```

[Senate Hearing 112-931]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 112-931

    ROUNDTABLE DISCUSSION: PENSION MODERNIZATION FOR A 21ST CENTURY 
                               WORKFORCE

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

                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                                   ON

      EXAMINING PENSION MODERNIZATION FOR A 21ST CENTURY WORKFORCE

                               __________

                           SEPTEMBER 20, 2012

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions

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                          Washington, DC 20402-0001      

          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                       TOM HARKIN, Iowa, Chairman

BARBARA A. MIKULSKI, Maryland        MICHAEL B. ENZI, Wyoming
JEFF BINGAMAN, New Mexico            LAMAR ALEXANDER, Tennessee
PATTY MURRAY, Washington             RICHARD BURR, North Carolina
BERNARD SANDERS (I), Vermont         JOHNNY ISAKSON, Georgia
ROBERT P. CASEY, JR., Pennsylvania   RAND PAUL, Kentucky
KAY R. HAGAN, North Carolina         ORRIN G. HATCH, Utah
JEFF MERKLEY, Oregon                 JOHN McCAIN, Arizona
AL FRANKEN, Minnesota                PAT ROBERTS, Kansas
MICHAEL F. BENNET, Colorado          LISA MURKOWSKI, Alaska
SHELDON WHITEHOUSE, Rhode Island     MARK KIRK, Illinois
RICHARD BLUMENTHAL, Connecticut      

             Pamela J. Smith, Staff Director, Chief Counsel
                 Lauren McFerran, Deputy Staff Director
              Frank Macchiarola, Republican Staff Director

                                  (ii)

  

                            C O N T E N T S

                               __________

                               STATEMENTS

                      THURSDAY, SEPTEMBER 20, 2012

                                                                   Page

                           Committee Members

Harkin, Hon. Tom, Chairman, Committee on Health, Education, 
  Labor, and Pensions, opening statement.........................     1
Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming, 
  opening statement..............................................     2
Franken, Hon. Al, a U.S. Senator from the State of Minnesota.....    12
Blumenthal, Hon. Richard, a U.S. Senator from the State of 
  Connecticut....................................................    12

                               Witnesses

Madland, David, Director of the American Worker Project, Center 
  for American Progress, Washington, DC..........................     5
Biggs, Andrew G., Ph.D., Resident Scholar, American Enterprise 
  Institute, Washington, DC......................................     6
Adler, John, Retirement Security Campaign Director, SEIU, New 
  York, NY.......................................................     7
Friedman, Karen, Retirement USA, Washington, DC..................     9
Hudson, Richard, Consulting Actuary, Cheiron, Washington, DC.....    10
Breen-Held, Susan L., Consulting Actuary, Principal Financial, 
  Des Moines, IA.................................................    13
Wong, Aliya, Executive Director of Retirement Policy, U.S. 
  Chamber of Commerce, Washington, DC............................    14
Davis, Jim, Owner, Iowa Title and Realty, Charles City, IA.......    15

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    .............................................................
    Response to questions of the HELP Committee by:
        David Madland............................................    41
        Andrew G. Biggs, Ph.D....................................    44
        John Adler...............................................    46
        Karen Friedman...........................................    47
        Richard Hudson...........................................    50
        Susan L. Breen-Held......................................    52
        Aliya Wong...............................................    63
        Jim Davis................................................    68

                                 (iii)

  

 
    ROUNDTABLE DISCUSSION: PENSION MODERNIZATION FOR A 21ST CENTURY 
                               WORKFORCE

                              ----------                              

                      THURSDAY, SEPTEMBER 20, 2012

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10 a.m., in room 
SD-430, Dirksen Senate Office Building, Hon. Tom Harkin, 
chairman of the committee, presiding.
    Present: Senators Harkin, Enzi, Franken, and Blumenthal.

                  Opening Statement of Senator Harkin

    The Chairman. The Senate Committee on Health, Education, 
Labor, and Pensions will come to order. I want to welcome 
everyone to this extraordinary roundtable we're holding today. 
We've brought together a number of very experienced and 
thoughtful participants to talk about an issue that is 
critically important for America, and that's rebuilding the 
pension system.
    I've said often in the past I think it's one of the most 
underreported crises facing us as a Nation. But it is a crisis 
confronting us, and I think we in the Congress are going to 
have to address it very shortly. Defined benefit pension plans 
are one of the simplest, most cost-effective ways for middle-
class Americans to earn a dependable source of retirement 
income. They're very effective at keeping older Americans out 
of poverty.
    Pensions boost savings rates and reinvest in the economy. I 
want to just add about reinvesting in the economy that when we 
start looking at this, we find that pension plans play a very 
important role in two areas of our economy. One is in terms of 
small startup companies that are seeking to expand. If you look 
at the companies like Apple or Google or any of those companies 
that have expanded and are employing thousands of Americans, a 
lot of their early investments came from pension funds.
    The second part is infrastructure. Pension funds buy a lot 
of municipal bonds, and those are used for sewer and water 
systems, streets, bridges, roads, and buildings. Pension funds 
invest in buildings, office buildings, things like that that 
are long-term infrastructure items in our country. So pension 
funds do play an instrumental role in those two areas and in 
creating jobs.
    The problem is that defined benefit pensions are 
disappearing. Only about one in five today have a pension. 
Thirty years ago, that was one out of every two. This has had a 
profoundly negative impact on retirement security. Again, it's 
made worse by the fact that the middle class is being squeezed 
between stagnant wages and rising costs. It's getting tougher 
and tougher for people to prepare for retirement, and that is 
the crisis.
    I'm told that the retirement income deficit, the difference 
between what people need for retirement in the future and what 
we actually have, is about $6.6 trillion. Half of Americans 
have less than $10,000 in savings. So on that supposedly three-
legged stool of retirement--social security, pensions, 
savings--about all some people have left is social security, 
and that's just not enough.
    I was in Iowa recently and met a woman by the name of 
Linda. I won't give her last name. She was a home healthcare 
worker. She has worked hard all her life and played by the 
rules. She got sick. That wiped out whatever little savings she 
had. Now, she's in retirement, and she's struggling to make 
ends meet. All she has is social security. She never had an 
opportunity to earn a pension. And that's just simply not 
enough for her.
    I've met a lot of people like this in hearings across my 
State that I've had on this retirement system. We've had 2 
years of hearings and discussions and investigations by this 
committee into this. I recently released a report called ``The 
Retirement Crisis and a Plan to Solve It.'' The basic idea is 
to provide universal access to a new type of privately run 
pensions. I'm calling it the Universal Secure and Adaptable 
Retirement Funds, USA Retirement Funds for short.
    As I have proffered it, it is sort of like a hybrid between 
defined benefits and 401(k)s. People would make contributions, 
but their money would be professionally managed by fiduciaries. 
Then when they retire, they get an annuity check every month as 
long as they live. It would also be portable. There would be no 
responsibility by employers to prefund anything. All they would 
have to do is just cut a check like they do for withholding 
right now for social security. So employers would have no 
fiduciary responsibility whatsoever.
    The idea, again, is to get a discussion going as to how we 
can build a system. Defined benefits have gone down for a lot 
of reasons. So what can we fill in there? What can we do to get 
people to begin to do more to put money away for retirement?
    That's why we have this roundtable here today. We have a 
lot of experts, people in the field that know what they're 
doing. How should we be looking at this? Any thoughts and 
suggestions that you have for how we proceed on this? That's 
what we're here for.
    With that, I'll turn to Senator Enzi for an opening 
statement.

                   Opening Statement of Senator Enzi

    Senator Enzi. Thank you, Mr. Chairman. I appreciate you 
holding this roundtable discussion today. I like that format. 
When it comes to retirement, I always warn people that looking 
at the statistics that come through our committee, most of the 
people who die are retired.
    The Chairman. Wait a minute. Let me think about that.
    Senator Enzi. Now, that's the usual----
    The Chairman. I can't get my head around that.
    [Laughter.]
    Senator Enzi. That's the usual reaction that I get to that. 
But I've watched people as they have wiped out dreams and wound 
up with nothing to do, and then they die. So what we want is 
for them to have a retirement so that they can keep doing 
things, the things that they put off doing, the things they 
want to do, the dreams they've had, the different things they 
want to do. We need to stimulate them to do that as well.
    Over the last couple of years, we've held several 
retirement hearings looking at all aspects of the retirement 
system, from the auto enrollment features contained in the 
Pension Protection Act of 2006 to why the traditional defined 
benefit system has been in a state of decline. Recently, you 
released a white paper looking at ways to bring back the 
traditional pension for workers and their families. The white 
paper should make for a good topic of conversation, and I look 
forward to hearing our roundtable participants discuss the 
paper. I appreciate the testimony that's been submitted 
already, with a lot of good ideas in there, and we'll try to 
make use of those, too, as we look for other ways to help and 
improve retirement savings in our country.
    Through the years, I've been a supporter of the traditional 
defined benefit plan system, as it forms one of the key legs of 
our three-legged stool that the chairman mentioned--the social 
security, the defined benefit, and then other savings, 
particularly 401(k)'s and IRAs. I also recognize that some 
people do not save enough through their 401(k)'s and IRAs for 
retirement, and these people will place a greater strain on 
very shaky Federal entitlement programs.
    As a former small business owner, I appreciate the carrot 
rather than the stick approach for getting small business 
owners to participate. Mandatory participation in a 
contribution on behalf of employees by small business owners is 
troublesome, especially for those businesses that have low-
profit margins and are already overburdened by the day-to-day 
obligations of running a business. If you ask a small business 
owner about making required contributions to a retirement plan, 
every small business owner will tell you they already make 
mandatory retirement contributions on behalf of their employees 
to the social security system.
    There is little doubt about the power of retirement dollars 
in our economy. Recently reported statistics show that there 
are more than $18 trillion of U.S. retirement assets invested 
in our economy. Currently, the greatest share of that comes 
from 401(k) and individual retirement accounts. The share from 
the traditional payment system is growing smaller each year. 
However, we still have room for improvement, and we will have 
to cover the problem of people moving from job to job and being 
able to move their retirement as well and be sure there aren't 
complications in that.
    Mr. Chairman, I thank you for holding this hearing. I'm 
looking forward to hearing from our witnesses today on what can 
or should be done to help encourage greater participation by 
the private sector in our retirement system and whether 
alternatives for the traditional defined benefit system can be 
found.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Enzi.
    As I mentioned, this roundtable is going to be a little bit 
different from the typical Senate hearing. We're reviving a 
format that Senator Enzi pioneered during the time that he was 
chair of this committee. Usually, we have a big square table 
and we sit around it. But we couldn't get a bigger room today. 
And because I knew we'd have a lot of people here who would be 
interested in this issue, if we put that out there, we wouldn't 
have room for people to come in and listen. So we had to do it 
in this way.
    But the format will be the same. Basically, we're just 
going to ask a question, and then we're going to start getting 
involved in a dialog, rather than questions and answers, that 
kind of thing. I request that responses be a couple of minutes 
or less and no long speeches. We just gave our long speeches.
    But I'll just briefly introduce everyone who is here. 
First, we have Jim Davis, who is owner of Iowa Title in Charles 
City, IA. Mr. Davis appeared at one of the hearings I had in 
Iowa on this issue and was very eloquent in talking about the 
problems that a small main street business person has in terms 
of having pensions.
    Next we have Aliya Wong from the Chamber of Commerce, the 
Executive Director of Retirement Policy, involved in pension 
policy for years. She led the Chamber's legislative efforts 
during the pension reform in 2006.
    Susan Breen-Held is a consulting actuary at Principal 
Financial in Des Moines. She has helped small and medium-sized 
employers establish and maintain pensions for a long time.
    Richard Hudson is a consulting actuary at Cheiron. He has 
worked to develop some incredibly innovative plan designs that 
make it easier for employers to offer pensions. I'm told that 
he has even helped some employers start new pensions recently. 
Well, that would be interesting to know.
    Karen Friedman, executive vice president at the Pension 
Rights Center, heads up the Retirement USA Coalition. We have 
worked together on issues in the past on retirement. It's good 
to have you here.
    John Adler is the Retirement Security Campaign director at 
SEIU. He works with the Service Employees International Union 
locals and State councils to address threats to the retirement 
security of its members and advocate for solutions to the 
retirement security crisis.
    Andrew Biggs is the resident scholar at the American 
Enterprise Institute, where he works on issues related to 
retirement security. Prior to joining AEI, he was the principal 
deputy commissioner of the Social Security Administration.
    Finally, we have David Madland, director of the American 
Worker Project at the Center for American Progress, who has 
written extensively about retirement policy and I'm told did 
his dissertation on pension issues.
    I thank you all for being here today. What I would like to 
do is to propose a first question and then start to get into 
it. Then maybe Senator Enzi would have the second question that 
we might propose, if that's the way we'll go on it. And then 
we'll just sort of see how this flows. Like I say, there's not 
a strict format on this.
    Senator Enzi. We might mention that while we have all of 
the jurisdiction on private pension funds, the Finance 
Committee has jurisdiction on social security. So we won't be 
debating that. We're trying to find out what to do in the 
private sector.
    The Chairman. Good point. We don't have jurisdiction. 
You're right. That's a good point. So we want to talk about 
private pensions rather than social security.
    I'll start off by saying this. Defined benefit pension 
plans have provided a secure retirement for millions. But it is 
clear that the traditional pension system is in decline, that 
existing defined benefit pension models may not be well-suited 
for some of our 21st century workforces. So, a broad question, 
what should our pension system look like to meet the challenges 
of the global economy and the need to provide retirement 
security for working Americans?
    I'll start here with Mr. Madland. And then what I'd like to 
do is if you'd like to respond and get involved in that, take 
that name tag of yours and just hold it up or just turn it on 
end. Just put it on end, and that way--well, I guess everybody, 
then. OK.
    [Laughter.]
    Let's just do this. We'll just go down the line. What 
should a pension system look like to meet these challenges, the 
global challenges we have and the changing workforce structure 
here in America? I think we all agree we need something. What 
is it?

  STATEMENT OF DAVID MADLAND, DIRECTOR OF THE AMERICAN WORKER 
               PROJECT, CENTER FOR AMERICAN PRO-
                     GRESS, WASHINGTON, DC

    Mr. Madland. Thank you very much for having me, Senators. I 
think the pension system of the future should ensure that all 
workers have a cost-effective and secure way to save for 
retirement so that they can retire with dignity. But in 
designing the private side plan to facilitate this, I think 
there's a couple of big things to keep in mind.
    The idea is that all retirement plans involve tradeoffs 
between cost, risk, and adequacy, and choices about who bears 
those costs and risks, employer, employee, or taxpayers. 
There's just no getting around these basic facts that 
retirement planning is about these kinds of tradeoffs.
    What is also really important to understand is that there 
are better ways of managing these tradeoffs, especially than 
the current 401(k) system. Andrew Biggs and I were talking 
about it a little bit before. It's bad right now, but it's a 
good situation to be in, because there are ways to improve 
people's outcomes without making other people worse off.
    First, just to briefly explain what I mean by the 401(k) 
system not being good at managing these tradeoffs, for 
employers, it's pretty good at managing costs and risks. It's 
contained. But for the employee, there are lots of costs and 
risks involved--that the performance of their investments won't 
do well, that they're trying to retire at a time when the stock 
market tanks, or so on, or high fees, ET cetera. So, we know 
all the facts.
    But the typical near retiree who has a 401(k) has a balance 
that would give them an annuity of about $575 a month, not that 
much, not sufficient to maintain their standard of living. We 
also know that about half don't even have a plan at work. So I 
think the future plan needs to be much better than the 401(k) 
at managing these tradeoffs.
    The Chairman. Excuse me. I want to get that clear. The 
average 401(k) at retirement right now is providing $575 a 
month.
    Mr. Madland. That includes their IRA assets as well, 
because those are probably accumulated in the 401(k). But, yes, 
a near retiree, if you add all their private retirement assets 
together, that would purchase an annuity of about $575. So 
these tradeoffs that I was talking about can be managed a lot 
better. I think, Senator Harkin, your plan does a very good job 
of managing these tradeoffs.
    For employers, it's a defined contribution plan. But for 
employees, it looks more like a defined benefit plan, and 
that's, in fact, very similar to a plan the Center for American 
Progress is releasing today called The Collective Defined 
Contribution Plan. The key thing I want to emphasize--and I'll 
be happy to talk more about this in future answers--is that 
these plans significantly reduce risk for workers and 
significantly reduce the cost of saving for retirement. They 
are so much more efficient and so much less risky for workers, 
while maintaining the same sort of structure as a 401(k) for 
employers, that I think there are tremendous advantages to be 
had in moving
    The Chairman. Very good.
    Mr. Biggs.

STATEMENT OF ANDREW G. BIGGS, Ph.D., RESIDENT SCHOLAR, AMERICAN 
              ENTERPRISE INSTITUTE, WASHINGTON, DC

    Mr. Biggs. Thank you very much for the opportunity to speak 
this morning. I think I'll make five quick points, which 
certainly aren't exhaustive in terms of what we'd like a 
pension system to look like, but I'll hit on points that I 
think are important.
    The first one is simplicity, both on the employer's side 
and the employee's side. When a pension is excessively complex, 
that reduces participation by the employees. It makes it more 
difficult for them to plan ahead and decide how much they need 
to save, when they're going to retire, and so on. It also makes 
it more difficult for businesses, in particular, small 
businesses, to take on the fixed cost of offering a pension. So 
I think plan design simplicity really does make sense.
    The point is broad participation. The big difference people 
focus on between a defined benefit and defined contribution 
pension is who bears the risk. Under a DB plan, it's the 
employer or the plan sponsor. Under a DC plan, it's the 
employee.
    An even bigger or more important distinction is that under 
DB pensions, generally, participation is universal. Under 
defined contribution plans, participation is voluntary. So you 
get a lot of people who simply don't sign up, and that's a real 
problem in terms of pension accumulation. The Pension 
Protection Act has worked toward automatic enrollment, and I 
think that's a really welcome addition. But getting broad 
participation really makes sense.
    A third point is adequate contribution rates. Many people 
will sign up for a defined contribution plan, but then 
contribute only at a low rate. There are plans such as the Save 
More Tomorrow plan which ramp up people's contribution rates 
over time. It's very difficult for people to know how much they 
need to save for retirement, because it's a very, very complex 
calculation. But I think if we can get more people saving more, 
that gives them a little bit more of a buffer, a margin of 
error, in terms of retirement income security.
    Fourth, is it's important to focus on life-long income. 
Defined benefit pensions have an advantage in that they pay 
benefits as an annuity, meaning it lasts as long as you live. 
It is very difficult for individuals to take a lump sum today 
and manage that lump sum over the course of an uncertain 
retirement. There are clearly efficiencies to be had, large 
efficiencies to be had, in annuitization where that mortality 
risk is pooled. So encouraging annuitization, I think, really 
makes sense.
    The final point I make is financial transparency. One of 
the main objections or problems I have with defined benefit 
pensions, both at the private sector level and at the State and 
local level where I do quite a bit of work, is a lack of 
financial transparency. There are a million different variables 
that can be used to alter the cost, the perceived cost, to the 
employer. Thinking about discount rates, thinking about 
mortality assumptions, thinking about wage growth assumptions--
all of these things are difficult to get on top of and are 
incentives for plan sponsors to use those assumptions to lower 
cost to themselves.
    You just have the key problem that people want to promise a 
benefit, but they don't always want to pay for it. Using 
financially transparent measures, meaning measures that are 
comparable with what markets would say, I think is a key issue. 
It's the degree you diverge from the way markets would judge 
the value of things, the cost of risk, and I think there's 
potential danger there.
    The Chairman. Thank you very much. That's very succinct. 
Thank you for those points, Mr. Biggs.
    Now we'll go on down the line.
    Mr. Adler.

STATEMENT OF JOHN ADLER, RETIREMENT SECURITY CAMPAIGN DIRECTOR, 
                       SEIU, NEW YORK, NY

    Mr. Adler. Thank you both for inviting me. It's an honor to 
be here. I'd like to point out the extent to which the three-
legged stool has ceased to exist for most Americans. There's a 
chart, which, hopefully, you have in front of you, that shows 
sources of retiree income by income quartile. You'll see that 
at the top of the chart is the bottom 25 percent, the bottom 
quartile, and 87 percent of their income comes from social 
security. So there's no three-legged stool here.
    What might be more surprising is if you look at the middle 
50 percent income group, 74 percent of their income also comes 
from social security. So you really don't have a three-legged 
stool there, either. It is only for the top 25 percent, the 
bottom pie in the chart, where you see there is a legitimate 
three-legged stool for retirement income for Americans. That is 
what's most disturbing and what we really need to address 
through the proposals we're discussing today.
    The Chairman. Can I ask you a question, Mr. Adler?
    Mr. Adler. Yes.
    The Chairman. I was struck by the ``other''--5, 9, and 21 
percent. What's the other? I understand dividends, rentals, 
things like that. What's the other?
    Mr. Adler. Honestly, I think it may be people----
    The Chairman. People working, maybe?
    Mr. Adler. People working. I actually don't know. The 
source is the U.S. Bureau of Labor Statistics, their current 
population survey. This was 2010 for the period 2007 to 2009. 
