picture of the cloudiness of the regulatory and legislative environment in which we function today. 

I certainly agree that we need more investment advice. And you 

are right, Mr. Pomeroy, nothing would feed my family better than 

to have more of that be delivered by independent advise providers 

such as our firm. 

That being said, I would rather see the rules in the regulatory 

and legislative environment incent the behavior that you want, 

which is independence across investment advice. If everyone is selfmotivated or self-interested, hopefully that self-interest is enlightened and we will reward those who are doing the thing that you 

want done, which is independent investment advice, rather than 

accept some iteration of investment advice simply because it is the 

best we can do given the construct that we have. 

We have a new retirement system for the 21st century funded 

through defined contribution instead of defined benefit. We need a 

new education and advice delivery mechanism to reach those 

needs. 

Mr. ETHERIDGE. Thank you, Mr. Davis. I yield back, Mr. 

Chairman. 

Mr. NEAL. Thank you, Mr. Etheridge. 

I want to thank our panelists for their good testimony today. We 

may have follow-up or questions, and I hope you will answer us 

promptly. 

In addition, you can note that this issue is not going to die in 

the immediate future, and I hope that we will all remain vigilant 

as we continue this conversation. 

Hearing no further comments, the hearing stands adjourned. 

[Whereupon, at 2:09 p.m., the committee was adjourned.] 

[Questions for the Record follow:] 


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[Submissions for the Record follow:] 

Statement of the American Council of Life Insurers 

The American Council of Life Insurers (ACLI) appreciates the opportunity to 

present its views to the Committee with respect to the investment advice rules for 

defined contribution plans. The ACLI is a national trade association of 340 member 

companies that account for 93 percent of the life insurance industry’s total assets 

in the United States, 94 percent of life insurance premiums, and 94 percent of annuity considerations. In addition to life insurance and annuities, ACLI member companies offer pensions, including 401(k)s, long-term care insurance, disability income 

insurance and other retirement and financial protection products, as well as reinsurance. 

The ACLI appreciates the Committee’s attention to this important subject and we 

urge the Committee to continue to support SunAmerica (and similar advisory opinions) as well as the investment advice provisions in the Pension Protection Act 

(PPA). Over the last two decades, there has been a sizeable shift away from defined 

benefit pension plans in favor of ‘‘participant directed’’ defined contribution plans in 


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1Government Accountability Office, GAO–07–355, ‘‘Employer Sponsored Health and Retirement Benefits: Efforts to Control Employer Costs and the Implications for Workers,’’ page 36, 

March 2007, Available at: http://www.gao.gov/new.items/d07355.pdf. 

which each participant manages the investment of his or her plan account.1 To 

make these investment decisions, it is important for participants to have access to 

both investment information and investment advice. With last year’s market decline 

as well as continued economic uncertainty, professional investment advice is more 

important than ever. 

Current Investment Advice Environment: SunAmerica and Other Advisory 

Opinions 

Employers and service providers have relied on long-standing Department of Labors (DOL) advisory opinions, in particular Advisory Opinion 2001–09A, a.k.a. 

‘‘SunAmerica’’ (2001) and Advisory Opinion 97–15A, a.k.a. ‘‘Frost Bank’’ (1997), as 

a cost-efficient way to get non-biased advice to American workers. 

Under SunAmerica, a service provider uses a third party’s computer model to provide participants with investment advice. This opinion includes several important 

conditions to ensure the investment recommendations are not biased in favor of the 

service provider or its affiliates. For example, the third party, who designed the 

computer program, must be totally independent of the service provider and its affiliates and retain control of the development and maintenance of its program. The 

service provider must not be able to change or affect the output of the computer program and must exercise no discretion over the communication to, or implementation 

of, investment recommendations provided under the arrangement. The third party’s 

compensation from the service provider must not be related to the fee income that 

the service provider or its affiliates receive from investments made pursuant to any 

recommendations. These opinions have allowed more advice to enter the workplace, 

and should continue to be upheld. If there are concerns that advice arrangements 

are not complying with these opinions, the DOL has broad authority to investigate 

and explore how plan sponsors are implementing these opinions. 

Increasing Investment Advice in the Workplace: PPA’s Investment Advice 

Provisions 

The ACLI continues to support the investment advice provisions enacted as part 

of the PPA. 

These provisions permit other ‘‘non-biased’’ advice solutions into the marketplace. 

Recognizing the benefits of expanding advice availability, the PPA provided a new 

statutory exemption that would permit advice to be provided as follows: (1) through 

a proprietary computer model certified by an independent expert or (2) under a level 

fee arrangement. 

There are numerous safeguards that apply to an advice arrangement under the 

exemption. First, only individuals who are otherwise subject to the securities laws, 

insurance regulation, or banking rules may utilize the provisions. Second, there is 

an obligation to disclose to participants information ranging from fees and compensation to material relationships. Third, the advisor must affirmatively accept the 

fiduciary status which requires acting in the best interest of the participant or account holder. Fourth, the participant must take the initiative to implement the advice. Fifth, on an annual basis, the fiduciary advisor must retain an independent 

auditor to sample the advice provided and evaluate compliance by the fiduciary advisor. Finally, upon failure to follow the requirements of the rules, an advisor must 

reverse the transaction, make the plan whole, pay a substantial excise tax, and be 

subject to civil liability under ERISA. These significant costs and potential liabilities 

for noncompliance are powerful incentives for any financial services firm to comply 

with the conditions of the exemption. Again, these provisions would be enforced by 

the DOL. 

Although the PPA was passed in 2006, the DOL issued regulations implementing 

the investment advice provision of PPA on January 21, 2009. However, the Obama 

Administration delayed implementation of the final regulation for its own review. 

Recently, the DOL has publicly stated it will re-propose this regulation by mid-November. Final regulations will be an important step in the process of increasing the 

availability of advice to plan participants. 

H.R. 2989 Will Roll Back the Amount of Investment Advice That Is Currently Available 

H.R. 2989, ‘‘The 401(k) Fair Disclosure and Pension Security Act of 2009,’’ as reported by the House Education and Labor Committee, would eliminate the PPA’s 

investment advice provisions and longstanding DOL guidance permitting ‘‘non-biVerDate Nov 24 2008 00:29 Jun 02, 2011 Jkt 063011 PO 00000 Frm 00137 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\63011.XXX GPO1 PsN: 63011

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1 According to a Watson Wyatt study, plans that used the relief under both WRERA and the 

Treasury Department guidance will have minimum contribution requirements in 2010 that will 

be almost triple of 2008 minimum contribution requirements. For plans that cannot use the 

Treasury relief, the minimum required contributions are more than double for both 2009 and 

2010. (Watson Wyatt Insider, April 2009—http://www.watsonwyatt.com/us/pubs/insider/ 

showarticle.asp?ArticleID=20942). 

ased’’ advice. The ACLI is concerned that this step would significantly limit the 

amount of advice options available to plan sponsors. Second, it is not clear that 

there is a sufficient number of ‘‘independent advisors’’ available to support the investment planning needs of American workers. Third, ‘‘independent’’ investment advice may be cost prohibitive to many small employers—resulting in a decline in advice available to workers generally. While we agree that conflicted advice should be 

prohibited, the ‘‘non-biased’’ advice approach undertaken by PPA and SunAmerica 

provides workers with an important source of investment information in these difficult economic times. 

Of particular note, H.R. 2989 would add additional costs to SunAmerica by requiring the fiduciary to ensure that the third party’s computer model be initially certified and audited annually by a fourth party. This step is unnecessary and redundant because the computer model is entirely controlled and maintained by a third 

party already independent of the service provider or its affiliates. As such, this requirement would only serve to discourage employers currently utilizing such a 

model by adding significant costs to employers. 

The ACLI would urge Congress to delay action on H.R. 2989 until it has had time 

to review the new Administration’s work. 

We would reaffirm our support for the investment advice provisions enacted as 

part of the PPA. As previously stated, the DOL is in the process of reviewing and 

reissuing the PPA investment advice regulations. We would urge Congress to let 

that process continue before considering new legislation. The ACLI shares the Committee’s interest in ensuring Americans have access to useful, non-biased investment advice. f 

Defined Benefit Funding Relief Working Group, Letter 

TO THE MEMBERS OF THE UNITED STATES CONGRESS: 

The undersigned organizations, which provide retirement benefits to millions of 

workers, urge you to enact legislation this year to provide much needed relief for 

both single employer and multiemployer pension funds. Ensuring pension contributions are not out of proportion to those required before the market downturn and 

that benefit restrictions are not allowed to go into place simply because of the recession and sudden market downturn is critical. 

We strongly urge Congress to move swiftly to adopt follow-up, temporary provisions that will ease cash flow constraints and make contributions more predictable 

and manageable. We believe that relatively modest temporary changes can provide 

greater stability and improved chances of economic recovery for many companies, 

non-profits, and charitable organizations. 

While the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) provided needed technical corrections and modifications to the transition rule and asset 

valuation rule, we remain extremely concerned about the viability of defined benefit 

pension plans during the current economic situation. Because of the importance of 

this issue to workers’ retirement security and the overall U.S. economy, we strongly 

urge Congress to address this issue immediately. 

Even with the relief provided by WRERA and the Treasury Department, minimum contribution requirements for 2010 will still far exceed the minimum contribution requirements for 2008; in addition, many companies are not eligible for the 

relief and thus face daunting contribution obligations for 2009.1 To meet these 2009 

and 2010 obligations, many employers will be forced to divert cash needed for current job retention and creation and investment in their organizations to their pension plans to fund long-term obligations. For most companies, 2010 funding obligations become fixed as of January 1, 2010, making the 2010 challenge imminent as 

creditors pressure companies regarding how they plan to meet this looming obligation. Therefore, without further legislative action, these unexpected funding requirements could cause an increase in unemployment and slow economic recovery. 

Thank you in advance for your support for this important effort. We appreciate 

the work and support from both the House and the Senate to move this issue forward, including a hearing to be held in the House Ways and Means Committee and 

the mark-up in the House Education and Labor Committee, and we stand ready to 


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work now with you and your staff to advance legislation that will promote our nation’s economic recovery and reinvestment, while securing sound long-term pension 

plan funding. 

Sincerely, 

Agricultural Retailers Association 

Alcatel-Lucent 

Allegheny Energy 

ALLETE/Minnesota Power 

Alliance for Children and Families 

Alliant Energy Corporation 

Alpha & Omega Financial Management Consultants, Inc. 

Alston & Bird, LLP 

AM General LLC 

Ameren Corporation 

American Benefits Council 

American Electric Power 

American Institute of Certified Public Accountants 

American Society of Association Executives 

Aon Corporation 

ArcelorMittal 

ASPPA College of Pension Actuaries 

Associated Benefits Corporation 

Association for Financial Professionals 

Avaya Inc. 

Avista Corporation 

B. Braun Medical Inc. 

Ball Corporation 

Belo Corp. and A. H. Belo Corporation 

Black & Decker 

Black Hills Corporation 

BP America 

Buck Consultants LLC 

Buffalo Supply, Inc 

Business Roundtable 

Caraustar Industries, Inc. 

Central Vermont Public Service Corporation 

CH Energy Group Inc. 

CMS Energy 

College & University Professional Association for Human Resources 

Committee on Investment of Employee Benefit Assets 

Con-way Inc. 

ConAgra Foods, Inc. 

Conoco, Inc. 

Connecticut Hospital Association 

Consolidated Edison, Inc. 

Constellation Energy 

Crawford & Company 

Dean Foods 

Direct Marketing Association 

DTE Energy 

Duke Energy 

DuPont 

Eastern Connecticut Health Network, Inc. 

Edison Electric Institute 

Edison International 

El Paso Corporation 

Elford, Inc. 

Eli Lilly and Company 

Energy Future Holdings Corporation 

Entergy Corporation 

Exelon Corporation 

Fabri-Kal Corporation 

Financial Executives International’s Committee on Benefits Finance 

FirstEnergy Corp. 

FMC Corporation 

Food Marketing Institute 


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Fox Entertainment Group 

FSG Pension Services, Inc. 

General Devices Co., Inc. 

Girl Scouts of the USA 

Goodrich Corporation 

Graphic Packaging International, Inc. 

Great Plains Energy Incorporated 

Greyhound Lines, Inc. 

Hallmark Cards, Incorporated 

Hawaiian Electric Company, Inc. 

Hillside Family of Agencies 

Hooker & Holcombe, Inc. 

Hospital for Special Surgery 

HR Policy Association 

HSBC–North America 

Indiana Chamber of Commerce 

Indianapolis Power & Light Company 

Ingram Industries Inc. 

Kansas City Power and Light 

King Kullen Grocery Co., Inc. 

Kraft Foods 

Lockheed Martin Corporation 

Lockton Companies, LLC 

Lord Corporation 

Machine & Welding Supply Company 

Manchester Memorial Hospital 

Maritz 

MassMutual Financial Group 

McGuireWoods LLP 

MD Helicopters, Inc. 

MDU Resources Group, Inc. 

Meridian Health 

MetLife 

Morgan Services, Inc. 

Motor & Equipment Manufacturers Association 

Motorola, Inc. 

National Association of Manufacturers 

National Association of Waterfront Employers 

National Association of Wholesaler-Distributors 

National Council of Chain Restaurants 

National Council of Farmer Cooperatives 

National Education Association 

National Federation of Independent Business 

National Grid 

National Gypsum Company 

National Mining Association 

National Retail Federation 

Navistar, Inc. 

Newell Rubbermaid 

Newspaper Association of America 

NiSource Inc. 

NMB (USA) Inc. 

Northeast Utilities 

NorthWestern Energy Corporation 

NSTAR 

Nuclear Energy Institute 

OfficeMax, Incorporated 

OGE Energy Corp. 

Olan Mills, Inc. 

Otter Tail Corporation 

P–Solve Asset Solutions 

Pactiv Corporation 

Paul, Hastings, Janofsky & Walker LLP 

Peabody Energy 

Peerless Machine & Tool Corporation 

PenChecks, Inc. 

Pepco Holdings, Inc. 

PG&E Corporation 


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Pietzsch, Bonnett & Womack, P.A. 

PNM Resources 

Portland General Electric 

PPG Industries, Inc. 

Principal Financial Group 

Printing Industries of America 

Progress Energy 

Public Service Enterprise Group, Inc. 

Qwest 

Rayonier Inc. 

Republic Services, Inc. 

Retail Industry Leaders Association (RILA) 

Rhodes-Joseph & Tobiason Advisors, LLC 

Rockville General Hospital 

RSM McGladrey, Inc. 

Ryder System, Inc. 

RR Donnelley 

Safeway Inc 

Saint Barnabas Health Care System 

Sears Holdings Corporation 

Small Business Council of America 

Smurfit-Stone Container Corporation 

Society for Human Resource Management 

Sony 

Southern Company 

Southern States Cooperative 

Spectra Energy 

SUPERVALU 

TECO Energy, Inc. 

Tenneco Inc. 

Textron Inc. 

The American Public Power Association 

The Associated General Contractors of America 

The Dayton Power and Light Company 

The E. W. Scripps Company 

The Empire District Electric Company 

The ERISA Industry Committee 

The Financial Services Roundtable 

The Goodyear Tire & Rubber Company 

The Kroger Co. 

The Segal Company 

The Wagner Law Group 

Towers Perrin 

UniSource Energy Corporation 

Unisys 

United Illuminating Company 

United Jewish Communities/The Jewish Federations of North America 

United Jewish Communities of Metrowest (NJ) 

United Neighborhood Centers of America 

United Plan Administrators, Inc. 

U.S. Chamber of Commerce 

Vectren Corporation 

Venable LLP 

Vought Aircraft 

Westar Energy 

Westfield Group 

Whirlpool Corporation 

Willis HRH, North America Inc. 

Windstream Communications 

Woods Hole Oceanographic Institution 

WorldatWork 

Xcel Energy, Inc. 

Xerox Corporation 

YRC Worldwide Inc. 

f 


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1 Christopher Howard, The Hidden Welfare State, Princeton University Press, 1999. 

Statement of Department of Labor’s Advisory Council on 

Employee Welfare and Pension Benefit Plans 

I am a second generation Sheet Metal Worker, and am currently serving my third 

term as General President of the Sheet Metal Workers’ International Association. 

I direct 157 Local Unions throughout the United States, Canada and Puerto Rico 

whose 150,000 members provide skilled services to the sheet metal and air conditioning industry, the kitchen equipment industry, the transportation industry, and 

to other related manufacturing and service operations. I also serve, among other positions, as a Vice President of the AFL–CIO Executive Council; a Director on the 

ULLICO Board of Directors; a Vice President of the Building and Construction 

Trades Department of the AFL–CIO; the Labor Co-Chairman of the Democratic 

Governors’ Association; and President of the Eugene Debs Foundation. I am also a 

proud Board member of the National Coordinating Committee for Multiemployer 

Plans (NCCMP). I began my sheet metal career in Indianapolis, IN, completing my 

apprenticeship in 1969. I have served in union leadership positions since 1973, and 

during this time I have been a trustee on many pension and welfare plans. 

Crisis begets legislation, particularly when it comes to pensions. Studebaker shut 

down in 1963 and thousands lost pensions. I was a boy then, but I remember the 

stark effect it had on many of my fellow Hoosiers. In response, President Kennedy 

formed a cabinet level committee on corporate pension funds. Yet, more than a decade would pass before the Employee Retirement Income Security Act of 1974 

(ERISA) became law. To many scholars, ERISA is a major event of American social 

welfare legislation dwarfed only by Social Security and Medicare.1 This landmark 

law created a complex regulatory scheme for pensions. Despite 10 years of study, 

ERISA’s passage was rushed by the impending impeachment of President Nixon. I 

am told by old Congressional hands that ERISA originally would have taken on 

health care; imagine that, over 30 years ago. 

ERISA spurred interest group advocacy. It also created whole new careers and 

lines of business. New groups formed, which this Council knows well, like the 

NCCMP, the Pension Rights Center, Employee Benefits Research Institute, the 

ERISA Industry Council, to name just a few. 

The volume and complexity of pension regulations created new experts—like 

many of you. The investment of assets under prudent man rules have led to increasing reliance on banks, investment managers, insurance companies and other financial services companies. In my experience, few trustees can make sense of federal 

pension law without actuaries, accountants, and lawyers. Their guidance through 

the bureaucratic maze is indispensable. Yet, it does not improve our ability to meet 

our fundamental responsibility—secure retirement income. Moreover, these experts 

often comment on proposed legislation and regulations and nudge the process in one 

direction or another. 

After the first economic downturn of this century in 2000 through 2002, Congress 

passed limited relief in the Pension Funding Equity Act of 2004. This limited bill 

reflected the inability of stakeholders and politicians to agree on more substantive 

reform. By 2006, employers, unions, and others—still reeling from the 2000–2002 

market downturn—put aside our differences and managed to enact the Pension Protection Act of 2006 (PPA), which was the most sweeping pension reform legislation 

since ERISA’s enactment. Unfortunately, the PPA’s reforms were no match for the 

current ‘‘economic tsunami’’ (as our President describes it) which has pension plans 

and their sponsors reeling again. By the way, my Union supported PPA’s multiemployer reforms, but we did not support the single employer changes. 

PPA, like almost all pension legislation since 1974, only addresses problems 

caused by the latest crisis. It was not designed for the current one. Like most legislation, it was written by bright, well-intentioned, young staffers with little experience or expertise in pension plan design. 

Understandably, the President and Congress have been preoccupied with our 

troubled economy and health care reform. Fixing both the economy and health care 

are daunting challenges that demand urgent action. These efforts will ultimately not 

succeed and the nation will not achieve lasting economic growth, unless the President and Congress do something to ensure permanently the economic security of 

America’s current and future retirees. Medical science has significantly extended life 

expectancies. Aging baby-boomers will further strain our economic resources and the 

health care system. Retirees can help pay for these resources and help fund health 

care if they have financial security. Past generations who reaped the benefits of our 

traditional private sector pension system had such security. Over the past few decVerDate Nov 24 2008 00:29 Jun 02, 2011 Jkt 063011 PO 00000 Frm 00142 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\63011.XXX GPO1 PsN: 63011

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2Policy Memorandum #143, ‘‘Obama Retirement Policy Falls Short,’’ Monique Morrissey, June 

26, 2009, Economic Policy Institute, Washington, DC. 3This finding is reported in ‘‘The Pension Factor: Assessing the Role of Defined Benefit Plans 

in Reducing Elder Hardships.’’ The report was authored by Dr. Frank Porell, Professor of Gerontology at the McCormack Graduate School of Policy Studies at the University of MassachusettsBoston, and Beth Almeida, Executive Director at the National Institute on Retirement Security. 

The analysis used the U.S. Census Bureau’s Survey of Income Program Participation (SIPP) 

panels from 1996, 2001, and 2004. The study sample included respondents age 60 or older and 

all households with a head age 60 and older, who had records in both the Pension and Adult 

Well-Being topical modules of the survey. This totaled 10,259 households. 

ades, our society’s shortsighted dismantling of this private source of income will 

shift these costs directly onto the taxpayer with crippling economic consequences. 

It is past time to overhaul our private pension system. Despite the 2008 market 

and ‘‘economic tsunami,’’ some in Congress say we gave pension relief last year. Certain band-aid approaches are suggested—give plans longer to fund this or that, or 

give temporary relief from funding standards. Reactive legislation again is supposedly all we should expect. Most significantly, current law does nothing to promote new and better pension plan designs or reduce the risks posed to participants 

and to employers. Still, I am heartened that the President’s emphasis on seeking 

long-term structural reform to our economy can be focused on retirement security. 