If you want, Senator Harkin, I can try to go back and research 
that and see what it is that consists of the other.
    The Chairman. If that's work and other things, then I'm a 
little confused about why the top quartile would have such a 
big other compared to the bottom, because the bottom quartile 
seems to be people who really do have to work when they're in 
retirement. I would think it would be more of a factor there. 
But, anyway, let me know.
    Mr. Adler. Sure. We'll get back to you on that.
    In terms of where we go in the future, what we do to try to 
address the problem of the erosion of the three-legged stool 
for the majority of Americans, we clearly--I mean, I honestly 
agree with most of the points that Andrew Biggs just made. 
We're a sponsor of Retirement USA that Karen Friedman is here 
representing today, so I'm going to let her go into greater 
detail. I just want to make a couple of points before I pass it 
along.
    Clearly, the goal here should be that workers, after a 
lifetime of work, can maintain their standard of living 
throughout retirement through social security combined with a 
life-long annuity stream. That's really what we don't have 
anymore. Because of the shift to 401(k)'s and other forms of 
defined contribution, they just don't provide enough retirement 
income. So we need to figure out how to replace that life-long 
stream of income to supplement social security.
    We believe that it should be the shared responsibility of 
employees, employers, and the government, with each making 
contributions. Obviously, the government already does in the 
form of tax deductions. One of the things that we would like to 
see is that the government take a stronger role in funding 
retirement for lower income workers. Because of the nature of 
the tax code, lower income workers get proportionately very 
little of the tax benefit from retirement accounts that upper 
income workers do. So I think we ought to look at using credits 
to balance that out more.
    The only other point that I want to make before I pass it 
along is that we ought to set minimum standards, we believe, 
that over a lifetime of work will enable workers to have an 
adequate stream of income to maintain their standard of living. 
But we also ought to enable increased contributions up to 
prescribed limits so that either through collective bargaining 
or just in non-union situations, companies and employees can 
contribute more if they want to.
    But we need to make sure that it's not just universal 
access, but there's actual adequacy, which I think is actually 
one of the points that Mr. Biggs made, that the contribution 
rates have to be adequate to fund sufficient lifetime income. 
And I will leave it there.
    Thank you very much.
    The Chairman. Thank you, Mr. Adler.
    Ms. Friedman. What's our pension system going to have to 
look like?

  STATEMENT OF KAREN FRIEDMAN, RETIREMENT USA, WASHINGTON, DC

    Ms. Friedman. Thanks, Senator Harkin and Senator Enzi. 
Thank you so much for inviting me here to this roundtable. 
Maybe we should call this a very long table discussion. I also 
want to just say that on behalf of both the Pension Rights 
Center and Retirement USA, we thank both of you for your strong 
leadership on retirement issues. You guys have both been 
terrific on this.
    I've also had the pleasure of working with just about 
everybody at this table in some shape or form, if not the 
people themselves, their organizations. I think that while 
everybody here may not agree on everything, I think we're all 
here because we're committed to the importance of retirement 
security. I really, again, want to thank you for having this 
discussion today, because I think that by listening to each 
other and looking for common ground rather than places that we 
disagree, we can shape measures that really ensure that 
hardworking Americans can retire with dignity and are able to 
make it, so that they don't die--wither away, as Senator Enzi 
said.
    Before I start to address the big issue of what our pension 
system should look like for the 21st century, I want to make a 
few quick comments on defined benefit plans and kind of 
reemphasize what you said, Senator Harkin. We all believe that 
defined benefit plans are the most efficient means for 
providing retirees with guaranteed income for retirement. And 
as you also pointed out, they're critical to the economy. For 
these reasons, we believe we should do everything possible to 
preserve and encourage defined benefit plans.
    However, recognizing the realities and the fact that 
defined benefit plans are on the decline in the private sector, 
we also have been very involved in trying to develop new and 
creative solutions for the 21st century. That's why the Pension 
Rights Center launched Retirement USA with 27 organizations, 
including the SEIU and the AFL-CIO and others, to advocate for 
a new pension system that in conjunction with social security 
is universal, secure, and adequate.
    What I'm going to share with you today--and John alluded 
to--is that Retirement USA developed 12 principles for a new 
private retirement system. Actually, many of those principles 
are reflected in your report, Senator Harkin. These principles 
combine the best parts of defined benefit plans and 401(k) 
savings plans and other features. So I'm going to quickly go 
through them and summarize what's in my written questions.
    We have three overarching principles that we think should 
underlie the design of a new system. These are universal 
coverage, and that means a new retirement system that 
supplements social security, should include all workers unless 
they're in plans that provide equally secure and adequate 
benefits; security, meaning that workers should be able to 
count on a steady lifetime stream of retirement income to 
supplement social security; and adequacy, that the average 
worker should have sufficient income together with social 
security to maintain a reasonable standard of living in 
retirement.
    Additional principles include shared responsibility, which 
John talked about, and that's contributions by employees and 
employers. We also feel that the government should subsidize 
the contributions of lower income workers. We also think that 
contributions to the system should be pooled and professionally 
managed. There should be pay outs only at retirement and 
lifetime payments. There should be portability and effective 
administration and oversight.
    I also want to say before I move on, Senator Harkin, that 
your USA Retirement Funds proposal meets, I would say, almost 
all of our principles and takes an innovative and realistic 
approach to risk sharing. Your proposal for a new system of 
privately run pension plans with employer contributions 
relieves employers of administrative and fiduciary burdens 
while also providing retirees with a lifetime benefit while 
also--and this is a very unique feature that we think is 
great--you share risks among the participants.
    I think it's also important to point out--and I can talk 
more about this later--that the Pension Rights Center recently 
held a conference called Reimagining Pensions with 
representatives of the business community. We looked at eight 
proposals, and many of them are risk-sharing--other types of 
risk-sharing approaches, including the Cheiron proposal. The 
Pension Rights Center also has our own proposal called 
Retirement Security Funds that we also unveiled at that 
conference. It has a lot of the same common elements of your 
proposal.
    I'm going to end here for now. But, again, I want to thank 
you for holding this discussion today.
    The Chairman. You said there were eight proposals?
    Ms. Friedman. Yes, there were eight proposals, and many of 
them--and there's even more. I mean, there were sort of 25 
proposals that meet all of our principles. But for the 
Reimagining Pensions conference, we had eight different 
proposals, some from business representatives, some from labor 
unions. As I said, Rich did his proposal at the conference. A 
lot of those proposals have the same elements that are in your 
proposal, Senator. So we'd be happy to share that with you.
    The Chairman. Well, I think what we ought to do--I just 
told my staff and I stated to Senator Enzi that we ought to 
take a look at those and put a matrix up and see what's 
identical in all those things and see what the areas of 
agreement are that people are really looking at. I think we 
ought to do that.
    Mr. Hudson.

   STATEMENT OF RICHARD HUDSON, CONSULTING ACTUARY, CHEIRON, 
                         WASHINGTON, DC

    Mr. Hudson. Thank you for inviting us to come down. We do 
appreciate your time and efforts on this important issue. I 
think, as you've already heard and will continue to hear, there 
are several aspects of what we've been doing, what your 
proposal is, and what other people are considering about risk 
mitigation, risk sharing, and how better to look at the 
retirement plans as a whole.
    One of the things we feel is, a lot of companies took a lot 
of risk in their pension plans to create benefits that were, in 
essence, free. In doing that, they never really realized what 
they were getting themselves into until the market downturned 
and they had to post their liabilities, and it just got out of 
control.
    As you've heard and, I think, will continue to hear 
throughout the day, defined benefits plans are the best way to 
provide retirement income for participants. They provide a 
secure retirement income. You know what you're going to get 
every single month until you die. The plans don't pay out too 
much and they don't pay out too little. If you die, the checks 
stop. You don't have to worry about am I going to run out of 
money before I die. So they are the best avenue for providing 
the income to retired participants.
    Insurance companies have been producing annuities for many, 
many years, and they're not running into trouble. The biggest 
difference there is they understand how to manage the risk. 
What we're looking at is trying to figure out how to do the 
same thing in a corporate or multi-employer plan or even a 
public sector plan. The plan designs that we've been looking at 
are hitting very strong chords with all three of those aspects.
    Defined contribution plans that are being favored by 
today's employers are shifting all of the risk onto the 
participants. The biggest issue that we see is that people 
don't understand fully that when they make that risk transfer 
to the participants, not only are they transferring all of the 
financial risk, but they're introducing new forms of risk and 
then passing that on to the participants. And that form of risk 
is longevity or mortality risk.
    In a defined benefit plan, it's pooled amongst thousands of 
people. In a defined contribution plan, you have your own pool 
of assets and you have your own longevity risk. That cannot be 
managed on an individual-by-individual basis. So we're looking 
at ways of assisting people in understanding that and how we 
can manage the financial risk in a defined benefit world but 
still be able to pool the longevity risk in a larger plan.
    Did you have a question?
    Senator Enzi. Yes. You're suggesting that if people die 
early and they've been contributing to this plan, they don't 
get anything out of it?
    Mr. Hudson. What we're looking at is a true traditional 
defined benefit plan. The employer is making contributions to 
the plan on behalf of the participants. Now, if they're 
married, they're guaranteed a joint survivor plan. It's a risk-
protected plan. But you're pooling that mortality risk across 
the entire group. So it's not an employee contribution.
    What we would say is the employee contributions would go 
into a savings plan, and they can take as much or as little 
financial risk as they want in their 401(k) plan or their IRAs 
or what-have-you. But in the defined benefit world, the risk 
should be mitigated, managed, and appropriately dealt with. 
It's a more conservative-based plan. We allow for a variability 
in the benefit. So the benefit can go up or down with 
investment returns, but never below a floor benefit. That's one 
concept.
    Another concept is future benefit accruals would be altered 
to adjust for financial downturns. But in a properly managed 
portfolio with a lot less risk, the portfolios that we've been 
testing out have proven that they can earn 6.25 percent to 
almost 7 percent with very low risk.

                      Statement of Senator Franken

    Senator Franken. May I just ask a question? I'm not sure if 
Senator Enzi's question was totally answered by that answer. I 
have a pension from being in the Writer's Guild. In my plan, if 
I die early, my wife can benefit from my pension, and that 
seems to be a very common way of addressing that. She doesn't 
get the full benefit. There are different ways to do that, and 
you can choose different ways to do that. You can choose to get 
less money per month but protect your spouse for a longer time, 
ET cetera, ET cetera.
    So is that in the design that you're talking about, or is 
that a potential design of what you're talking about?
    The Chairman. You're talking about some kind of a built-in 
survivor's benefit.
    Senator Franken. Yes.
    Mr. Hudson. That's an ERISA requirement. So, yes, it's in 
the plan. You'd never be allowed to design a traditional 
defined benefit plan without that protection in there.
    Senator Franken. OK.
    Senator Enzi. That's a little closer to what I was talking 
about.
    Senator Franken. OK. Thank you.
    Senator Enzi. I'm still interested in getting really young 
people involved in thinking about their retirement. Of course, 
none of them think they're going to die, anyway. But if they 
don't see some way that the money that they put in comes back 
to their survivors or something--not necessarily a wife, 
because a lot of them wouldn't be married yet at that age. How 
do they make sure that they get some benefit out of all the 
money they put in or that's put in on their behalf?
    Senator Franken. I think if you have no survivors, there 
isn't really much benefit you can get after you're dead.
    [Laughter.]
    We're now talking a lot of philosophy, I think.
    [Laughter.]

                    Statement of Senator Blumenthal

    Senator Blumenthal. Mr. Chairman, I'm not sure I can say 
I'm following up on that line of questioning. Is it fairly 
uniform that some form of survivor's benefit is contained in 
these plans and policies? Is that now pretty much the standard 
operating procedure?
    Mr. Hudson. Yes. ERISA requires that if you have a 
traditional defined benefit plan, and it's operating under 
ERISA production, you get your IRS determination letter, it's a 
tax-qualified plan, there must be a joint survivor benefit for 
spousal coverage. So if you're married and you die, your spouse 
has to get some benefits from those years of work. So that's a 
requirement. It's not so much of the plan design as much as 
part of law right now.
    Senator Blumenthal. Does that hold true for offspring?
    Mr. Hudson. No.
    Senator Blumenthal. If there is no surviving spouse?
    The Chairman. No.
    Senator Blumenthal. Would that apply also to same-sex 
couple marriages in States like Connecticut?
    Mr. Hudson. A lot of that would depend on how the plan 
document is governed. There are significant issues now with 
differences between Federal law and State law with marital 
status, because if you're married to a same-sex spouse under 
State law, it's the Federal law in ERISA that provides the 
spouse the right to select benefits and the right for 
protection. Federal law does not recognize a same-sex spouse.
    So if the plan document allows for the same-sex spouse, 
you're going to lose an argument somewhere, because either 
you're giving a right to somebody who doesn't get it under 
Federal law--it's kind of circular, and you run into a lot of 
problems. It would be much better if all the State laws matched 
up with Federal law. But the plan document can be drafted the 
way the plan sponsor intends.
    Senator Blumenthal. So if I can sort of distill your answer 
into one sentence, the answer to the question depends on the 
plan document currently.
    Mr. Hudson. Yes.
    Senator Blumenthal. Whereas for heterosexual couples, ERISA 
would apply.
    Mr. Hudson. Yes.
    Senator Blumenthal. Thank you.
    The Chairman. Thank you very much, Mr. Hudson.
    We'll move on to Ms. Breen-Held.

STATEMENT OF SUSAN L. BREEN-HELD, CONSULTING ACTUARY, PRINCIPAL 
                   FINANCIAL, DES MOINES, IA

    Ms. Breen-Held. Thank you. Thank you for having us to talk 
about this important topic. You asked: What would the pension 
system look like to provide retirement security? While this 
panel has focused primarily on defined benefit, we feel 
strongly that defined benefit and defined contribution are both 
important sources, and that the soundest way to provide good 
retirement benefits, adequate retirement benefits, is not 
through a single plan type but looking at the entire system as 
a whole and strengthening each part of the system.
    Having said that, I do want to say I'm not sure that we 
believe that the system is broken today. I don't think it is. I 
think what you have is a very firm foundation with the laws as 
they're set up now. Is it perfect? No. But I do believe that it 
provides a starting place so that we can look at what's 
working, what's not working, and learn lessons and build on 
those lessons for both the government from the legal side and 
from the plan sponsor's side.
    What are the lessons that we've learned? First, I think, as 
several of the speakers have said, a voluntary employer-
sponsored system, and DB, in particular, is the most efficient 
and the most effective way to deliver retirement benefits. And 
when I say most efficient, what I'm talking about is the most 
retirement benefits out for the contributions put in. It also 
provides that guaranteed monthly income to participants that is 
so critical to them that is inherent in the defined benefit 
system.
    The second lesson: We need to make the system simpler to 
operate. We need to simplify or reduce testing, some of the 
funding rules, some of the other regulations, especially for 
smaller employers, because, frankly, complexity drives the 
costs up. Small businesses need to have an affordable system. 
I'm not talking about cost of benefits. I'm talking about cost 
of administration. Without that, it drives up those costs, but 
without really improving funding or security of benefits for 
the smaller employers.
    The third lesson that we've seen is we need to give 
employers more reason to voluntarily offer that plan. That may 
mean covering more of their incomes within the qualified plan. 
It certainly means continuing the tax incentives for defined 
benefit and defined contribution plans. We've heard very 
clearly that that's a very important component for them.
    And, finally, I think we need to assure that the employees 
understand and value the defined benefit plan and the value of 
having an annuity benefit. I know that the policymakers are 
aware of that. But employees are not always, and so we need to 
make sure that there is an effort made so that participants, 
workers, understand, because appreciation will drive value, and 
that brings something to the business owner as well, when their 
employees appreciate the plan that they provide.
    Senator Enzi. What kind of reasons would you put forth for 
them to voluntarily offer?
    Ms. Breen-Held. Well, more on that in my later comments. 
But I think reasons to put forth--right now, frankly, with many 
sponsors that I work with, the key decisionmakers have very 
little skin in the game. The compensation limits over the years 
have been reduced. When I'm talking about a compensation limit, 
I'm talking about the amount of income that they can recognize 
to base their benefit on.
    If everybody gets 20 percent of their pay, well, the people 
that are making the decisions about the plans only get 20 
percent of a very small portion of their pay covered, not all 
of it. So they don't have as much stake in the plan. Those 
reductions have come over the years, and they've been revenue 
driven. I understand that. But each time that those have been 
dropped, we saw participation in the system drop.
    Senator Enzi. Thank you.
    The Chairman. Thank you, Ms. Breen-Held.
    Ms. Wong.

   STATEMENT OF ALIYA WONG, EXECUTIVE DIRECTOR OF RETIREMENT 
        POLICY, U.S. CHAMBER OF COMMERCE, WASHINGTON, DC

    Ms. Wong. Thank you. And thank you for inviting me to 
participate in this roundtable today. When people think of the 
Chamber, they often think of the big companies and large 
companies. But our membership is made up of over 96 percent of 
small businesses with fewer than 100 employees, and 70 percent 
of those have fewer than 10 employees.
    The Chairman. We're going to hear from that next from Mr. 
Davis.
    Ms. Wong. Our concerns about retirement security obviously 
covers a wide array of employers and their employees. When I 
think of the retirement system of the future of the Chamber, 
there are three words that come to mind: voluntary, flexible, 
and innovative. Obviously, I'm going to followup on the 
comments of Ms. Breen-Held. These may sound familiar, because 
we do consider the current system to be successful, and we 
consider it something that we should build upon and improve.
    While there is widespread agreement that retirement savings 
and programs are important, not every employer is able to offer 
a retirement plan, as Senator Enzi mentioned in his opening 
statement. There are employers that have small profit margins, 
and if you mandate a benefit or increase their administrative 
costs associated with plans, then it makes difficult decisions 
for them in terms of their business, in terms of employment 
decisions, investment decisions, and otherwise expanding their 
businesses.
    We believe flexibility is important. This was shown in 2008 
in the financial crisis. Unfortunately, due to that crisis, a 
lot of companies had to suspend their matching contributions. 
And as we all did--individuals, government, and all--we had to 
tighten our belts. However, the fortunate part of that 
situation is that as the financial situation improved, most of 
those companies did reinstate that match.
    We saw a situation where companies, because of the 
flexibility of the system, were able to take time out when 
their businesses couldn't afford it, but they didn't have to 
terminate the plan. The plan was still in place. Very quickly, 
when the economy started to return, they were able to reinstate 
that match and continue with the program.
    Finally, innovation, as my other colleagues have mentioned, 
has been critical in the system. There has been a number of 
plan designs that have been sparked over the last several 
years. It has been important for employers to make sure that 
they are using plan designs that meet the needs of their 
workforce. Often, employers will have more than one plan design 
to meet those different needs. So we think it's important that 
the policy decisions that we make, or that Congress makes, 
continue to offer that flexibility and innovation so that 
employers are able to continue to implement plans that are 
important to their workforce.
    I will summarize, and, obviously, there will be more detail 
later. But, again, just voluntary, flexible, and innovative.
    Thank you.
    The Chairman. Thank you very much, Ms. Wong.
    And now small businesses, small main street businesses that 
employ few people that really don't have the wherewithal to set 
up DB plans--let's face it. That's the bulk of what we're 
looking at around America.
    Mr. Davis.

 STATEMENT OF JIM DAVIS, OWNER, IOWA TITLE AND REALTY, CHARLES 
                            CITY, IA

    Mr. Davis. Thank you, Senator. I've been in business on 
main street in small town Iowa since 1977. It's what we call 
where the rubber meets the road. The goal of any pension system 
should be to provide for a safe and secure retirement. A 
pension system should be mandatory. If voluntary worked, we 
would not find ourselves in this dire situation.
    It should be professionally managed. Investing for 
retirement requires a very consistent, disciplined effort 
that's applied without emotion. Funds should be allocated over 
a wide variety of investments in order to minimize risk. A 
modern pension system should be predicated on the reality that 
we now live in a global financial system. An employee should 
have 1 year of service at their employment location in order to 
be eligible for a pension. The pension plan should be subject 
to a 5-year vesting schedule.
    Thank you.
    The Chairman. OK. Back up a second, Mr. Davis. Just a 
second here. What did you say on the first year? What was that? 
What did you say about the first year?
    Mr. Davis. Employees should have 1 year of service at their 
present location in order to be eligible to receive a pension.
    Senator Franken. I'm sorry, Mr. Chairman. May I just ask a 
followup to that?
    One year of service to qualify for a pension, but a 5-year 
vesting schedule. Can you clarify that distinction a little 
bit?
    Mr. Davis. Yes. I mean, you wouldn't want somebody who, if 
they came there on day one and then left after 6 months, to be 
eligible for the pension.
    Senator Franken. I understand the 1 year of service. But it 
has a 5-year vesting schedule. In my experience, to be vested, 
that means, you don't qualify for getting your pension until 
you're vested.
    I'm trying to get the distinction between 1 year and 5 
years here. What happens if you work there 2 years?
    Mr. Davis. You would begin to qualify after 1 year, and 
then start to receive the pension. I think part of what I'm 
referring to is the portability and taking it with you. It's 
vested just like any other thing after a 5-year period.
    Senator Enzi. They increase it 20 percent per year of the 
amount that's been contributed on their behalf, as far as being 
able to take it with them if they leave? When you say 5-year 
vesting, is that 20 percent per year of increase?
    Mr. Davis. I guess they'd be able to take the entire amount 
with them that they've earned is, I guess, my thought.
    The Chairman. I'll have to think about that. Let me ask 
this provocative question. If someone comes to work for you, 
and they only stay for 6 months, and then they move on to some 
other employment, why shouldn't they be able to have some 
contribution to a pension plan, no matter where they work, no 
matter how long they work someplace? Why shouldn't they be able 
to contribute?
    Mr. Davis. I guess one of my key goals is to keep long-term 
employees. In order to just avoid turnover, part of my thought 
is if people are just qualifying so easily, that's not a good 
thing for me as a business person.
    The Chairman. Oh, I see. You see this as an employment 
issue and keeping good employees. Oh, well, I never thought 
about that.
    Senator Franken. It provides an incentive to stay there, 
and that's what the vesting usually does, too. I don't mean to 
belabor this, but I still don't understand that if you're there 
for a year and then you're qualified for the pension, but it 
takes you 5 years to be vested, that means you have ownership 
of your own pension. Right?
    Mr. Davis. Guaranteed, I guess, is the word that I 
associate with it, too.
    Senator Franken. OK. So after a year, you start to get 
payments in. But if you don't work there for 5 years, it's not 
guaranteed that you'll get any of the benefits from the 
pension. Is that correct?
    Mr. Davis. Yes.
    Senator Franken. OK. Good.
    The Chairman. Mr. Hudson, did you have a comment on this 
aspect?
    Mr. Hudson. Yes. The 1-year issue--what a lot of employers 
find is there's a lot of financial implications with making 
somebody immediately participate in a plan. If it's a DB plan, 
you have to pay PBGC premiums on all participants. So if the 
employee becomes a participant in the plan on day one, you have 
to start paying PBGC premiums. If you have a 1-year wait, then 
you save a lot of administrative costs, because if the guy is 
going to come in and leave--after 6 months, they leave. So a 
lot of plans do have a 1-year wait clause already embedded in 
them.
    Then they have a 5-year vesting rule, so you don't actually 
have the right to receive any benefit from the plan until after 
5 years. But the company or some individual is making 
contributions on behalf of that plan and accruing benefits, but 
you may not become vested until a 5-year period exists. In the 
idea of a 401(k) plan or the hybrid cash balance plans, that 5-
year vesting is now down to 3 years.
    The Chairman. Yes. I'm sorry.
    Ms. Friedman. I was just going to say pretty much the same 
thing. I mean, I think that under current law--just to give you 
a quick history on this, before ERISA, you could work your 
entire life and never vest. You could work until 65, and then 
if you didn't make it to your retirement age, bye-bye. Then 
ERISA changed it to 10. Congress changed it to 5. And as Rich 
said, right now, under defined benefit plans, it's 5 years. 
Under our principles, the Retirement USA principles, there 
would be immediate vesting as soon as you're in there. And the 
Pension Rights Center has always been trying to lower the 
vesting standards for the very reasons that you're talking 
about.
    The Chairman. Jim, let me ask this. In the retirement 
proposal that I put forward, anyway, we took all the 
administrative burden off of employers. You have no 
administration burden. All you have to do is just cut a check, 
just like you do withholding right now, for your employees. 
Wouldn't that make it easier for you to offer a benefit? I 
mean, you'd have no administrative burden whatsoever.
    Mr. Davis. Absolutely. That comes up in question No. 2, and 
I'll just jump to that and say employers want a system that 
makes it easy to participate in without additional burdensome 
and time-consuming paperwork.
    The Chairman. Mr. Adler.
    Mr. Adler. I was just going to say that I think one of the 
issues that we're sort of exploring here is the tension between 
an employer-based system and a universal system that's 
portable. So with an employer-based system, it makes total 
sense to have a wait and a vesting period to do exactly what 
Mr. Davis was talking about and what Senator Franken mentioned, 
which is incentivizing employees to stay long enough to collect 
the benefit.
    With a universal portable system, the employer is just the 
conduit for money going into this system, along the lines that 
you propose, Senator Harkin. Then the issue of incentives to 
stay with a single employer if all employers are in this 
system, or the rationale for vesting, really evaporates. So I 
just think that's a tension in the plan design as we talk about 
a 21st century pension that we ought to acknowledge.
    The Chairman. Mr. Madland.
    Mr. Madland. Very quickly on that, I think John Adler hit 
that right on the head and that universality becomes 
increasingly important for the future. We just think of job 
tenure decreasing, and the kinds of jobs we are likely to have 
in the future, where it's less likely--yes, some people stay 
with the company for a long time, but it's less likely. 
Figuring out how to have greater universality, I think, is key 
in the future.
    The Chairman. Well, you mentioned the second question I 
wanted to bring up, and that is: What would make it easier and 
attractive for businesses? I'm going to focus especially on 
small businesses. A lot of times, when you think of DB plans, 
yes, they're efficient. I get all that. But for a small 
business like Mr. Davis' and so many all across America, they 
can't do that. They don't have the administrative wherewithal 
to have a defined benefit plan.
    So what would make it easier and attractive for small 
businesses to provide their employees with some kind of a 
traditional pension benefit and would reduce employers' risk 
and plan complexity? Almost all of you have talked about 
reducing complexity and making it simpler. So what would make 
it easier?
    OK. Jump right at it.
    Mr. Davis. Can I start out by issuing a disclaimer?
    The Chairman. Sure.
    Mr. Davis. Unlike these other folks up here on this panel, 
I'm not a particular expert on this topic. But, anyway, I'll 
repeat my first answer here. Employers want a system that makes 
it easy to participate in without additional burdensome and 
time-consuming paperwork. Employers do not want a system that 
is so costly that it makes their business uncompetitive.
    Employers want competent fiduciaries to manage the fund so 
that they are not forced to spend time managing a plan. 
Employers do not want to make allocation decisions for which 
they're not capable. Employers don't want to own any pension 
plan. My view is that employers should expect to provide 3 
percent to 5 percent of an employee's annual salary for a 
pension program. Finally, employers should be able to provide 
additional retirement benefits without costly testing or rules.
    The Chairman. Say that last one again. I was making a note 
here.
    Mr. Davis. Employers should be able to provide additional 
retirement benefits without costly testing or rules.
    The Chairman. In other words, they could voluntarily 
contribute more.
    Mr. Davis. Correct.
    The Chairman. I see. I was trying to write all those down. 
Could you make sure you give those to my staff?
    Mr. Davis. Actually, I submitted those earlier this week to 
Michael.
    The Chairman. OK. Very good. Thank you very, very much. I 
appreciate it.
    Mr. Davis. Yes, sir.
    The Chairman. Thank you very much, Mr. Davis.
    Senator Enzi. On the testing, what you're talking about are 
like the top-heavy tests?
    Mr. Davis. I guess more what I was referring to was 
possibly medical tests or something for qualification. 
Sometimes we have to get--like with life insurance policies or 
something like that.
    The Chairman. Well, again, throwing it open, what's going 
to make it easier for businesses? We have to have them to buy 
into this or nothing will work.
    Ms. Wong, we'll just go down the line.
    Ms. Wong. I will echo Mr. Davis' comments. Obviously, 
decreasing complexity is a huge issue that we hear about. Our 
small business members often tell me that I cannot overstate 
the need for simplification and a reduction in regulatory 
burdens that they see as unnecessary.
    Even as a retirement expert, I often hear from businesses 
about very highly technical issues that I have a hard time 
understanding. So I can only imagine for a small business owner 
who is trying to follow this as well, who is not an expert and 
who is trying to run a business, this is something that becomes 
very daunting, and it's very easy at that point to say that 
they just don't even want to be involved.
    I have some specific comments that I did submit in written 
testimony. But I do want to respond to two things that were 
said. No. 1, is about the need for a universal system. We do 
have a universal system. It's social security. That is 
immediately vested and portable. I don't think there is a 
tension between a universal system and the private system. 
Actually, from our perspective, they're a complement to each 
other. So a lot of employers that do have the private system 
often take into account the social security benefits and how 
that's going to work for their employees when they retire.
    And, No. 2, we appreciate the desire to remove risk from 
employers in terms of managing pension plans. But there is a 
significant number of employers that do want to maintain 
retirement plans, and they do it for workforce reasons. They 
want to remain competitive. They do it to have their employees 
stay with them.
    I go back to this point that there's not one design that's 
going to work for every employer. There are different needs, 
different reasons, and different issues that employers are 
trying to address. We just think it's incredibly important that 
there be different options and flexibility within that.
    There is one or maybe two things I want to mention, 
specifically, when you talk about simplification--streamlining 
notices and disclosures. I've talked with Michael and Craig 
Dean about this many, many times. There are an incredible 
amount of notice and disclosure requirements that plan sponsors 
are required to comply with. In addition to being able to 
streamline and consolidate those--we're not even talking about 
elimination, but there's just so much repetitiveness, but there 
is a way to streamline those issues.
    In addition, if we could find a way to really encourage 
employers to use electronic delivery, we think that would be 
extremely helpful, not just in terms of eliminating 
administrative burdens, but also in terms of getting 
participants' information that they find useful and necessary 
at the time that they need it.
    The other issue I would raise is the Financial Accounting 
Standards Board, FASB. Both Senators have done tremendous jobs 
in the Pension Protection Act and in pension reform since then. 
However, a lot of the work that Congress does is undone by the 
FASB rules. So I would just urge Congress to take a look at 
that and really consider that as we move forward.
    Thank you.
    The Chairman. Ms. Breen-Held.
    Ms. Breen-Held. Thank you. I do want to kind of maybe set 
the groundwork here. Principal is a global company and a very 
large company. Our practice is with small- and medium-size 
employers. So that's the world that I'm going to be talking 
about here.
    The No. 1 thing that we hear from employers right now 
that's a problem for them--that if we could fit it, it would 
make it more attractive--is the volatility of defined benefit 
plans. That happens because when market interest rates change, 
it can cause unexpected changes in the plan's funded status 
under the current rules. Now, as a business owner, that can 
make budgeting difficult or impossible to do. We are dealing 
with that in some ways now through investment strategies, but 
it's early get-going for that.
    Structural forces, also because of the way the funding 
rules work, mean that in bad times, bad economic times, you're 
forcing businesses to put more money in than you make them put 
in in good times. Those rules work with the business cycle. 
When things are bad, the funded status looks bad, and the 
contributions rise. Is that volatility?
    Now, I know that this committee helped quite a bit with the 
transportation bill, which eventually became what we 
affectionately call MAP-21, Moving Ahead for Progress in the 
21st Century. We appreciate that support, but it really didn't 
go far enough. We would urge the committee to consider 
restoring the 10 percent corridor--and I know I'm kind of 
getting into the weeds. But there was a 10 percent corridor 
around the interest rate that you could use that phases out 
over time. I understand that that phase-out removes 
stabilization, removes that protection for businesses, and it 
was taken out for financial reasons.
    But if we had it back, it improves the ability to budget. 
It is a countercyclical measure. In other words, it would 
reduce contributions during bad times and increase required 
contributions that businesses have to make in their good times. 
And, not incidentally, it would also raise tax revenue in the 
short run.
    The second issue, and back to the point I mentioned 
earlier, is we need to give business owners a reason to offer, 
because, frankly, in a voluntary system, it's a business 
decision to offer a plan. For a small business to invest their 
scarce resources--and I'm not talking just money. I'm talking 
time--there has to be a benefit to the business. I think that's 
one of the things that Mr. Davis was talking about.
    Compensation limits allow plans to provide benefits as just 
a minimal part of the total pay of the people who are sitting 
around the table making the decisions about the plan. They have 
very little incentive to maintain that plan and the risk that 
it represents. I see a couple of things that might incent 
owners, operators, to keep these plans or even possibly to 
create them.
    The first one is, as I said, increased compensation limits. 
The second possibility would be either to reduce--or to raise 
or to remove the compensation limits for 5 years when a plan is 
first established, providing that owner an incentive to put the 
plan out there. They could balance that so that the rank-and-
file also receives benefits by either requiring minimum 
benefits of a certain level during that period of time, or, 
back to Senator Franken's question, to provide immediate 
vesting, so that it's a win-win. At the end of the day, we want 
participants to have benefits and that lifetime income. We want 
it to come through this voluntary system.
    The third idea that I want to put forth is, again, echoing 
Mr. Davis and several of our speakers, reducing the 
administrative costs for small businesses. Reducing some 
testing that's done right now from annually to every 3 years, 
similar to what's done in some rules, or for very small plans, 
exempting them completely, could reduce the costs without 
significantly risking benefits or a significant risk to the 
Pension Benefit Guarantee Corporation.
    The Chairman. In a system that I had put out there for 
discussion--and others have talked about similar aspects of 
this--where it's voluntary and there is no administrative 
burden on these small businesses--there's just none.
    Ms. Breen-Held. We have studied your proposal, and I will 
admit there are questions, as we've discussed with your office, 
because it still--concepts are not--the devil is always in the 
details.
    The Chairman. That's why we're having these discussions. 
We're trying to figure that all out.
    [Laughter.]
    Ms. Breen-Held. Are we the devils? No, no, no. I think what 
we're doing--one of the concerns that I see is that it's 
replacing a system that operates within an HR department with 
building another completely new structure.
    The Chairman. But, again, I would proffer that there's no 
structure within the employer. That's what makes it easier on 
small businesses. And as long as they don't have to set up an 
HR department and they don't have to do anything like that, 
then there's no burden on that business.
    Well, anyway, I'll leave it there, and we'll talk about it, 
I guess. I don't know.
    Mr. Hudson.
    Mr. Hudson. I hit the button first this time. I may be 
slow, but I get there eventually.
    A couple of the issues that we're running into in real-life 
situations where we're working with plan sponsors is we're 
taking a lot of the issues that were just presented by my 
compatriot here about what types of risk are in the pension 
plan, how much volatility is there, and how to properly manage 
it. Some of it comes to employers investing 70 percent of the 
plan assets in equities when 70 percent of the participants are 
retired. It doesn't make sense to have that type of a mix.
    So we've come up with some interesting plan design 
alternatives that are premised on risk mitigation and risk 
sharing. But they are very different than what is out there in 
the market today. When we present this to an employer, they 
say, ``Well, how many other employers are doing this?'' we say, 
``Well, you're going to be the lucky No. 1.'' They get scared 
off of it, because they're not sure if they'll get a 
qualification letter from the IRS, and that's huge.
    We've got one plan where we submitted a determination 
letter. It goes through the IRS. Now it's behind in the queue 
with everyone else. If you're setting up a brand new pension 
plan, there should be a way to get some sort of priority in 
taking a look at that plan and making sure that it's going to 
be qualified by the government. That would be a great benefit 
for a lot of the groups that we're talking to.
    The second issue that we run into is you set up a defined 
benefit plan, and you have to pay PBGC premiums. The PBGC 
premiums are escalating at extremely rapid rates, especially 
the flat dollar premium amount. If you set up a pension plan, 
and you've properly addressed the majority of the risks in the 
plan, you're mitigating it, and you're properly managing it, 
there is a very low likelihood that you'll ever go to the PBGC 
and ask for anything, because the plans that we're designing 
are designed to be fully funded at all points in time. Every 
precaution is taken to keep these plans fully funded, so there 
should never be a need to go to the PBGC and get insurance.
    But what actually happens is you freeze an existing plan 
and you startup a new plan, and you are now paying twice the 
PBGC premiums. So you're doing a better job mitigating the 
risks, doing the right thing, and getting penalized for it by 
double paying the PBGC premiums, because you've got a frozen 
benefit in one plan and a new plan benefit accruing in the 
second ongoing plan.
    That is extremely detrimental, and a lot of employers look 
at that and they say, ``Well, this is just crazy. Why would we 
ever want to do this? We'll just go to a DC plan and we don't 
have the PBGC premiums.'' Well, you go to the DC plan and you 
don't have a guaranteed benefit. So it's kind of a big 
difference. And when you get into a DC plan, if you're working 
with a group of participants that are either in a labor-
intensive job or a job where they just can't get to age 65 
retirement, if you have to retire and go out early for a 
disability or just not being capable of working, you're going 
to get almost no annuity benefit out of that DC plan.
    The third item that's hurting a lot of plans right now, 
which I'm sure you may hear from some of the other colleagues 
here, is that multi-employer plans are suffering under 
tremendous orphan liabilities. These are liabilities 
attributable to companies that have gone bankrupt, withdrawn 
from multi-employer plans, but those participants are still 
covered by the plan. The employers that were contributing on 
behalf of those individuals that employ them are now gone in 
some fashion, either bankrupt or just withdrawn from the plan.
    Then there's this issue of taking on too much risk in the 
plan portfolio to take care of those liabilities. The market 
crash has decimated these plans, and now you have a liability 
for what we call an orphaned individual with no employer who's 
ever employed that person, but those existing employers have to 
make up that liability. That's another big avenue of stress on 
a lot of these plans.
    And just as a side note, I'm going to go back to my first 
answer to answer a question that Senator Enzi posed. What would 
drive an employer to want one of these plans if there's a 
chance where they're not going to get any money back out of the 
plan at the end of their career? We talked about what happens 
if you're married and you've got a joint and survivor benefit, 
and those are guaranteed by ERISA. You could set up a 5-year or 
10-year certain in life benefit, where if you die and you're 
not married, your estate would get 5 or 10 years worth of 
payments.
    That could be designed into the plan. And if it's something 
that's really wanted by everybody, it could be mandated by 
ERISA in some fashion. It's certainly something that could be 
taken care of in today's plan designs.
    Senator Enzi. I'd say that I really appreciate your concern 
over the PBGC premiums and what that does on medium and smaller 
companies, because the new higher fees that companies have to 
pay actually cost more than the actuarial statement that those 
people would have to do. So they're actually paying in more 
than what it would take to guarantee the benefit that they're 
offering.
    Most people don't realize that that's really not going into 
the PBGC trust fund. That's actually going to the highway trust 
fund now to build the next 2 years worth of highways over the 
next 10 years worth of PBGC funds, and we all ought to be 
pretty concerned about that.
    Ms. Friedman. Well, I guess I'm next, and I'll talk about 
the small business stuff. Before I get there, I just want to 
respond to one point that Aliya made. And, yes, we have a 
universal social security system, and the Pension Rights Center 
and Retirement USA believe that we have to both preserve and 
strengthen social security. But we have to keep in mind that 
social security right now is only averaging about $14,000 for 
the typical retiree. So we would say that everyone does need a 
pension. That's what this long table roundtable is about today.
    Getting to why would small businesses like Jim--what could 
inspire them to set up plans, and how do we make it easier for 
small businesses? For 7 years, from 2001 to 2007, I coordinated 
something called the Conversation on Coverage, which was a 
common ground dialog, which brought together experts from 
business, unions, retiree groups, and others to discuss ways of 
increasing pensions for low-wage workers. And, particularly, we 
focused on those low-wage workers in small businesses.
    I want to share with you today--and some of the folks here 
actually were part of that common ground dialog. I want to 
share what we learned. Jim said a lot of this, but we heard 
that small businesses would be much more likely to start a plan 
if administrative costs were eliminated or reduced and 
complexities and fiduciary responsibilities were reduced.
    Jim, I want to say that you say, ``Well, I'm not an 
expert.'' You're not supposed to be an expert. Even for those 
of us who do pension stuff every day, it's enough to make 
everybody's head explode. So small businesses should not have 
to be doing that.
    The Conversation on Coverage developed two plans with small 
businesses in mind that I want to bring to your attention 
today. One is called the Model T plan, and it's a simplified 
multiple employer plan with automatic enrollment.
    Senator Enzi, I know that you have a very strong interest 
in new multiple employer arrangements. So I'd be happy to talk 
to you and your staff more about the findings of that 
particular multiple employer plan.
    We also learned that there may be ways of structuring 
defined benefit plans to make them easier to be adopted by 
small businesses. The Conversation on Coverage developed 
something called the Plain Old Pension Plan, or POPP, which 
provides a straightforward career average defined benefit. The 
one part of it that really appeals to employers is that it 
would have predictable employer funding. As Rich pointed out, 
that's one of the biggest concerns employers have in adopting 
defined benefit plans.
    Also, Senator Harkin, the structure you developed for the 
USA Retirement Funds is consistent with addressing many of the 
concerns of small businesses, because your retirement fund 
proposal would be run by financial institutions. It would take 
the burden off of small businesses, and all businesses would 
have to do under your proposal would basically be to provide a 
modest contribution. Then they're free, and then employees 
would be automatically enrolled unless they opt out. So it 
would seem that your type of plan, your proposal, would be 
highly appealing to both small businesses and their employees.
    Now, I wanted to raise one concern as we're talking about 
small businesses and, particularly, new forms of multiple 
employer plans and others, which I learned from both the 
Conversation on Coverage and R-USA. That is that under current 
law, the fiduciary issue is something that we hear over and 
over again from the small business community, that it's a real 
burden. What that means is that employers have the fiduciary 
responsibility of choosing a plan provider and also monitoring 
the investments, which is a lot, like Jim was saying, for a 
small business to do.