Americans are hard workers. We deserve some semblance of leisure in our later 

years. Over the past 20 years, most employers, but not most union employers, have 

phased out their traditional defined benefit pension plans, which provide a reliable 

monthly pension check. Instead, to the extent retirement benefits are provided at 

all, employers have shifted to defined contribution plans in which a worker’s retirement income is determined at the end of the day by the losses or gains in his/her 

account. This latest ‘‘unprecedented’’ economic downturn starkly illustrates how 

woefully inadequate a retirement system is that is limited to defined contribution 

plans. Most workers, including those who save religiously, have seen their retirement accounts decimated in just one year. Just look at the folks who thought 2010 

would be their retirement year. One large provider’s 2010 ‘‘target date’’ fund lost 

41% in 2008; most others lost at least 25%. The situation is most dire for middle 

age and older workers—the baby boomers moving through the latter stage of life 

like the proverbial pig through a python. It is unlikely that they will recoup their 

losses before the time that they hoped to retire (if ever). Moreover, many workers 

may be disinclined to contribute to defined contribution plans in the future, if they 

fear their money may be gone when they are ready to retire. 

We encourage employees to save more, be patient, wait the market out. But employers in the DC Plans have made their decisions. As the Economic Policy Institute’s Monique Morrissey has written, ‘‘Employers ranging from AARP to Zygo Corporation have suspended their 401(k) matches during the current downturn.’’ 2

Despite medical advances and better habits, our bodies inevitably decline, making 

some tasks more difficult and prolonged. Yet, every day we hear of retirement-age 

folks who have to keep working, or who return to work, because their retirement 

savings have collapsed or their pensions were dumped on the Pension Benefit Guaranty Corporation (PBGC) and they cannot live on the amount guaranteed by the 

PBGC. Lacking a secure source of retirement income, a growing number of older 

workers are now forced to continue working in jobs that younger workers could fill. 

In some arenas, workforce productivity will suffer if older workers must stay put 

and younger workers are left out, or their advancement is delayed. Employer provided health insurance will become more expensive as an older workforce demands 

more medical care. For people that simply are unable to perform their job as they 

age, additional strains will be placed on our already strained Social Security system. 

Social Security is not meant to be, nor should it be, the main source of income for 

our aging population. Especially in light of current high unemployment, we risk fanning the flames of intergenerational conflict as younger workers have fewer job 

prospects and those that are working have fewer advancement opportunities. 

Others may disagree, but it is clear to me that these DC plans do not provide 

retirement security. In fact, it is clear that defined benefit pensions play a critical 

role in reducing the risk of poverty and hardship among older Americans. According 

to a recent study, poverty rates for older households lacking pension income were 

about six times greater than those with such income.3 The analysis also finds that 

pensions reduce, and in some cases eliminate, the risk of poverty and public assistance that women and minority populations otherwise would face. Dr. Frank Porell, 

one of the lead authors, has said the following: 

‘‘Evidence that pensions contribute to the retirement readiness of older American households has been noted by experts and academics. With our analysis, 


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4The study’s key findings are compelling. Pensioners in 2006 were associated with: 

• 1.72 million fewer poor households and 2.97 million fewer near-poor households 

• 560,000 fewer households experiencing a food hardship 

• 380,000 fewer households experiencing a shelter hardship • 320,000 fewer households experiencing a health care hardship 

• 1.35 million fewer households receiving means-tested public assistance 

• $7.3 billion in public assistance expenditures savings, representing about 8.5 percent of 

aggregate public assistance dollars received by all American households for the same benefit programs. 5 Christopher Howard, The Hidden Welfare State, Princeton University Press, 1999, p. 132. 6See, ‘‘Inside the Black Box: The Politics of Presidential Advisory Commissions,’’ Liz Clausen, 

School of Economic, Political and Policy Sciences, University of Texas at Dallas. 

we now have hard numbers on the people and budget impacts of pensions. The 

bottom line: pensions help older Americans escape poverty, especially women 

and minorities who we know are most vulnerable.’’ 

Because they have pensions, many older Americans have adequate food, shelter, 

and health care, and avoid public assistance.4

The latest economic downturn demonstrates that reform measures such as the 

PPA may be expedient, but they do not address the system’s fundamental problems. 

Whatever immediate dangers our pension plans face can be addressed—in the shortterm—by modifications to the PPA, a few of which Congress already is considering. 

A solution to our pension woes, however, cannot be addressed in the short-term. Nor 

can we continue only to seek pension reform in times of crisis. In 2014, much of 

the PPA will expire. Pre-PPA laws had already been inadequate. We cannot return 

to old models. We must use this time wisely to develop new forms of lifetime retirement security or risk revisiting today’s economic woes on future generations. 

I have been around Washington, almost full-time for over 15 years and a frequent 

visitor before that. From my layman’s perspective, incoherence is a primary characteristic of retirement legislation and regulations. National retirement policy has 

veered in multiple directions. Access to benefits has expanded and contracted. Congress simultaneously tightened nondiscrimination rules, forcing employers to cover 

more lower-paid workers while it made voluntary retirement plans, now known as 

401(k)’s, more attractive to employers. The government made it easier for workers 

to retire early by allowing withdrawals at 59 and in-service distributions at 62 while 

‘‘preserving’’ Social Security by raising the age for full benefits from 65 to 67 and 

creating incentives to work even longer. 

There are overlapping Congressional jurisdictions among the revenue, labor, and 

governmental operations committees. Administrative and regulatory authority is 

distributed among the Treasury Department, Labor Department and PBGC who 

often work at cross-purposes and which produce conflicting demands on sponsors.5

The problems with our current pension system are complex and demanding, but 

not insoluble. The right solutions, however, require careful thought and analysis, 

and the input of many diverse sectors of our economy. No one official or department 

possesses the requisite knowledge and experience to address the enormity of pension 

reforms. As with other challenges, the nation should turn to a panel of experts to 

marshal research and make recommendations to elected officials.6

The best way forward is a Presidential Commission, chaired by a high-level administration executive, whose task would be to recommend, within a two-year period, a new policy and legislative framework for ensuring long-term retirement security for all Americans. Its members should represent a broad cross section of employers, participants, unions, and benefit and investment professionals. The Commission should investigate and recommend new forms of pensions where risk is fairly borne both by participants and plan sponsors, but also in which a reasonable 

monthly benefit is fully funded. We need to replace the byzantine rules, which 

measure funding, tax consequences and required contributions and greatly decrease 

the exposure of the PBGC. Rather than providing a minimum benefit in the event 

of plan insolvency, we should have a system that removes obstacles to private sector 

plan sponsorship. The appropriate Congressional Committees should then examine 

the Commission’s recommendations and retain experts to draft the actual legislation. But we have to do this in two years, to ensure that those whose vision helps 

shape a new comprehensive retirement policy are in a position to promote and enact 

the changes that are called for. 

This is not a partisan suggestion. A commission is not a solution or even a start 

to a solution, unless it is followed by action. Who here remembers President Carter’s 

Commission on Pension Policy which recommended sweeping changes to ERISA, including immediate vesting, full portability and mandatory coverage by all employers? The report was issued, the administration changed and nothing happened. 


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It is time to create a new ERISA and a new retirement structure. Our best and 

brightest must be called to serve. Thank you for your attention. 

f 

Statement of Nicholas Paleveda, MBA J.D. LL.M 

My name is Nicholas Paleveda MBA J.D. LL.M, I am a tax attorney, licensed before the U.S. Tax Court for 25 years, and CEO of Executive Benefits Design Group. 

Executive Benefits Design Group is one of the largest pension service providers 

in the United States, servicing more defined benefit plans than Merrill Lynch, 

T.Rowe Price and Putnam (in terms of numbers of plans). This committee needs to 

be aware of what is taking place in the Defined Benefit area especially as it relates 

to small plans, less than one hundred employees. Many plan sponsors are interested 

in setting up plans for their employees and funding the defined benefit plans with 

guaranteed annuity contracts. This prevents the plan from losses that take place if 

the funds were invested in the stock market. At the same time, the IRS has created 

a campaign to wipe out these plans using 6707A, a penalty that is non-reviewable 

before any court and creates fines in excess of $200,000 for each plan. 

The plan sponsors, in many cases never entered into any ‘‘listed transaction’’ or 

in some cases fall into inadvertent ‘‘listed transactions.’’ The IRS audits in many 

cases are time consuming and expensive for the small business owner. The taxes 

and law in the pension area can be, in many cases, misstated and misrepresented 

by the IRS. 

This whole process creates an atmosphere where the small companies do not want 

to set up pension plans for their employees. This atmosphere will in turn create less 

savings for retirement and shift more of a burden on the social security system. 

The solution needs to come from Congress by: 

1. Establishing a small plan audit and compliance section of the IRS where 

‘‘substantial compliance’’ becomes the rule. This will encourage small businesses to set up plans and lessen the burden of social security. 

2. Amend 6707A to allow for Judicial review of plans and impose a tax or penalty relative to the error that the plan created such as 10% of the amount 

deducted as opposed to $200,000 on a $20,000 deduction. 

3. Make this law retroactive to 2004 where the American Jobs Creation Act 

was passed. 

Please find a sample battle in Tax Court that is a waste of time for the taxpayer 

and the small business owner. 

1. This can happen to any small business. 

2. The notice of deficiency, a copy of which including its annexed computation and 

explanation pages, is attached hereto as Exhibit A, was mailed to Any small business on March 9, 2009 by the Department of the Treasury Internal Revenue Service. 

3. The deficiency as determined by the Commissioner is in income tax for the calendar year 2005 in the amount of $56,000 and in the year 2006 of $25,665 of which 

part of this amount is attributable to the denial of a deduction to a qualified retirement plan is in dispute. 

4. In 2005, Any small business Inc. decided to create a retirement plan for the 

benefit of all their employees. The employees were in their 40s and 50s and did not 

want to take risk in the stock market. The corporation set up a fully insured defined 

benefit plan under section 412(i). 

5. A section 412(i) plan is a defined benefit plan that is exempt from the minimum funding standard under Section 412 as the plan is funded with guaranteed 

annuity and life insurance contracts. 

6. A defined benefit pension plan provides a participant at retirement with the 

benefit stated in the plan. The cost of benefits payable from such plans are funded 

on an annual basis over the preretirement period I.R.C. Sec. 404, 412 Contributions 

made to the plans, within certain limits, are deductible. Sec. 404(a)(1) Earnings on 

the contributions are not taxed as they accumulate. Sec. 501(a) Plan assets are 

taxed to participants only as they are paid out as benefits. Sec. 402(a)(1) The payments of benefits under a qualified plan are limited. Sec. 415 Lear Eye Clinic Ltd. 

et al. v. Commissioner of Internal Revenue 106 T.C. 23 (1996). 

7. The Any small business plan was for the benefit of all their employees and 

funded the plan with guaranteed annuity contracts and guaranteed whole life contracts which built up cash value for retirement and provided a death benefit to the 

survivors if an untimely death. The annuity and insurance contracts were obtained 

from A+ Life Insurance Company. The plan (exhibit 1) established a Trust that purchased the annuity and insurance contracts, and the plan had a trust agreement 


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in place with a favorable determination letter (exhibit 2) from the Internal Revenue 

Service. The Trust (exhibit 3) was a volume submitter plan and participants were 

given summary plan descriptions describing the lifetime income retirement benefits, 

death and disability benefits from the plan. The Trust met the rules of the Internal 

Revenue Service including plan amendments such as The Final 401(a)(9) amendment, (exhibit 4), the Pension Funding Equity Act amendment (exhibit 5), the Code 

401(a)(9) Model amendment pursuant to announcement 2001–82 (exhibit 6), the 

EGTTRA ‘‘good faith’’ plan amendment (exhibit 7), the Regulation Section 

1.401(a)(4)–3(b)(5)(iv) plan compliance agreement (exhibit 8) and corporate resolution (exhibit 9) ratifying the plan. The plan owned the annuities and life insurance 

policies (exhibit 10) and filed 5500 returns as required under ERISA (exhibit 11). 

The plan is also a PBGC plan (exhibit 12) after receiving a determination status 

letter from the PBGC on medical technicians. 

8. The Commissioner’s determination that a plan did not exist and the income tax 

set forth in the deficiency is owed is based upon misstatements of facts and errors 

of law including but not limited to the following: 

The Commissioner erred in determining the defined benefit plan set up by the 

corporation did not satisfy the requirements of section 412(i). Section 412(i) is 

the code section that provides an exemption for the minimum funding standards 

of Section 412 as the plan is funded and maintained based upon the guaranteed 

interest and crediting rate of a major insurance company as opposed to risk 

taken in the stock market. In the determination letter issued by the Internal 

Revenue Service, the Service stated the plan did not satisfy all of the following 

requirements. The Service states as follows Section 412(i): 

(1) The plan is funded exclusively by the purchase of individual insurance contracts. 

(2) Such contracts provide for level annual premium payments to be paid extending not later than the retirement age for each individual participating 

in the plan, and commencing with the date the individual became a participant in the plan, (or in the case of an increase in benefits commencing at 

the time such increase becomes effective). 

(3) Benefits provided by the plan are equal to the benefits provided under each 

contract at normal retirement age under the plan and are guaranteed by an 

insurance carrier . . . to the extent premiums are paid. This is the area 

under dispute. 

(4) The benefits for each participant provided under the 412(i) plan that holds 

individual insurance contracts must be equal to the benefit provided under 

the participant’s individual contracts at the participant’s normal retirement 

age under the plan. 

This was placed in the deficiency letter and is a misstatement of law. 

Section 412(i)(4) does not say this at all. In fact Section 4 states: 

(5) Premiums payable for the plan year, and all prior plan years, under such 

contracts have been paid before lapse or there is reinstatement of the policy. 

The Service also misstates 412(i) Section 5. Section 5 actually states: 

(6) No rights under such contracts have been subject to a security interest at 

any time during the plan year. 

The Service also misstates 412(i) Section 6. 

Section 6 actually states: 

(7) No policy loans are outstanding at any time during the year. 

412(i) Section 1, 2, 4, 5, and 6 have all been met by the taxpayer. The only section 

in dispute is 412(i) Section 3 and misstated Section 4. Since Section 4 is not part 

of the statute, (and appears to be made up), the court should determine if the plan 

meets 412(i) Section 3. 

The Service argues that the life insurance and annuity contracts provide benefits 

which exceed the benefits under the plan; the premiums to the excess benefits are 

not deductible. Assuming there are contributions that exceed the benefits these excess contributions should not be allowed. Petitioner agrees with this statement—excess premiums are not deductible. Petitioner disagrees that the entire contribution 

to the trust should be disallowed. In the instant case, Respondent disallowed all the 

deductions under 404(j) which is legally not correct. 404(j) states: 


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(1) NO DEDUCTION IN EXCESS OF SECTION 415 LIMITATION. 

I.R.C. Code Section 404(j) does not say there will be no deduction for the entire plan if plan contributions exceed Section 415. The plain wording of the statute makes this clear as the statute refers to ‘‘no deduction in excess of the 415 

limit’’. In construing a statute, courts generally seek the plain and literal meaning of its language. United States v. Locke, 471 U.S. 84, 93, 95–96 (1985); 

United States v. American Trucking Associations, Inc. 310 U.S. 534,543 (1940). 

For that purpose, courts generally assume that Congress uses common words 

in their popular meaning. Commissioner v. Groetinger, 480 U.S. 23, 28 (1987); 

see also Addison v. Holly Hill Fruit Prods., Inc. 322 U.S. 607,618 (1944). Moreover, words in a revenue act generally are interpreted in their ‘ordinary, everyday sense’ ’’. Commissioner v. Soliman 506 U.S. 168, 174 (1993). In the instant 

case, the statute is not ambiguous, Congress intended to disallow only deductions that exceed the 415 limit-not the entire contribution. 

Congress has affirmed this position in the House Committee Report H. R. Rep. 

No. 107–51 pt. 1 in granting relief to excise taxes on Defined Benefit plans 

‘‘The Committee believes that employers should be encouraged to adequately 

fund their pension plans. Therefore, the committee does not believe that an excise tax should be imposed on employer contributions that do not exceed the accrued liability full funding limit’’. 

The deficiency letter ignores the intent of Congress to encourage employers to 

fully fund their defined benefit plans by disallowing the entire plan if contributions 

are made in excess of allowable limits when the remedy is clearly to make the contributions that are excess-non-deductible. 

The deficiency letter from the service goes on to say ‘‘Under Section 404(a) (1), 

the limitation on deductions for a defined benefit plan is calculated using the same 

funding method and actuarial assumptions that are used for the purpose of funding 

the plan under IRC Section 412.’’ This is not a correct statement of Section 404(a) 

(1) which actually states: 

(1) PENSION TRUSTS.— 

(A) IN GENERAL- In the taxable year when paid, if the contributions are 

paid into a pension trust (other that a trust to which paragraph 3 applies), 

and if such taxable year ends within or with a taxable year of the trust for 

which the trust is exempt under section 501(a), in an amount determined 

as follows: 

(i) the amount necessary to satisfy the minimum funding standard 

provided by section 412(a) for plan years ending within or with such 

taxable year (or for any prior plan year), if such amount is greater than 

the amount determined under clause (ii) or (iii) (whichever is applicable 

with respect to the plan). 

(ii) the amount necessary to provide with respect to all of the employees under the trust the remaining unfunded cost of their past and 

current service credits distributed as a level amount, or a level percentage of compensation, over the remaining future service of such employee, as determined under regulations prescribed by the Secretary, 

but if such remaining unfunded cost with respect to any 3 individuals 

is more than 50% of such remaining unfunded cost, the amount of such 

unfunded cost attributable to such individuals shall be distributed over 

a period of at least 5 taxable years. 

(iii) an amount equal to the normal cost of the plan, as determined 

under regulations prescribed by the Secretary, plus if past service or 

other supplementary pension or annuity credits are provided by the 

plan, an amount necessary to amortize the unfunded costs attributable 

to such credits in equal annual payments (until fully amortized) over 

10 years, as determined under regulations prescribed by the Secretary. 

In determining the amount deductible in such year under the foregoing limitations the funding method and the actuarial assumptions used shall be those 

used for such year under Section 412, and the maximum amount deductible for 

such year shall be an amount equal to the full funding limitation for such year 

determined under Section 412. 

The Service makes a legal error that the taxpayer followed none of the requirements of section 412—and should be following Section 412. Taxpayer is not 

required to follow Section 412. In fact section 412(h) specifically states, ‘‘412(h) 


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EXCEPTIONS—This section shall not apply to any insurance contract plan described in subsection (i).’’ 

The Service made a factual error stating that the taxpayer did not use an enrolled actuary to certify the funding. An enrolled actuary is not needed to certify 

the funding, however the taxpayer did use an enrolled actuary to determine the 

funding. The remaining statements by the service are without merit as they 

apply to traditional defined benefit plans. The taxpayer did use a reasonable 

method for calculating the amount of funding to provide the benefits. The funding provided for level annual premiums to normal retirement age and the benefits of the plan equaled the guaranteed cash surrender value of the life insurance and annuity converted to a lifetime income using the annuity conversion 

rates from the annuity contracts purchased under the plan. Contributions are 

reduced to the extent any excess dividend or interest is paid to the contracts 

and the plan is correctly funded. As this is a traditional section 412(i) plan, established by Congress in 1974 and reaffirmed in 2006, the remainder of the 

service’s argument that it is a non-qualified plan is without merit. In any event, 

if the plan did not meet the qualifications of section 412(i), the plan would lose 

412(i) status and become a traditional defined benefit plan. It is nearly factually 

impossible for a plan funded solely with annuity and insurance contracts, as in 

the instant case, not to meet section 412(i) as the contracts themselves demonstrate the guaranteed cash value build up and guaranteed lifetime income. 

It is factually possible for this plan to contain more assets than allowed under 

Section 415, or be operationally non-compliant 

Delinquency Penalty-failure to File. Section 6651(a)(1). Petitioner’s Counsel is 

unaware of the time the tax return was filed and requests the penalty to be 

reduced to reflect the allowable deduction to the retirement plan. 

Civil Fraud Penalty. Section 6663 

Petitioner’s Counsel is unaware of the alleged Fraud in connection with certain previously agreed and assessed adjustments. Fraud must be pleaded with 

particularity and in fact was not plead at all. Petitioner request the Fraud penalty should be abated. 

Accuracy Related Penalty Section 6662. 

Petitioner request this penalty be abated as the deduction for the retirement 

plan was properly taken on the return. No facts have been pled that would impose 6662. There was no substantial underpayment of income tax, there were 

no valuation misstatements nor did taxpayer disregard the rules and regulations. In fact taxpayer followed the rules as promulgated by Congress in Section 

412(i) and did not ‘‘misstate the law’’ as the Service did to this court either intentionally or unintentionally by adding a section to 412(i) that does not exist. 

Taxpayer created a qualified plan document, had an approval letter from the 

service and funded the plan to meet the objectives of the plan. 

Similarly, and with respect to the previously agreed and assessed adjustments, Petitioner reasonably and justifiable relied on its tax advisor and return 

preparer in connection with the preparation of its Form 1120 for the years 

ended December 31, 2005 and December 31, 2006. Consequently, there was reasonable cause for the underpayment of tax associated with and resulting from 

the previously agreed and assessed adjustments. 

The Accuracy Related Penalty 6662A. 

The Service incorrectly determined the plan to be a listed transaction. The 

Service originally stated that all three participants had ‘‘excess insurance’’ and 

the entire plan was a listed transaction. Upon further review, the Internal Revenue service stated only one participant created a listed transaction. In a review 

of the computations by enrolled actuaries it was discovered that, the area auditor from the IRS incorrectly used a lower salary than was actually paid to the 

participant and incorrectly used an annuity conversion rate that was not in the 

plan for this one participant. If the lower salary and higher annuity conversion 

rate was used, the plan met the guidelines for a ‘‘listed transaction’’. A penalty 

of $200,000 was sent to the taxpayer in addition this penalty was imposed. 

(2) Whereas Petitioner respectfully request this court and prays for relief as follows: 

1. Determine that this plan is a Section 412(i) plan and the contributions 

are deductible under Section 404. 

2. Determine that the commissioner erred in disallowing the deduction to 

the retirement plan. 


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3. If there were excess deductions, the deduction for the plan remains in 

tact and only the excess deductions are disallowed as per section 404(j). 

4. Abate any penalties and deem this plan, a traditional 412(i) plan, not 

to be a ‘‘listed transaction’’. 

5. In the alternative, if the plan does not meet the standards of section 

412(i), the plan would become a traditional defined benefit plan not a nonqualified plan as proposed by the Service. 

6. Abate imposition of the penalty under Section 6663. 

7. Abate imposition of the penalty under Section 6662. 

8. Abate imposition of the penalty under Section 6662A. 

9. Give such other and further relief or recovery to which any small business may be entitled. 

Please enact legislation that stops this nonsense. 

f 

STATEMENT OF GIRL SCOUTS OF THE USA 

OVERVIEW 

On behalf of the Girl Scouts of the USA, its 109 councils across the country, 

13,000 active and former employees and 3.5 million girl and adult members, we are 

pleased to submit the following statement about the Pension Protection Act, the recent economic downturn and their combined impact on the Girl Scouts’ defined-benefit pension plan. We commend the Ways and Means Committee for its attention 

to this issue and look forward to working with Congress to enact legislative relief 

for plan sponsors. 

For more than 35 years, Girl Scouts of the USA has partnered with Girl Scout 

councils across the country to provide a defined-benefit pension for approximately 

13,000 active, past, and retired employees. Even as many corporations have moved 

away from defined-benefit plans, Girl Scouts has remained committed to providing 

this important form of retirement security for our employees, 90 percent of whom 

are women. 

Unfortunately, implementation of the Pension Protection Act, when coupled with 

the unprecedented economic downturn and the increasing liabilities of our pension, 

has created a ‘‘perfect storm’’ that is significantly impacting Girl Scouts’ ability to 

continue providing a defined-benefit pension to our employees. Absent prompt Congressional relief, Girl Scouts will have to freeze its plan, cut programs, lay off staff, 

and engage in other cost-cutting measures that will significantly inhibit our ability 

to achieve our mission of creating girls of courage, confidence and character who 

make the world a better place. 

ABOUT GIRL SCOUTS 

Girl Scouts is the world’s preeminent organization dedicated solely to girls, serving 3.5 million girl and adult members in every corner of the United States, Puerto 

Rico, the Virgin Islands, and ninety-five countries worldwide. For almost 100 years, 

Girl Scouts has helped girls discover the fun, friendship, and power of girls together. 

Girl Scouting helps girls develop their full individual potential; relate to others with 

increasing understanding, skill, and respect; develop values to guide their actions 

and provide the foundation for sound decision-making; and contribute to the improvement of society through their abilities, leadership skills, and cooperation with 

others. More than 50 million American women enjoyed Girl Scouting during their 

childhood—and that number continues to grow as Girl Scouts continues to inspire, 

challenge, and empower girls everywhere. 

As an employer, Girl Scouts offers flexible benefits packages to suit our employees’ needs. We truly believe in investing in our employees, and our benefits and 

compensation packages reflect that commitment. In addition to our defined-benefit 

pension plan, many Girl Scout councils offer our employees a range of benefits such 

as Medical/dental, vision, life, short- and long-term disability insurance, 403B/401K, 

a variety of alternative work arrangements and many other benefits. This approach 

allows us to attract, recruit and retain talented, qualified, and dedicated staff. 

This issue is important to us, not just as an employer, but as an organization that 

is dedicated to protecting the interest of girls and women. In general, older women 

are at greater risk of poverty than men because they typically live longer, earn less, 

and spend less time in the workforce than men do. As a result, they are more reliant on the income security offered by a defined-benefit pension plan. 


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1 CRS: Older Workers Employment and Retirement Trends, Sept 7, 2007. 

2 National Center on Women and Aging 2002 National Poll Women 50+, National Center on 

Women and Aging, The Heller School for Social Policy and Management Brandeis University 

November 2002. 

As it is, too few women have access to a defined-benefit plan. Women receive 

about half the pension benefits retired men count on.1 Furthermore, women rely on 

their employers to help with retirement planning—almost a third of working women 

cite lack of a retirement plan at work as a barrier to saving.2 At a time when 

women are projected to account for 49 percent of the increase in total labor force 

we should be working toward policies that promote and protect their retirement security—not threatening a critical safety net. 

THE PENSION PROTECTION ACT AND ITS IMPACT ON GIRL SCOUTS 

The Pension Protection Act of 2006 (PPA) was enacted in response to the default 

in recent years of several large defined-benefit pension plans and the increasing deficit of the Pension Benefit Guaranty Corporation (PBGC). The PPA established new 

rules for determining whether a defined-benefit pension plan is fully funded, the 

contribution needed to fund the benefits that plan participants will earn in the current year, and the contribution to the plan that is required if previously earned benefits are not fully funded. 

Defined-benefit plans like Girl Scouts’ were never the intended target of this new 

law. Congress enacted the law in an effort to stem abuses by corporations who were 

try to shirk their pension responsibilities, or companies that were on the verge of 

collapse. As Girl Scouts is approaching its 100th year, it is in no danger of closing 

its doors. Even as we merge and realign some of our smaller councils, the Girl 

Scouts Movement continues to be a thriving, vibrant part of our communities and 

our nation. 

Moreover, Girl Scouts has always been a responsible, conservative steward of our 

pension plan. As recently as January 1, 2007, the National Girl Scouts Council Retirement Plan (NGSCRP) was funded at 142 percent. Even after implementation of 

the Pension Protection Act, which modified the way plans calculate assets and liabilities, our NGSCRP was funded at 112 percent in early 2008. Thanks to our 

strong fiscal management, Girl Scouts was able to fund the NGSCRP in part by 

using carry-over balances (i.e., savings generated from larger-than-necessary contributions in prior years, as well as income generated from investments). This practice allowed councils to keep their pension costs relatively low—approximately 3.8 

percent of payroll in 2008. 

With the economic downturn in late 2008, however, the NGSCRP experienced significant losses. This affected both our pension balance, as well as the carry-over balance we had accrued over the years. Overall, our assets lost almost 30 percent of 

their value in the last year. At the same time, an aging workforce and increased 

liabilities are making it more and more difficult for Girl Scouts to maintain this 

benefit. Combined with the more stringent requirements of the Pension Protection 

Act, this confluence of events has resulted in a ‘‘perfect storm,’’ that will have a devastating effect on our councils. 

THE HUMAN TOLL 

Absent further Congressional relief or a sharp, near-term rebound in investment 

markets, under existing PPA rules, it is projected that Girl Scout councils will be 

required to contribute on average $60 million per year—or 25 percent of covered 

payroll and 7.7 percent of Girl Scout revenue beginning in 2011—for several years. 

The unfunded liability is projected to increase to $195 million in that same timeframe, as compared to an overfunding position of $58 million we held at the beginning of 2008. This reflects the more stringent PPA rules to fully fund the plan in 

a shorter time period, as well as to make up for market losses incurred in 2008, 

and lower interest rates used to value liabilities. 

Girl Scout councils are ill-equipped to manage this significant increase in operating expenses in such a short timeframe. The attached spreadsheet clearly defines, 

on a state-by-state basis, the financial impact this situation will have on councils 

in the next few years. To make up for this funding shortfall, councils will need to 

cut programs, scale back activities, and lay off staff. 

In more human terms, consider that it costs approximately $280 per girl to provide a year of Girl Scouting. Girl Scout dues, however, remain very affordable to 

our members at $12 per year. The remainder of these costs must be covered through 

fundraising, corporate contributions, merchandise sales, and other revenue generators. Any shift in revenue to cover pension costs comes directly from sources that 


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would otherwise be spent on girl programming. In short, this increase translates 

into approximately 214,000 girls losing the benefits of Girl Scouting. 

LEGISLATIVE RELIEF 

Girl Scouts of the USA commends the Ways and Means Committee for its attention to this important issue. We share your commitment to protecting the viability 

of defined-benefit pension plans generally, and the NGSCRP specifically. We are especially grateful to Congressman Earl Pomeroy (ND) for his outstanding leadership 

on this issue. His draft legislation offers much-needed relief to defined-benefit plans. 

Furthermore, the need for relief is urgent. Without immediate relief, Girl Scouts 

will have to freeze our plan, and even then, will have to find revenue savings to 

meet ongoing requirements of the PPA. As the law requires that plan sponsors must 

notify participants of changes in the plan by November 15, 2009, Congress must act 

quickly to provide legislative relief. 

During these difficult economic times, Girl Scouts’ mission is more critical than 

ever. Girls are struggling with the impact of the economic downturn in their families, schools and communities. The benefits of Girl Scouts—programming that helps 

them build their skills, confidence, financial literacy, and career possibilities—are 

more critical than ever. We must ensure that Girl Scouts has the resources, through 

its benefits structure and its staff, to continue delivering on that mission. We encourage Congress to promptly enact legislation that provides relief from this economic crisis. 

f 

Statement of the Illinois Education Association 

As an employer sponsoring a Defined Benefit plan for a large number of our employees, we appreciate the opportunity to comment on the above issue. 

During the last economic downturn (2000–2002), our association’s defined benefit 

plan portfolio sustained major losses. Instead of following the lead of many other 

organizations and eliminating or ‘‘freezing’’ our plan, we addressed the challenge by 

raising membership dues by over fifty dollars, by cutting staff, and by reducing services to our members. Our staff assisted in the effort through the collective bargaining process by accepting reductions in benefits. Through these means, and by 

contributing millions of dollars in excess of the minimum requirements over the 

past five years, our plan became funded at nearly 100%. 

Despite all of these efforts, which involved significant sacrifice from both our 

members and our staff, the 2008–2009 market decline has severely impacted our 

funding situation. We are once again planning on dues increases, service reductions 

and compensation reduction in order to rebuild our portfolio, but we strongly feel 

that help from Congress in the following areas is necessary in order for us to ensure 

that our plan continues to be financially viable: 

1. Allowing a longer smoothing period for the plan’s investment gains and 

losses. A 3 to 5 year smoothing makes sense in a period of volatile market 

conditions. 

2. Allow a special ‘‘set aside’’ amortization for the five month period of extraordinary losses by pension plans across the country due to the stock market 

collapse in 2008–2009. Giving plans the flexibility to amortize those losses 

over a period of 15 years will allow sponsors time to recover without threatening the stability of plans, ensure that obligations are met, and require the 

losses (if not completely covered with future positive investment results) to 

be funded in a way that allows sponsors sufficient time to budget and fund 

the plan properly. 

These two actions will give sponsors needed flexibility without compromising the 

stability and viability of their plans. In fact, these actions will make it easier for 

employer sponsors like ourselves to responsibly meet our obligations, continue to 

offer a Defined Benefit plan, and do so while looking out for the financial wellbeing 

of our organization. These changes are a positive action for the protection of DB 

pension plans and sponsors. That should be the goal which guides all congressional 

action regarding pension security and we strongly urge Congress to take these positive steps as soon as possible. 

Thank you for your attention to this urgent matter. 

f 


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Statement of Independent Sector 

Independent Sector thanks Chairman Rangel and members of the House Ways 

and Means Committee for using this important hearing to look for ways to avoid 

the looming threats to the vital services provided by the countless nonprofit organizations throughout our nation that offer their employees defined benefit pension 

plans. These organizations are on the front lines in helping millions of families who 

are suffering through our ongoing financial crisis and who come to our nation’s nonprofits for food, shelter, medical care, and financial and crisis counseling. 

Many nonprofit organizations that offer defined benefit pension plans are striving 

to meet the growing need for their services despite diminishing private contributions, increasing delays in state and local government reimbursements for contracted services, and reduced access to credit. These nonprofits include both large 

and small human service agencies, educational institutions, and arts organizations 

that operate at the local, national, and international level. All have long-standing 

presences in their home towns. They provide pensions not as an opportunity to take 

a tax deduction—they are already tax exempt—but as a cost-effective means for attracting and retaining qualified employees committed to serving their communities. 

These nonprofits have endeavored to meet the significantly increased minimum 

funding obligations imposed by the Pension Protection Act of 2006 while maintaining programs upon which individuals and communities rely. The abrupt market decline last year turned those pension funding obligations into a severe problem never 

anticipated when the act was drafted. The funding rules now threaten not just the 

viability of the pension plans, but the survival of the organizations themselves. Consider the following examples: 

• Family Service of Greater Boston, a 174-year-old human service agency that 

serves over 5,800 mostly poor and working poor families each year, offers a 

defined pension plan to employees responsible for carrying out programs for 

healthy child development, structured residential programs for teen mothers 

and their children, and intense behavioral health programs for severely 

abused and neglected children. The funding status of Family Service’s pension 

plan dropped to 72 percent as a result of the market decline, creating projected future minimum annual contributions of almost $500,000 for this small 

agency. The agency has already significantly reduced or eliminated other benefits, increased the employee share of health insurance premiums, frozen 

wages for a 2-year period, eliminated positions through attrition and consolidated administrative functions. Now it is facing further actions that could impede its ability to sustain critical services. 

• A human services agency in the Midwest with fewer than 400 employees saw 

its pension funding level decline by 30 percent in 2008. The organization has 

been unable to secure bridge loans due to its $5.5 million pension funding 

shortfall, further limiting its ability to meet pension funding obligations, 

much less its ongoing operational costs. 

• A large Northeastern nonprofit maintains a multiple-employer pension plan 

that provides retirement security to approximately 10,000 current and former 

employees. Due to the severe recession, the plan is facing an increased contribution of $5.3 million this year, and annual increases of $11 million in the 

following several years, 70 percent more than its base contribution of previous 

years. Without legislative relief and other cutbacks, the organization states 

that the increased cost of the defined benefit plan ‘‘would significantly impair 

our charitable mission to help those who are poor and vulnerable and place 

[the organization] and its agency system in financial peril.’’ 

• A large national charity that has sponsored a defined benefit plan for six decades is facing an increase in pension contributions of more than 250 percent 

for 2010 due to the investment losses. The organization has already reduced 

staff by 15 percent and, because it has no endowment, will be forced to borrow much of the $4.4 million needed to satisfy its unexpected pension obligations. 

The budgets of nonprofits serving multiple needs in their communities are already 

stretched too thin, and, as the recent cuts described above demonstrate, additional 

expenses will mean eliminating or reducing existing programs. Most nonprofit organizations that sponsor defined benefit plans do not have endowments or other 

sources of funds to cover these unexpected pension obligations. A December report 

of the Urban Institute (Maintaining Nonprofit Operating Reserves: An Organizational Imperative for Nonprofit Financial Stability, December 2008) found 

that nearly fifty percent of nonprofits located in Washington, D.C. had operating reserve ratios of less than 3 months of their annual expense budget. More worrisome, 


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1The Investment Company Institute is the national association of U.S. investment companies, 

including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment 

trusts (UITs). ICI seeks to encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders, directors, and advisers. Members of ICI manage total assets of $11.02 trillion and serve over 93 million shareholders. 

32 percent had reserve ratios of zero to three months. Without immediate relief 

from the pension obligations arising from the market losses of 2008, the current 

rules will force nonprofits that sponsor defined benefit plans to divert substantial 

financial resources away from vital community services at a time when they are 

desperately needed. 

We urge Congress to enact temporary funding relief for nonprofit organizations 

and other sponsors of defined benefit pension plans that will allow them to recoup 

the shortfall for 2008 over a longer, more manageable period. By stretching out payments for these unexpected losses, such relief will permit organizations to maintain 

services and jobs, while continuing to fund their pension plans. 

We thank you for your consideration, and look forward to working with you and 

your staff to develop and pass legislation that will help our organizations continue 

to serve communities across the nation while providing secure retirements for our 

employees. 

Independent Sector is a national, nonpartisan charitable organization with approximately 550 members, including public charities, private foundations, and corporate giving programs, collectively representing tens of thousands of charitable 

groups in every state across the nation. Our coalition leads, strengthens, and mobilizes the charitable community to fulfill our vision of a just and inclusive society and 

a healthy democracy of active citizens, effective institutions, and vibrant communities. IS members represent a broad cross-section of our nation’s nonprofit community, which exists to meet society’s needs, frequently in partnership with government, in diverse areas such as the arts, education, human services, community development, and health care. 

Contact: 

Patricia Read 

Senior Vice President, Public Policy 

f 

Statement of the Investment Company Institute 

The Investment Company Institute, the national association of U.S. investment 

companies,1 which companies manage more than 40 percent of all 401(k) and IRA 

assets, is pleased to submit this statement. 

Executive Summary 

In the nearly 30 years that it has existed, the 401(k) plan has become a powerful 

engine for providing retirement security to millions of American workers who participate in plans. The system would work even better, however, if more participants 

had increased access to investment advice and if ERISA rules both assured that 

participants receive disclosure concerning key information about all investment options in their plans, and set out clearly the information employers need to consider 

about plan service arrangements. 

The need to expand access to investment advice is clear. Access to a financial adviser is much more common for investors outside retirement plans than for those 

saving in 401(k) plans, despite the amount of assets in those plans, and the importance of those savings to plan participants. The current financial crisis, which has 

made many Americans want to take stock of their financial picture, underscores the 

need for robust investment advice services for those savers. The Pension Protection 

Act of 2006 (PPA), which we supported, created a new exemption to expand access 

to advice to allow plan and IRA savers to obtain advice from companies familiar to 

those savers—the companies providing services or investments to the plan or IRA. 

Congress included strict conditions and protections, including that the advice be unbiased and offered under fully transparent arrangements and from someone who accepts ERISA’s full fiduciary responsibility. 

After a long regulatory process, the Department of Labor under the Bush Administration adopted a regulation to implement the exemption and resolve ambiguities 


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2See U.S. Department of Labor, Employee Benefits Security Administration, Private Pension 

Plan Bulletin: Abstract of 2006 Form 5500 Annual Reports (Dec. 2008), available at http:// 

www.dol.gov/ebsa/PDF/2006pensionplanbulletin.pdf. The bulk of these plans were 401(k) plans, 

with 465,653 plans and more than 58 million active participants. 3The Institute surveyed 3,000 U.S. households. The survey was conducted in late October 

through December 2008—that is, during some of the most jarring days in the history of our financial markets. See Investment Company Institute, Retirement Saving in Wake of Financial 

Market Volatility (Dec. 2008), available at http://www.ici.org/pdf/ppr_08_ret_saving.pdf. 4See, e.g., Vanguard, How America Saves 2009, A Report on Vanguard 2008 Defined Contribution Plan Data, available at https://institutional.vanguard.com/iam/pdf/HAS09.pdf; Vanguard Research Commentary, ‘‘Participants calmer than you’d think amid market turmoil,’’ 

(Dec. 2, 2008), available at https://institutional.vanguard.com/VGApp/iip/site/institutional/ 

researchcommentary/article?File=NewsPartCalm; Fidelity, ‘‘Participants Continue to Stay the 

Course Amidst Market Downturn,’’ available at http://content.members.fidelity.com/ 

Inside_Fidelity/fullStory/1,,7669,00.html; The Principal, Retirement Trends Report, The Total 

View 2009, available at http://www.principal.com/about/news/totalview.htm. 

about the meaning of the PPA statutory language. While the Institute believes these 

regulations reasonably implemented the PPA provision in a manner that provides 

clarity and makes it possible for plans and providers to offer new investment advice 

programs, we understand the Obama Administration’s desire to take a fresh look 

and issue a new proposal for notice and comment. We urge DOL in its regulatory 

process and Congress in its consideration of investment advice to encourage the appropriate expansion of avenues for investment advice and preserve pre-PPA guidance that allows various forms of advice and education programs on which many 

plans now successfully rely. We do not support the advice provisions in H.R. 2989, 

the ‘‘401(k) Fair Disclosure and Pension Security Act of 2009,’’ because the bill 

would not only repeal the PPA statutory exemption but would require significant 

revision of pre-PPA programs, which have been operated successfully. 

The Institute strongly supports efforts to enhance existing rules providing for disclosure to participants and employers. The Obama administration has said it will 

complete two regulatory projects that will close gaps in its disclosure regime, and 

we support those projects. Two bills referred to this Committee for consideration 

(H.R. 2779 and H.R. 2989) would address the same disclosure gaps in defined contribution plans. As the Ways and Means Committee looks at the bills and considers 

whether legislation is necessary in light of DOL’s proposals, we urge that the Committee be guided by the following principles: 

• Participants in all self-directed plans need simple, straightforward disclosure 

focusing on key information, including information on fees and expenses, 

which allows comparisons among a plan’s investment options. Comparability 

of fees is best achieved through use of percentages or basis points or through 

a representative example (such as the dollar amount of fees for each $1,000 

invested). • The disclosure should cover all investment products available in plans, including providing comparable disclosure for products that provide a fixed or promised return. • Employers should get clear information that allows them to fulfill their fiduciary duties. • Plan fiduciaries are responsible for determining the investments that are appropriate for participants and Congress should not upend ERISA’s framework. It is not appropriate for the government to pick investment options for 

private 401(k) plans. • The disclosure rules should be precise and clear so that service providers and 

plan fiduciaries know what disclosure is required of them. These rules also 

should be designed to prompt correction of minor or inadvertent errors. 

I. Introduction 

The success of the defined contribution plan system is evidenced by wide employer 

and participant adoption and participant feedback. Latest available official Department of Labor data indicate that in 2006, there were 645,971 private-sector defined 

contribution plans with more than 65 million active participants.2 Institute research 

on Americans’ attitudes towards 401(k) plans tells us that Americans strongly support the current 401(k) system and greatly value the tax incentives 401(k)s provide.3

Almost nine in 10 households surveyed rejected the idea that the government, and 

not individuals, should make investment decisions for retirement accounts. Even 

households without 401(k) or IRA savings see value in the 401(k) system and do 

not want drastic changes. Reports indicate that, despite the bear market of late 

2008 and early 2009, 401(k) participants are staying the course and not abandoning 

their plans.4


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5 In recent testimony to the Education and Labor Committee, ICI recommended seven policy 

improvements that could be made to strengthen the U.S. retirement system. See Testimony of 

Paul Schott Stevens, Hearing on ‘‘Strengthening Worker Retirement Security,’’ House Education 

and Labor Committee (Feb. 24, 2009), available at http://www.ici.org/policy/ici_testimony/ 

09_house_401k_tmny. 6See Profit Sharing/401k Council of America, 52nd Annual Survey Reflecting 2008 Plan Experience (2009). 7 Investment Company Institute, 2009 Investment Company Fact Book, 49th Edition, available 

at http://www.ici.org/pdf/2009_factbook.pdf. 8 Holden and Schrass, The Role of IRAs in U.S. Households’ Saving for Retirement, 2008, ICI 

Fundamentals, vol 18, no. 1(Jan. 2009), available at www.ici.org/pdf/fm-v18n1.pdf. 9Sabelhaus, Bogdan, and Holden, Defined Contribution Plan Distribution Choices at Retirement: A Survey of Employees Retiring Between 2002 and 2007, Investment Company Institute 

Research Series (Fall 2008), available at www.ici.org/pdf/rpt_08_dcdd.pdf. 10See http://content.members.fidelity.com/Inside_Fidelity/fullStory/1,,7669,00.html. 