    But we just have to keep in mind that relieving employers 
of those responsibilities raises a lot of complex issues and 
also possible conflicts of interest. So the Pension Rights 
Center feels that it's very important if new arrangements 
transfer fiduciary duties on to third parties, there has to be 
effective government regulation, because without really strong 
regulation oversight, there's room for enormous amounts of 
self-dealing and other conflicts of interest. We saw that 
recently with Matthew Hutcheson, who many of you may remember 
as the fiduciary that used to come and testify a lot before 
Congress about 401(k) fees. And it turns out that he was 
indicted as an independent fiduciary for embezzling.
    But I want to end by saying that since small businesses 
represent the fastest growing employment sector in the economy, 
finding creative ways to encourage employers to provide secure 
benefits is of paramount importance. So, again, I encourage the 
discussions that we're having today and applaud you for your 
proposal and applaud you, Senator Enzi, for looking at these 
new multiple employer arrangements.
    The Chairman. Mr. Adler.
    Mr. Adler. Thank you, Senator Harkin.
    The Chairman. Again, to refresh, what we're talking about 
is how to make it easier for employers, especially small 
employers, to have pension systems.
    Mr. Adler. Right. I think one of the keys--and this is part 
of your proposal--is that we're not looking here to replace the 
current system, because the current system does work for the 
one in five that have a defined benefit plan by and large. What 
we want to do is supplement it for those who do not have access 
to an adequate and secure lifetime stream of income. So we want 
to allow for the continuation of the voluntary system, but we 
want to supplement it with a system that then includes 
everybody who is not covered by the current system. Almost half 
of American workers are not covered by an employer-sponsored 
retirement plan today. I believe the current number is 
approximately 46 percent.
    The Chairman. Are covered by a----
    Mr. Adler. Are not covered.
    The Chairman. Not covered.
    Mr. Adler. Do not have access to an employer-sponsored 
retirement plan. That's an awful lot of the American workforce 
that are not covered. That's who we need to address.
    The Chairman. Do they have access to a 401(k)?
    Mr. Adler. No, they do not have access to a 401(k). What 
they could do is create their own IRA, because anybody can do 
that. But they don't have access to a plan at work whereby they 
can put pre-tax contributions, whether or not matched by their 
employer, into a retirement savings plan--46 percent. Again, as 
you pointed out, of the, let's say--I think the 46 percent is 
the right number. Does that sound about right? It's higher? 
What is the right number, David?
    Mr. Madland. I'd have to look at my notes. But it's more 
than half who do not have any sort of retirement plan at work--
more than half.
    Mr. Adler. I understated the problem. It's clearly a 
significant problem. I think the reason we're here today is 
because there is a crisis, and the current system is not 
adequate. And, yes, we do have social security, but, as Karen 
pointed out, the average social security benefit is not enough 
to allow workers to maintain their standard of living and do 
what Senator Enzi talked about, allowing workers to do all the 
things they didn't have time to do during their work lives when 
they retire and live out their retirement.
    I think one of the things that we need to do to enable 
employers and to encourage employers to participate is create 
safe harbors for them. In some ways, I think that's what Karen 
was talking about--a safe harbor whereby if they choose a 
third-party provider who meets government established criteria, 
then they have taken care of their fiduciary responsibility, 
instead of having to do this ongoing monitoring and so on, 
because I think that's a huge burden for small businesses.
    If the Department of Labor could say, ``OK. If you meet 
this checklist of criteria, then you are an acceptable provider 
under ERISA of a retirement plan,'' then the small business is 
off the hook, as long as you pick one of those providers. I 
think under your USA Retirement Funds plan, what would happen 
is that those financial institutions that offer these funds 
would have to meet the criteria that are established by the law 
and implemented, I assume, by the Department of Labor under 
ERISA in order to offer those funds, and then the employer is 
off the hook, just writes the check, and you're set. I think 
that's the kind of thing that small businesses are looking for, 
that safe harbor, so they don't have this ongoing fiduciary 
burden and regulatory burden in order to provide their 
employees with a retirement plan.
    Let me just make a couple of other comments. I agree with 
those who have said that the contributions need to be 
predictable and stable. We've had a terrible time, really since 
the financial crisis in 2008, in convincing new employers to 
participate in the Taft-Hartley multi-employer plans that our 
union sponsors. The reason is that, first of all, contribution 
rates have skyrocketed because of the decline in both interest 
rates and the investment values of the funds. As a result of 
PPA, these plans, most of which had to go into the red zone, 
had to do these rehabilitation plans, and they're just 
extremely costly. So new employers want nothing to do with 
that.
    Then we have the problem with withdrawal liability, which 
is the problem that Mr. Hudson referred to, where you have 
these orphaned employees from employers that have withdrawn 
from the fund, generally, because they went out of business, 
which makes it extremely difficult for new employers. 
Historically, we have been able to get new employers into our 
funds on a regular basis. Since 2008, it's impossible. So for 
the last 4 years, virtually no new employers are coming into 
any of these multi-employer funds.
    The last point I wanted to make is I do have a concern 
about Ms. Breen-Held's proposal that I think she's stated twice 
now about increasing compensation limits. My concern would be 
that if you're talking about increasing contribution limits and 
the amount of tax deductible contributions that you could put 
into a tax-favored retirement savings plan in order to entice 
the executives, which is essentially what you're talking about, 
to create or participate in these plans so they can put more of 
their money in, what you're really talking about is increasing 
the tax subsidy for those wealthier income earners to 
participate in the system.
    The truth is they do not need more tax subsidy, and I don't 
believe that we can afford a greater tax subsidy for upper 
income earners to save for retirement. They're going to save 
for retirement anyway. It's the middle and lower income workers 
who need help saving for retirement, not the upper income 
earners. I would really caution against any system that would 
increase the tax subsidy for those upper income earners.
    Thank you very much.
    The Chairman. Thank you, Mr. Adler.
    Mr. Biggs.
    Mr. Biggs. Thanks. I just have a series of short comments 
on what's come before, which I think hit on some points that I 
personally find interesting or important. First, on pension 
coverage, I don't want to sound Pollyannaish, as if everything 
is OK. But I think the figures that Mr. Adler and Mr. Madland 
used in terms of the percentage of people who are offered 
employer-sponsored pensions--I think those come from the 
current population survey and they're self-reported. Often, 
people are not very good at describing what they're offered at 
work.
    There is research that came out a year or two ago from the 
Social Security Administration where they matched individuals' 
tax records to see if there was in fact, from the tax record, 
an employer-sponsored pension. I think the coverage rates were 
about 10 percentage points higher than that.
    And, second, there's other research that came out from the 
Investment Company Institute, again, several years ago, that 
looked at the people who are not covered by pensions. And by 
and large, these were the people you would expect not to be 
covered. They are people who are either young, and those are 
folks who, in general--economic theory tells you they should 
not be focusing on retirement savings at that point. They 
should be focusing on paying off students loans and things like 
that. But it's also low-income people who can predominately 
expect to get retirement income from social security.
    I'm not saying there aren't issues. But at the same time, 
if we think there's a crisis, often, it spurs action that we 
may later regret.
    Second, Ms. Breen-Held had some comments on the volatility 
or the countercyclical nature of pension funding. I agree with 
her that you don't want a situation where you're forcing 
employers to pay more into pensions when times are bad and less 
when times are good. Ideally, you want to flip it around, and 
when times are flush, then they pay more in.
    At the same time, though, I think--she had some other 
comments in terms of interest rate volatility, thinking about 
how we've dealt with the pension discount rate in the highway 
bill. The key point I want to make here is if you want to fund 
a guaranteed benefit for somebody in the future, it is, in 
fact, more expensive to do it in a low-interest rate 
environment. If I'm promising you a guaranteed benefit 30 years 
from now, the best estimate of the cost of that would be the 
yield on 30-year treasuries.
    Looking back 25 years, in order, in my mind, to 
artificially generate a higher discount rate--in my initial 
statements, I talked about financial transparency using market-
based measures. Going back to the past to dig up interest rates 
when the market gives you a perfectly good discount rate today 
is something I find a little troubling.
    Finally--and this goes back to Senator Enzi's initial 
discussions about how payouts may be handled from defined 
benefit pensions. A point that I made and others made is 
there's enormous efficiencies from annuitization, because they 
offer you a guaranteed benefit that lasts as long as you live. 
That's really helpful in terms of retirement planning. But the 
way that efficiency comes is it offers you a guaranteed benefit 
as long as you live, not beyond where you live.
    Yes, you can offer what's called a period-certain annuity, 
which may offer 10 years of guaranteed payments, and then sort 
of a life annuity thereafter. But in doing that, you're 
unwinding the annuity. You're raising the cost of providing a 
benefit. You're taking away from the efficiencies that the 
annuity provides.
    The ideal way to think about this is if you're concerned 
about leaving money for your heirs, you have essentially two 
pools of money. You have your retirement savings, which are 
fully annuitized, and by fully annuitizing it, you are 
providing a guaranteed income in the cheapest possible way. 
Then you have money you set aside in a separate pool that you 
want to leave for your kids. When we try to combine these 
things, I think it's not necessarily the most efficient way to 
do either of those things.
    So people want to have all of this. But the efficiency of 
the annuity is that once you die, the benefit stops. So by 
using that savings, they can help the people who might live to 
95 or 100 and help keep them out of poverty in older age.
    The Chairman. You know, the more I've gotten into this over 
the last couple of years in looking at this, I really agree 
with what you just said, Mr. Biggs, that we're trying to 
combine two different things here. And to a certain extent, the 
way I see it, when you provide for this kind of an annuity 
through contributions early on, it's almost like an insurance 
plan.
    Mr. Biggs. An annuity is an insurance product. It's not an 
investment product.
    The Chairman. It is an insurance product. I've always said 
it's like when I buy car insurance. I've been buying car 
insurance for most of my life, obviously, and I've never had a 
wreck. Why shouldn't I get my money back? Well, because that's 
the nature of insurance. So I think we have to start thinking 
about it in that context of being an insurance policy rather 
than some kind of a savings account where you put away and then 
you can leave it to whoever you want. It's insuring that no 
matter how long you live, you're going to get some monthly 
stipend--simple.
    Mr. Biggs. If I could make one final point on annuities, 
almost all of us have made some statement of the benefits of a 
life-long income and the efficiencies that come from annuities. 
Economists love annuities. Everybody but economists hates 
annuities. I mean, honestly, people given the chance to 
annuitize won't do it. People in defined benefit plans, if you 
offer them a lump sum payment, they'll take it.
    The Chairman. Of course.
    Mr. Biggs. In the policy arena and the practicality of 
doing things, that's a legitimate problem or a threshold you 
have to meet of how you convince people to accept something, 
which we have very good reason to believe is very good for 
them, but which, for whatever reason, they don't like. I mean, 
the joke about annuities is it takes a person who is a 
millionaire and turns them into somebody with a $50,000 a year 
income. That's sort of the--if you have a large premium, and 
you get a smaller monthly or annual payment, people can't do 
the math. They don't like this stuff.
    That's the thing that I think is from your perspective of 
how you talk to people and convince them in the matter. So 
that's one of the ways that some of the research finds, that 
instead of focusing on ``Well, what if I die young, and I may 
lose out?'', think of it in terms of insurance and saying, 
``Well, when I'm 65, things may look good. When I'm 75 or 85 or 
95, I want to make sure I have that money there.'' So framing 
the question in that sense of protecting you and giving you 
money at the times when you need the money the most may be the 
way of getting around those hurdles.
    Senator Franken. Mr. Chairman.
    The Chairman. Yes.
    Senator Franken. I, unfortunately, have to go. But I was on 
the Special Committee on Aging, and we had a hearing on 
annuities. The thing I was really surprised to hear was that 
most Americans underestimate how long they will live. I always 
felt that people--maybe that's because I've been young most of 
my life until recently.
    [Laughter.]
    But I always thought that most Americans would overestimate 
how long they would live. That's not the case. Most Americans 
underestimate how long they'll live. That speaks, again, to the 
problem of getting people to want to do annuities.
    Mr. Biggs. If you have a married couple--if I were not 
recovering from a cold, I could pull these statistics out of my 
head. But if you've got a married couple, you have a very good 
chance that at least one member of the couple is going to 
survive to age 85--not 85, but 95. People think about their 
life expectancy by the average. But there's going to be people 
who die before the average and people who die well beyond the 
average. There's a lot of people who survive to 90, 95, and 
100. Those are the folks who really have worries, because at 
that age, you can't go back into the workforce again.
    The Chairman. Mr. Madland, unless you had something, Ms. 
Breen-Held wanted to interject something here. Go ahead.
    Ms. Breen-Held. I just wanted to reply while the remarks 
were still fresh to Mr. Adler's comment that we don't want to 
increase the tax subsidy for the highly paid because they'll 
get paid somehow. They'll take care of their retirement. I 
don't disagree with that at all. What my proposal was is to use 
the carrot so that they get paid inside of a qualified plan, 
because the rules are structured right now so that benefits 
that they get have to be balanced by benefits for the rank-and-
file, so that it's actually a protection for those people.
    In terms of what I've observed, when you have a CFO sitting 
there who has a very small stake or no stake at all in a 
defined benefit plan, those are the people who are looking for 
reasons to get rid of it. If that same person has a respectable 
benefit within that qualified plan, they're looking for reasons 
to keep it. And as your question was: How do I make plans more 
attractive to employers?, it seemed to answer the question.
    The Chairman. Thank you very much.
    Mr. Madland.
    Mr. Madland. Thank you. The question, I think, posed is 
sort of: Would reducing risk and complexity encourage more 
employers to provide a pension-like benefit? I think there's no 
doubt that that's true. Employers have been shifting away from 
defined benefit plans for many reasons, including complexity. 
As was previously said, I think the central issue is the 
volatility. The unpredictable nature of payments and the risk 
that employers bear has meant that their company's 
profitability can be determined more by the pension rather than 
by the business. That's not a situation that many employers 
have wanted to be in.
    So shifting away from that risk and complexity has been 
something employers have wanted to do. The central issue, 
though, is they've shifted that risk and complexity onto 
workers and added new risk and complexity onto workers. The 
kinds of proposals that, Senator Harkin, you have proposed and 
the Center for American Progress is proposing are to try to 
minimize the risk and complexity for employers so that they 
have strong incentive and ability to offer plans, while also 
minimizing the risk and complexity for workers.
    Hybrid models can do that very well. I think that also will 
be especially attractive to employers, because what they will 
have is then a similar risk and complexity profile to a 401(k), 
but they will be providing a much better retirement plan to 
their workers. That's attractive, so that they know their 
workers have a good chance of retirement.
    The Chairman. So we've covered the first question, which 
was sort of the broad view of what the plans in the future 
should look like. I asked you what businesses need. I thought 
we had a very good discussion on what businesses need.
    What do workers need? What is it that workers need to--like 
you said, maybe they have to realize that they're actually 
going to die someday. I don't know. What do you do to entice 
workers?
    I'll start with you, Mr. Davis.
    Mr. Davis. Employees want a pension system that provides a 
supplement to their monthly income. Employees want peace of 
mind that comes from knowing that assets are safe and secure. 
Employees need reassurance that measures have been taken to 
prevent the reoccurrence of the financial meltdown of 2008.
    Individuals should not be left to fend for themselves. No 
matter how capable that individual may be in their particular 
occupation, they don't have the ability to make these complex 
financial decisions. Employees should match the percentage 
contributed by their employer. And, finally, studies show that 
the happiest people are those that have good pensions.
    The Chairman. That's really a study that was done? I can 
see the peace of mind, yes. Again, that's a good list to start 
from. Thank you.
    Ms. Friedman--well, we'll just go down the line.
    Ms. Wong, go ahead.
    Ms. Wong. Thank you. If you'll bear with me a minute, I 
just want to make one point, that an employer's fiscal 
resources are like a pie, and each slice goes to different 
pieces--salaries, business investment, cost of administrative 
requirements. Then if anything is left over, there's benefits 
that it goes into. So as we're looking at mandating benefits, 
that pie doesn't grow. The slices just change. So we do run the 
risk that, if that slice for benefits increases, then it 
necessarily eats into things like salaries and business 
investment.
    I bring this up, because if we talk about what employees 
need for a secure retirement, I would absolutely say that an 
employer-provided pension plan contributes to that. What a 
participant needs to have an employer-provided pension plan is 
an employer. The real tension is making sure that we don't, in 
the pursuit of trying to find options that are perfect and have 
all the bells and whistles, drive people out of the workforce.
    Having said that, for those that do have an employer-
provided plan, I think what they need, again, is flexibility 
and innovation, at the risk of sounding like a broken record. 
People are living longer, and the concept of retirement is 
changing, and I think the retirement plans have to keep up with 
that. I have a number of different ideas that the Chamber has 
proposed, starting with phased retirement, looking at employees 
that don't necessarily want to leave the workforce and 
employers who don't want those employees to leave the 
workforce, and having flexibility in those programs to allow 
them to stay in the workforce as long as possible and maybe at 
the same time still collecting a pension so they can supplement 
their salary at the same time.
    Encouraging additional distribution options--as Mr. Hudson 
talked about, the financial companies, insurance companies, are 
coming out with great products that can really be used to vary 
the way that people can get their retirement assets and use 
them long-term.
    The Chairman. But that gets so complex, though. You get 
into all these different things. I was just looking at mine, 
and I don't get it. I mean, look at all the different plans. 
You can invest in high risk, medium risk, low risk, this, that, 
this, that. I don't even feel qualified to make those 
decisions. How does any worker out there know how to do that? I 
just think, when you get all these different things, it just 
becomes so complex.
    Mr. Davis.
    Mr. Davis. That's because somebody can sit down and measure 
your risk tolerance. They can ask a series of questions and put 
you on a scale from one to five that will show what risk 
tolerance you'd like to have.
    Ms. Wong. I do think the financial companies have done a 
good job of trying to simplify these products in terms of 
explaining them. There's still more work to be done. Again, we 
can go further along that way. But I don't think we want to 
discourage them from coming out with these products that do 
respond to the different needs of the workforce and 
participants.
    And, finally, I think allowing employers to offer different 
products either through retirement plans or using retirement 
savings, for example, retiree healthcare, long-term care 
insurance, longevity insurance--these are things that 401(k) 
assets can be used to either purchase, so they're done on a 
pre-tax basis, or done through cafeteria plans.
    The Chairman. Thank you very much.
    Ms. Breen-Held, what do workers need?
    Ms. Breen-Held. Workers need the plan to be there.
    The Chairman. I'm sorry?
    Ms. Breen-Held. They need the defined benefit plan to be 
there. It's a simple answer. Not frozen, not terminated--they 
need the plan to be there. It's the fundamental way to provide 
that foundation benefit that's part of this three-legged stool 
that we talk about. How you do that comes back to recognizing 
this combination of employer and employee issues.
    As well as the things I've already said, I would agree with 
Mr. Hudson. We need to assure that government agencies provide 
clear and timely guidance, and that's not just on letters for 
individual plans, but also as Congress passes new laws, so it 
can allow the sponsors to move forward with confidence to 
design and operate their plans. And I'll note that the 
committee has provided influence that's been invaluable in the 
past, and we very much appreciate that. But that is an area 
that continues to need attention.
    Second, I would agree with Mr. Biggs that employees need to 
understand and value that lifetime annuity concept that comes 
out of these plans. If they understand the plans, they 
appreciate the plans. You can ask any 50-year-old with a 
pension plan if they like it or not, and they will know what 
you're talking about, and they will know what they're going to 
get out of it. It's not the same answer when you're 25 or 30, 
although there are signs that that's changing.
    If they appreciate it, that provides that retention for the 
business owner. That gives them that business reason to sponsor 
the plan, because at the root of this, they're in business to 
run their business. They're not in business to provide the 
pension plan. That's an extra that they voluntarily provide. 
They need to have a reason to justify maintaining it for their 
employees, and that may be retention, that may be hiring.
    There are signs--I saw a headline that I was excited about 
not too long ago that younger workers are starting to base job 
decisions on availability of defined benefit plans. I think 
that's--honest to goodness. I saw it in the press. It must be 
true.
    [Laughter.]
    I have a daughter who just entered the workforce and said 
to me, ``Mom, they've got a retirement program.'' She was so 
excited, and I was so proud. Anyway, that's an aside. But we're 
starting to see that resurge a little bit. They're starting to 
see the value of that guaranteed benefit, as opposed to 
something where they're taking the risk on their own.
    And, third, I would echo Ms. Wong's comments--employee 
flexibility on when and how to begin their defined benefit 
pension benefit. I'm not talking about leakage of money in 
advance of retirement age. I'm talking about people who, as 
they are approaching the end of their career, want to begin to 
phase down their hours but financially can't do it. So allowing 
them--giving them rules that will enable them to draw a portion 
as they phase into retirement in a defined benefit plan.
    I think those three things will allow us to provide 
employees benefits from a defined benefit plan into the future.
    The Chairman. Good. Thank you.
    Mr. Hudson.
    Mr. Hudson. Thank you. I think she's been reading some of 
my notes here.
    [Laughter.]
    The Chairman. Just a second.
    Senator Enzi.
    Senator Enzi. Can I interrupt here for a minute, because 
I'm going to have to go give a speech to a bunch of small 
business men in just a few minutes. I'll incorporate some of 
the ideas that you've passed out here.
    One of the things we're lacking in this country is 
financial literacy. This is one way of providing some of it. 
But there's too much of a feeling, as Ms. Breen-Held mentioned, 
that people aren't really in business to provide benefits. They 
provide benefits so they can have workers. But we're going to 
have to do some more on financial literacy.
    I appreciate the comments on testing. I'm an accountant. I 
used to do testing for companies, where I looked at their 
different plans. I was fascinated to find out that the same 
form had to be filled out for health insurance provided to 
employees as was done for pension benefits to employees. And 
I've got to tell you, the questions are the same for both, but 
the answers are totally different.
    They provide you--well, no, you buy a manual--it's about 
that thick--to explain how to answer the questions which are 
really not the right questions for what you're answering. As 
long as that's one of the things out there for small 
businesses, they're not going to do plans. So your idea of 
getting the administration handled somewhere else is an 
excellent idea, and I think there's a lot of room to work on 
it.
    I appreciate all the ideas that have been given to us 
today. I just regret that I can't stay to hear some more of 
them. But we'll submit some questions in writing, too, that I 
hope you'll answer based on what we've learned here already.
    Thank you.
    The Chairman. Thank you, Senator Enzi. This will be the 
final question anyway, because we all have to leave. But thank 
you very much, Senator Enzi.
    Mr. Hudson.
    Mr. Hudson. The primary thing that participants need is a 
secure income, to know what they're going to get every month, a 
defined benefit annuity. In a defined contribution plan, 
participants don't know what they're finally going to get at 
retirement until they retire. They don't understand the annuity 
value of it.
    The plan that we had redesigned for a group up in Boston--
the issue they faced was they had a defined contribution plan, 
and they had an 80 percent opt out rate. So 80 percent of the 
people decided that they couldn't contribute to the defined 
contribution plan, so they didn't get any type of benefit from 
the plan. So we've replaced the DC plan with a defined benefit 
plan.
    That's counterintuitive against the rest of the world, I 
know, but now they get 100 percent coverage and an affordable, 
reasonable benefit that will be there for the participants. So, 
first and foremost, they need to have at least some clue as to 
what they're looking for at retirement.
    The Chairman. Repeat that again. You had a defined 
contribution plan, and you said--but was it automatic 
enrollment?
    Mr. Hudson. No.
    The Chairman. No. They had to opt in.
    Mr. Hudson. Right.
    The Chairman. You said 80 percent did not opt in.
    Mr. Hudson. Right.
    The Chairman. But you changed to a defined benefit, and you 
had more of an opt-in.
    Mr. Hudson. Well, there's no opt-in. A defined benefit just 
automatically covers everybody.
    The Chairman. Automatically covers.
    Mr. Hudson. So that auto election--there's no more 
election. It's just auto coverage.
    The Chairman. One of the things I've proffered in the plan 
that I've proposed was an automatic enrollment, but with an 
opt-out, because we have some data to show that automatic 
enrollment is basically supported by people, and if you have 
that--I don't know--the figure was very low, but how many 
actually opt out later. But if you have just the reverse of 
opting in, then people don't do that. That's why I had 
suggested we have an automatic enrollment, but with an opt-out, 
which continues that one aspect of a 401(k) voluntary type of 
situation.
    Mr. Hudson. Right. Another issue that was just stated is 
participants do need the plan to be there when they retire. 
I'll state it again. If the plan's cost is extremely volatile 
from year to year, there's a much more likelihood that the plan 
sponsor will shut the plan down, freeze it, and switch to a 
defined contribution plan. If they do that in the middle of a 
person's working career, that person worked for maybe 20 years 
from hire until now, getting the low-defined benefit plan 
accruals in the hope to get that promise of higher accruals 
later in their career.
    If they shut the plan down and move to a defined 
contribution plan, they've now worked a career in a plan where 
they got the low DB accruals and they got the low DC accruals. 
They're not going to be able to retire.
    Your statement earlier about, all this is about insurance--
that's a true statement. The largest corporations in America 
who have pension plans that have been around for 30, 50, 100 
years--those are some of the largest insurance companies in 
America. They just don't know it.
    What we're showing them is in the plan design phase, we 
show them what that insurance or maturity risk is at the tail 
end of a person's working career. We make sure it's accounted 
for up front in the plan design and that the plan benefits 
factor all of that into consideration. So that's how we can 
stabilize the ongoing cost of the defined benefit plan.
    Then the idea of, you pay your car insurance for many, many 
years. Why don't you get your premiums back if you don't have 
an accident? That goes back to my statement about the PBGC. If 
we design a plan where we'll never have to go to the PBGC, or 
very likely won't have to go there, then why do we pay double 
PBGC premiums?
    The Chairman. Very true.
    Ms. Friedman.
    Ms. Friedman. Well, we're talking about what employees need 
from a pension. Let me start by saying that public opinion 
polls are reflecting that a majority of Americans have mounting 
anxiety about retirement. In fact, in a recent Gallup poll, the 
top financial concern for most Americans was not having enough 
money for retirement, which surpassed concerns about paying for 
healthcare and paying the mortgage.
    So, Susan, your daughter's concerns are real and reflected 
in public opinion polls.
    Senator Harkin, you started your statement today by talking 
about a home healthcare worker making a small hourly wage. We 
hear from those people all the time. These are people who 
either don't have enough in their retirement plans, if they 
have one, but, as John and David said, about half of Americans 
don't have any retirement savings plan at all. What employees 
want is income that is sufficient to supplement social security 
and that will enable them to live with dignity and lead 
productive lives.
    So I'll go back to what I said earlier. What they need is a 
vehicle where both employers and employees contribute. If 
they're lower income, contributions are subsidized by the 
government. The money should be pooled and professionally 
managed to minimize costs and financial risks. Of course, 
everybody is in favor of financial education, but if the money 
is pooled and professionally invested, then the kinds of issues 
you were pointing out aren't really necessary, because 
individuals typically don't have either the education, 
experience, or even the desire to be managing their own 
portfolio.
    The savings in a retirement plan should be locked in until 
retirement or for disability and should be paid over the 
lifetime of an employee and their spouse or life partner, which 
goes back to the concerns that were raised earlier. It would be 
desirable to have a modest guaranteed base benefit. From our 
perspective, having a retirement plan is part of the American 
dream. What employees want is to be able to continue to know 
that they can take care of themselves and take care of their 
families and also contribute to society. So that, I think, sums 
it up.
    The Chairman. Thank you. One of the things, also, that I'm 
thinking about is if you have a plan similar to what a lot of 
you are talking about and we've talked about, then it would 
seem to me that at any point along that line, you would know, 
as a worker, if you never contributed another cent, here's what 
your annuity is going to be. So every year that you work, or 
every 5 years, you would see how much your annuity would be 
growing. Compound interest is a wonderful thing, right, over a 
long period of time, maybe not if you get out early.
    Is that also a benefit to a worker?
    Ms. Friedman. Oh, absolutely, I mean, just so that they 
know. We're long-time advocates of people being able to see 
what their lump sum buys as an annuity. We've supported the 
legislation for that, and we would encourage Congress to push 
that forward. I think people need to know how much money--when 
they have money in their account now, what it's going to buy 
them.
    The Chairman. Mr. Hudson.
    Mr. Hudson. I just want to make one comment about that. If 
you look at your statement today, and you take your 401(k) plan 
balance or a savings account, and you price it out, and you 
determine what that annuity will buy today--if you do that a 
year later, even if you've earned 10 percent on your money, it 
might buy a less annuity, because the underlying interest rates 
have changed. So it goes up and down, and you're never really 
quite sure what it's going to be. I just wanted to make sure 
that was clear.
    Ms. Friedman. Just another thing, and I'll pass it over to 
John. But just another thing with annuities--right now, if 
you're buying an annuity on an open market and it's not in a 
plan, women have to pay more, because, in general, they live 
longer and so they're charged against that. It's very difficult 
for people to know how much that annuity is going to be. So 
we're big advocates for transparency in that and making sure 
that there's low-cost and transparent annuities. We'd be happy 
to work with Principal on that.
    The Chairman. Mr. Adler.
    Mr. Adler. What I think we need to focus on--there's been a 
lot of discussion here about what we need to do to make sure 
workers maintain their defined benefit plan and so on. I do 
think we need to focus on this very, very large group--and we 
can have academic debates about what the statistics actually 
are--but the large group of workers who have no pension other 
than social security.
    SEIU has 2.1 million members, and 35 percent of them, over 
700,000, have no retirement plan at work. These are low wage--
--
    The Chairman. These are like the home healthcare workers 
and people like that.
    Mr. Adler. Home healthcare workers, janitors, childcare 
workers, security officers, this type of worker. They're low-
wage workers. They're living paycheck to paycheck. Their 
employer does not offer a retirement plan. And, truthfully, 
even some who are with an employer where there's a defined 
contribution plan feel like they can't afford to put money into 
it. It's like your 80 percent opt-out rate.
    For example, for many of our members who work in nursing 
homes, nursing home chains often offer a 401(k) plan. But if 
you're a nursing attendant and you're earning $11 or $12 an 
hour, you feel like you don't--and most of them don't--have the 
ability to take a portion of that and put it into a 401(k). 
What we need is a plan that works for those workers.
    I believe another critical element here--and we talked 
earlier about younger workers and their lack of interest and 
younger workers needing to pay off their student loans and so 
on. First of all, a lot of our members don't have student loans 
because they didn't go to college. But the truth is the dollar 
you put into a retirement account when you're 22 years old will 
go a long way toward funding your retirement when you're in 
your 60's, much further, obviously, than the dollar you put in 
when you're 50 years old.
    If we can create a system that enables employees and their 
employers to contribute on their behalf in their 20s throughout 
their working life, we're going to have a much better funded 
system. That's why I appreciate the universality of the USA 
Retirement Fund proposal in conjunction with the existing 
private voluntary system, not to replace it, but to supplement 
it for those who don't have access to a retirement plan at 
work.
    I think we need that if we're going to address the problem 
of employees who have no access to a retirement plan at work 
for either all or part of their working lives. And, obviously, 
in the 21st century, where people do change jobs frequently, 
sometimes you have a plan and sometimes you don't. For those 
workers, it's not all or nothing, generally, and so you want to 
be able to have access to this plan so that contributions are 
being made consistently throughout your working life so that 
when you retire, there will be enough money there to generate 
the kind of annuity that will enable you to maintain your 
standard living.
    The Chairman. One of the things that we touched on very 
briefly in the plan that we've proposed--but we haven't really 
flushed it all out--is this very aspect of low-income workers. 
There's a government program now where the government matches a 
dollar for a dollar type thing.
    Mr. Adler. The saver's credit.
    The Chairman. The saver's credit, something like that, for 
low income, where if you put in something, then your employer 
puts in something, and then the government comes in and puts in 
something, sort of like the saver's credit. The only way you'll 
get that back is through some type of an annuity later on. You 
won't be able to take it out or something early on. Does that 
make sense?
    Mr. Adler. I think that's a terrific concept that needs to 
be expanded, because the truth is, it's quite low right now, 
and it phases out at a very, very low-income level. So even 
somebody who earns $28,000 a year earns too much to qualify for 
the saver's credit.
    The Chairman. It's about 150 percent of poverty or 
something like that, which is very low.
    Mr. Adler. Yes, which is about $24,000.
    The Chairman. Something like that.
    Mr. Adler. Yes.
    The Chairman. But I hope that as we move ahead, I hope 
you'll help think about this idea of a matching part for the 
government to put in for low-income workers for annuities.
    Mr. Adler. Absolutely. It's extremely important, I think, 
and in the form of a tax credit, refundable tax credit.
    The Chairman. Refundable or something, yes. And they don't 
pay taxes, so how do you get a tax----
    Mr. Adler. Exactly, refundable tax credit.
    The Chairman. Mr. Biggs.
    Mr. Biggs. Rather than go through a list, which I had much 
of before, maybe I'll focus on this last point that you and Mr. 
Adler were discussing, because I think it's very important, 
particularly, when you're thinking about low-wage, low-income 
workers. One of the points Ms. Wong made earlier is the 
compensation paid to employees is essentially a fixed amount. 
Labor economics says that amount is based on what we call the 
marginal product of the worker, essentially the productivity of 
the worker.
    You can shift income or you can shift the forms of 
compensation. You can say, ``Well, you're going to get more 
pensions, but that might mean you're going to get less in 
healthcare, less in wages.'' It's like the toothpaste tube 
effect there. If you're concerned about folks who are really 
living paycheck to paycheck, it might be good for them to have 
a pension. But the problem is that's going to squeeze them on 
their actual paychecks. That's going to make it tougher, 
because we can't simply create money out of nowhere.
    Two policy points come from that. First is you want to 
focus on making pensions low-cost, focus on making them 
efficient, because the costs that you think are being borne by 
the employer are actually going to be borne by the employee in 
some way, shape, or form. They're going to be shifted back to 
the employee, because that's just how the labor market works.
    The second point--and I think this is a point that you both 
hit on--is that if you want to supplement low-income workers--
and that may be where things like the saver's credit come in, 
where you say, ``Look, their total compensation is a function 
of their productivity. We think as a social goal, they should 
get more money that they can put away for retirement,'' then 
that's something like the saver's credit or some other 
governmental policy can do. You're not going to squeeze too 
much more out of the employer on that end.
    So I think there are two main focuses. Keep costs low and 
think about the government's role in terms of supplementing low 
earners, because that's just going to be tough to get out of 
the employers.
    The Chairman. Mr. Madland.
    Mr. Madland. Thank you. To follow on to Andrew's point 
about low cost--and I want to highlight that I might think 
about it in a slightly different way, although I think there's 
a decent amount of agreement about how we would think about low 
cost. I'll get to that point in a second. But I started off the 
testimony saying that all retirement plans involve a tradeoff 
between cost and risk and adequacy. What workers need is a plan 
that is good at managing those tradeoffs, that reduces cost, 
reduces risk, so that they're likely to have a secure 
retirement.
    The collective defined contribution plan that CAP has 
proposed and your proposal, I think, are very good at managing 
cost and risk. I want to highlight the features in them that 
are so good and sort of what they do and why they work--
professional money management, long-time horizons, and the 
ability to spread risk across multiple generations. These 
features should be a central part of the retirement plan of the 
future, because they are much more cost-effective and much less 
risky for an individual than a 401(k) kind of plan.
    The thing about professional money management--that 
significantly reduces cost because you get much better returns. 
Professional money managers might not beat the market, but 
they're going to be diversified, stay in the market at the 
right time. They aren't going to make all the behavioral 
mistakes that individuals tend to make. Being able to invest 
over a long timeframe means you're going to have a balanced 
portfolio as a person ages, rather than get more conservative 
as you get closer to retirement, and that boosts your returns.
    You also have low longevity risk from spreading risk across 
multiple generations and pooling this, so you can plan for the 
average life expectancy instead of a maximum life expectancy. 
All of those cost efficiencies are huge. The National Institute 
for Retirement Security estimates that those features reduce 
the cost of saving for adequate retirement by 46 percent, 
compared to a 401(k).
    To put that in perspective, a person earning $50,000 the 
year before their retirement, age 65, that would reduce the 
cost that they would be contributing or their employer would be 
contributing by over $5,000 in the year before retirement and 
thousands more every year before. This is big money that's on 
the table from a more efficient plan design. That plan design 
also is much less risky for workers than the current 401(k) 
model.
    The long timeframe--being able to invest over a much longer 
timeframe is much less risky. The worst performance over a 30-
year period--you think that's a fairly long time period, but 
it's still an individual worker's kind of investment horizon. 
The worst performance for the Dow was basically no return over 
30 years. But if you expand it to a 75-year period, you always 
get a good return. So this long-time horizon is big. It reduces 
the risk.
    It also reduces the timing risk. If you're retiring--if you 
think about people who were trying to retire right around the 
Great Recession, they got hit with a huge, huge stock market 
risk. The estimates are that the near retiree with a 401(k) in 
the Great Recession lost 17 percent of their balance. Instead, 
this kind of pooling and long-time horizon significantly 
reduces those risks.
    In the Netherlands, they have similar kinds of plans to 
what your proposal is or our proposal. The estimates are that 
they are around a 3 percent or 4 percent reduction in assets 
for people who are going to retire. So this hybrid kind of 
model can really ensure all workers have a cost-effective and 
secure plan. I think it needs to be a fundamental part of the 
retirement plan of the future.
    The Chairman. Well, thank you very much. Our time has 
expired. I found this very enlightening, a very great 
discussion, with a lot of common threads, some differences.
    I want to also say that all of your statements that you 
submitted will be made a part of the record in their entirety. 
I forgot to say that in the beginning.
    The one last thing that came to my mind when Mr. Madland 
was talking about long-term horizons and balanced portfolios, 
is that this comes up a lot when we talk about taking money out 
of someone's paycheck to go to retirement. They say, ``Well, I 
can barely get by right now and you're going to take some more 
money out.''
    But you have to look at it from another standpoint. I kind 
of mentioned this earlier. And that is that pension funds do 
create jobs. They do invest in new businesses. They're able, 
because of long-term horizons--if they invest money in a 
startup entrepreneurship, a business, and that business goes 
under, well, they lose. But they've got such a big pool. They 
can afford to do that.
    They also do some of the best investments in long-term 
infrastructure projects. So this is jobs. I always call it win-
win-win. You provide a savings stream for an annuity, or like a 
savings stream for a worker, so there's some savings. Second, 
you get money invested in growth industries and business in 
this country. And, third, you have some retirement security.
    It seems to me it's kind of a win-win-win. I just keep 
wanting to point that out, that unlike social security, which, 
by law, can only invest in government securities--and there's a 
reason for that--this would be privately held. We're talking 
about private investments through professional managers that 
have these long horizons. It seems to me that really does 
invest in future growth of businesses and entrepreneurs in this 
country.
    I think that's a benefit. A lot of times, we only look at 
the benefit of what about retirement? Well, how about the 
benefit to our economy overall from something like a mandatory 
plan--or not mandatory, but at least something which is 
automatic and we say you can opt out. But we know from data 
that most people, if they're automatically enrolled, tend to 
stay with it. If you start them young, very young, and they 
begin to see what that little bit is going to amount to when 
they're 65, well, that's pretty enticing.
    I just wanted to point that out. But I think it has a 
present day economic benefit to our country, from how I see 
this, aside from a long-term benefit of secure retirements.
    With that, I'll leave the record open for 10 days for any 
submittal of any other statements or questions.
    I thank you all very much for your expertise, for being 
here today. I hope that I can count on all of you to continue 
to interact with our staff on both sides as we move ahead. As 
I've said before, obviously, we're not going to do anything 
this year. We're done here in a day or so. We'll come back for 
probably a lame duck session.
    I really believe this committee is going to really push 
ahead on this next year and, I mean, very aggressively to come 
up with a pension system that will move us ahead in terms of 
some kind of a better retirement system. I don't have all the 
answers. But, as I said, I detected in everything I heard today 
these certain common threads coming through all this.
    I said to Mike earlier, ``We ought to get all this and put 
it on a matrix.'' Let's see where all the interconnectors are 
and where the outliers are and see how we kind of blend those 
to come up with something.
    I thank you all again very much, and we'll look forward to 
working with you as we move ahead on this very, very critical 
issue, I think, for all Americans.
    The committee will stand adjourned.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

      Response by David Madland to Questions of the HELP Committee
    Thank you for inviting me here today to discuss pension 
modernization for the 21st century.
    My name is David Madland and I'm the director of the American 
Worker Project at the Center for American Progress Action Fund.
    I appreciate the opportunity to present my views on this important 
topic, a topic which I have been researching for some time. I wrote my 
dissertation about the decline of the private-sector defined-benefit 
pension system and have written extensively in academic and popular 
publications about retirement policy.
    In my testimony I will address the three questions posed by this 
committee, which are focused on how to best improve the private 
retirement system, and leave discussion about Social Security for 
another time.
    Social Security provides an essential baseline of income for 
retirees and must be strengthened to ensure that it continues to do so 
for generations to come, as the Center for American Progress has 
proposed.\1\ But Social Security was never intended to be people's only 
source of income in retirement.
    To maintain their standard of living in retirement, Americans 
depend upon accumulations in employer-sponsored retirement accounts--
such as 401(k)'s and pensions--and, to a smaller degree, private 
savings.
    Unfortunately, the private retirement system is failing too many 
Americans, something that is becoming abundantly clear as the first 
generation of workers to depend primarily on 401(k) plans--rather than 
the increasingly rare defined benefit pension--starts to retire.
    The failures of the private retirement system could have troubling 
consequences. If we continue down the current path, many retirees will 
outlive their retirement savings, potentially saddling their children 
and the country with a burden that weighs down the economy and causes 
significant human suffering.

    Question 1. Defined-benefit pension plans have provided a secure 
retirement for millions of middle-class Americans, but it is clear that 
the traditional pension system is in decline and that existing defined-
benefit pension models may not be well-suited for some of our 21st 
century workforces. What should our pension system look like to meet 
the challenges of the global economy and the need to provide retirement 
security for working Americans?
    Answer 1. The pension system of the future should ensure all 
workers have a cost-effective and secure way to save so that Americans 
can maintain their standard of living in retirement and retire with 
dignity.