Defined contribution plans could be improved, and the Institute has offered a 

number of suggestions for changes that, in our view, would strengthen the system 

by which employers and workers have entrusted and will continue to entrust trillions of dollars of retirement savings to these plans.5 This statement addresses two 

ways to better serve those saving for retirement in 401(k) plans: expanding access 

to quality investment advice, and ensuring that plan fiduciaries and participants 

have the information they need to make the decisions charged to them under their 

plans. 

II. Investment Advice 

A. The Need for Advice 

While the need for increased opportunities for investment advice to participants 

is clear, relatively few participants have access to or use investment advice today. 

According to the Profit Sharing/401k Counsel’s annual survey, about half of all 

plans offered investment advice to participants in 2008, and only 28% of participants utilized advice when it was offered.6 While pre-PPA programs have been effective in reaching some plans and some participants, more work is needed to create 

cost-effective advice solutions that would encourage adoption by employers and utilization by participants. Although the PPA exemption adopted in 2006 held great 

promise for encouraging more advice programs in plans, the absence of clear rules 

for using the exemption has deterred new offerings of advice. 

Compare the relatively low offering and utilization of advice in 401(k) plans with 

what mutual fund investors outside 401(k) plans and IRA savers experience. Among 

households holding fund shares outside plans, 77 percent owned shares through professional financial advisers in 2008.7 Among households owning traditional IRAs in 

2008 who took a withdrawal in tax-year 2007, 59 percent consulted a professional 

financial adviser to determine the amount to withdraw in tax-year 2007.8 A survey 

the Institute conducted in 2007 of recent retirees about how they used their defined 

contribution proceeds at retirement showed that respondents pursued a range of 

outcomes reflecting their own personal needs, in many cases rolling some or all of 

their account balances over to IRAs.9 In making their distribution decision, retirees 

with a choice of options often consulted multiple sources of information. Forty-two 

percent indicated they sought advice from a professional financial adviser that they 

found on their own. 

The recent financial crisis, which has made many Americans want to take stock 

of their financial picture, underscores the need for clarity in making advice more 

broadly available to participants. Investment advice services can help participants 

in ERISA plans and IRAs understand the long-term nature of retirement savings 

and assemble and maintain a diversified portfolio. During the financial crisis, many 

participants sought help and reassurance from their 401(k) providers. One Institute 

member with a large recordkeeping business reported to us that participant calls 

increased 60 percent, and website visits increased by 65 percent, during the market 

volatility in late 2008. Another large retirement service provider reported that the 

volume of calls during the most volatile period (late September and early October 

2008) spiked to over 100,000 calls per day.10 Without clear rules from DOL, it is 

difficult for 401(k) providers to offer real assistance to nervous participants. Obtaining clarity on the rules that govern investment advice under the PPA exemption 

would allow providers to better serve participants when they reach out for reassurance. 

B. Pension Protection Act of 2006 and Implementing Regulations 

In 2006, Congress enacted the Pension Protection Act to expand access to investment advice for plan and IRA savers by allowing the companies they are already 


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11See ‘‘Labor Department moving ahead on advice proposal, Borzi says,’’ Pensions and Investments (Sept. 23, 2009), available at http://www.pionline.com/article/20090923/DAILYREG/ 

909239990. 12See http://www.ici.org/policy/regulation/products/mutual/07_house_401k_tmny. 

familiar with—those providing services or investments to the plan or IRA—to provide advice programs under strict conditions and protections. These conditions require that the advice be unbiased, in that either the adviser’s compensation does 

not vary depending on the participant’s investment choices, or the advice is rendered through an unbiased computer model. Additional safeguards require that (1) 

the adviser must agree to be subject to ERISA’s strict fiduciary duty and acknowledge fiduciary status in writing; (2) the advice program must be audited annually 

by an independent auditor for compliance with the conditions of the exemption; (3) 

computer model advice must be pursuant to a model certified by an independent expert; (4) the fiduciary adviser must provide robust disclosure of fees, material affiliations and conflicts of interest, past performance, use of participant information, 

and more; and (5) the fiduciary adviser must maintain records demonstrating compliance with the exemption for six years. 

The PPA required DOL to issue regulations implementing a number of the investment advice provisions. In addition, there were a number of textual ambiguities in 

the statutory language that needed clarification. After a regulatory process extending over thirteen months, which included two requests for information, a Field Assistance Bulletin, two public hearings, and notice and comment on proposed regulations, DOL issued final regulations at the end of Bush administration. 

While the final regulations did not include most of the changes that the Institute 

had requested in its comments to DOL, we believe that the final regulations reasonably implement the PPA exemption in a manner that will encourage plans and providers to offer investment advice programs to assist participants and beneficiaries 

of ERISA plans and IRA investors in managing their accounts. 

We appreciate, however, that the Obama administration wishes to take a fresh 

look at these rules to assure itself that the rules are appropriate and in the public 

interest. Assistant Secretary Phyllis Borzi has stated DOL will issue a new proposal 

so that interested parties can comment.11 In its efforts, DOL should adopt policies 

that promote the provision of investment advice and preserve pre-PPA guidance 

that allows various forms of advice and education programs on which many plans 

now successfully rely. This pre-PPA guidance either provides an exemption with 

conditions that protect participants and beneficiaries or finds that if an arrangement operates as described in the guidance, there would be no prohibited transaction requiring exemptive relief. 

Congress should follow the same principle: adopt policies that expand, not reduce, 

the number of participants with access to investment advice. For this reason, we 

do not support the advice provisions in H.R. 2989, the ‘‘401(k) Fair Disclosure and 

Pension Security Act of 2009,’’ because the bill would not only repeal the PPA statutory exemption but would require significant revision of pre-PPA programs. These 

programs have operated successfully and there is no need to subject arrangements 

that do not involve prohibited transactions or those under prohibited transaction exemptions to additional conditions that add unnecessary cost and might cause plans 

or providers to no longer offer the programs. 

III. Improving Disclosure 

A. Why Disclosure Reform is Needed 

The Institute has long supported meaningful and effective disclosure to 401(k) 

participants and employers, as Institute President Paul Stevens testified before this 

Committee two years ago.12 We stated then and continue to believe that initiatives 

to strengthen the 401(k) disclosure regime should focus on the decisions that plan 

participants and employers must make and the information they need to make those 

decisions. 

In addition to supporting disclosure reform, we have sought to shed light through 

our research on 401(k) fees and the factors that drive fees. A recently completed and 

detailed survey of 130 plans of various sizes by the ICI and Deloitte Consulting LLP 

found that the median fee (including investments and recordkeeping) across all 


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13Deloitte Consulting and Investment Company Institute, Defined Contribution/401(k) Fee 

Study (Spring 2009), available at http://www.ici.org/pdf/rpt_09_dc_401k_fee_study.pdf. 14This figure represents the median fee for the 130 plans in the survey. The survey used a 

sampling technique known as nonproportional quotas. Knowing that the universe of 401(k) 

plans includes more than 450,000 plans, and that smaller plans are harder to find, the survey 

was specifically targeted across the spectrum of asset sizes and stayed in the field until specific 

quotas for plans of different sizes were filled. Although the plans are intended to be representative, the median fee should not be projected to the entire population of U.S. 401(k) plans. 

Weighting the reported fees in the 130 plans by the actual distribution of participants in all 

401(k) plans results in a total fee of 0.86 percent. See the Study for more information on the 

plans surveyed. 15 Holden and Hadley, The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 

2008, ICI Fundamentals, vol. 18, no. 6 (August 2009), available at http://www.ici.org/pdf/fmv18n6.pdf. While the Deloitte/ICI study described above covers all plan costs, this research only 

covers mutual funds held in 401(k) plans because ICI does not have the information necessary 

to study other investments. 16See 73 Fed. Reg. 43014 (July 23, 2008). 

plans surveyed was 0.72 percent (or 72 basis points) as a percentage of total assets,13 significantly less than some critics of 401(k) plans have claimed.14 While fees 

vary across the market, 90 percent of all plans surveyed had an all-in fee of 1.72 

percent or less. 

The research showed that a plan’s number of participants and average account 

size (which together constitute the total plan size) are the two most significant drivers of the plan’s overall cost. Other factors that correlated with a lower total fee included higher participant and employer contribution rates, lower allocation of assets 

in equity-oriented asset classes; use of auto-enrollment; fewer plan sponsor business 

locations reducing the servicing complexity; and other plan sponsor business relationships with the service provider (e.g., defined benefit plan or health and welfare 

plan). The factors that were not significant drivers of fees include the type of provider the plan utilized (insurance company, mutual fund company, bank, third party 

administrator) and the extent to which investments of the 401(k) provider were utilized. 

Examining mutual fund assets, ICI research shows that 401(k) investors concentrate their assets in lower-cost mutual funds. The average asset-weighted total 

expense ratio incurred by 401(k) investors in stock mutual funds was 0.72 percent 

in 2008, about half the 1.44 percent simple average for all stock funds and substantially less than the industry-wide asset-weighted average of 0.84 percent.15

Disclosure reform should address two gaps in the current 401(k) disclosure rules, 

the first relating to participant disclosure, and the second to that received by the 

employer (plan sponsor). First, unlike current DOL participant disclosure rules, 

which cover only certain plans and do not require disclosure about all investment 

products, participants in all self-directed plans should receive key information about 

all products. Second, disclosure reform should clarify the information that service 

providers must disclose to an employer on services and fees. The Institute supports 

disclosure of payments a service provider receives directly from plan assets and indirectly from third parties in connection with providing services to the plan. Where 

the service provider’s services include access to a menu of investment options, employers should receive from that provider information about the plan’s investments, 

including information about fees. 

B. Department of Labor Proposals to Address Disclosure Gaps 

The Department of Labor has two proposed regulations that will address both of 

these gaps. The first proposal will require that all participants in 401(k) plans receive basic and comparable information, including fees, on all the investment options available to them.16 Participants would also receive at enrollment a description of any fees that they may pay in addition to the costs of the plan’s investments. 

DOL’s proposal uses a layered approach to ensure each participant receives key information, with more detail available online and upon request for those participants 

who want it. 

Participants would receive, at enrollment and annually thereafter, a chart listing 

each investment on the plan’s menu and comparing each investment’s type (i.e. 

large cap, international equity, etc.), 1-, 5-, and 10-year historical performance compared against a benchmark, and fees. DOL’s proposal includes a model comparative 

chart plans can use. Participants would be referred to a website for more information on each investment, including the investment’s strategies and risks, the identity of the investment issuer or provider, portfolio turnover, and the assets held in 

the portfolio. More detailed documents, like a copy of a prospectus or similar document, would be available upon request. Participants’ quarterly statements would 

display any administrative fees deducted from their accounts during the quarter. 


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17See 72 Fed. Reg. 70988 (Dec. 13, 2007). 18 ‘‘Lifting the fog: Face to Face with Phyllis C. Borzi,’’ Pensions and Investments (Sept. 7, 

2009), available at http://www.pionline.com/article/20090907/FACETOFACE/309079996. 

The second DOL proposal would require plan service providers to disclose to employers the services that they provide and the direct compensation they receive from 

the plan and employee accounts.17 Service providers also must disclose in detailed 

fashion all indirect compensation, broadly defined to include anything of value paid 

from any source other than the plan, employer, or the recordkeeper. This would include finder’s fees, soft dollar payments, float, brokerage and other transactionbased fees, and payments that an affiliate of the recordkeeper receives in connection 

with the plan. In addition to fee disclosures, the regulation will require comprehensive ‘‘conflict of interest’’ disclosure to employers. Under these new disclosure regulations, a plan fiduciary will be able to assess all of the compensation paid to a 

401(k) plan service provider before any contract is entered into. Violations of the 

new disclosure scheme are enforced by tough penalties on the service provider. 

These projects were not completed by the Bush Administration, and Assistant 

Secretary Borzi has announced she intends to finalize them.18 The Institute strongly 

supports these initiatives and has urged DOL to complete these projects as quickly 

as possible. 

C. Congressional Proposals to Enhance Disclosure 

This Committee has been referred for consideration two bills intended to close the 

disclosure gaps described earlier: H.R. 2779, the ‘‘Defined Contribution Plan Fee 

Transparency Act of 2009’’ and H.R. 2989, the ‘‘401(k) Fair Disclosure and Pension 

Security Act of 2009.’’ As noted earlier, H.R. 2989 also contains extensive reworking 

of the rules for providing investment advice to participants. In analyzing these proposals, and considering whether legislation is necessary in light of the Department 

of Labor’s proposals, we urge the Committee to apply the following principles. 

Participants in all self-directed plans need simple, straightforward disclosure focusing on key information, including information on fees and expenses, which allows 

comparisons among a plan’s investment options. This key information includes an 

investment option’s investment objective, risks, historical performance, and fees. 

Comparability is particularly important with respect to fees. Mutual fund investors 

have for years had access to a simple, standardized measure of fees—the expense 

ratio—as well as a representative example showing what the expense ratio means 

in dollar terms for a typical investment. H.R. 2989 requires plan fiduciaries to 

translate asset-based investment fees into dollars on a quarterly basis. Because contributions and distributions are continually being made into and out of 401(k) accounts, creating systems that could provide this disclosure could be very expensive, 

and in addition, the requirement complicates comparing among the plan’s investment options. For example, if a participant has 90% of his or her account invested 

in a fund with a 0.40% (40 basis point) expense ratio and 10% invested in a fund 

with a 1.00% (100 basis point) expense ratio, the participant presented with the dollar amounts of fees for each investment might think the first fund is relatively expensive and the second is cheaper. The best way to achieve comparability is through 

use of percentages or basis points or through a representative example (such as the 

dollar amount of fees for each $1,000 invested). 

The disclosure should cover all investment products available in plans, including 

providing comparable disclosure for products that provide a fixed or promised return. All of the current legislative and regulatory proposals would cover all products. Both legislative approaches include a provision requiring regulations to ensure 

comparable disclosure for insurance and other products that provide a fixed return 

(like annuities). However, H.R. 2779 appropriately makes the issuance of these regulations mandatory; H.R. 2989’s provision is optional for DOL. 

Employers should get clear information that allows them to fulfill fiduciary duties. 

Employers should receive information from service providers on the services that 

will be delivered, the fees that will be charged, and whether and to what extent the 

service provider receives compensation from third parties in connection with providing services to the plan. These payments from third parties, sometimes inaccurately referred to as ‘‘revenue sharing’’ but which are really cost sharing, often 

are used to defray the expenses of plan administration. We support requiring their 

disclosure by service providers. 

We do not support provisions in H.R. 2779 and H.R. 2989 that force providers to 

disclose fees in various service categories even if there are no separate charges for 

the services and the services are not available on a standalone basis. This approach 

favors one business model—firms that just bundle together recordkeeping and other 

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keeping and administration as well as investment management services, by imposing additional disclosure burdens on the full-service model. More importantly, employers need information that they can use, and this presents them with information—an unbundled number for a service that is not offered separately—the usefulness of which is unclear and which could create liability concerns for employers and 

service providers. 

If Congress should determine nevertheless to require providers to allocate fees 

among categories even when services are not separately available, it must recognize 

the difficulties (and liability risks) of disclosing a fee for a service that is not offered 

separately and allow service providers to allocate in a manner that is reasonable 

and in good faith. At a minimum, the legislation should provide for safe harbor 

methods a service provider could, but would not be required to, use for the allocation. This would offer certainty for providers that want to rely on a pre-approved 

allocation method but offer flexibility for providers to develop and use other reasonable methods. Finally, disclosure should provide flexibility in the form of disclosure 

(percentage of assets, total dollars, amount per transaction) so that providers can 

disclose fees accurately in the manner in which they are charged. 

Congress should leave to plan fiduciaries the responsibility of determining the investments that are appropriate for participants. H.R. 2989 sets a dangerous precedent by effectively requiring plans to include an indexed investment option meeting 

specific requirements. This goes far beyond disclosure. It is not appropriate for the 

government to begin to pick investment options for private 401(k) plans. Decisions 

about the investment menu of a 401(k) plan are best made by plan fiduciaries who 

can consider all options available now or in the future in designing plan offerings 

that will enhance employees’ retirement security. 

The disclosure rules should be precise so that service providers and plan fiduciaries know what disclosure is required of them and do not need to interpret the 

law broadly to avoid penalties. Unless the rules are clear, the resulting disclosure 

will be confusing to plan fiduciaries and participants and unnecessarily costly to 

prepare. H.R. 2779 is more clearly written and therefore avoids a number of difficult 

interpretive issues presented by H.R. 2989. For example, H.R. 2989 defines a 401(k) 

plan’s services subject to the bill so broadly that it could cover service providers to 

the plan’s investments. As a result, service providers to investment products like 

mutual funds and insurance contracts (such as accountants, printers, and 

custodians), who have no direct relationship with a plan, could suddenly be subjected to detailed fee disclosure for one class of investors, the cost of which will be 

passed on to retirement plan savers investing through a workplace savings plan. In 

addition, this suggests that plans must have a personalized contract with each investment product in which it invests, which violates the basic securities law principle that all mutual fund shareholders must be treated equally. 

In addition, because of the difficult compliance burdens that the disclosures in 

H.R. 2779 and H.R. 2989 would require, the bills should include provisions that 

allow one service provider to rely on information provided by another entity unless 

the provider knows or should know that the information is inaccurate or incomplete, 

and that allow inadvertent errors to be corrected within a reasonable time without 

penalty. Provisions along these lines, which are contained in H.R. 2779, will enhance compliance and correction of minor or inadvertent errors. 

As the Institute said when it last testified before this Committee, we applaud the 

Committee for examining how we can make the 401(k) system even more effective 

in providing retirement security. We look forward to continuing to work with this 

Committee and its staff on these issues. 

f 

Maryland State Education Association, letter 

On behalf of the 70,000 member Maryland State Education Association (MSEA), 

I am please to submit these comments on funding defined benefit pension plans. 

While our members are all public sector employees, our Association and the defined benefit pension plan we provide to nearly 100 employee-participants fall under 

private sector rules. 

We are committed to maintaining and adequately funding our defined benefit 

plan. In addition, we encourage our employees to supplement their retirement savings by participating in our 401(k) defined contribution retirement plan. We offer 

a generous employer match for those who do. 

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sion plan funding more volatile and the plans themselves unaffordable to many employers. 

MSEA felt the impact of the Pension Protection Act’s funding changes. For example, over the past two years we made the full contributions recommended by our 

actuaries, transferring more than eight percent of our revenue into our defined benefit plan. Simultaneously, our accountants informed us that FAS 158 required us 

to adjust net assets downwards by nearly four million dollars. This turned what 

would have been a million dollar two-year increase in our beginning balance into 

a three million dollar reduction! 

That hit us pretty hard. But the worst aspect was that it occurred prior to the 

staggering market losses of late 2008 and early 2009. Absent significant and speedy 

relief from the onerous funding requirements in the PPA, we will soon need to curtail staff, reduce programs, or both. 

MSEA joins the National Education Association (NEA) and many of its state affiliates in supporting legislation being drafted by Representative Pomeroy of North 

Dakota. Representative Pomeroy understands that we need more time to offset the 

recent market losses. He also understands that providing this flexibility to private 

sector DB plan sponsors will allow them to maintain—not terminate—existing 

plans, thereby relieving funding pressure on the Pension Benefit Guarantee Corporation. 

Defined benefit pension plans are good for the economy. They provide valuable retirement security for workers. Their sponsors utilize smart, balanced investment 

policies (in terms of equities and fixed income) and long-term horizons, improving 

returns for their employees while adding stability to our nation’s markets. Unfortunately, the PPA discourages such an approach, deeply penalizing employers for placing plan assets in equities. It is quickly driving the remaining defined benefit plans 

out of existence. 

Please support Representative Pomeroy’s legislation and help us in our efforts to 

properly fund our obligations, thereby providing our employees the retirement security we’ve promised them. 

Thank you, 

David E. Helfman 

f 

Executive Director 

Statement of Matthew D. Hutcheson 

INTRODUCTION 

Chairman Rangel, Ranking Member Camp, and Members of the Committee on 

Ways and Means. Thank you for the opportunity to deliver this testimony today. 

My name is Matthew Hutcheson. I am a professional independent fiduciary. In 

some instances, employers that sponsor 401(k) and other pension benefit plans may 

determine that, due to day-to-day workload, or unavoidable conflicts of interest, it 

is better simply to sponsor the plan instead of both sponsor and manage it. In those 

cases, an employer may choose to appoint an independent fiduciary to ensure a professional level of fiduciary decision, oversight, and accountability. That is the role 

I play; employers appoint me to become the primary decision maker, accountable to 

plan participants. 

EXPERIENCE 

It has been my experience that 401(k) plan participants feel financially vulnerable. It is difficult for them to make sound investment decisions. This year, I have 

asked thousands of rank and file employees and professionals alike, all who have 

been participating in their 401(k) plan for many years, whether they could take the 

funds in their retirement accounts and construct a meaningful portfolio with expected long-term rates of return and expected levels of risk. Not one of the thousands of participants or professionals (‘‘professionals’’—read Attorneys, CPA’s, Engineers, Physicians, etc.) could answer the question in the affirmative. Not one of 

them could even partially answer, or explain the principles of Modern Portfolio Theory that is the foundation of making such decisions. The ensuing discussions revealed a significant lack of investment understanding. 

Those experiences confirm to me that most participants either do not have the aptitude for understanding complex investment concepts, or they do not have the time 

or inclination to learn. Nevertheless, the Employee Retirement Income Security Act 

of 1974 (ERISA) affords iron clad protections to participants and their beneficiaries 


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1Statement of Scott Simon, JD, AIFA® during Independent Fiduciary Symposium, Boise State 

University, September 24, 2009. 2 ERISA section 404(a)(1)(B), 29 U.S.C. 1104(a)(1)(B). 

3Donovan v. Bierwirth, 680 F.2d 263, 272 (2d Cir. 1982. 

4SIMFA testimony Marc E. Lackritz President and Chief Executive Officer Securities Industry and Financial Markets Association Before The Employee Benefits Security Administration 

United States Department of Labor. 

July 31, 2007 http://www.sifma.org/legislative/testimony/pdf/ComputerModelHearing.pdf. 

that must not be discounted. In other words, under ERISA provides an expectation 

that the participant’s portfolio is free from conflicts of interest, and is economically 

sound at its core. 

A prominent attorney and investment fiduciary pursuant to ERISA section 3(38) 

explains it this way: 

ERISA was the first body of law to apply key tenets of modern portfolio theory to the management of assets by investment fiduciaries. In a Department of 

Labor regulation issued in 1977 [Labor Reg. § 2550.404a–1 (42 FR 54122, 

1977)], the DOL decided that ERISA fiduciaries responsible for investing and 

managing the assets of qualified retirement plans such as 401(k) plans must do 

so according to the principles of Modern Portfolio Theory. Not only the DOL but 

also the courts have decided that ERISA’s investment provisions are grounded 

in Modern Portfolio Theory. 

The language of Modern Portfolio Theory found in another ERISA regulation 

[ERISA Reg. § 2550.404a–1] instructs investment fiduciaries of 401(k) plans to 

avoid thinking in terms of ‘‘bits and pieces’’—that is, a non-portfolio mindset. 

Notwithstanding ERISA’s regulations, an overwhelming number of fiduciaries 

responsible for 401(k) plans demonstrate this kind of mindset—whether or not 

they’re even aware of it—by offering plan investment options with risk and return characteristics that do not take into account the fact that they function 

within the context of a portfolio. 

Keeping in mind the primacy of the portfolio, independent fiduciaries must 

focus consciously on the risk and return tradeoffs of plan portfolios. As ERISA 

Interpretive Bulletin 94–1 puts it, in part: ‘‘any models or materials presented 

to participants or beneficiaries will be consistent with widely accepted principles 

of modern portfolio theory, [which] recogniz[e] the relationship between risk and 

return.’’ 

This is important because, in fulfilling their duty to provide a prudent menu 

of investment options, investment fiduciaries of 401(k) plans must find a tradeoff for each portfolio that will achieve the highest return for a given level of risk 

or the lowest risk for a given level of return. Achievement of this goal helps 

independent fiduciaries introduce truly prudent investment options to 401(k) 

plans.1

Given the preexisting right a 401(k) participant has to an economically sound, unbiased, prudent portfolio, Congress must augment that existing right through policy 

that clearly prohibits biased or conflicted investment advice. 

ADVICE TO 401(k) PARTICIPANTS 

401(k) plan participants have a well founded reason to believe that any advice 

they receive will lead them to a prudent portfolio that would be equal in every way 

to a portfolio created by an investment expert familiar with such matters.2 It would 

be best if all participants were simply ‘‘given’’ such a portfolio, as the duty owed 

to participants is the highest duty known to the law.3 Notwithstanding, the current 

401(k) environment permits most participants the opportunity to construct their 

own portfolio from an available list of funds. That requires advice, guidance, etc. Although participants need the advice, most choose not to use it. 

[T]he Department pointed out repeatedly in support of investment advice legislation, this model simply did not work because very few investment providers adopted 

the models and even fewer participants actually used them.4 (emphasis added) 

To further clarify, advice is available to participants, but the participants choose 

not to utilize the advice, despite their recognition that they are vulnerable and given 

the conventional participant directed environment, participants need to rely on advice from ‘‘someone.’’ 

Dr. Gregory Kasten explains: 

Over the Past 20 Years 401(k) Plan Features Have Steadily Increased. Daily 

valuation multiple fund families, web based calculators, target date funds, electronic trading, rapid loan processing, simple ‘‘gap’’ reports, better communication materials, Financial Engines, Morningstar reports, asset allocation softVerDate Nov 24 2008 00:29 Jun 02, 2011 Jkt 063011 PO 00000 Frm 00161 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\63011.XXX GPO1 PsN: 63011

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5Statement of Dr. Gregory Kasten, MD, MBA, CPC, AIFA® during Independent Fiduciary 

Symposium, Boise State University, September 24, 2009. 6 Email from Chad Griffeth, AIF®, July 28, 2009. 

ware, quarterly reports, auto enroll, PPA 2006, increasing fund choices, sector 

funds, brokerage accounts. Yet with more ‘‘features’’—retirement confidence has 

steadily fallen (citing Source EBRI: The 2009 Retirement Confidence Survey: 

Economy Drives Confidence to Record Lows; Many Looking to Work Longer).5

(emphasis added) 

The reality that participants do not use the advice or ‘‘features’’ available to them 

is confirmed by a study performed by Ruth Helman; Mathew Greenwald & Associates; Jack VanDerhei of Temple University and EBRI Fellow; and Craig Copeland, 

EBRI. [‘‘The Retirement System in Transition: The 2007 Retirement Confidence 

Survey’’ EBRI Issue Brief No. 304 April 2007.] 

They found that: 

• 46% don’t want advice; • 5% ignore all of the advice; • 36% implement some of the advice; and, just • 13% implement all of the advice 

Indeed, fewer than half of participants choose to use any advice, and therefore are 

left to their own devices to try to figure out one of the most complex financial matters in modern life. The question that should be asked is not whether advice should 

be available in a participant directed plan. Rather, the question is why aren’t participant’s utilizing that advice? What is it that concerns them? 

Independent Fiduciary Adviser, Chad Griffeth, AIF®, makes the following observation: 

If the provider of the advice is being paid by the mutual funds in any way, 

trust is damaged dramatically. The reality of the situation is that the advice 

provider must earn participants’ and management’s respect, and the story of 

true independence, fiduciary prudence, and thus acting in the sole interest of 

the participant’s best interest is critical to the success of the advice provider, 

and thus the participants. If participants do not trust the source of the advice 

and account management, they will not use it, even though they need it. Thus, 

participants will likely not experience the success they need for a dignified retirement.6

There exists under the SunAmerica and PPA participant advice models, a level 

fee requirement. That means compensation received by the individual or entity providing the advice not be tied directly to subsidies offered by mutual funds or other 

financial instruments, nor may compensation be higher for selecting one individual 

fund over another. 

Although that ‘‘prior advice’’ policy or regulation seems reasonable on its face, participants can sense that something is ‘‘off.’’ That explains why the advice is not 

being used by participants. 

To gain insight into the visceral concern of 401(k) plan participants, we can look 

to 2003 Congressional testimony given by Department of Labor officials: 

Current ERISA law raises barriers against employers and investment firms 

providing individual investment advice to workers. As a result, millions of rank 

and file workers do not have the information and advice necessary to make 

sound investment decisions to enhance their long-term security and independence. 

The President’s Retirement Security Plan would increase workers’ access to professional investment advice. By relying on expert advisers who assume full fiduciary 

responsibility for their counsel and disclose relationships and fees associated with 

investment alternatives, American workers will have the information to make better 

retirement decisions. 

Here we find the answer to the riddle. Participants intuitively know, suspect, or 

worry that the person or entity giving the advice is not an adviser that will or can 

assume full fiduciary responsibility for the advice given. Rather, in all too many 

cases participants can discern that the person or entity rendering the advice is 

doing so under exemptions, exceptions, or under the appearance of full fiduciary loyalty, but avoiding the full meaning of that term. 

To summarize, it is somewhat irrelevant what advice model is advanced as ‘‘best 

policy’’ if the advice model is not widely trusted by participants. That requires a 

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ment fiduciaries who are independent of those managing the portfolios and selecting 

the underlying funds. 

RESTORING TRUST IN THE 401(k) SYSTEM AND THE ROLE OF H.R. 2989 

The fiduciary duty is highest duty known to the law. The assistance we give participants, whether in the form of advice or discretionary action taken by a fiduciary, 

must conform to that ‘‘highest’’ duty. 

In other words, the advice must be the ‘‘highest’’ possible advice; namely, advice 

that carries with it the highest ideals of society and does not carry with it exemptions, exceptions, conflicts, or biases that favor the advice giver. That is very clear. 

Given that there are many professional investment fiduciaries giving unconflicted, 

unbiased advice, independent of the investment fiduciaries managing the portfolios, 

we know it can be done, and must be required for all other advice givers. 

Participants are vulnerable due to the complexities of the world of finance. Those 

vulnerabilities require a participant who wants advice to rely on others, with an expectation of loyalty. Participants expect those that are brought in to provide advice 

will have been vetted and screened for conflicts of interest by their plan sponsor; 

they are expecting and relying on that sponsor to protect them. However, they currently are uncertain and unsettled; there’s a lack of confidence that the advice giver 

is truly willing to assume full responsibility for the advice given. 

Participants will use advice if they are certain that the advice giver is an investment fiduciary with a duty of loyalty that is ‘‘eye-single’’ to the interests of the participant and the participant’s beneficiary. 

H.R. 2989 creates that environment of loyalty. If we as a society of future retirees 

will ever benefit from unbiased advice, such advice must first be used. To foster the 

trust in an advice based system, we will need to adopt and implement a system that 

satisfies the broad discernment of over fifty million American workers. That means 

getting rid of exemptions and bringing a true fiduciary duty to advice given; as the 

Department of Labor conveyed to Congress in 2003. 

It will be necessary to adopt and implement policy that requires advice givers be 

Registered Investment Advisers defined under the Investment Advisers Act of 1940 

(such advisers are investment fiduciaries), or individuals directly under the oversight and management control of a Registered Investment Adviser. 

Principal decision making fiduciaries like me have the opportunity to hire an investment manager as defined under ERISA section 3(38). To the extent that participants desire to construct their own portfolios, a separate advice giver other than the 

investment manager hired at the plan level, will be permitted to give participants 

advice so long as they are independent of the ERISA 3(38) investment manager, and 

are willing to accept full fiduciary responsibility for the advice given. 

Professional fiduciaries will not accept or hire an investment professional under 

any other conditions. The investment advice component of H.R. 2989 is trust building policy, and should be advanced to law. When this legislation becomes law, it will 

pass the ‘‘smell test’’ of those who need advice, and who, in turn, will have increased 

confidence in the 401(k) system as a means to provide them with retirement income 

security. 

The following paper from the Journal of Pension Benefits further elaborates on 

the vulnerabilities and expectations of 401(k) participants, and facilitates an understanding of the favorable impact H.R. 2989 will have on American workers. 

f 

Statement of National Association of Insurance and Financial Advisors 

The National Association of Insurance and Financial Advisors (NAIFA) appreciates the opportunity to share with you, the members of the House Ways and 

Means Committee, our views in connection with your hearing on defined benefit 

pension plan funding levels and investment advice rules. Our comments are focused 

on investment advice rules, which are important to many NAIFA members who operate as investment advisor representatives, and to the consumers whom we serve. 

For the reasons discussed more fully below, we urge you to maintain current law, 

allowing advisors to provide much-needed information to participants in 401(k) 

plans. 

Founded in 1890 as the National Association of Life Underwriters, NAIFA comprises more than 700 state and local associations representing the interests of approximately 200,000 agents and their associates nationwide. NAIFA members focus 

their practices on one or more of the following: life insurance and annuities, health 

insurance and employee benefits, multiline, and financial advising and investments. 

The Association’s mission is to advocate for a positive legislative and regulatory enVerDate Nov 24 2008 00:29 Jun 02, 2011 Jkt 063011 PO 00000 Frm 00163 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\63011.XXX GPO1 PsN: 63011

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vironment, enhance business and professional skills, and promote the ethical conduct of its members. NAIFA’s website can be accessed at www.naifa.org. 

As part of their business plans, many NAIFA members work with their small 

business clients to establish 401(k) plans to provide a means for employers and employees to build retirement income security. Since passage of the Pension Protection 

Act (PPA) in 2006, NAIFA members who are investment advisor representatives 

have been able to provide much-needed assistance and advice to participants in 

401(k) plans. The 2006 Act modified ERISA prohibited transaction rules that barred 

financial institutions that sponsor their own investment products from recommending those products to plan participants when asked to give recommendations, 

and provided legal protections to employers who offered investment advice to employees participating in their 401(k) plans. The changes resulting from the 2006 Act 

allow professionals to offer investment advice to 401(k) plan participants, whether 

or not they are independent of a plan investment provider, subject to certain protective conditions. Thus, advisors are now permitted, again, under certain protective 

conditions, to answer questions, recommend changes to investment selections, and 

generally assist participants in understanding their 401(k) investments. 

NAIFA supported the changes ushered in by the PPA, and opposes the provisions 

in proposed legislation, H.R. 2989, that would change current law by prohibiting investment advisers who represent companies providing investments to 401(k) plans 

from providing advice to plan participants. The pending legislation would recreate 

the ‘‘advice gap’’ that existed prior to the 2006 reforms—resulting in investors being 

less informed as they make critical decisions about their financial futures. 

Professional assistance is crucial to help people figure out how best to allocate the 

hundreds and even thousands of dollars that they and their employers deposit in 

their 401(k) plans annually. The need for advice from trained and licensed professionals to 401(k) plan participants has increased with the ever growing shift from 

defined benefit plans to defined contribution plans, and is arguably even greater in 

light of the precipitous drop in the market over the last year and continuing market 

volatility. Yet, as we have seen from experience, a significant number of 401(k) plan 

participants do not have an investment advisory service available to them through 

their retirement plans. In many cases, this occurred because employers were unwilling to risk legal liability prior to the enactment of PPA in 2006. This is problematic 

for all participants, but particularly troublesome in light of the fact that many novice retirement plan participants direct their own account investments. 

There is no dispute that there exists a huge need for sound investment advice for 

most workers. Planning for retirement is a complex task, taking into account numerous variables years, even decades into the future. This makes it difficult for 

most people—not just rank and file workers, but other groups one would expect to 

be more investment savvy. According to news reports, more than half of 401(k) participants allocate their money either into overly conservative or overly aggressive investments. Many—including an estimated 50% of Harvard’s faculty and staff, as 

well as the 3 million plus members of TIAA–CREF—simply allocate their money to 

money market accounts, or, once allocated to specific funds, never adjust them. 

This is changing. A recent report by the Profit Sharing/401k Council of America 

(PSCA) notes that the availability of investment advice for 401(k) plan participants 

continues to increase. For the first time, more than half of all plans (51.8 percent) 

offer investment advice options to participants. More small companies offer investment advice options than large companies. (PSCA 52nd Annual Survey of Profit 

Sharing and 401(k) Plans, September 28, 2009.) This is good progress that should 

be encouraged to continue. Unfortunately, current legislative proposals—specifically, 

H.R. 2989—would likely reverse any gains made since enactment of the PPA in 

2006. 

That is why NAIFA opposes the proposed rolling back of the changes made by the 

PPA. We believe such a move would significantly hurt plan participants—the average American worker and investor—because it would reduce their access to an informed adviser whose purpose is to help them understand their retirement plan and 

make informed choices about their 401(k) investments. Moreover, we believe the 

current rules provide adequate consumer protections that would not be enhanced by 

the new proposals. 

Here is a brief explanation of how the current marketplace works: The typical 

NAIFA member represents a plan investment provider in connection with 401(k) 

plans. The NAIFA member, an investment advisor representative (IAR), interacts 

with the plan sponsor on behalf of the provider. In that role, the NAIFA member/ 

IAR provides a number of services to the plan sponsor, including (under current 

law) providing investment advice regarding investment options to the sponsor’s employees. 


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The IAR generally is compensated for all services provided in connection with a 

plan based upon a certain percentage of assets under management. In our experience, these are generally very small amounts—up to 25 basis points is common— 

and are included in the general fee charged by the plan investment provider. Moreover, our experience indicates that the compensation generally does not vary if the 

plan participant chooses one fund over another. There is, therefore, no incentive for 

the IAR to recommend a particular fund, whether it is a proprietary fund of the 

plan investment provider or any other investment. The incentive, to the extent there 

is one, is to provide the best advice possible to the participant in order to increase 

the size of assets under management. And given the very small percentages, that 

goal benefits the plan participant far more than the IAR. 

Under the proposed legislation, this would change. To the extent a plan sponsor 

engages an investment adviser for its plan participants, the adviser would be required to be independent of the plan investment provider. This independence comes 

at a cost. The independent adviser would charge a fee—likely to be 1–1.5% of assets. 

This fee would be in addition to the fee charged inside the product, be it insurance, 

mutual fund or collective trust. Experience has shown that many plan sponsors are 

unwilling to incur the additional cost, leaving participants to seek out and pay for 

their own investment advice or go without. 

Moreover, even to the extent a plan sponsor incurs the cost of engaging an independent adviser, the adviser is at no advantage to an IAR because the adviser is 

limited to the same group of funds within the plan—that is, an independent adviser 

is making recommendations from the same menu of funds that an IAR would select. 

Given that there is no financial incentive to an IAR to select one fund over another, 

there is no reason to believe an independent adviser would be less conflicted or do 

a better job. 

Thus, rolling back current PPA provisions would very likely result in less information—and potentially, less helpful information—in the hands of investors: 

• Plan participants are not likely to seek out advice on their own because they 

cannot (or will not) pay for it. We note that there is nothing in current law 

that prohibits plan participants from engaging an independent adviser if they 

would prefer to work with someone who is not affiliated with the plan investment provider. Indeed, the Department of Labor’s proposed regulations, which 

have now been withdrawn, would have required that participants be notified 

in writing of their ability to do so. Having said that, it is our experience that 

most plan participants do not have the means or inclination to engage an adviser on their own, and there is nothing to suggest that this would change. • Plan sponsors, who currently pay for the advice provided by IARs through the 

fees they pay plan investment providers, would violate ERISA by arranging 

for an adviser to provide investment advice to their employees unless they engage independent advisers. Even hiring an independent adviser places all the 

liability for the adviser’s compliance with the requirements of the statute on 

the sponsor. Having said that, however, there is no requirement that a plan 

sponsor provide any investment advice to participants—whether through an 

affiliated or non-affiliated adviser. Thus, faced with additional costs charged 

by independent advisers and facing potential legal liability, we believe employers are likely to forego providing advice altogether, leaving participants 

to fend for themselves once again. 

• Plan investment providers and their IARs, who have the closest relationships 

with plan sponsors and participants, would be prohibited from sharing their 

knowledge and expertise for the benefit of participants. 

The practical effect of rolling back the PPA’s investment advice provisions and replacing it with a requirement that participants be provided with independent advisers—or no advice at all—is that many, if not most, rank and file employees will not 

have access to affordable, professional advice with respect to how to invest their 

401(k) plan contributions. We do not believe this is in anyone’s best interest, particularly those of plan participants. The financial markets are incredibly complicated. Investors are confused and it is difficult to determine the best course of 

action. That results in inaction and/or uninformed action on the part of plan participants. Current law has helped to provide better, more complete information to plan 

participants, to assist them in making informed choices based on their needs and 

risk tolerance. The proposed legislation, instead of fostering an increase in accessible, professional advice, is very likely to do just the opposite with serious adverse 

consequences. 

Thank you for your consideration of our views. 

f 


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Statement of the National Council of Farmer Cooperatives 

The National Council of Farmer Cooperatives (NCFC) appreciates the opportunity 

to submit this statement in response to the Committee’s hearing: ‘‘Defined Benefit 

Pension Plan Funding Levels and Investment Advice Rules.’’ 

Since 1929 NCFC has represented the interests of America’s farmer cooperatives. 

There are nearly 3,000 farmer cooperatives across the U.S. whose members include 

a majority of our nation’s more than two million farmers. We believe farmer cooperatives offer the best opportunity to achieve farmer-focused agricultural policy 

because farmer cooperatives allow individual farmers the ability to own and lead organizations essential for continued competitiveness in both the domestic and international markets. 

America’s farmer cooperatives provide a comprehensive array of services for their 

members. These diverse organizations handle, process and market virtually every 

type of agricultural commodity produced. They also provide farmers with access to 

infrastructure necessary to manufacture, distribute and sell a variety of farm inputs. Additionally, they provide credit and related financial services including export financing. Earnings derived from these activities are returned by cooperatives 

to their farmer-members on a patronage basis, thereby enhancing their overall farm 

income. 

Farmer cooperatives generate benefits that strengthen our national economy, providing jobs for nearly 250,000 Americans with a combined payroll of over $8 billion. 

Many of these jobs are in rural areas where employment opportunities often are 

limited. The pension funding crisis has placed many of these rural jobs in jeopardy, 

however. The economic crisis and the collapse of the stock market have caused unprecedented losses in defined benefit pension plans all across the country, and requirements for defined benefit pension plans of farmer cooperatives are reaching 

unsustainable levels. 

Due to increased funding requirements, farmer cooperatives may be forced to lay 

off workers, postpone investments in new products and services, and take other 

drastic measures in order to meet current funding requirements. 

NCFC surveyed members from all parts of the country and asked them whether 

the market downturn has had an impact on their defined benefit plan funding requirements. Nearly all of those surveyed reported dramatic increases in funding requirements. In fact, for single employer plans, the anticipated increase in average 

annual contribution (2006–2008 vs 2009–2014) is more than 75 percent. Prior to the 

market downturn, many of those plans had sizeable cushions from discretionary 

contributions or were approaching full funding. 

In order to address this severe funding problem, farmer cooperatives are taking 

or considering the following actions: 

• Eliminating jobs and reducing salaries. 

• Reducing patronage payments to members, impacting both members and 

rural communities. 

• Reducing capital investments. 

• Reducing spending on marketing, travel, training, etc. 

• Suspending 401(k) employer-match contributions. 

• Canceling annual salary increases. 

• Canceling annual incentive programs. 