    In designing a plan to meet these goals, I think it is essential to 
understand that all retirement plans involve tradeoffs between costs, 
risk, and retirement adequacy, and involve different choices about who 
bears these costs and risks--employers, employees, or taxpayers.
    There is no getting around these tradeoffs--but there are better 
and worse ways to manage these tradeoffs.
    Some retirement plans are simply better at managing these tradeoffs 
because of the way they are designed.
    While 401(k)'s, the dominant defined-contribution retirement plan 
in the current system, have worked well for some workers, in general 
they do not do a particularly good job at managing these tradeoffs. 
401(k)'s have relatively low risks and costs for employers, but for 
workers the costs and risks are quite high, such as excessive fees, the 
potential for significant loss of assets due to drops in the stock 
market, and the likelihood of outliving assets.\2\
    As a result, 401(k)'s have proven unable to provide adequate 
retirement security for most workers. Indeed, the typical near-
retirement age worker with a 401(k) has only accumulated enough money 
to provide a monthly payment of about $575 in retirement.\3\ To make 
matters worse, less than half of all workers even have a retirement 
plan at work, and that figure has been declining over the past few 
decades as 401(k)'s have supplanted define benefit pensions.\4\
    To create the retirement system of the future, we should learn from 
these challenges. All workers should have access to a high-quality 
retirement plan that will help create a secure retirement.
    The USA Retirement Funds plan that Senator Tom Harkin (D-IA) 
proposed in his July report entitled ``The Retirement Crisis and a Plan 
to Solve It'' builds upon the lessons we have learned from the 
weaknesses of the current retirement system and is a good place to 
start building a modern retirement system because it manages the cost, 
risk, and adequacy tradeoffs quite well.\5\
    Indeed USA Retirement Funds share much in common with the new 
retirement plan proposal from the Center for American Progress, called 
collective defined contribution plans--details of which are being 
released today in a new issue brief.\6\
    Both the USA Retirement Funds and collective defined contribution 
plans are hybrid-type plans that combine elements of a traditional 
pension--such as regular payments in retirement, professional 
management, pooled investing, and risk sharing across generations--with 
elements of a 401(k)--such as predictable costs for employers and 
portability for workers.
    This hybrid approach should be a core part of our future pension 
system because its features are less costly and less risky than a 
401(k). Indeed, retirement plans that have the core features of these 
hybrid models--professional money management, long investment time 
horizons, and the ability to spread risks across multiple generations--
are estimated to cost about half as much to provide an adequate 
retirement benefit, while exposing participants to much lower levels of 
risk than a 401(k).\7\
    In subsequent answers I will elaborate more on the advantages of 
these features and explain why they should be part of the retirement 
system of the future.

    Question 2. What would make it easier and attractive for 
businesses--especially small businesses--to provide their employees 
with a traditional pension benefit? Would reducing the employers' risk 
and plan complexity help?
    Answer 2. Reducing employers' risk and plan complexity would make 
it easier and more attractive for businesses to provide their employees 
with a pension benefit.
    Employers have been shifting away from traditional defined-benefit 
pension plans for a number of reasons, including plan complexity, 
regulatory changes, and reduced inflation, but a central factor in the 
shift has been the volatility of pension funding.\8\ Some employers 
have been willing to bear this volatility, but for most employers the 
risk that additional contributions may be required--especially during 
tough economic times when money is tight--has been a significant 
disincentive for employers to offer defined benefit pensions. The 
unpredictable nature of pension contributions can cause problems for a 
company's balance sheet.
    Hybrid models, such as CAP's collective defined contribution plan 
and Senator Harkin's USA Retirement Funds can reduce this volatility 
for employers. That is because to employers, these kinds of hybrid 
plans are defined contribution plans, like a 401(k).
    In these hybrid models the employer is not responsible for 
guaranteeing benefits, but rather is only responsible for making 
contributions--just like in a 401(k). Thus the employer would enjoy 
predictable contribution levels and minimal risk.
    I think these hybrid models would be very attractive to employers. 
Employers would be able to provide a retirement plan that is more 
likely to lead to a secure retirement for their employees than a 401(k) 
without taking on the cost, risk, and complexity of a defined-benefit 
pension plan. In short, these kinds of hybrid plans allow employers to 
provide a good retirement plan to their workers without bearing the 
responsibilities of a defined pension plan.

    Question 3. What do employees need from a pension plan to ensure 
they will have a secure retirement?
    Answer 3. As I mentioned before, retirement planning is a tradeoff 
between cost, risk, and adequacy. Workers need a retirement plan that 
does a good job managing these tradeoffs, meaning the plan is cost-
effective, minimizes risks, and has a very high likelihood of providing 
an adequate retirement benefit.
    There are three core elements in retirement plan design that are 
particularly important in effectively managing the costs and risks of 
retirement: professional money management, long investment time 
horizons, and the ability to spread risks across multiple generations. 
Both Senator Harkin's USA Retirement Funds and CAP's collective defined 
contribution plans include these features.
    Let's start with how these features reduce the cost of saving for 
retirement.
    Professional money management of a pension fund leads to higher 
investment returns than most 401(k) participants achieve.\9\ Though 
fund managers have a hard time beating market averages,\10\ they 
typically do much better than individual investors--in large part by 
avoiding common investing pitfalls such as failing to diversify assets 
and pulling money out of stocks at the bottom of the market and thus 
missing the rally.\11\ Professional money managers would ensure 
retirement portfolios are properly diversified and invested for the 
long haul to achieve better returns than most individual investors are 
likely to achieve.
    Similarly, pooling investment risks over a longer time period also 
boosts investment returns: Individuals in a 401(k) have to become more 
conservative with their investments as they age because they have less 
time to recover any possible losses, resulting in lower returns. But 
when accounts of both older and younger workers are pooled together, 
the fund manager can maintain a balanced portfolio that achieves higher 
returns. This effect, called intergenerational risk sharing, can 
substantially raise pension returns.\12\
    Finally, pooling longevity risk across all retirees in the plan 
means that the plan needs only to accumulate sufficient funds to pay 
for the average retiree's life-span in the plan. In contrast, an 
individual with a 401(k) has to save an amount sufficient for their 
maximum life expectancy: Saving only enough for the average life-span 
could leave retirees without sufficient income in their later 
years.\13\
    These advantages mean that a retirement plan with these features 
would cost an estimated 46 percent less than a 401(k) to provide the 
same level of retirement benefit, according to research by the National 
Institute on Retirement Security.\14\ To put this percent savings in 
dollar terms: A worker earning $50,000 before retirement would need to 
contribute an estimated $5,200 less in the year before retirement and 
thousands less in each of the other 29 working years they made 
retirement contributions to save enough for a secure retirement with a 
collective defined contribution plan compared to a 401(k).\15\
    These features also help reduce the risk of saving for retirement 
when compared to a 401(k).
    A long investment horizon helps mitigate the risk that the market 
performs poorly while a worker is saving for retirement. While an 
individual career may seem like a long time horizon for retirement 
investing, the chance that the market will perform poorly during the 
time when a worker is most aggressively invested in the market is still 
quite great compared to the longer timeframe that the intergene-
rational pooling of the CDC allows. A shorter timeframe increases the 
chance an individual will experience a period of low growth. For 
example, the lowest average annual return on the Dow Jones Industrial 
Average over a 75-year period was 3.05 percent compared to a low of -
0.04 percent annual return for investments over a period of 30 
years.\16\
    Further, the risk that an individual in a 401(k) is hurt by a big 
drop in the market is much greater than the risk borne by participants 
in a collective defined contribution plan. That is because investment 
timing risk can be particularly acute for an individual but is less 
critical for a pooled investment fund.
    Between December 2007 and June 2009 (the duration of the Great 
Recession), for example, workers who were near retirement, aged 55 to 
64, and had a 401(k) for 20 to 29 years, saw their account balance 
decrease by 17.4 percent on average--and though account balances have 
recovered slightly since then, they are still down significantly.\17\ 
In contrast, estimates suggest that because of investment losses 
suffered during the Great Recession, hybrid pensions in the 
Netherlands--where the hybrid model is common--may need to be reduced 
by much less.\18\
    In short, hybrid models with professional money management, long 
investment time horizons, and the ability to spread risks across 
multiple generations are a good way to manage the tradeoffs inherent in 
retirement planning because they reduce costs and risks and make a 
secure retirement more likely.
    The pension system of the future should include a hybrid model to 
ensure all workers have a cost-effective and secure way to save so that 
Americans can maintain their standard of living in retirement and 
retire with dignity.
                                Endnotes
    1. Christian E. Weller, ``Building It Up, Not Tearing It Down: A 
Progressive Approach to Strengthening Social Security'' (Washington: 
Center for American Progress, 2010).
    2. Rowland David, Nayla Kazzi, and David Madland, ``The Promise and 
Peril of a Model 401(k) Plan: Measuring the Effectiveness of Retirement 
Savings Plans Offered by Private Companies and the Federal Government'' 
(Washington: Center for American Progress Action Fund, 2010).
    3. Alicia H. Munnell, ``401(k) Plans in 2010: An Update From the 
SCF'' (Chestnut Hill, MA: Center for Retirement Research at Boston 
College, 2012). According to the 2010 Survey of Consumer Finances, the 
typical household approaching retirement with a 401(k) balance had only 
$120,000 in 401(k)/IRA holdings. The $575 per month figure cited 
assumes an individual purchases an annuity at age 65. Note that the 
$120,000 figure includes IRA balances, as these are largely due to 
401(k) rollovers. Note also that when those with no 401(k) wealth are 
included in these calculations, the median retirement balance is 
significantly lower. Indeed, EBRI surveys indicate that 48 percent of 
respondents had less than $10,000 in savings. See: Ruth Helman, Craig 
Copeland, and Jack VanDerhei, ``The 2012 Retirement Confidence Survey: 
Job Insecurity, Debt Weigh on Retirement Confidence, Savings'' 
(Washington: Retirement Benefit Research Institute, 2012).
    4. Alicia H. Munnell, Rebecca Cannon Fraenkel, and Joshua Hurwitz, 
``The Pension Coverage Problem in the Private Sector'' (Chestnut Hill, 
MA: Center for Retirement Research at Boston College, 2012). Note that 
over a lifetime of working, the authors' estimates indicate that about 
one-third of workers will never be covered under workplace retirement 
plans.
    5. U.S. Senate Committee on Health, Education, Labor, and Pensions, 
``The Retirement Crisis and a Plan to Solve It'' (2012).
    6. David Madland, ``Making Saving for Retirement Easier, Cheaper, 
and More Secure'' (Washington: Center for American Progress, 2012), 
available at http://www.americanprogress.org/issues/economy/report/
2012/09/17/38263/.
    7. Beth Almedia and William B. Fornia, ``A Better Bang for the 
Buck: The Economic Efficiencies of Defined Benefit Pension Plans'' 
(Washington: National Institute on Retirement Security, 2008); Madland, 
``Making Saving for Retirement Easier, Cheaper, and More Secure.''
    8. Alicia H. Munell and Mauricio Soto, ``Why Are Companies Freezing 
Their Pensions?'' (Chestnut Hill, MA: Center for Retirement Research at 
Boston College, 2007); David Madland, ``A Fragile Equilibrium: The 
Past, Present, and Future of Private Pensions,'' Contingencies, 
November/December 2008, p. 50-54.
    9. Ibid.
    10. Ron Elmer, ``College Endowment and Public Pension Fund Returns 
Are Not Good,'' Investor Cookbooks, February 9, 2012, available at 
http://investorcook
books.blogspot.com/2012/02/college-endowment-and-public-pension.html; 
Sydney P. Freedberg and Connie Humburg, ``Easy investments beat state's 
expert pension planners,'' Tampa Bay Times, July 31, 2011, available at 
http://www.tampa
bay.com/news/politics/article1183442.ece; Jeff Hooke and Michael 
Tasselmyer, ``Wall Street Fees and The Maryland Public Pension Fund'' 
(Germantown, MD: The Maryland Public Policy Institute, 2012).
    11. Chris Flynn and Hubert Lum, ``DC Plans Under Performed DB 
Funds'' (Toronto, CEM Benchmarking, 2006); Towers Watson, ``Defined 
Benefit vs. 401(k) Investment Returns: The 2006-2008 Update'' (2009).
    12. Christian Gollier, ``Intergenerational risk-sharing and risk-
taking of a pension fund,'' Journal of Public Economics 92 (6) (2008): 
1463-85.
    13. Almedia and Fornia, ``A Better Bang for the Buck.''
    14. Ibid.
    15. Author's calculations using data from: Almedia and Fornia, ``A 
Better Bang for the Buck.''
    16. Author's calculation of historical Dow Jones Industrial 
Average.
    17. Employee Benefit Research Institute, ``Change In Average 
Account Balances (by Age and Tenure) From January 1, 2008-June 30, 2009 
Among 401(k) Participants with Account Balances as of Dec. 31, 2007'' 
(2010).
    18. Leen Preesman, ``Dutch regulator confirms more than 100 pension 
funds facing discounts,'' Investment & Pensions Europe, February 21, 
2012; Personal communication from Pieter J. Kiveron, Managing Director, 
Holland Financial Centre, September 7, 2012.
Response by Andrew G. Biggs, Ph.D., to Questions of the HELP Committee*
    Chairman Harkin, Ranking Member Enzi and members of the committee: 
Thank you for the opportunity to testify at the roundtable with regard 
to Pension Modernization for a 21st Century Workforce. I have 
structured my written testimony as answers to the questions posed by 
the Chairman and Ranking Member.
---------------------------------------------------------------------------
    * The views expressed in this testimony are those of the author 
alone and do not necessarily represent those of the American Enterprise 
Institute.

    Question 1. Defined benefit pensions have provided a secure 
retirement for millions of middle class Americans, but it is clear that 
the traditional pension system is in decline and that existing defined 
benefit pension models may not be well-suited for some of our 21st 
Century workforces. What should our pension system look like to meet 
the challenges of the global economy and the need to provide retirement 
security for working Americans?
    Answer 1. A defined benefit (DB) pension plan offers certain 
important advantages: simplicity and predictability of benefits, 
protection against market risk, and insurance against outliving your 
retirement assets, all of which are highly valuable to employees. Of 
course, these benefits to employees inevitably come at a cost to 
employers, particularly smaller businesses, who may be ill-suited to 
managing market and longevity risks.
    Moreover, DB pensions carry certain disadvantages in a modern 
economy. In particular, DB pensions lack portability and are 
discriminatory against short-term employees, who often are the young, 
mobile professionals that high-tech businesses seek to attract. There 
is evidence that a significant part of the shift from DB to defined 
contribution (DC) pensions was driven, not by businesses, but by the 
employees businesses seek to attract.\1\ In addition, certain 
individuals may desire the greater liquidity that DC pensions allow for 
relative to DB plans.
---------------------------------------------------------------------------
    \1\ Aaronson, Stephanie, and Julia Coronado. 2005. ``Are firms or 
workers behind the shift away from DB pension plans?'' Federal Reserve 
Board Finance and Economics Discussion Series Working Paper No. 2005-
17. Washington, DC: Federal Reserve Board of Governors.
---------------------------------------------------------------------------
    A pension system for the 21st Century will attempt to capture the 
advantages of DB pensions while avoiding their disadvantages. It will 
be:

     Streamlined: Because complexity discourages participation 
and encourages mistakes.
     Low-cost: Because higher administrative costs eat into 
employee savings. I understand the desire to provide ordinary savers 
with ``professional money management,'' but I fear that the extra costs 
are rarely justified by higher returns and, in the case of more exotic 
investment strategies, carry risks that often are ill-understood.
     Convertible to a lifetime income: Most economists hold 
that annuities are extremely valuable relative to lump sum pension 
payouts, because they efficiently manage against the problem of not 
knowing how long one's retirement savings must last. It remains a 
puzzle why so few Americans choose to purchase annuities; the expected 
causes, such as administrative costs or the presence of Social 
Security, which already pays benefits as an annuity, do not provide a 
full explanation.
     Financially transparent: One method by which governments 
implicitly encourage pensions, either for State/local government 
employees or through the Pension Benefit Guaranty Corporation (PBGC), 
is by allowing them to operate under accounting precepts that differ 
from how private financial markets would value liabilities and risk. 
One example is allowing pensions to use higher discount rates to value 
their liabilities. These efforts, however well-intentioned, are 
dangerous both to the plans and to taxpayers and should not be 
tolerated. If the government wishes to subsidize pensions it should do 
so explicitly through appropriations, not by facilitating accounting 
arbitrage that encourages underfunding and excessive risk-taking. 
Policy efforts to encourage retirement income security should be very 
careful not to go down this road.

    Question 2. What would make it easier and attractive for 
businesses--especially small businesses--to provide their employees 
with a traditional pension benefit? Would reducing the employers' risk 
and plan complexity help?
    Answer 2. Pensions, both DB and DC, can carry significant 
regulatory and administrative burdens. While large firms can bear these 
costs, for smaller employers they may be prohibitive.\2\ Reducing the 
cost and complexity of pension provision may encourage more widespread 
adoption.
---------------------------------------------------------------------------
    \2\ See Perun, Pamela J. and Steuerle, C. Eugene. ``Why Not a 
`Super Simple' Saving Plan for the United States?'' The Urban 
Institute. May 2008.
---------------------------------------------------------------------------
    Reducing employer risk in provision of DB pensions or similar types 
of benefits would presumably encourage employers to offer such plans. 
However, we should be wary for two reasons. First, because DB pensions 
have shrunk despite the fact that most economists believe that the 
pension insurance provided by the PBGC is already significantly under 
priced. In other words, we have a natural experiment in the degree to 
which subsidies can increase DB pension coverage. Clearly these were 
not sufficient to maintain DB plans even in larger employers, much less 
expand coverage among small employers.
    And second, the government is capable only of transferring risk, 
not of eliminating it. If employers are relieved of risk with regard to 
financing DB pension plans, that risk is simply shifted onto taxpayers. 
Simply because Federal budget rules do not adequately account for the 
cost of risk does not mean it does not exist. In the wake of Fannie Mae 
and Freddie Mac, of TARP and of the General Motors bailout, the 
potential cost of contingent liabilities should be foremost in the 
minds of policymakers. They should consider costs to the taxpayer of a 
policy not based on what is expected to happen, but on cases in which 
things go wrong.

    Question 3. What do employees need from a pension plan to ensure 
that they will have a secure retirement?
    Answer 3. A pension plan should have a variety of characteristics. 
First, adequate levels of saving, although these may differ 
significantly from person-to-person. The amount a person should save 
for retirement may differ based upon their income, their marital 
status, the number of children they have, and other factors. 
Unfortunately, there is no simple rule that will dictate a correct 
saving rate for each person and we should be wary of policy solutions 
that do not allow flexibility in this regard.
    Second, simplicity of design. I have shown in other work that many 
Americans, even those on the verge of retirement, have very little idea 
what they will receive from Social Security despite receiving annual 
benefit statements.\3\ This is due, I believe, to excessive complexity 
of the Social Security benefit formula. Traditional DB pensions are 
simpler than Social Security and this simplicity should be retained.
---------------------------------------------------------------------------
    \3\ Biggs, Andrew G. ``Improving the Social Security Statement.'' 
(October 2010). Financial Literacy Center Working Paper No. WR-794-SSA.
---------------------------------------------------------------------------
    Third, lifetime income. Management of retirement income cash-flows 
is difficult in the face of uncertain life spans. A DB plan provides 
annuitization automatically, while a DC plan may do so through the 
purchase of annuities with account balances at retirement. 
Alternatively, individuals might purchase deferred annuities on an 
annual basis, thereby building up a pseudo-DB benefit within a DC 
structure. In whatever context, however, greater attention to managing 
the decumulation phase of retirement saving may be helpful to middle 
income households for whom Social Security is not the major source of 
retirement income.
       Response by John Adler to Questions of the HELP Committee
    Question 1. Defined benefit pension plans have provided a secure 
retirement for millions of middle-class Americans, but it is clear that 
the traditional pension system is in decline and that existing defined 
benefit pension models may not be well-suited for some of our 21st 
century workforces. What should our pension system look like to meet 
the challenges of the global economy and the need to provide retirement 
security for working Americans?
    Answer 1. The biggest problem with our current retirement system 
for Americans who work in the private sector is that tens of millions 
of people have very limited prospects for a secure stream of income 
besides Social Security that lasts the rest of their lives. The three-
legged stool of yore now exists only for the top quartile of American 
retirees. For the middle 50 percent of retirees, Social Security makes 
up 74 percent of their income, and Social Security comprises 87 percent 
of income for the bottom quartile. The replacement of the traditional 
pension system by defined contributions plans such as 401(k)'s has 
failed to provide most working Americans with enough retirement income 
to maintain their standard of living in retirement. As Alicia H. 
Munnell, director of the Boston College Center for Retirement Research, 
said in the New York Times on September 12, ``No matter how much you 
try to spruce up the 401(k)'s, they're never going to provide enough 
retirement income.''