Farmer cooperatives are not asking for relief from, or a reduction in, pension 

funding obligations; instead, they are asking for additional time to allow for a positive stock market correction. Time is of the essence, however, and we urge you to 

act quickly to address this problem. The vast majority of single employer plan sponsors’ funding obligations will be determined on January 1, 2010, regardless of stock 

market performance in the remainder of the year. Farmer cooperatives and other 

businesses must plan now for the substantial funding liabilities in the new year. 

NCFC is very pleased that Representative Earl Pomeroy has issued a discussion 

draft of legislation providing relief to plan sponsors and workers. The discussion 

draft provisions would allow more time for employers to manage losses from the recent stock market downturn. That additional breathing space for employers would 

help to ensure economic recovery in rural America and the continued viability of our 

nation’s farmer cooperatives. 


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Conclusion 

Thank you for the opportunity to share our views. NCFC looks forward to working 

with the Committee to address the ongoing challenges in defined benefit pension 

plan funding. We appreciate this statement being included in the official hearing 

record. f 

New Jersey Education Association, letter 

Dear Mr. Chairman: 

On behalf the 203,000 members of the New Jersey Education Association, we appreciate the committee’s interest in the future of defined benefit pensions and wish 

to submit the following comments, for the record, on Defined Benefit Pension Plan 

Funding Levels and Investment Advice Rules. 

NJEA strongly believes in the value of a defined benefit pension as the most secure retirement benefit for American workers. In addition, we believe that properly 

regulated defined benefit plans are the most responsible and stable retirement benefits employers can offer to their employees. 

These policy positions are modeled by NJEA through its sponsorship of a singleemployer, private defined benefit pension plan for our own employees and retired 

employees. As a responsible plan sponsor, NJEA has consistently met all federal 

funding requirements for its Plan, ensuring the retirement security of more than 

470 Plan Members and beneficiaries. 

However, like many other defined benefit plan sponsors, NJEA is facing the challenge of continuing to fully fund our Plan in the wake of deep investment losses in 

2008–09 while meeting more stringent funding requirements under the Pension Protection Act of 2006. This has caused us to defer planned staff expansion and capital 

projects, and to reduce other expenditures, impacting the local economy, as we have 

shifted resources within our budget in anticipation of a required employer contribution that could be three to five times our previous annual funding requirement. 

We recognize that some measure of pension funding relief was enacted under the 

Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), and we greatly appreciate changes to the original asset smoothing method in the PPA. 

In addition, WRERA and subsequent regulatory measures by the IRS provide 

flexibility to plan sponsors in setting the interest rates on which their plan liabilities are valued. While this can have a dramatic effect on current liability for this 

plan year—and help prevent a spike in required employer contribution—it is a 

short-term and somewhat artificial fix. The fact remains that our Plan’s assets declined almost 16% from September 1, 2008 to August 31, 2009, and plan sponsors 

with calendar fiscal years saw far steeper declines. 

While rate relief will allow us to measure our Plan liabilities much lower, it may 

only defer the spike in employer contribution for a year. Corporate bond yields— 

on which the target liability yield curve is based—are already falling, which will 

likely cause our Plan’s liability to be measured at a dramatically higher level next 

year. At the same time, the Plan’s assets will have to be at 96 percent of liability 

(versus 94 percent this year) under the PPA funding target phase-in. 

We strongly encourage Congress to enact additional relief measures, including a 

provision for plan sponsors to separately value and amortize their 2008 and 2009 

investment losses over 30 years. This would alleviate volatility and spikes in employer contributions without forgiving any plan liability. 

This proposal and others have been advanced by the National Education Association, in concert with many other organizations. We urge the Committee to consider 

and act favorably on NEA’s proposals. 

Sincerely, 

Barbara Keshishian 

f 

President 

Oklahoma Education Association, Letter 

Dear Chairman Rangel and Members of the Committee on Ways and Means: 

Please allow me to introduce myself as the Executive Director of the Oklahoma 

Education Association (OEA), a state affiliate of the National Education Association 

(NEA). I am writing to respectfully submit the comments of the OEA to the Ways 

and Means Committee in conjunction with a draft proposal by Representative PomVerDate Nov 24 2008 00:29 Jun 02, 2011 Jkt 063011 PO 00000 Frm 00167 Fmt 6633 Sfmt 6621 I:\WAYS\OUT\63011.XXX GPO1 PsN: 63011

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eroy that will provide relief for defined benefit pension plan funding levels and investment advice rules. 

The OEA was established in 1889 prior to Oklahoma statehood and currently represents approximately 40,000 active and retired public sector education employees. 

Over 50 hard working Oklahoma citizens are directly employed by the OEA to carry 

out our mission. Those employees are private sector employees and consist of support, professional, and management staff. 

The OEA maintains a single employer defined benefit retirement plan for its employees. Our plan currently has 53 plan participants and I think it is fair to describe 

our plan benefits as ‘‘modest’’ at best. Our defined benefit plan is based on a 2% 

factor and we do not have any cost of living provisions, nor do we provide any postretirement health care or other post-retirement benefits. We do however believe that 

our plan provides basic economic security for our employees who vest in the plan 

and retire from service at the OEA. 

The OEA has always been a fiscally responsible sponsor of its defined benefit pension plan, despite requirements to make substantial additional monetary contributions to the plan in order to provide the maximum funding levels implemented by 

the recently enacted Pension Protection Act (PPA). We are proud to sponsor a defined benefit plan that is annually funded at the maximum allowable level and sincerely believe in our obligation to provide reasonable and affordable retirement benefits to our hard working employees. 

However, the inflexible and stringent rules mandated by the PPA and the recent 

downturn in the financial markets have created an environment where we are facing a catastrophic financial crisis. Unless we have relief in the form of more flexible 

funding requirements for the defined benefit plan—particularly in the area of funding investment losses over a longer period of time than is currently available under 

the PPA—or drastically cut back regular services to our members, staffing, and normal capital improvement expenditures, the OEA will not be able to sustain its annual budget. Under the current PPA rules, the total impact of our defined benefit 

plan on our most recent fiscal year budget is 43% of our total revenues. 

The OEA will not be able to continue to maintain its defined benefit plan under 

the current funding requirements without suffering substantial financial damage. 

We are currently faced with the unpleasant dilemma of either breaking our promise 

to continue sponsoring a defined benefit plan for our employees, or breaking our 

promise to continue to provide the very best services available for our members. 

Changes in the current funding requirements are necessary to make plan funding 

more predictable and affordable, which in turn will allow organizations/employers 

such as the OEA to maintain defined benefit pension plans in the future. 

The draft proposal by Representative Pomeroy provides sensible short term funding relief for defined benefit pension plans without jeopardizing the long term funding protections for these plans. I urge the Ways and Means Committee to support 

the Pomeroy proposal and to expeditiously enact legislation that will provide much 

needed relief to sponsors of defined benefit plans in the private sector. 

Thank You, 

f 

Lela Odom, Executive Director 

Statement of The ERISA Industry Committee 

As the representative of America’s major employers on retirement issues, The 

ERISA Industry Committee (‘‘ERIC’’) appreciates the Committee’s focus on the 

issues of funding relief for pension plans and investment advice in defined contribution plans. 

ERIC is a nonprofit association committed to the advancement of the employee 

retirement, health, incentive, and welfare benefit plans of America’s largest employers. ERIC’s members provide comprehensive retirement, health care coverage, incentive, and other economic security benefits directly to some 25 million active and 

retired workers and their families. ERIC has a strong interest in proposals affecting 

its members’ ability to deliver those benefits, their costs and effectiveness, and the 

role of those benefits in the American economy. 

SUMMARY: DEFINED BENEFIT PLAN FUNDING RELIEF 

ERIC strongly supports and has urged both the Congress and the Administration 

to provide immediate, temporary and meaningful funding relief for defined benefit 

plans. Employers have not asked and are not now asking for relief in the form of 

direct financial support from the government. Rather we are merely asking for more 


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time to make unexpected and larger contributions to defined benefit plans as a result of the unprecedented financial and economic problems that stem from the ongoing global financial meltdown. 

Companies that sponsor defined benefit plans, including those that had made significant contributions to comply with the new more stringent funding rules of the 

Pension Protection Act of 2006 (PPA), suffered significant and unexpected losses in 

their pension plan investment portfolios as a result of the ‘‘once in a generation’’ 

investment crisis. Because of the worst recession since the Great Depression, many 

have been forced to freeze their pension plans, reduce financial support for 401(k) 

plans, curtail employment, and significantly reduce investment. 

Unlike other sectors of the economy, however, companies sponsoring defined benefit plans are not asking for a taxpayer bailout; instead we are merely asking for 

more time to make contributions to match long-term liabilities inherent in the pension plan system. There is ample precedent for such a solution: in 1974 when the 

Employee Retirement Income Security Act (ERISA) was enacted, companies were 

given 30 years to amortize existing liabilities. 

SUMMARY: PARTICIPANT ADVICE 

Millions of Americans rely on their 401(k) plan and other defined contribution 

plans for retirement security. ERIC member companies who sponsor 401(k) plans 

offer investment advice products and services to plan participants as permitted 

under current law. Many utilize the regulatory framework approved by the Department of Labor known as ‘‘SunAmerica,’’ whereby participants receive investment advice based on a computer model designed by a third party with no financial stake 

in the underlying investments in the plan and is independent of the service provider 

or financial institution providing the investment advice. 

ERIC supports investment advice rules that carefully balance the need of the participant to receive effective and useful investment advice from the company plan 

sponsor and/or its service provider as well as the need for the employer to have clear 

and consistent rules under which to legally offer the advice. ERIC’s members have 

a vital interest in assuring that the rules and regulations issued in connection with 

investment advice achieves its objective in a way that encourages voluntary investment advice programs without exposing employers to an undue risk of fiduciary liability. 

Defined Benefit Plan Funding 

As Congress and the Administration focus on efforts to stimulate the economy, 

real relief for America’s pension plans is an absolute necessity. There is general 

agreement among those directly concerned with business, employment, and retirement administration that failure to provide meaningful relief will increase unemployment, slow economic recovery, and put retirement security at risk. The drop in 

the value of pension plan assets and the credit crunch, together with the new accelerated funding requirements of the Pension Protection Act of 2006 (PPA), has placed 

employers in a difficult position. 

At a time when companies need cash to keep their business afloat, retain and recruit employees, build product in American factories, the new funding rules under 

the PPA coupled with the economic meltdown require extraordinary and unexpected 

cash contributions to their defined benefit plans, to fund liabilities that are many 

years in the future. 

As a result, companies, including those that need to continue to manufacture 

goods and build inventory, will divert much needed cash to make pension plan contributions, cash that would otherwise be spent on current job retention, job creation, 

and capital investments. Many of these companies fear that they will be forced to 

increase off-shore resources—with its permanent impact on jobs—in order to reduce 

costs to make up for these contributions. These funding challenges apply to both frozen and non-frozen plans (those that continue to accrue new benefits for employees). 

Unless Congress intercedes with reasonable rules that will promote retention of 

pension plans, the result will be an increase in unemployment—some of it permanent—and a slower economic recovery. 

The Worker, Retiree, and Employer Relief Act of 2008 corrected a number of technical errors in the PPA and clarified some points of contention between plan sponsors and the regulatory agencies. It did not, however, adequately provide the substantive relief needed to force plan sponsors from making an unfortunate choice between funding their pension plans and retaining current employees, hiring new employees, and the capital investments necessary to stimulate the economy and improve the lives of millions of Americans. 

The Treasury Department has recently provided some needed regulatory relief in 

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vided to all pension plans, leaving some plans, particularly fiscal-year plans (as opposed to calendar-year plans) suffering grave economic hardship. Simply stated, 

Congress needs to act, quickly and decisively in order to support the remaining defined benefit plans still offering retirement security to participants. Any relief that 

Congress provides must be made available to both frozen and non-frozen plans in 

order help companies transition out of this deep recession. 

As you are aware, the last four months of 2008 posed a significant challenge for 

defined benefit pension plans that, in compliance with the PPA 2006, had reached 

or were close to full funding. A dramatic and unexpected decline in the value of the 

equity markets significantly reduced the assets held by these plans through no fault 

of the PPA. As a result, pension plans that were fully funded only one year ago are 

now substantially underfunded under the standards set by the PPA 2006. 

The PPA significantly tightened the nation’s pension funding rules. Congress, not 

anticipating the financial crisis, made no provision in the Act that that would have 

provided relief from the crisis. Plan sponsors have spent the two-plus years since 

the legislation was enacted preparing to meet the new law’s funding requirements, 

but they, like Congress when the law was enacted, did not and could not anticipate 

the financial crisis through which the nation is now progressing. The confluence of 

tighter funding laws and the current economic environment created a ‘‘perfect 

storm’’ that requires relief. 

Many major employers that have responsibly funded their pension plans are now 

facing statutorily required contributions in the coming year that exceed the previous 

year’s contributions by magnitudes of hundreds of percent. The sheer size of the contributions leaves employers in an untenable position: they must either cut jobs and 

delay hiring and investment, or allow their plans to go underfunded, in many cases, 

resulting in restrictions on the benefits that workers can claim as they retire. In 

some cases, the pension liabilities that must be met under the requirements of the 

PPA may exceed the net worth of the company. We do not believe that Congress 

intended to allow companies to close their doors as a result of inability to meet the 

funding requirements of the PPA coupled with the Great Recession. 

Looking ahead to 2010, companies expect increased required contributions to their 

pension plans, barring an enormous market recovery or another unusual spike in 

interest rates that would reduce minimum contributions. These increased minimum 

contributions apply to both frozen and non-frozen plans because of investment losses 

and interest rate assumptions. 

Because companies suffered enormous investment losses in 2008, current investment returns are not sufficient to reverse the dramatic negative investment returns 

of the last quarter of 2008. Those losses, the low return on investments, coupled 

with the fact that interest rates are substantially lower than in October 2008, results in an increase in the computation of pension plan liabilities (based on current 

interest rates). Higher liabilities result in higher minimum contributions to the 

plans, thus continuing the cash-crunch cycle into 2010 and forcing companies to 

choose between funding pension plan trust funds, that represent long-term liabilities, and ending workforce reductions, rehiring workers and/or making infusions of 

capital into their core business interests. 

A failure to provide funding relief will undoubtedly have real pension implications 

including an increased risk to the PBGC and the loss of pension benefits and plan 

freezes (as well as curtailment of 401(k) plans in order to raise cash) for many workers, the repercussions will stretch far beyond pensions to the whole of economic 

growth. With required contributions for many employers reaching tens and hundreds of millions of dollars, the job and investment consequences of failing to act 

are real. We urge you to provide real, temporary relief that allows plan sponsors 

additional time to fully fund their pension plans. 

Pension plan sponsors are not asking for a bailout—we are not asking that the 

government provide plan sponsors with cash or take on plan sponsors’ liabilities. 

Plan sponsors simply need additional time over which to make their pension contributions. Plan sponsors need more time to amortize the 2008 losses as well as 

rules that reflect the true long-term nature of the pension plan liability. 

In these uncertain economic times, employers are forced into making hard and 

difficult choices—in some cases cutting retirement benefits in order to retain jobs. 

Many employers eliminated 401(k) matches in order to divert the cash to cover 

other expenses, including payroll, and defined benefit plan funding. These employers 

hope to and in some cases are slowly returning to providing the employer match. 

However, as we have learned from this economic crisis, employers need the flexibility to make business decisions regarding cash allocation quickly and without depending on Congress. 

One short-term result of the economic crisis, and government failure to date to 

provide needed flexible relief, is that employers are hesitant to take on long-term 


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financial commitments. For instance, employers are wary of making long-term commitments that require maintenance of short term funding to cover what are in fact, 

long term liabilities. The current financial crisis not only impacts workers today, but 

also will have severe, short-term negative effects on the pension plans in which they 

participate, reducing benefits, undermining retirement security and will continue to 

impact the ability for large employers to maintain current workforce levels. 

We understand that there are some, in and out of government, who contend that 

there are no econometric studies to illustrate that if companies are required to make 

statutorily required pension contributions they will be forced to curtail spending for 

jobs and investment. We find this contention so out of balance with common sense 

that it is without merit of consideration. 

Investment Advice 

The Education and Labor Committee approved a bill this summer that would 

drastically change the way employers offer investment advice to workers participating in their 401(k) plans. The PPA included investment advice provisions that 

expanded the ways in which employers could provide investment advice to their 

workers through their 401(k) plans. The effective date of the final regulations on 

investment advice issued by the Bush Administration has been delayed upon further 

review by the Obama Administration. 

Employers need clear rules that apply when an employer chooses to make investment education or investment advice available under a participant-directed defined 

contribution plan. Congress should recognize, however, that plan sponsors and fiduciaries are increasingly targeted in class action lawsuits that propose expansive 

theories of fiduciary liability and seek substantive damages. Even when these lawsuits are without merit, as is often the case, they are expensive to defend and they 

divert time and attention from the employer’s business. As a result, any employer 

that considers whether to adopt an investment advice program must weigh the potential benefit to plan participants against the very real risk of costly and time-consuming litigation. 

Employers will voluntarily offer investment advice programs only if the rules governing these programs are clear and objective, do not open the door to increased fiduciary liability, and provide safe harbors whenever possible. 

The Education and Labor’s bill approved out of the Committee this summer, 

would significantly disrupt the manner in which employers provide investment advice to plan participants. Specifically, this legislation would prohibit employers from 

providing investment advice under most ‘‘SunAmerica’’ models, which has provided 

a framework for employers to provide investment advice for eight years. 

Many ERIC members provide investment advice under the SunAmerica model. 

Our members have indicated that if the rules under which employers may offer participants investment advice in 401(k) plans are completely revamped so as to preclude most SunAmerica arrangements, many would not undertake the expensive 

and time-consuming exercise of overhauling their investment advice programs. In 

addition, these changes would also result in uncertainty and increased exposure to 

liability for employers. 

ERIC strongly supports the SunAmerica investment advice framework. It appears 

that the Education and Labor Committee has concerns regarding the PPA investment advice provision as well as the Bush Administration final regulations on investment advice. ERIC urges a full and fair debate on this issue within the Committee. However, by casting doubt on SunAmerica arrangements, Congress would 

force employers to review and reconsider whether providing investment advice results in litigation jeopardy. Employers would limit and or eliminate investment advice programs resulting in fewer Americans receiving investment advice through 

their employer-sponsored 401(k) plans. 

ERIC appreciates the opportunity to present this statement. If the Committee has 

any questions about our statement for the record, or if we can be of further assistance, please let us know. 

The ERISA Industry Committee 

f 

Statement of the Michigan Education Association 

The Michigan Education Association (MEA) respectfully submits these comments 

to the Committee on Ways and Means in conjunction with the October 1, 2009 hearing on defined benefit pension funding levels and investment advice rules. 

MEA is a labor organization with more than 160,000 members consisting of active 

and retired employees of public elementary and secondary schools and institutions 


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of higher education in the state of Michigan. Although MEA members are not subject to the funding rules governing private sector defined benefit pension plans, the 

MEA has a defined benefit pension plan that covers over 700 employees of MEA and 

its associated organizations. 

MEA strongly supports legislation being drafted by Representative Pomeroy that 

will provide appropriate funding relief for sponsors of private sector defined benefit 

pension plans. The extraordinary economic downturn that has been experienced 

during the past 12 to 18 months in Michigan and throughout the United States creates substantial funding challenges for employers, like the MEA, that have defined 

benefit pension plans for its employees. Congressman Pomeroy’s proposed legislation 

would significantly assist MEA and other defined benefit plan sponsors by providing 

extended amortization of certain funding shortfalls, expanding the smoothing corridor for assets that have experienced serious declines in value, and protecting an 

employee’s right to choose a social security leveling benefit payment option. 

MEA is facing significant increased minimum contributions to its pension plan in 

the next few years due to the unusually severe downturn in the economy. The ability to elect to amortize funding shortfalls over a 15 year period and an expansion 

of the smoothing corridor for assets greatly enhances MEA’s ability to fund the pension plan and protect the benefits of its employees. The plan has had a Social Security leveling benefit option for its employees for many years. The ability to retain 

that option for its employees is a significant benefit of the proposed legislation. 

The Pomeroy draft legislation assists in addressing the funding crisis arising out 

of the economic recession, while ensuring the protection of employees’ benefits. MEA 

fully supports this legislation and urges the members of the Ways and Means Committee to approve it expeditiously. 

f 

Statement of the National Education Association 

The National Education Association (NEA) respectfully submits these comments 

to the Committee on Ways and Means for the record in conjunction with the October 

1, 2009 hearing on defined benefit pension plan funding levels and investment advice rules. 

NEA strongly supports legislation being drafted by Representative Pomeroy that 

will provide the funding relief desperately needed by sponsors of defined benefit 

pension plans in the private sector. The bill is appropriately calibrated to help plan 

sponsors recover from the cataclysmic market losses that occurred during the fivemonth period stretching from the summer of 2008 through the winter of 2009, when 

the assets of defined benefit pension plans suffered an average market value loss 

of 40 percent. Without the short-term, targeted funding relief provided by the Pomeroy draft, many employers will not be able to continue in business, let alone maintain their pension plans. Accordingly, NEA commends Representative Pomeroy for 

sponsoring this bill and urges the House Ways and Means Committee to move the 

bill to the House floor intact and to send with it an urgent message about the need 

for speedy passage of the bill in both the House and Senate. 

NEA is a leading advocate for financially stable, employment-based, defined benefit pension plans in both the public and private sectors of the economy. Although 

nearly all of NEA’s members are employed by public school employers not subject 

to the funding rules governing private sector defined benefit pension plans (and 

therefore would not be affected by the funding relief provided by the Pomeroy bill), 

NEA understands that passage of the legislation is vitally important to the survival 

of employment-based defined benefit pension plans in all sectors of the economy. 

Without funding relief, the relatively inflexible funding rules imposed on sponsors 

of private sector defined benefit plans would make sustaining those plans, given the 

stresses of the once-in-every-other-generation market upheaval of the end of last 

year and the beginning of this one, nearly impossible for many employers. For those 

employers, the cost of sustaining their defined benefit pension plans under the funding rules without relief will force them to retrench their operations severely, causing 

losses in economic activity and jobs in their core businesses. And, as private sector 

defined benefit pension plans become rarer, the defined benefit pension plans maintained for our members will inevitably become harder for public sector employers 

to sustain. 