    We need a retirement system that diversifies the income available 
to American workers so that they can have a secure, adequate, lifelong 
stream of income to supplement Social Security. This system should be 
the shared responsibility of employees, employers, and the government, 
with each making contributions (in the form of tax deductions or 
credits in the case of the government), and with each having 
representatives on the governing board of the entity or entities with 
oversight of the plan. These contributions should be phased in to a 
mandatory minimum level that is adequate to provide for enough income 
replacement after a lifetime of work in combination with Social 
Security to maintain workers' standard of living throughout their 
retirement. Employees and employers should be able to voluntarily 
contribute more than the required minimum, or increase contributions 
through collective bargaining, with reasonable limits on tax-advantaged 
contributions. The plan should be completely portable. The assets 
should be pooled and professionally managed to minimize costs and risk, 
and maximize economies of scale. Finally, the assets should not be 
subject to early withdrawal or loans, should be payable only at 
retirement or permanent disability, and should be annuitized.

    Question 2. What would make it easier and attractive for 
businesses--especially small businesses--to provide their employees 
with a traditional pension benefit? Would reducing the employers' risk 
and plan complexity help?
    Answer 2. Clearly, businesses of all sizes are seeking to minimize 
their exposure to risk when it comes to retirement benefits. The story 
of businesses freezing and shedding traditional pensions is by now old 
and well-known. SEIU continues to believe that well-managed defined 
benefit pension plans are the best way for workers who work for 
extended periods of time for one employer or one skilled industry to 
achieve retirement security. To that end, the funding rules of the 
Pension Protection Act (PPA) should be reformed in 2014 to enable 
existing defined benefit plans to recover from the investment losses of 
the financial crisis of 2008. At the same time, we recognize that many 
companies do not want to participate in defined benefit plans--be they 
single-employer or multi-employer--and many low-wage workers change 
employers and industries several times over the course of their 
worklives. In addition, our own experience is that it has become nearly 
impossible since the 2008 financial crisis to convince new employers to 
agree to participate in defined benefit pension funds, both because of 
contribution rates that have skyrocketed in the wake of steep declines 
in investment values and PPA-driven rehabilitation plans, and concerns 
about potential withdrawal liability these employers would face. In the 
face of these concerns, we are interested in finding approaches that 
will both enable us to sustain our existing defined benefit plans while 
at the same time enable non-participating employers to provide their 
employees with a traditional pension benefit or something approximating 
such a benefit.
    Undoubtedly, reducing employers' risk and plan complexity will make 
it easier and more attractive for them to provide such benefits. We 
believe that we need solutions that enable employers' contributions to 
be predictable and stable, without the volatility that has marked 
employers' contributions to DB plans in the wake of PPA and the 2008 
market crash, while at the same time containing the investment and 
longevity risk for workers. We need a system that is easy to explain, 
with advantages that are easy to explain to employers as well as the 
public at large.

    Question 3. What do employees need from a pension plan to ensure 
that they will have a secure retirement?
    Answer 3. SEIU represents 2.1 million members who work in 
healthcare, property services, and public services. Approximately 35 
percent, or more than 700,000, have no access to a retirement plan at 
work. These include home care workers, child care workers, security 
officers, janitors, and others. These members tend to be in low-wage 
occupations where they are living paycheck to paycheck, without 
significant savings, and with little ability to shoulder the burden of 
retirement savings on their own.
    Many of these members, as well as the nearly 50 percent of all 
American workers without access to a retirement plan at work, are 
facing the choice of working until they die, or retiring into poverty 
or near poverty. They need a pension plan that will ensure that after a 
lifetime of work, they can retire with a secure income stream that 
enables them to maintain their standard of living as long as they live.
    Since most employees in the 21st century no longer work for one 
employer for the majority of their working lives, the plan needs to be 
portable and universal, with immediate vesting, so that employees' 
accounts receive contributions throughout their working lives. We 
strongly believe that accounts must be pooled and professionally 
managed and invested, in order to reduce administrative costs and 
investment management expenses, and to spread investment and longevity 
risk among many participants.
    All employers and employees should make pre-tax contributions to 
the system up to reasonable income limits. These contributions should 
start at a low rate when the program first takes effect and gradually 
phase in over a number of years to achieve the level needed to build an 
adequate retirement benefit with reasonable investment assumptions over 
a workers' lifetime. The Federal Government should support employee 
contributions for low- and moderate-income earners through refundable 
tax credits.
     Response by Karen Friedman to Questions of the HELP Committee
    Question 1. Defined benefit pension plans have provided a secure 
retirement for millions of middle-class Americans, but it is clear that 
the traditional pension system is in decline and that existing defined 
benefit pension models may not be well-suited for some of our 21st 
century workforces. What should our pension system look like to meet 
the challenges of the global economy and the need to provide retirement 
security for Americans?
    Answer 1. Chairman Harkin and Ranking Member Enzi, thank you for 
inviting me to this roundtable today and bringing together such a 
diverse group of experts to develop creative solutions to solving the 
retirement security crisis facing today's and tomorrow's retirees. I am 
here to represent both the Pension Rights Center, the Nation's only 
consumer organization devoted exclusively to promoting and protecting 
the retirement rights of workers and retirees and their families; and 
Retirement USA, a campaign working for comprehensive and effective 
retirement solutions. We thank you both for your strong leadership on 
retirement issues.
    While those on this panel may not agree about everything, we are 
all here because we are committed to the importance of retirement 
security. I believe that by listening to each other, finding common 
ground to achieve our shared aims, and working together, we can shape 
measures to ensure that hard-working Americans will be able to retire 
with a strong supplement to Social Security today and tomorrow. I look 
forward to a vigorous and productive discussion.
    I want to turn now to the first question you asked us to address.

    Question 1. What should our pension system look like to meet the 
challenges of the global economy and the need to provide retirement 
security for Americans? And what is the role of the defined benefit 
plan?
    Answer 1. I want to start with defined benefit plans. As we know, 
such plans--particularly traditional defined benefit plans--have been 
on a steady decline among private-sector employers. However, I want to 
stress how important these plans are to the individuals still covered 
by them and their importance to economic growth. First, approximately 
20 percent of all workers continue to be covered by defined benefit 
plans. That is a large slice of the population, and they generally work 
well for those people. Indeed, defined benefit plans are the lowest 
cost and most efficient means of providing retirees with guaranteed 
income for retirement.
    Defined benefit plans also provide one of the most important 
sources of patient capital, investing for the long-term. According to 
the National Institute on Retirement Security, the steady benefits 
provided by these plans are especially important in stabilizing local 
economies during economic downturns because retirees can keep spending 
their pension checks, knowing that more are coming.
    For these reasons, both the Pension Rights Center and the 
organizations represented by Retirement USA believe that we should do 
everything possible to preserve the defined benefit plans that already 
exist and to encourage new forms of these plans or plans that have 
these features.
    However, with the decline of traditional defined benefit plans, we 
need creative ways of developing new plans that mimic many of these 
plans' features. That's why the Center launched Retirement USA with an 
array of 27 other organizations--including the AFL-CIO, the Service 
Employees International Union, and the Economic Policy Institute--to 
advocate for a new pension system that is universal, secure, and 
adequate (hence, the ``USA''). This new system, in conjunction with 
Social Security, will provide people with sufficient income in 
retirement and allow them to continue to maintain the same standard of 
living that they enjoyed while still in the workforce.
    After studying numerous systems and proposals found here in the 
United States and in other countries, Retirement USA developed 12 
principles for a new private retirement system. These principles borrow 
from the best parts of defined benefit plans and 401(k) savings plans, 
and include some additional features.
    We have three overarching principles that we believe should guide 
the reshaping of our pension system for future generations of workers. 
These are:

    Universal Coverage. Every worker should be covered by a retirement 
plan. A new retirement system that supplements Social Security should 
include all workers, unless they are in plans that provide equally 
secure and adequate benefits.
    Secure Retirement. Retirement shouldn't be a gamble. Workers should 
be able to count on a steady lifetime stream of retirement income to 
supplement Social Security.
    Adequate Income. Everyone should be able to have an adequate 
retirement income after a lifetime of work. The average worker should 
have sufficient income, together with Social Security, to maintain a 
reasonable standard of living in retirement.
    Additional principles include:

    Shared Responsibility. Retirement should be the shared 
responsibility of employers, employees, and the government.
    Required Contributions. Employers and employees should be required 
to contribute a specified percentage of pay, and the government should 
subsidize the contributions of lower income workers.
    Pooled Assets. Contributions to the system should be pooled and 
professionally managed to minimize costs and financial risks.
    Payouts Only at Retirement. No withdrawals or loans should be 
permitted before retirement, except for permanent disability.
    Lifetime Payouts. Benefits should be paid out over the lifetime of 
retirees and any surviving spouses, domestic partners, and former 
spouses.
    Portable Benefits. Benefits should be portable when workers change 
jobs.
    Voluntary Savings. Additional voluntary contributions should be 
permitted, with reasonable limits for tax-favored contributions.
    Efficient and Transparent Administration. The system should be 
administered by a governmental agency or by private, non-profit 
institutions that are efficient, transparent, and governed by boards of 
trustees that include employer, employee, and retiree representatives.
    Effective Oversight. Oversight of the new system should be by a 
single government regulator dedicated solely to promoting retirement 
security.

    We hope that these principles will serve as a guidepost to evaluate 
and strengthen any new proposals.
    Recently, the Center has been working with business groups to come 
up with new risk-sharing models. Earlier this year we co-sponsored a 
conference, ``Reimagining Pensions,'' with the Urban Institute, and 
Covington and Burling, a law firm representing some of the largest 
corporations in America. The conference explored new pension designs to 
share and spread risk between employees and employers, and among 
generations. In all, we looked at eight proposals, including flexible 
hybrid plans, simplified defined benefit plans, and multiple employer 
plans.
    Senator Harkin, your USA Retirement Funds proposal meets most of 
our principles and takes an innovative, fair, and realistic approach to 
risk-sharing. By setting up a system of privately run pension plans, 
where the employer's responsibility is to write a contribution check 
for a modest amount to the plan administrator, USA Retirement Funds 
relieve employers of administrative and fiduciary burdens, and should 
make the plan attractive to employers. By providing low fees, pooled 
investments, and a lifetime benefit at retirement age, they allocate 
investment and mortality risk in sensible ways among employees. They 
are, we believe, a significant improvement over today's 401(k) plans, 
which place all of the responsibility and risk on individual employees. 
We believe USA Retirement Funds are a serious model that can help 
millions of Americans prepare for retirement.
    It should be noted that, while we favor new creative approaches to 
ensure that all Americans enjoy a decent standard of living in 
retirement, we are not advocating replacing the system that we now 
have. Rather, we want to augment what currently works with meaningful 
retirement-savings opportunities for approximately 50 percent of the 
workforce that are shut out of the system. With your leadership, 
Senators Harkin and Enzi, I know we can do it!

    Question 2. What would make it easier and attractive for 
businesses--especially small businesses--to provide their employees 
with a traditional pension benefit? Would reducing the employers' risk 
and plan complexity help?
    Answer 2. For 7 years, from 2001-7, I coordinated a common-ground 
initiative called the Conversation on Coverage, which brought together 
45 experts from business, financial institutions, unions, retiree 
groups, and other constituencies to discuss ways of increasing pension 
coverage--especially for lower wage workers. We developed four concrete 
proposals--a few of which were especially suited for small- and medium-
sized businesses.
    Let me share what I learned from this common-ground dialog. Studies 
show--and the participants of this dialog confirmed--that small 
businesses would be more likely to start a plan if administrative 
costs, complexities, and fiduciary responsibility were reduced and if 
employer contributions were voluntary. One plan developed especially 
with small businesses in mind is called the Model T which is a 
simplified plan with automatic enrollment. I know, Senator Enzi, that 
you have been very interested in new multiple employer approaches, and 
I would be happy to share with you and your staff more about the 
findings.
    I also learned that there may be ways of structuring defined 
benefit plans to make them easier to be adopted by smaller businesses. 
The Conversation on Coverage provided an example, the Plain Old Pension 
Plan or POPP. In short, the POPP provides a straightforward career 
average defined benefit through a plan that would have predictable 
employer funding--which is one of the biggest concerns employers have 
in adopting defined benefit plans. It also enables owners to give 
themselves, and other longer service employees, benefits for the years 
worked before the plan was established.
    Also, Senator Harkin, it seems that the structure you developed for 
the USA Retirement Funds is consistent with addressing many of the 
concerns of small businesses. Your Retirement Funds would be run by 
financial institutions, taking the burden off of small businesses, and 
would also automatically enroll participants into the plan, unless they 
opt out. This, it seems, would be highly appealing to small businesses.
    I want to raise one important concern regarding fiduciary issues 
that I learned during discussions with our partners in both Retirement 
USA and the Conversation on Coverage. Under current law, employers have 
the fiduciary responsibility of choosing a plan provider and also 
monitoring investments. Relieving employers of such responsibilities 
raises a bevy of complex issues and possible conflicts of interest. It 
is very important that, if new arrangements transfer fiduciary duties 
on to third parties, there will be effective government regulation. 
Without such regulation and oversight, there is room for enormous 
amounts of self-dealing and other conflicts of interest.
    Since small businesses represent the fastest growing employment 
sector in the economy, finding creative ways to encourage these 
employers to provide secure benefits is of paramount importance.

    Question 3. What do employees need from a pension plan to ensure 
that they will have a secure retirement?
    Answer 3. Public opinion polls reflect America's mounting anxiety 
about retirement. In a recent Gallup poll, the top financial concern 
for most Americans was not having enough money for retirement--
surpassing concerns about paying for health care and paying the 
mortgage.
    We hear every day from people who can't make ends meet. Folks like 
Shareen Miller, a home health care aide who makes only $12 an hour and 
can't put enough away for retirement. Women like Karen O'Quinn who 
never worked for a company that offered a pension or savings plan and 
had to use all her savings to take care of her kids and her health 
care.
    What employees want is income that is sufficient to supplement 
Social Security and that will enable them to live with dignity in 
retirement. What they need is a vehicle where both employers and 
employees contribute and, if they are lower income, that includes a 
government-subsidized contribution. The money that is contributed to 
that vehicle should be professionally managed because most Americans do 
not have the time, education, and experience to create an investment 
portfolio that provides the right combination of risk and return. The 
savings in a retirement plan should be more or less locked in until 
retirement and should pay benefits over the lifetime of the employee 
and their spouse or life partners.
    Having a good retirement is part of the American dream. And what 
people want is to be able to continue to know that they can take care 
of themselves and also contribute to society.
     Response by Richard Hudson to Questions of the HELP Committee
    Question 1. Defined benefit pension plans have provided a secure 
retirement for millions of middle-class Americans, but it is clear that 
the traditional pension system is in decline and that existing defined 
benefit pension models may not be well-suited for some of our 21st 
century workforces. What should our pension system look like to meet 
the challenges of the global economy and the need to provide retirement 
security for working Americans?
    Answer 1. The Defined Benefit plan is the best way to provide 
retirement security for Americans. The current ideas need to be 
revamped though. Companies should not be taking significant investment 
risk with assets in the pension plan and certainly should not be taking 
any risk with money needed for retiree liabilities.
    Insurance companies have been able to provide annuities for many 
years with little trouble, the reason is they invest in a way to 
control cash-flow risk and count on risk pooling to reduce the overall 
level of mortality risk they are subjected to.
    Defined Contribution plans are favored by employers as they shift 
all the risk to the plan participants. What is not clearly understood 
is that Defined Contribution plans introduce an additional level of 
risk for the participants. This additional risk is mortality or 
longevity risk--participants as individuals can only avoid this risk by 
pooling via an insurance contract which is a hard choice not many take 
and can be very expensive. In a Defined Benefit plan the mortality risk 
is pooled amongst all the employees of the plan. This risk pooling 
helps reduce the level of risk.
    In addition, when employers shift to a DC plan, the older workers 
lose out significantly since they don't have time to accrue large 
enough accounts to replace the lost accruals from the Defined Benefit 
plan. Also, in general, participants do not fully understand how to 
invest and as a result many take the safest option available which 
reduces the long-term investment income in their accounts. Another 
problem with 401(k) and similar plans is that the investment vehicles 
offered have higher investment fees and investment bookkeeping fees 
that would be found in large DB plans.
    The current Defined Benefit plan system can survive if expectations 
are modified and responsible parties are made aware of the risks and 
understand how to mitigate underlying risks.
    We have been successful in assisting some clients to create new 
defined benefit plans or continue in the defined benefit arena with a 
better understanding of long-term expectations.

    Question 2.  What would make it easier and attractive for 
businesses--especially small businesses--to provide their employees 
with a traditional pension benefit? Would reducing the employers' risk 
and plan complexity help?
    Answer 2. The employers' risk and plan complexity can be dealt with 
through proper plan design. The main issues we face in assisting our 
clients are:

    1. Will the new designs we are developing for our clients receive a 
favorable determination letter from the IRS? It would help for newly 
created pension plans to receive priority in the IRS review process 
over current plans who are re-applying for a determination letter. Once 
we get a couple of these ``hybrid'' plan designs approved, employers 
will be more confident in the design concept and not have to worry 
about whether or not contributions made to these plans will be 
deductible.
    2. The PBGC premiums are reaching levels that make sponsors take 
pause in thinking about retirement plans. If a plan sponsor does the 
right thing and designs a pension plan with policies in place to 
mitigate risk, the likelihood of needing PBGC insurance is very low. 
But, they do not receive a break from the PBGC premiums. In actuality, 
if they freeze their current plan and establish a new plan with lower 
risk and lower benefit accruals, the amount of their retirement 
benefits decline but the PBGC premiums double. The focus should be on 
variable rate premiums--where the risk is--and possibly lower the flat 
rate premiums.
    3. Some multi-employer plans are suffering under the weight of 
liability associated with past withdrawn or bankrupt employers. This is 
causing a tremendous amount of strain on these plans as they need to 
reduce benefit levels or even freeze future accruals to pay off the 
liability for these ``orphan'' liabilities.

    Question 3. What do employees need from a pension plan to ensure 
that they will have a secure retirement?
    Answer 3. The participants need to know they will not outlive their 
assets. Defined Benefit plans provide a level income for life so 
retirees can plan their finances. They know what they will have so they 
know what they can spend. This makes them more comfortable and allows 
them the freedom to spend money without being anxious about running out 
of income. The efficiency of an annuity is not well-understood and the 
benefit of an income for a long life is overshadowed by the cost of not 
leaving a residual balance of retirement savings to one's heirs. To 
illustrate the efficiency of an annuity as an example, if we plan to 
live on $2,000 per month and take a 10 percent risk of out-living our 
savings we would need $340,000 to retire at 65 if we were confident of 
earning 6 percent per year through our investment skill. Contrast that 
with the cost of an annuity for $2,000 per month--$320,000 (assuming 3 
percent investment earnings) which has no risk of being outlived.
    Participants also need the plan to have stable funding during the 
accrual years. When the cost of funding the plan gets too high 
employers switch to DC plans. Defined Benefit plans have smaller 
accruals in early years and larger accruals in later years. Defined 
Contribution plans have relatively larger accruals in early years 
(because of compounding interest) and smaller accruals in later years. 
If an employee works for an employer for many years earning the smaller 
accruals, they need to be rewarded with the higher accruals that come 
at the end of their career. When an employer switches to a Defined 
Contribution plan, they are hurt again by now getting smaller relative 
accruals in the DC plan which significantly hurts their overall 
retirement benefit. Therefore, the plans need to be established for 
long-term sustainability in mind.
    Defined Contribution plans provide participants with a lump sum of 
money which is likely not enough to retire on. There are several 
reasons for this. Participants do not save enough nor do they start to 
save early enough. They also do not have the investment knowledge to 
properly invest their accounts. Individuals in these plans feel like 
they must continue to work longer, save more, and spend less to achieve 
their retirement goals. Since the limits on how much an individual and 
employer can contribute to a Defined Contribution plan are 
significantly less than Defined Benefit plans, the ultimate retirement 
benefits will be less. Also, employers tend to switch to DC plans to 
save money, so even if deductions were not a problem it is likely that 
the contribution amounts would still be insufficient.
    Some plans are looking at providing lifetime income benefits in DC 
plans through an annuity purchase but this is very expensive for 
participants if the annuity is purchased through an insurer. A Defined 
Benefit plan handles annuities more efficiently.
   Response by Susan L. Breen-Held to Questions of the HELP Committee
                              introduction
    My name is Susan Breen-Held. I am a pension actuary at the 
Principal Financial Group. I have been with The Principal for 33 
years; the last 30 have been spent consulting with plan sponsors on the 
design and funding of defined benefit plans.
    The Principal is a global investment management leader including 
retirement services, insurance solutions and asset management. 
Retirement is our core business and largest operating segment.
    For more than 70 years we have helped millions of people save for 
retirement. We are the No. 1 provider of defined benefit plans, serving 
more than 2,400 defined benefit plans with nearly 333,000 eligible 
participants.\1\ We are also one of the largest recordkeepers of 
defined contribution plans with nearly 30,000 defined contribution 
plans nationally and more than 3.3 million participants,\2\ 
representing more than $14.5 billion in assets.\3\
---------------------------------------------------------------------------
    \1\ PLANSPONSOR DB Administration survey, April 2012.
    \2\ Based on a number of recordkeeping plans, PLANSPONSOR 
Recordkeeeping Survey, June 2012.
    \3\ As of June 30, 2012.