NEA’s knowledge about the severe challenges that private sector employers are 

facing in maintaining their defined benefit pension plans has been gained first hand 

through the experience of its own affiliated associations throughout the country, 

nearly all of whom maintain defined benefit pension plans—on both a single employer and multiemployer basis—for their own employees. For the most part, NEA’s 

affiliates are financially stable, mature organizations with predictable cash flow. 


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These organizations take pride in providing retirement security for their staff employees by maintaining well-funded defined benefit pension plans. Yet, the application of the new stringent funding rules of the Pension Protection Act (‘‘PPA’’)— 

which generally increase the unpredictability of funding requirements year-toyear—to plans that have suffered, over a five-month period, a drastic and unpredictable market drop in the value of their funding, has suddenly made sustaining those 

plans a nearly unbearable burden. 

And it is not just the plans that are jeopardized by this funding crisis: many of 

NEA’s affiliated associations are being forced to postpone, curtail, or eliminate regular services, staffing, and capital improvements, often on top of increases in member dues. This is because, absent relief, in 2009 the average NEA affiliate will be 

faced with the immediate obligation to make funding contributions equal to 37 percent of its payroll, just to maintain its defined benefit pension plan. This huge funding obligation is not the result of past irresponsible funding behavior; on the contrary, these organizations have been uniformly fiscally responsible sponsors of their 

defined benefit plans, and many have been making markedly increased contributions to their plans over the last few years. Not one of these associations has taken 

contribution holidays or paid only the minimum contribution required by existing 

funding rules. Financially sound, long-term membership organizations such as 

these—like many other businesses in the private sector—should be financially able 

to maintain defined benefit pension plans. But, unless these employers are given 

some temporary flexibility in how to recoup the severe investment losses of the last 

two years suffered by their plans, many of these plans will not be sustained, and 

the organizations will be substantially damaged financially as well. 

Representative Pomeroy’s proposal will have a major beneficial impact by providing sponsors the opportunity to fund the investment losses that their defined 

benefit plans incurred at the end of 2008 and the beginning of 2009 over a longer 

period of time. This one temporary change in the funding rules will permit many 

defined benefit pension plans to remain viable; and it will free up needed investment capital for the sponsors’ core businesses and allow these employers to begin 

hiring again. The Pomeroy proposal provides this temporary relief in the form of two 

alternative funding rules, either of which sponsors may elect voluntarily to comply: 

(1) an option to defer for two years the amortization of the shortfalls occurring in 

2009 and 2010; or (2) an option to amortize the shortfalls occurring for the first time 

in 2009 and 2010 separately over a 15-year period. NEA is most pleased by the inclusion of the latter alternative in the bill, because it will provide greater relief for 

sponsors’ contribution obligations in the earlier years. NEA is similarly pleased with 

the bill’s temporary funding relief for multiemployer plans, which employers would 

be permitted to elect voluntarily during 2009 or 2010 either: (1) to restart the amortization of unfunded liabilities over a 30-year period; or (2) to establish a separate 

amortization base for investment losses recognized from the fall of 2008 through the 

fall of 2010 and to fund this liability over a 30-year period. 

The bill’s ‘‘maintenance of effort’’ requirements, which are linked to its temporary 

funding relief provisions for single employer plans, are appropriately calibrated to 

incentivize sponsors to continue to provide benefits to plan participants during the 

same period in which they are receiving relief. As no plan sponsor is required to 

accept the temporary funding relief, and the bill provides different methods of complying with the maintenance of effort requirements, the temporary limitation on the 

sponsors’ flexibility to curtail plan benefits or to enhance executive nonqualified 

plan benefits is both justified and fair. 

The genius of the bill is that it provides temporary funding relief without undoing 

the principles of the Pension Protection Act, which were designed to ensure that defined benefit pension plans were better funded. Under the bill, no employer would 

be allowed to make contributions for 2009 and 2010 that are less than those made 

for prior years. And no liabilities will be hidden; that is, the accounting statements 

made on behalf of the plan will fully reflect the value of the liabilities and the 

longer time period during which sponsors will fund them. 

Further, the changes that the bill does make to the PPA will help sponsors maintain better funded defined benefit pension plans. All of the temporary and permanent changes to the PPA are well-designed to make plan funding more predictable 

and affordable, making it much more likely that sponsors will be able to maintain 

their defined benefit pension plans in the long run. By doing so, the bill improves 

the financial outlook of the plan sponsors and the Pension Benefit Guaranty Corporation. 


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For all of these reasons, NEA fully supports the Pomeroy proposal and intends 

to advocate vigorously for the bill’s enactment. We urge the members of the Ways 

and Means Committee to pass it expeditiously. 

Thank you for the opportunity to submit these comments. 

f 

Statement of the North Dakota Education Association 

The North Dakota Education Association (NDEA) respectfully submits these comments to the Committee on Ways and Means for the record in conjunction with the 

October 1, 2009 hearing on defined benefit pension plan funding levels and investment advice rules. 

The NDEA is firmly in support of legislation being drafted by Representative 

Pomeroy that will provide desperately-needed funding relief to defined benefit pension plans in the private sector. Representative Pomeroy’s proposed legislation will 

provide necessary and appropriate relief to both single and multi-employer pension 

plans. The recently-enacted Pension Protection Act (PPA) did not envision the cataclysmic melt down of financial institutions and investments. Through no fault of 

their own, trustees of private pension plans saw their funds depleted by as much 

as 40 percent. The strict requirements of the PPA could cause the closure not only 

of many pension funds, but the closure of many private businesses and non-profit 

organizations that are responsible for these pensions. Such events could not only exacerbate the wounds inflicted upon the nation’s economy, but they could also slow 

down efforts in speeding up the economic recovery. 

The NDEA participates in the NEA Pension Fund, a private, multi-employer defined benefit plan. The required contributions to keep this plan solvent have forced 

us to radically reduce our budget for the 2009–2010 fiscal year. Projected increases 

for the 2010–2011 year, up to 37percent of payroll, could force us to reduce staff. 

We know that our experience is similar to all other companies that are trying to 

maintain this valuable benefit for their employees. 

Representative Pomeroy’s proposal will grant the trustees of pension plans the 

ability to segregate these once-in-a-century losses in a way that will grant employers time to recoup the losses without damaging the pension plans. Time is the friend 

of all pension plans, and Representative Pomeroy’s plan gives employers the time 

necessary to recover from the unforeseen and unprecedented losses of 2008–2009. 

This temporary relief comes in the form of two alternatives, either of which employers are free to choose: (1) an option to defer for two years the amortization of the 

shortfalls occurring in 2009 and 2010; or (2) an option to amortize the shortfalls occurring for the first time in 2009 and 2010 separately over a fifteen-year period. The 

NDEA is especially supportive of the second alternative because it will provide 

greater relief for sponsors’ contribution obligations in the earlier years. 

The NDEA is in strong support of the bill’s temporary funding relief for multiemployer plans. Under this plan employers would be permitted to elect voluntarily 

during 2009 or 2010 either: (1) to restart the amortization of unfunded liabilities 

over a thirty-year period; or (2) to establish a separate amortization base for investment losses recognized from the fall of 2008 through the fall of 2010 and to fund 

this liability over a thirty-year period. 

The ‘‘maintenance of effort’’ provisions of the proposed legislation are especially 

important for pension relief and viability. These provisions encourage and allow 

plan sponsors to keep their benefit promises to employees, while fixing the longterm problem. The temporary limitation on plan sponsors’ flexibility to diminish 

plan benefits or to enhance executive nonqualified benefits is equitable and fair. 

What makes Representative Pomeroy’s bill so powerful and just is that it provides 

necessary pension funding relief without undoing the principles of the PPA. The 

PPA is still intact and pension plans are allowed to recover from the harsh economic 

events of 2008–2009. Employer contribution levels cannot be reduced from prior 

years. And the transparency for pension plans required by the PPA will still be intact. 

Congressman Pomeroy’s proposed legislation will prevent further economic damage from the investment and banking problems of 2008–2009. It will allow plans 

to recover without violating or vitiating the effects of the PPA. 

The NDEA wishes to go on record in support of the Pomeroy proposal. We urge 

the members of the Ways and Means Committee to pass this bill as quickly as possible. 

We appreciate the Committee’s prompt attention to this critical issue. 

f 


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Statement of the Pennsylvania State Education Association 

The Pennsylvania State Education Association (PSEA) respectfully submits these 

comments to the Committee on Ways and Means for the record in conjunction with 

the October 1, 2009 hearing on defined benefit pension plan funding levels and investment advice rules. 

PSEA and Pension Plan Funding 

Background 

PSEA’s mission is to advocate for strong effective schools on behalf of our membership of 191,000 public school teachers, educational support professionals, 

healthcare workers, retired educators, and students preparing to become educators. 

Both our members and staff appreciate the value and security of a traditional final 

average pay defined benefit (DB) pension plan. PSEA is a committed DB pension 

plan sponsor, with a pension plan designed to appeal to all employees. 

Prior to the Pension Protection Act (PPA), our normal cost for pension benefits 

(not including plan expenses) was $2.6 million, or 11% of payroll. With the advent 

of PPA, our normal cost increased by $1.5 million to $4.1 million, or 17% of payroll. 

Given our annual budget of approximately $60.0 million, this increase is significant, 

however, it has not served to make our plan unsustainable. 

Concern 

PSEA’s most significant pension issue is the potential for annual volatility in our 

funding requirements due to the methods and procedures required by PPA for recognition of pension funding shortfalls. Based on the recent downturn in the investment markets, we have seen just how quickly the tide can turn. As of July 1, 2007, 

our pension plan’s Funding Target Attainment Percentage (FTAP) was 100.6%. One 

year later at July 1, 2008, our FTAP had dropped to 94.4%, and our most recent 

valuation indicates a July 1, 2009 FTAP of 94%. While these funded levels may 

sound higher than those generally being reported in the press, it is only because 

we have made extraordinary contributions on the order of 50% of payroll for the 

past two years in order to maintain these funding levels ($12.75 million contributed 

in the period from July 1, 2007 to June 30, 2008, and $11.9 million contributed in 

the period from July 1, 2008 to June 30, 2009). Since July 1, 2009 we have been 

contributing over $1 million per month in order to continue to address the funding 

shortfall in our pension plan. A recent funding projection indicates that our minimum requirement will be nearly $8 million per year as we continue to pay down 

the shortfall. These extraordinary contributions are not sustainable and have significantly reduced our reserves to precarious levels. 

Organizational Impact 

We hope that two things are evident from the above. First, PSEA has and continues to responsibly fund its pension plan in an attempt to close the funding shortfall, and second, the recent levels of extraordinary contributions are not sustainable 

within our annual budget. PSEA maintains a DB pension plan in order to attract 

high-quality staff who will carry out the mission of our organization. However, 

based on recent circumstances, maintaining and managing our pension plan has become a mission in and of itself and has severely limited our ability to carry out the 

organization’s mission. The following are examples of organizational cutbacks and 

postponements that have been made in direct response to increased pension funding 

requirements: 

• PSEA has placed all capital improvement projects on hold including $3 million in projects that were budgeted for the 2008–2009 fiscal year. The capital 

improvements placed on hold include shovel ready construction projects for 

which numerous contractors had submitted bids. 

• PSEA has eliminated a number of staff positions and carefully considers each 

vacant position to determine whether or not it will be filled. 

• PSEA cut the 2008–2009 budget by $1.8 million in the middle of the fiscal 

year to provide additional resources to fund the pension plan. The cuts were 

across the board. 

These are just a few examples to highlight the fact that the funds previously allocated to staff positions, capital projects, and other expenditures are now being directed to the pension plan and are not being used to stimulate the economy, and 

to create jobs within PSEA and within the state. 


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Pomeroy Proposal 

Background 

In late 2008, the Worker, Retiree and Employer Recovery Act (WRERA) was enacted, providing DB pension plan sponsors with some temporary relief from the extraordinary market losses that occurred in conjunction with the new and untested 

PPA funding rules. WRERA undoubtedly preserved jobs and was a lifeline to some 

companies that maintain DB pension plans. However, the hoped-for recovery in the 

wider economy has not happened yet, leaving DB plan sponsors still facing the difficult position of downward pressure on revenue and significant increases in pension 

funding requirements. 

Thus, we were pleased to review the discussion draft of Representative Pomeroy’s 

proposal for pension funding relief. In our view, the proposal will allow DB pension 

plan sponsors the ability to maintain their plans, which is a win/win/win situation 

for plan sponsors, plan participants, and also very importantly for the Pension Benefit Guaranty Corporation (PBGC), since healthy plan sponsors are a source of premium income for the PBGC and do not add to the PBGC’s liability. We will focus 

on the two provisions of the Pomeroy proposal that would provide PSEA with the 

greatest short-term flexibility in dealing with the pension funding shortfall, while 

allowing us to establish a sustainable long-term pension funding strategy in conjunction with carrying out our organization’s mission. Neither of the provisions 

change the underlying concepts of PPA; both are pragmatic responses to unprecedented events in modern times for DB pension plan sponsors. 

Amortization Period 

Under PPA, losses occurring in a given year are amortized and funded over a 7 

year period. In the event of swift and significant asset losses such as has occurred 

recently, the annual amortization payments needed to pay off the losses can reach 

levels that cause extreme stress on the sponsoring organization. Pension plan funding is a long-term proposition, and the 7 year period specified in PPA is simply an 

arbitrary number—other numbers that are not inherently better or worse could 

have been selected. Section 101 of the Pomeroy proposal offers plan sponsors alternate amortization options and requires ‘‘maintenance of effort’’ on the part of the 

plan sponsor. We strongly support both components and will address them in turn 

below. 

A longer amortization period results in a lower annual payment, at the cost of 

higher total contributions overall. It is important to note that extending the amortization period does not change the amount of the initial shortfall—no liability is 

being removed or avoided. This situation is similar to the mortgage on a house, 

where increasing the term of the loan results in lower payments each month, with 

a higher total amount paid over time due to additional interest charges. However, 

the length of the loan and the total amounts paid over time do not change the original purchase price of the house. 

The ‘‘maintenance of effort’’ requirement on the part of the plan sponsor is an important component of this section that protects the retirement security of plan participants. This provision also protects the PBGC in that it does not allow troubled 

plan sponsors to curtail benefit accruals and extend amortization periods to simply 

defer contributions and get deeper in the hole prior to turning the plan over to the 

PBGC. 

In the case of the PSEA Pension Plan, where benefit accruals are ongoing, the 

optional extension of amortization period would move us from a situation where we 

pay our normal cost each year plus an amortization payment that severely stresses 

the organization, to a situation where we pay our normal cost each year plus a 

lower and more manageable amortization payment that extends over a greater number of years. 

Asset Smoothing 

Prior to PPA, pension plan sponsors commonly ‘‘smoothed’’ annual investment 

gains and losses by recognizing them on a pro rata basis over a 5 year period. In 

doing so, the smoothed asset value used to determine the contribution requirement 

progressed each year with much less volatility than in the underlying market value 

of assets. The prior rules limited the smoothed asset value to a range of 80% to 

120% of the market value of assets. 

Under PPA, the maximum period for smoothing annual investment gains and 

losses was reduced from 5 years to 3 years, and the allowable corridor around market value was reduced from 80%/120% to 90%/110%. Both of these changes significantly increase the volatility in the smoothed asset values that will emerge in future 

years. 


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1 EBRI Databook on Employee Benefit, includes both defined benefit and defined contribution 

plans. 2Profit Sharing/401(k) Council of America survey of 1,011 plans with more than 7.4 million 

participants and $730 billion in plan assets. 

Section 102 of the Pomeroy proposal expands the corridor to 80%/120% for the 

2009 and the 2010 plan years. The 80%/120% corridor was in existence for decades 

and worked well during that time. The proposal does not change the 3 year smoothing period, and does not change the ultimate goal of PPA, rather it allows plan 

sponsors short-term relief to cope with the existing shortfalls and to phase in the 

provisions of PPA. We strongly support this phase-in to PPA asset smoothing. 

Conclusion 

Under either the current PPA rules or the Pomeroy proposal, PSEA will pay our 

normal cost each year and will make positive progress each year toward paying 

down our unfunded liability. The fundamental question is one of speed—is one time 

frame superior to the other? 

In the current economic climate we do believe so. Under the PPA rules we will 

pay down our unfunded liability more quickly, at the cost of staff reductions and 

delayed capital investments. Under the Pomeroy proposal, we will pay down our unfunded liability over a longer period, freeing up current funds to carry out our core 

mission. 

Given that we will be continually reducing our unfunded liability in either scenario, we do not believe that our plan poses a greater risk to the PBGC under the 

Pomeroy proposal than under the current rules. On the contrary, we believe that 

over the long term, the macroeconomic benefits of having PSEA and other DB plan 

sponsors invest in our people and our businesses will be more beneficial to society 

and to the PBGC than if we curtailed our programs in order to meet specified shortterm pension funding thresholds. 

For all of the reasons discussed in our comments above, PSEA fully supports the 

Pomeroy proposal. We urge the members of the Ways and Means Committee to pass 

the bill expeditiously in order to provide greatly needed short-term flexibility and 

relief to DB pension plan sponsors, thereby allowing for a renewed focus on our mission in conjunction with setting a sustainable long-term strategy for pension plan 

funding under PPA. 

Thank you for the opportunity to submit these comments. 

f 

Statement on Investment Advice and Defined Benefit Plan Funding 

The U.S. Chamber of Commerce and the National Association of Manufacturers 

would like to thank Chairman Rangel, Ranking Member Camp, and Members of the 

Committee for the opportunity to provide a statement for the record. The issues 

raised at today’s hearing—defined benefit funding and investment advice—are crucial to the continued success of the private retirement system. 

The U.S. Chamber of Commerce is the world’s largest business federation, representing more than 3 million businesses and organizations of every size, sector, and 

region. More than 96 percent of the Chamber’s members are small businesses with 

100 or fewer employees, 71 percent of which have 10 or fewer employees. Yet, virtually all of the nation’s largest companies are also active members. We are particularly cognizant of the problems of smaller businesses, as well as issues facing the 

business community at large. The Chamber has substantial membership in all 50 

states. 

The National Association of Manufacturers is the nation’s largest industrial trade 

association representing small and large manufacturers in every industrial sector 

and in all 50 states. The NAM’s mission is to advocate on behalf of its members 

to enhance the competitiveness of manufacturers by shaping a legislative and regulatory environment conducive to U.S. economic growth and to increase understanding among policymakers, the media and the general public about the vital role 

of manufacturing in America’s economic and national security for today and in the 

future. 

The success of the current employer-provided retirement system is evident in the 

numbers. In 2007, private employers spent $199.9 billion on retirement income benefits.1 81.9% of eligible employees participate in their 401(k) plan.2 By 2008, 55.1% 

of all plans and 70.5% of plans with 1,000 or more employees permitted immediate 


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3Profit Sharing/401(k) Council of America survey of 531 companies of all sizes and region. 

4PBGC Pension Insurance Data Book 2007, and BLS Abstract of 2006 form 5500 published 

in December 2008. 5 ‘‘The Financial Crisis and Private Defined Benefit Plans’’ (November 2008, Number 8–18), 

Alicia H. Munnell, Jean-Pierre Aubry, and Dan Muldoon. 6 According to a Watson Wyatt study, plans that used the relief under both WRERA and the 

Treasury Department guidance will have minimum contribution requirements in 2010 that will 

be triple the contribution required in 2008. For plans that cannot use the Treasury relief, the 

minimum required contributions are almost triple for both 2009 and 2010. (Watson Wyatt 

Insider, April 2009—http://www.watsonwyatt.com/us/pubs/insider/showarticle.asp?ArticleID=20 

942). 

participation in their 401(k) programs, up from 24% of plans in 1998.3 Defined benefit retirement plans cover 43.8 million participants. Moreover, defined contribution 

plans have been on the rise, and now cover 79.8 million participants, up from 47 

million in 1995.4

Nonetheless, the current economic environment has created specific challenges for 

employers that want to maintain retirement plans. In addition to complying with 

the normal set of rules and regulations, plan sponsors must make tough decisions 

about their retirement plans and their businesses based primarily on economic survival. Therefore, the more certainty that plans sponsors have about the rules surrounding retirement plans, the better they will be able to make these important decisions. 

The hearing today focuses on two areas where plan sponsors need greater certainty. Defined benefit funding relief is a direct result of the financial crisis and the 

issue that requires the most immediate attention. Without definitive action from 

Congress, plan sponsors must take action based on the current law. Issuance of regulations pertaining to investment advice is necessary to provide certainty about the 

rules to plan sponsors and to provide participants with information useful in making decisions about their plan investments. Thus, we urge Congress to maintain the 

investment advice provisions under the Pension Protection Act of 2006 (‘‘PPA’’) and 

encourage the Department of Labor to issue final regulations. 

Defined Benefit Plan Sponsors Need Funding Relief 

On August 17, 2006, the Pension Protection Act of 2006 (‘‘PPA’’) was signed into 

law. The act fundamentally changes the funding rules for both single-employer and 

multiemployer defined benefit plans. A major impetus behind the PPA funding rules 

was to increase the funding level of pension plans. Consequently, most plan sponsors entered 2008 fully ready to comply with the new funding rules and based contribution estimates on these rules. However, the severe market downturn at the end 

of 2008 drastically changed the situation. 

At the beginning of 2008, the average funded level of plans was 100%. Data from 

a study published by the Center for Retirement Research at Boston College 5 indicates the following as of October 9, 2008: 

• In the 12-month period ending October 9, 2008, equities held by private defined benefit plans lost almost a trillion dollars ($.9 trillion). 

• For funding purposes, the aggregate funded status of defined benefit plans 

unpredictably fell from 100% at the end of 2007 to 75% at the end of 2008. 

(See footnote 5 of the study). 

• Aggregate contributions that employers will be required to make to such 

plans for 2009 could almost triple, from just over $50 billion to almost $150 

billion. 

Various reports showed that as a result of the unprecedented downturn in virtually all the investment markets, across the board, pension funding ratios fell significantly. In addition, corporate bond interest rates fell dramatically during December of 2008, triggering a significant increase in pension liabilities. 

In December of 2008, Congress took an important first step by passing The Worker, Retiree, and Employer Recovery Act of 2008 (‘‘WRERA’’) which provided needed 

technical corrections. However, the business community was very clear that additional legislative relief would still be necessary to fully address the economic downturn and its impact on employee retirement plans. 

Third quarterly payments for the unexpectedly high 2008 contribution requirements are due on October 15 and fourth quarterly payments are due January 15, 

2010. Moreover, even with the relief provided by WRERA and the regulatory flexibility provided by the Treasury Department, minimum contributions requirements 

for 2009 and 2010 will still significantly exceed the minimum contribution requirements for 2008.6


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Because of the importance of this issue to workers’ retirement security and the 

overall U.S. economy, we continue to urge Congress to adopt follow-up, temporary 

provisions that will ease cash flow constraints and make contributions more predictable and manageable in 2009 and 2010. We believe that relatively modest temporary changes can provide greater stability and improved chances of economic recovery for many companies, non-profits, and charitable organizations. 

We encourage Congress to implement funding relief without attaching conditions 

that could ultimately hurt the defined benefit system. Requiring a maintenance of 

effort as a condition of receiving relief will limit the legislation in two ways. First, 

many companies will choose to forego the relief due to concern that if economic challenges continue they will be unable to meet the obligations set forth by Congress. 

Secondly, and more importantly, a maintenance of effort provision jeopardizes the 

voluntary nature of the defined benefit system that has served employers and workers so well. If companies believe that the government might eliminate a company’s 

ability to change or suspend its pension plan down the road, they will be more reluctant to continue their current defined benefit plans and certainly unlikely to begin 

a new defined benefit plan. Other efforts to penalize companies through executive 

compensation restrictions or targeting some companies over others will not achieve 

the intended effect, which is in fact to protect and encourage continuation of employer-provided retirement plans. 

Without further legislative action, these unexpected funding requirements will 

continue to require that companies choose between funding their pension plans 

(which are long-term obligations) and laying off workers, closing plants, and postponing capital investments. This could result in increased unemployment and more 

harm to the economy. 

Current Investment Advice Provisions Should be Maintained 

The PPA modernized ERISA by better enabling employers to provide workers 

with access to investment advice pertaining to their retirement plan. Defined contribution plans, which largely did not exist when ERISA was enacted in 1974, require greater employee participation than traditional defined benefit plans, in which 

the employer pays for the entire benefit and takes on investment risk. With defined 

contribution plans, employees make investment decisions and take on that risk. 

Clearly, the need for education and advice on how to invest that money is an important complement to the defined contribution retirement model. 

In light of the financial crisis of the past year, it is more important than ever for 

participants to have access to professional investment advice. The provisions in the 

PPA will allow plan sponsors to more easily provide employees access to investment 

advice from regulated professionals. To reduce the potential for a conflict of interest 

should the retirement plan service provider also be the provider of investment advice, the legislation requires disclosure of fees as well as any potential conflicts. 

The PPA was a negotiated compromise between all interested parties. While we 

were not in agreement with all of the provisions implemented, we have agreed to 

maintain the compromises as negotiated. We urge Congress to do the same. As such, 

no legislative changes should be made to the investment advice provisions under the 

PPA and the Department of Labor should be encouraged to issue and implement 

final investment advice regulations. 

Conclusion 

The current economic situation has put a significant strain on the employer-provided retirement system. Therefore, plans sponsors and participants need certainty 

about the rules surrounding retirement plans to make appropriate decisions. We appreciate the opportunity to share our thoughts and concerns with you and look forward to future discussion on this issue. 

f 

United Jewish Appeal–Federation of New York, letter 

Dear Chairman Rangel: 

UJA–Federation of New York is the largest Jewish communal philanthropy in 

New York State and in the nation. Last year, despite a severe national recession 

that reduced contributions to our annual campaign by over 11 percent we were still 

able to raise $215 million in support of our mission to care for those in need and 

strengthen the Jewish community. A significant portion of the money we raise supports the work of 100 health and human service and community agencies within our 

catchment area of New York City, Long Island and Westchester County. These 

agencies include Jewish Home Lifecare, Metropolitan Council on Jewish Poverty, 


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Jewish Board of Children and Family Services, as well as many Jewish community 

centers and councils. As you know, our agency network provides services to all individuals and families that request their assistance. 

For the last 58 years, UJA–Federation has maintained a multiple-employer, defined benefit plan that includes 39 of our affiliated agencies as participants. 

Through this defined benefit plan we provide approximately 10,000 current and 

former employees with the assurance of retirement income, providing them sufficient income in their retirement years to maintain a suitable standard of living. 

Unfortunately, the severe economic recession of the past two years threatens the future of UJA–Federation’s defined benefit pension plan. From a base of $16 million 

our contribution this year will rise to $21.3 million, an increase of $5.3 million. 

Without plan changes or federal pension relief legislation our annual pension payment is expected to rise to $27 million per annum for the following several years, 

$11 million—nearly 70%—more than our base contribution of previous years. These 

increased payments are simply unaffordable. Given this reality, UJA–Federation 

must consider all options including seeking federal legislative relief (e.g. spreading 

payments over a longer period of years) and reducing the future benefits of both current employees and employees newly enrolled in our pension plan. Doing nothing 

is not an option as the increased cost of our defined benefit plan left unaddressed 

would significantly impair our charitable mission to help those who are poor and 

vulnerable and place UJA–Federation and its agency system in financial peril. 

We look forward to working with you and the other members of the House Ways 

and Means Committee to address the difficulties now faced by defined benefit pension plans in both the private and non-profit sectors. 

Sincerely, 

Irvin A. Rosenthal 

Chief Financial Officer 

Ron Soloway 

Managing Director 

f 

Government and External Relations 

United Jewish Communities of Metro West New Jersey, letter 

Dear Honorable Chairman Rangel: 

Imagine not helping a person who lost his job and was so embarrassed he didn’t 

tell his wife as he went to work each day, briefcase in hand. The ensuing marital 

discord, compounded by lack of income, needs the professional services provided by 

our agencies. Yet, because of the drain on our resources stemming from the current 

pension funding requirements, we will be forced to cut counseling and employment 

services. 

I am Max Kleinman, chief executive officer of the United Jewish Communities of 

MetroWest, New Jersey (‘‘UJC’’), and I write to urge Congress to pass meaningful 

defined benefit pension plan funding relief legislation so that UJC can continue to 

serve community needs and retain its valuable employees. 

Who We Are and What We Do in the Communities 

United Jewish Communities of MetroWest New Jersey is the Jewish federation 

serving New Jersey’s Essex, Morris, Sussex, and parts of Union counties. Our federation is ranked as the ninth largest in North America, representing a community 

of over 90,000 Jews who are part of the more than 1.4 million people who live in 

our service area. 

UJC is the largest Jewish philanthropy in New Jersey. Our United Jewish Appeal 

campaign raised over $20 million in 2009 (significantly reduced from almost $24 

million in 2008, prior to the economic downturn). As a Jewish federation, we are 

the central fundraising organization on behalf of Jewish community needs locally 

and abroad. Locally, we fund our network of agencies directly, and we are their largest source of philanthropic support. Our major local beneficiary agencies include a 

nursing home, Jewish community center, vocational and family service agencies, 

and Jewish educational institutions. Through our agencies and program services delivered directly by our organization, the UJC serves as a focal point for Jewish community life in our area. Many of our agencies serve the general community, in addition to the Jewish community. Indeed, we seek and find common cause with peoples 

of all faiths. 


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The UJC and its partner agencies employs more than 2,000 full- and part-time 

employees to help the young, the old, the poor, the needy, the hungry, the homeless, 

and those seeking a sense of community and purpose in their lives. Our committed 

employees accept modest pay and benefits for helping others. 

In addition to supporting our local beneficiaries financially, the UJC provides a 

variety of shared services to the agencies, including benefits plans (e.g. including 

our pension plan and also health insurance), human resource management functions, payroll services, accounting services, information technology services, and facilities management. 

Specific Impacts of Excessive Pension Plan Costs 

During this period of economic decline and uncertainty, our services are in greater 

demand than ever, and our resources (both people and assets) are in dangerously 

short supply. Without meaningful funding relief, the UJC and its partner agencies 

will be forced to permanently freeze our pension plan, and further reductions in 

services to the community may become necessary. 

Examples of some of the reductions in services that have already been, and may 

become, necessary, due in part to the increases in plan funding requirements, include: 

• A decrease in counseling and employment services due to staff cuts and reduced financial aid 

• Budget reductions that eliminate or postpone administrative support services 

and needed facility maintenance projects 

• Reduction in Holocaust survivor education programs 

• Reduction in, or possible elimination of, support services for Holocaust survivors 

• Reductions in home-based social work and advanced nursing services for atrisk seniors 

• Reduction in the delivery mode for dental services for nursing home residents 

• Reduction in fitness program subsidies for seniors 

• Elimination of community-based adult day-care center 

• Significant reductions in rent subsidies available for the poor 

• Reduction in programs for the developmentally handicapped 

• Reductions in scholarships and electives available for students at our Jewish 

Day School 

• Curtailed community inter-group relations outreach programs 

The UJC and its partner agencies have worked extremely hard to minimize the 

adverse impact on services resulting from these pension-funding increases, by reducing administrative functions, deferring maintenance and spending down reserves. 

But these strategies will only increase our costs in the long term. 

What Has Happened to Our Plan 

As part of our remuneration, UJC and its partner agencies provide a modest defined benefit pension plan, which until recently provided pensions of approximately 

one percent of final average pay times years of service. Before the Pension Protection Act of 2006 (the ‘‘PPA’’) become effective in 2008, our pension plan had been 

fully funded for many years, thanks in large part to careful stewardship and consistently above-average returns on investments. Although we continued to reserve cash 

for contingencies, we were not required to contribute to the plan because the plan 

was fully funded as defined by law. 

Suddenly in 2008, due largely to the changes required by the PPA, our plan went 

from being 108% funded, with no required annual contribution, to being 97% funded 

and requiring a $1.3 million employer contribution, which represents an increase of 

four percent (4%) in payroll costs. This additional cost directly hurt our ability to 

deliver services, which was equivalent to losing approximately 20–25 employees. Vacant employee positions were left unfilled and our employees—already stretched too 

far—were stretched to the limit. Budget cuts were inevitable, and more will be needed without pension relief legislation. 

For the fiscal year beginning July 1, 2009, the UJC was forced to reduce its support of local and overseas charitable organizations by 19%, because of the decline 

of our fundraising campaign in the face of the financial market meltdown. In addition to reductions in our external philanthropic support, our organization trimmed 

its own internal operating budget by approximately 11%, including reductions in 

force, involuntary furloughs for employees, and salary reductions for management 

staff. 

In 2009, due to the market crash and the oppressive burdens of the PPA, the costs 

of our plan put our organizations in greater financial peril. For the 2008–2009 plan 


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year, our plan assets declined 30% or $10 million, from $37.6 million to $25.7, and 

our plan’s funding percentage further declined to 80%, which would have resulted 

in annual contributions increasing 266% to $3.2 million, a $2 million increase. 

In the face of the dramatic cuts in budget and staff, the organization could not 

tolerate the higher pension funding requirements. The PPA left us and our agency 

partners no choice but to freeze the plan for the vast majority of the covered employees, as of July 1, 2009. 

Even with the plan freeze, we have been forced to require substantial furloughs 

of employees, which, in turn, has reduced services (some of which are described 

above), made life that much harder for those we serve and our employees, and, last 

but not least, made it substantially harder for employees who have dedicated their 

lives to serving the community to have secure retirements. 

Where Do We Go From Here 

Unlike many companies that have frozen their pension plans with no prospect or 

intent to ‘‘unfreeze’’ them, we continue to hope that Congress will provide us with 

legislative relief that will allow us to unfreeze our pension plan. We recognize our 

responsibility to fully fund our plan—indeed, we have done so for many years. However, it will take time to recover the $13 million of plan assets lost over the past 

two years, which will restore our plan to full funding. 

If Congress were to pass legislation giving us more time to amortize our 2008 investment losses and our unfunded liabilities, and give us more leeway to smooth assets to absorb the short-term upheavals in the markets, we would like to unfreeze 

our plan, and possibly consider restoring some, if not all, of the benefits that have 

been lost during the freeze. 

Our actuaries have considered the potential impact of Congressman Pomeroy’s 

proposal on our plan. If both asset smoothing (i.e., widening the permitted deviation 

between the actuarial value and market value of assets from 10% to 20% of market 

value) and permitting 9-year amortization of 2008 losses, with interest-only payments in the first two years were enacted, it would provide much needed relief to 

our organizations and would help us overcome the difficult combination of drastic 

changes in the law and crippling losses in the markets. Any diminution of Congressman Pomeroy’s proposal for pension funding relief will seriously impair our ability 

to deliver critical services. 

Please contact Howard Rabner, our Chief Operating Officer/Chief Financial Officer, if you have further questions regarding our situation. 

Thank you your help on behalf of the UJC, its partner agencies, and the more 

than 1.4 million people in our central New Jersey service area. 

Sincerely, 

Max L. Kleinman 

f 

Chief Executive Officer 

Statement of YRC WORLDWIDE, INC. 

YRC Worldwide, Inc. is one of the nation’s largest trucking companies. We employ 

approximately 45,000 men and women in the United States, the majority of whom 

are members of the International Brotherhood of Teamsters. We provide good middle class jobs with strong wages, health care, and a pension. YRCW has approximately 700,000 customers, including the Department of Defense and FEMA. In 

2008, YRCW generated $22.1 billion in total output, employment for 141,158 workers, and $2.8 billion in total tax revenues for federal, state, and local governments. 

The Company transported goods valued at approximately $202 billion or 1.4 percent 

of GDP. In addition, YRCW contributed approximately $540 million to 36 multiemployer pension plans to provide pension benefits to more than 1.2 million active and 

retired Teamster members. 

In the hearing notice, the Chairman pointed out that many companies that sponsor defined benefit plans ‘‘may find themselves simultaneously struggling to navigate an economy during a severe downturn with decreased cash flow and less access 

to credit while having to make up for significant losses incurred in the pension 

trusts that fund their workers’ pension benefits.’’ For companies that are part of the 

trucking and grocery industries, the problems are even more acute. 

Prior to the start of the recession, the Company had delivered record earnings and 

operating margins. Since the freight recession began in the second half of 2006, 

however, the Company has gone from producing strong earnings to significant 

losses. In this exceptionally difficult business environment, YRCW now faces three 


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inter-related problems in meeting its pension obligations: The Company funds the 

benefits of, and effectively acts an insurer or guarantor for, hundreds of thousands 

of workers who never have worked for YRCW (‘‘non-sponsored retirees’’); the multiemployer plans to which we have been contributing have suffered significant investment losses; and we face a worsening demographic challenge as fewer workers support the pension obligations of more and more retirees. Given our significant pension obligations, the downturn in business volume in the current economic environment has had especially adverse consequences for the Company. In short, our contribution burden has now grown to an unsustainable level as our business continues 

to suffer from the global economic meltdown. 

Working with the Teamsters, we are doing what we can through self-help measures to address the challenges we face. Since the beginning of the year, for example, 

our union and non-union employees have agreed to a 15% reduction in wages. Management has done so as well. In addition, YRCW has taken other steps to improve 

the company’s cash flow and liquidity, including selling off excess property, consolidating back-office functions, and reducing overhead. In addition, we have temporarily terminated our participation in our largest plans for 18 months in order to 

preserve our cash flow. At the same time, the multiemployer plans to which the 

Company has contributed also have taken self-help measures to address the solvency challenges they face. 

But unless Congress provides legislative relief this year, many of the pension 

plans to which YRCW has been contributing will eventually become insolvent. When 

that occurs, the Pension Benefit Guaranty Corporation (PBGC) will be responsible 

for the pension obligations of the hundreds of thousands of participants in the plans. 

How did we get here? In 1980, Congress enacted two bills that, albeit seemingly 

unrelated, have together over time created unsustainable pension plan obligations 

for YRCW and other successful freight carriers. The Motor Carrier Act deregulated 

the trucking industry, while the Multiemployer Pension Plan Amendments Act 

(MPPAA) imposed an exit penalty on companies upon their withdrawal from multiemployer pension plans, including companies in the trucking industry. As a result 

of MPPAA, a company that withdraws from a multiemployer plan must pay its fair 

share of liability to fund the plan’s unfunded vested benefits. 

Although seemingly similar, ‘‘termination’’ liability and ‘‘withdrawal’’ liability are 

fundamentally different legal concepts, and have had fundamentally different impacts in the real world. Prior to the enactment of MPPAA, if a multiemployer plan 

had a declining base of contributing employers, the remaining employers were required to absorb a greater share of the funding costs of benefits for non-sponsored 

participants, i.e., plan participants previously employed by former contributing employers. Similarly, if a multiemployer plan terminated because of a substantial decline in its contribution base, only the companies remaining in the plan at the time 

of termination were required to pay termination liability to the PBGC. This often 

resulted in a race to the exits by companies wishing to avoid termination liability 

upon the plan’s termination. 

By substituting ‘‘withdrawal liability’’ for ‘‘termination liability’’ in MPPAA, Congress sought to provide some measure of protection for companies remaining in multiemployer plans. The rationale for the change was that, if a company had to pay 

a fee upon withdrawal, remaining employers would be less exposed and less inclined 

to race to exit the plan. But the legislation had a perverse effect instead: by imposing an exit penalty upon withdrawing companies, MPPAA acted as a deterrent to 

new companies entering into multiemployer agreements. The impact was particularly dramatic in a contracting industry such as the freight carrier industry. 

As a result of the interplay of the two statutes, of the thousands of carriers in 

business in 1979, only a few are left to principally fund multiemployer pension plans 

today. This has created a crippling financial obligation that could lead to massive 

job losses and health care and pension benefits losses for hundreds of thousands of 

active and retired workers. To put the impact of the legislation in perspective, we 

have appended to our statement a list of the top 50 LTL carriers that were in business in 1979 and the handful left in business today, two of which are now part of 

YRCW and two of which have dropped out of the top 50. 

In short, as an unintended consequence of the 1980 legislation, YRCW now supports hundreds of thousands of workers who never worked for YRCW. In fact, we 

have contributed more than $3 billion towards their benefits. Employer bankruptcies and recent investment losses are crippling the multiemployer plans to 

which YRCW has been contributing. As a result, YRCW’s contribution burden has 

become unsustainable and many pension funds are headed for insolvency. 

Many plans have been forced to implement both benefit reductions and contribution increases as a result of the collapse in equities and the requirements of the 

Pension Protection Act. Many plans are ‘‘mature’’ plans in which retirees receiving 


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benefits heavily outnumber participating active employees and where contributions 

already fall well short of paying benefits, requiring significant investment earnings 

each year to maintain their funding level. By themselves, these circumstances likely 

will require every multiemployer plan to make some kind of draconian adjustment 

for 2009 and beyond. Plans that are fully funded or nearly fully funded will likely 

be required to reduce the level of benefits they provide. Plans that are operating 

under an amortization extension, funding improvement plan or rehabilitation plan 

likely will be required to further reduce benefits or increase contributions or both 

for 2009 and beyond. 

The failure of a major employer, such as YRCW, will exacerbate these problems. 

When a contributing employer fails, the plan loses the contributions attributable to 

the employer both for the current year and for the purposes of its actuarial calculations. Only a small percentage of withdrawal liability—the amount the defunct contributors owe for prior year benefits—is ever recovered in bankruptcy. The plan suffers an immediate reduction in actives and often a substantial and immediate increase in retirees, increasing its annual benefit payments and making it more dependent on investment income. Required adjustments become correspondingly greater. Contributions will need to be higher. Cuts will need to be deeper. 

In a multiemployer plan, when one employer fails, the benefit obligations are 

shifted to the surviving employers, who must bear the burden not only for current 

participants but also for the new non-sponsored retirees. For members of the Teamsters, the remaining employers include not just industrial employers but also participating local unions and affiliated health and welfare and pension plans. At a 

minimum, these remaining employers will bear the added burden of the vested benefits of the failed employer’s employees. Depending on required adjustments, their 

employees may suffer reduced future accruals, and the employers will likely be required to pay even higher contributions. If the failure creates an immediate funding 

deficiency, the remaining employers, even if they have an existing collective bargaining agreement, will likely be required to pay an excise tax on top of the increased contributions. 

Higher contributions and reduced benefits may prompt other employers to leave 

the plan, further reducing the number of active members and the contribution base, 

increasing the number of retirees and terminated vested members, and making the 

plan even more dependent on future investment returns and more unstable. In some 

situations, higher contributions will likely force remaining employers into bankruptcy, resulting in even more lost jobs. In the worst case, the failure of the primary 

plan will have a domino effect, leading to the failure of other plans in which these 

employers contribute and even more job losses. 

Having made roughly $3 billion in contributions to fund the pension benefits of 

retirees not affiliated with YRCW, the Company can no longer afford to continue 

to serve in its role as an involuntary surrogate for the PBGC. Self-help measures 

will not be enough. For the sake of our Teamster employees and retirees, we need 

help from the Congress this year to address the challenges facing the company and 

the multiemployer plans to which we have long provided support. 

Proposed Legislative Solution 

We very much appreciate the efforts by Representative Pomeroy and other Members to address the challenges faced by multiemployer plans and companies such as 

YRCW. In drafting legislation this year, we urge the Ways and Means Committee 

to— 

• Update the ‘‘partitioning rules’’ of current law so that the PBGC would assume the pension obligations for non-sponsored retirees while the plans continue to support the participants of current employers; 

• Provide a ‘‘fresh start’’ for multiemployer pension plans suffering from recent 

investment losses; and 

• Provide tax relief to offset the financial burden that employers like YRCW 

have borne by acting as a surrogate PBGC in funding the pension obligations 

of non-sponsored retirees. 

Thank you for your consideration. 

Æ 


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