---------------------------------------------------------------------------
    We continue to support American workers as they enter retirement, 
providing monthly income annuity payments to more than 254,000 
retirees.\4\
---------------------------------------------------------------------------
    \4\ Ibid.

    Question 1. Defined benefit pension plans have provided a secure 
retirement for millions of middle-class Americans, but it is clear that 
the traditional pension system is in decline and that existing defined 
benefit pension models may not be well-suited for some of our 21st 
century workforces. What should our pension system look like to meet 
the challenges of the global economy and the need to provide retirement 
security for working Americans?
    Answer 1. Thank you for this opportunity to discuss ways to help 
ensure adequate retirement income for all Americans by improving the 
employer-based retirement system.
    I speak today on behalf of our core constituency: small and medium-
sized employers, who are the economic backbone of this Nation.
    While the question focuses on traditional defined benefit plans, 
some of my comments will also address defined contribution plans. Both 
are critically important sources of retirement income.
    We believe the soundest way to help ensure adequate retirement 
income for all Americans is through a holistic approach: strengthening 
each part of the Nation's retirement system.
    The good news is we have a very firm foundation upon which to 
build. We don't have to start over nor should we. Instead we should 
build on what's working and draw from the lessons we've learned as the 
system has evolved over time.
    What we have learned is that voluntary employer-sponsored plans, 
and defined benefit plans in particular, are one of the most efficient 
ways to provide retirement benefits. The factors that have fueled 
success include:

     The flexibility of the system that meets the varying needs 
of employers.
     The stable, guaranteed benefit from defined benefit plans 
that is a valuable commodity to the participants.
     The features in defined contribution plans that help make 
it easier and more enticing to save such as automatic enrollment and 
increases, fiduciary oversight, worksite guidance and education, tax 
deferrals, and savings incentives for both the employer and the 
employee.

    Among the factors that challenge the system are complexity, 
administrative burden, cost, global competition, economic instability 
and human behavior.
    We need to make sure that any changes focus on alleviating the 
challenges and removing the barriers without inadvertently removing or 
weakening the features and incentives that are working well today.
    Here are some high level recommendations to enhance both the 
defined benefit pension system and the defined contribution system. 
Some of these ideas are based on results from ``The Principal 
Retirement Readiness Survey--2011,'' \5\ a major survey we conducted of 
1,305 small and medium-sized employers. Some of the respondents offered 
a defined contribution plan and some did not. (See attached)
---------------------------------------------------------------------------
    \5\ The Principal Financial Group Retirement Readiness Survey 
commissioned by The Principal conducted by Harris Interactive online. 
Data was gathered from May 17 through June 17, 2011 from 1,305 
employers.

---------------------------------------------------------------------------
    Make the system simpler for employers and workers.

     Simplify the rules, plan designs and regulations to make 
it easier for employers to establish and operate retirement plans. The 
complexity and administrative burden drives up costs.

          In our Retirement Readiness Survey, nearly a third of 
        small employers we surveyed said the costs of establishing and 
        administering a plan are reasons they aren't offering one.

     For defined contribution plans: make it easier and more 
attractive to increase the use of automatic enrollment features at 
higher contribution levels which nudge workers into saving at what we 
believe are more adequate levels.

    Give to employers more reasons to voluntarily offer a retirement 
plan.

     As onerous as defined benefit plans can be, this is 
critical.
     Small employers have all they can do to keep the business 
running. If they are going to voluntarily invest time and money to 
offer a retirement plan, they need to know it will benefit the business 
and the owners need to receive some benefit as well.
     We know that incentives work for defined contribution 
plans. In our Retirement Readiness Survey:

          92 percent of the employers we surveyed say tax 
        incentives are important in their decision to offer a defined 
        contribution plan.
          75 percent say tax deferral incentives are the most 
        attractive retirement plan feature to employees.
          More than 80 percent say participation and savings 
        would decrease if the incentives were removed.
          Just over half of employers not offering a plan (53 
        percent) are not aware of the startup tax credit given to 
        employers who start a DC/401(k) plan.
          Only 17 percent are aware of how the startup tax 
        credit works.

    Address the challenge of retirement income.

     The vast majority of the employers in our Retirement 
Readiness survey agree that placing retirement income illustrations on 
benefits statements would be helpful but two-thirds are concerned about 
the liability if employees don't end up with the amount they projected.
     Educating employees about retirement income will help them 
better value the guaranteed income provided by a defined benefit plan.
     Providing a safe harbor or regulatory guidance that the 
retirement income projection is an estimate and not a guarantee will 
help alleviate fiduciary concerns.

    I can elaborate on these recommendations as our discussion 
continues.

    Question 2. What would make it easier and attractive for 
businesses--especially small businesses--to provide their employees 
with a traditional pension benefit? Would reducing the employers' risk 
and plan complexity help?
    Answer 2. Plan sponsors tell us one of the biggest problems with 
defined benefit plans is volatility caused by market interest rate 
fluctuations. This volatility has a significant negative impact on 
funding. When interest rates go down, funding must increase, which puts 
tremendous pressure on the capital needed to keep the business 
operating. Many plan sponsors have coped with funding volatility and 
the resulting heavy cash requirements by freezing their defined benefit 
plans. That is not the result any of us want.
    The industry has helped address some of the volatility with 
different ways of managing investments. Congress helped address 
volatility with a recent law, ``Moving Ahead for Progress in the 21st 
Century Act,'' P.L. No. 112-141,\6\ that provides interest 
stabilization. It allows sponsors to reference a longer term interest 
rate that would be less affected by market swings. This measure is yet 
another positive step back to a longer view of pension plan funding. 
The measure also provides the counter-cyclical funding that sponsors 
need requiring lower contributions during difficult economic times and 
higher amounts in better times.
---------------------------------------------------------------------------
    \6\ ``Moving Ahead for Progress in the 21st Century Act'', P.L. No. 
112-41, enacted July 6, 2012.
---------------------------------------------------------------------------
    However, the law doesn't go far enough. It doesn't offer the same 
protection for future years. Restoring the 10 percent corridor for all 
years, as was originally proposed, would strengthen protections for 
sponsors and also generate tax revenues in the near term. Relieving 
volatility concerns helps support existing plans and could spur 
creation of new ones.
    In addition to expanding the new law, we offer three other steps 
that we believe would encourage small employers to maintain or create 
defined benefit pension plans.

    First, give employers a reason to offer defined benefit plans.

     Deciding whether to offer a retirement plan is a business 
decision. For a smaller business to invest the time and money to 
establish or maintain a plan, there must be a benefit to the business 
and to the employer.
     The current structure provides only a minimal benefit to 
the employer and other highly compensated employees.
     The current compensation and total benefit limits allow 
the defined benefit plan to replace only a small portion of the 
decisionmakers' or other highly compensated employees' income. Thus 
they have little incentive to take on the risk of sponsoring or 
maintaining a defined benefit plan.
     We recommend raising the compensation and benefit limits 
so that the employer and highly paid employees have more of a stake in 
the defined benefit plan.
     We also recommend waiving all compensation limits in the 
first 5 years after defined benefit plan's creation. This would provide 
an incentive to increase the number of defined benefit plans in 
existence, expand the working population covered by those plans and 
help assure that more employees have more adequate retirement income.
     These steps could be tied to features that would benefit 
the rank and file such as immediate vesting or benefit accruals.
     We've seen this working very effectively in the defined 
contribution world where safe harbor rules allow the employer to 
establish contribution levels that provide reasonable savings 
opportunities for both highly compensated and non-highly compensated 
employees.
     We see strong positive results from cash balance plans 
that can provide incentives to owners and higher income employees.

          The average employer contribution to retirement 
        accounts where companies have both a 401(k) and a cash balance 
        plan is 6 percent of pay, compared to 2.3 percent of pay in 
        companies with only a 401(k).
          This kind of arrangement is so attractive to 
        employers that despite the severe economic slump between 2008 
        and 2010, there was a 38 percent increase in new cash balance 
        plans.\7\
---------------------------------------------------------------------------
    \7\ 2012 National Cash Balance Research Report, Kravitz, Inc.

          We need to provide similar incentives to traditional 
---------------------------------------------------------------------------
        defined benefit plans.

    Second, reduce administrative costs.

     The new law I referenced earlier is expected to 
significantly increase what is already a burdensome number of 
calculations for defined benefit plans.
     We recommend reducing the number of different calculations 
that are required for small plans, which are generally defined at 100 
lives or less.
     This could be accomplished by exempting small plans from 
some testing or lengthening the time between tests, for example from 
every year to every 3 years.
     Limit the amount of government reporting for the smallest 
of plans. This would be an enormous help to these smaller 
organizations.
     These ideas could reduce the sponsors' administrative 
costs while posing little additional risk on the Pension Benefit 
Guaranty Corporation (PBGC).
     One of the last things these employers need is an increase 
of their PBGC premiums. Such an increase would only serve as a 
barrier--and for many smaller employers an insurmountable one--to 
maintaining and creating defined benefit plans.

    Question 3. What do employees need from a pension plan to ensure 
that they will have a secure retirement?
    Answer 3. First and foremost, employees need the defined benefit 
plan to be there and allow continual benefit accrual. A traditional 
pension plan provides a foundation for a total retirement program, 
enhancing the savings in a defined contribution plan and supplementing 
Social Security.
    One way to keep the defined benefit plans alive is to make sure 
that government agencies provide clear and timely guidance for the laws 
that Congress enacts. This allows sponsors to react with confidence and 
in a timely fashion to design and operate plans. This committee's 
influence in this area has proven to be invaluable to plan sponsors in 
the past, and is much appreciated.
    Plan participants themselves need a better understanding of the 
advantages and value of defined benefit plans. The more participants 
appreciate a defined benefit plan, the more the plan can benefit the 
business as an attraction and retention tool which can help drive 
demand for continuing or establishing a defined benefit plan.

     Participants have a much greater awareness of defined 
contribution plans because they are easier to understand and have been 
more widely promoted.
     This isn't the case with defined benefit plans. 
Participants don't have to take action to participate nor do they 
receive much education about defined benefit plans. In the past, 
defined benefit plans have tended to be invisible except to those 
employees approaching retirement.
     We are beginning to see the first signs that young people 
increasingly value defined benefit plans. As an industry we need to 
build on this trend and focus greater attention to educating 
participants on the value of defined benefit plans.

    A word about defined contribution plans.

    Because most Americans with a defined benefit plan also have a 
defined contribution plan, providing an income replacement orientation 
to defined contribution plans only serves to increase appreciation of 
defined benefit plans while at the same time increasing the chances of 
providing more adequate retirement income.
    The next generation of defined contribution plans is borrowing from 
some of the best features of defined benefit plans. It begins with a 
better definition of what it may take to achieve a more secure 
retirement.

     We define true retirement readiness as having enough 
savings to replace 85 percent of pre-retirement income.
     In order to save enough to meet that goal, our analysis 
indicates Americans need to save, on average, between 11 and 15 percent 
of their income over the course of a career--including employer 
contribution from either a match or defined benefit plan.
     In an analysis we conducted, which measured the impact on 
retirement account balances of three key variables: investment 
performance, asset allocation and the amount the participant is saving, 
we found that while investment performance and asset allocation are 
important, in the long run the amount of savings has the biggest impact 
on the ending account balance.\8\
---------------------------------------------------------------------------
    \8\ ``Pursuing `Retirement Plan Success' During Participants' 
Accumulation Years'' The Principal Financial Group, April 2010.
---------------------------------------------------------------------------
     We are encouraging plan sponsors to redesign their plans 
in a way that sets participants up to save successfully. We can do some 
of this now, but we need help from Congress and regulators to encourage 
sponsors to take these actions.

    Here are the five plan design features we believe can lead to true 
retirement readiness:

    1. Offer automatic enrollment--with at least a 6-percent default 
deferral rate.

     Our analysis \9\ of participants in plans through The 
Principal shows 6 percent drives better saving behavior without hurting 
participation.
---------------------------------------------------------------------------
    \9\ Analysis of participants in plans through The Principal 12/31/
2010.

          Only 19 percent opted out at 6 percent compared to 15 
        percent opting out at 3 percent.
          When 6 percent default rate is combined with an 
        employer match, 61 percent of participants reached an overall 
        savings rate of more than 11 percent of pay.

    2. Couple automatic enrollment with an annual automatic escalation 
of the deferral rate--and make it the default.

     Automatic enrollment alone likely won't encourage 
participants to increase their salary deferrals over time.
     Automatic escalation harnesses the power of inertia.

          Our analysis \10\ shows that 80 percent of 
        participants use automatic escalation when it's the default 
        while only 6 percent use it when it's a feature they have to 
        choose.
---------------------------------------------------------------------------
    \10\ Analysis of participants in plans through The Principal 12/31/
2010.

    3. Apply automatic enrollment to all employees at least one time 
---------------------------------------------------------------------------
and consider re-enrolling all employees periodically.

     This ensures that more than just new employees reap the 
benefits of automatic enrollment.

    Congress can encourage these auto savings changes by providing 
additional incentives for employers who add auto escalation and by 
removing the 10 percent cap on default deferrals.

    4. Employers can re-structure the employer match in a way that 
requires participants to contribute more in order to get the full match 
but doesn't change the employer's cost.

     Participants tend to save up to the employer match or the 
automatic enrollment default rate and not beyond.
     Our analysis \11\ shows participants contribute more when 
employers stretch the target match rate and it has not hurt 
participation and participants defer up to the higher level.
---------------------------------------------------------------------------
    \11\ Analysis of participants in plans through The Principal 12/31/
2010.

    5. Professionally managed investment options: offering target date 
or target risk investment options as the default investment provides 
built-in diversification and simplicity for participants who seek a do-
---------------------------------------------------------------------------
it-for-me choice.

    Plans need to focus education on retirement income needs.

     Illustrating projected monthly income in retirement on 
benefits statements can be a savings motivator. Learning that a $50,000 
balance at age 65 would amount to only about $275 a month \12\ for life 
can be a real wakeup call.
---------------------------------------------------------------------------
    \12\ Principal Financial Group Income Annuity Quote for a 65-year-
old, unisex pricing, with installment refund, August 30, 2010.
---------------------------------------------------------------------------
     But as I said earlier, employers have grave concerns about 
liability if the ultimate savings falls short of the projections.
     Employers need regulatory guidance that they won't be 
liable.

    I appreciate the opportunity to appear before you today. We look 
forward to working with you as you consider ways to help protect and 
expand defined contribution plans and help Americans have a more secure 
lifetime income at retirement. I would be happy to answer any questions 
you may have.

    Note: Insurance products and plan administrative services are 
provided by Principal Life Insurance Company a member of the Principal 
Financial Group (The Principal), Des Moines, IA 50392.
    While this communication may be used to promote or market a 
transaction or an idea that is discussed in the publication, it is 
intended to provide general information about the subject matter 
covered and is provided with the understanding that none of the member 
companies of The Principal are rendering legal, accounting, or tax 
advice. It is not a marketed opinion and may not be used to avoid 
penalties under the Internal Revenue Code.
                                 ______
                                 
    Attachment.--Retirement Coverage and Adequacy: Perspective and 
            Solutions from Small and Medium-Sized Employers
                              introduction
    Employer-sponsored 401(k) plans and other worksite retirement plans 
have helped millions of workers save trillions of dollars. These plans 
have proven to be resilient even in challenging times. But more is 
needed. More Americans need access to worksite retirement plans. Those 
who do have access to plans need to save more. Those factors, combined 
with recent economic volatility and burgeoning baby boomer retirements, 
have spurred calls for changes to the voluntary retirement system.
    At the same time as tax reform and deficit reduction discussions 
take place in Washington, DC, the retirement savings system has been 
caught in the cross hairs. Some proposals include reducing or 
eliminating current tax incentives offered to employers sponsoring 
qualified defined contribution (DC) retirement plans and participants 
in those plans.
    It is critical that any proposals to change the voluntary 
retirement system be evaluated against whether they would solve or 
prolong the key challenges to retirement savings in America:

     Expanding coverage of employees in employer-sponsored 
retirement plans,
     Increasing retirement savings to adequate levels, and
     Securing income to last through retirement.

    Because worksite retirement plans are set up voluntarily by 
employers, the Principal Financial Group believes it is critically 
important to understand how employers feel about the state of the 
retirement system today and how proposed changes would affect their 
decisions about offering and making changes to their retirement plans. 
In particular, it is important to hear from smaller employers because 
they are the economic backbone of the Nation.
    To bring their voices to Washington, DC, The Principal 
commissioned the 2011 Principal Financial Group Retirement Readiness 
Survey, a major survey of small- and medium-sized employers, conducted 
online by Harris Interactive.\1\ Employers who currently do not offer a 
defined contribution retirement plan, and employers who do offer 
defined contribution plans, serviced by The Principal, were included in 
the survey. The Principal provides services to nearly 40,000 employer 
plan sponsors with over 3 million eligible participants,\2\ and we are 
a retirement leader with more than 70 years in the retirement industry.
---------------------------------------------------------------------------
    \1\ Unless noted otherwise, all statistical information in this 
document is from the 2011 Principal Financial Group Retirement 
Readiness Survey commissioned by the Principal Financial Group 
conducted by Harris Interactive online. Data was gathered May 17 
through June 17, 2011 from 1,305 employers.
    \2\ As of September 30, 2011.
---------------------------------------------------------------------------
    Findings from the survey clearly demonstrate that:

     Reducing or eliminating current tax incentives would 
significantly hamper voluntary plan sponsorship and retirement savings 
in 401(k) plans.
     Simplifying rules to operate a plan and educating 
employers about incentives and benefits would remove barriers and 
encourage more plan formation.
     Plan sponsors understand participants need to save more 
and are willing to make voluntary changes in plan design that would 
encourage greater retirement readiness among participants.
     Plan sponsors are willing to address retirement income 
challenges but need regulatory clarity.

    This document outlines key findings from the data, along with our 
recommendations for addressing the Nation's retirement challenges.
 expanding coverage of employees in employer-sponsored retirement plans
Tax Incentives Work and Reductions Would Hamper Plan Sponsorship and 
        Savings
    Despite the fact that the 401(k) system was originally designed as 
a supplement to retirement savings, the majority of plan sponsors state 
that the current 401(k) system is effective and tax incentives are 
important factors in their decision to offer a plan.

     Nearly two out of three plan sponsors (61 percent) say the 
current 401(k) system is effective to extremely effective in helping 
employees achieve adequate retirement savings. Only 3 percent of plan 
sponsors say the current 401(k) system is not at all effective in 
helping employees achieve adequate retirement savings.
     Virtually all plan sponsors (92 percent) and over half (52 
percent) of employers who do not offer a plan say the ongoing tax 
deferral for employees is important in their decision to offer a DC/
401(k) plan.
     Approximately four out of five plan sponsors (79 percent) 
and half of employers who do not offer a plan say the ongoing tax 
incentive given to employers is important in their decision to offer a 
DC/401(k) plan.

    Many employers state that reducing tax incentives would cause 
employee participation levels, employee contribution levels, and their 
own desire to offer a plan to decrease significantly.

     Three-quarters of plan sponsors say the most attractive 
feature to employees is the pre-tax deferral.
     When asked about the specific proposal to lower the limits 
on what employees can save on a tax deferred basis within 401(k) plans 
to 20 percent of compensation or $20,000 annually:

          83 percent of plan sponsors registered an unfavorable 
        opinion of that proposal.
          Close to 7 in 10 (68 percent) of plan sponsors say 
        they are most concerned about the proposed change because 
        employees are already not saving enough for retirement.
          54 percent say employee tax deferred limits should be 
        raised not lowered.

     When asked about general reductions in the amount of 
401(k) plan contributions employees are allowed to deduct:

          Almost half (44 percent) of plan sponsors say 
        employee participation would decrease.
          Two-thirds (67 percent) of plan sponsors say employee 
        contribution levels would decrease.
          23 percent of plan sponsors say that their desire to 
        continue to offer the retirement plan would decrease.
          Over a quarter (27 percent) of employers not offering 
        a plan say it would decrease their desire to start offering a 
        defined contribution plan to their employees.

    Employers say that eliminating the ability for employees to deduct 
any amount of the 401(k) plan contributions from taxable income would 
cause employee participation levels, employee contribution levels and 
their own desire to offer a plan to decrease even further.
     More than 8 out of 10 plan sponsors state that employee 
participation and contribution levels would decrease (85 percent and 86 
percent respectively).
     Nearly two-thirds (65 percent) of plan sponsors say their 
desire to continue offering the plan would decrease.
     36 percent of employers not offering a plan say it would 
decrease their desire to start offering a defined contribution plan to 
their employees.

    To complement the survey findings, we analyzed the block of 401(k) 
and 403(b) plans we service, and our analysis \3\ found that the 
majority of those deferring the maximum amount into these plans are 
pre-retirees (age 50+) and are nearly evenly split between highly 
compensated (earned more than $110,000, the 2011 indexed compensation 
guideline) and non-highly compensated.
---------------------------------------------------------------------------
    \3\ Analysis complete on a total of 8,446 401(k) and 403(b) plans 
serviced by The Principal with over 65,500 participants reaching the 
maximum deferral limits in 2010.

     Participants age 50+ represent 61 percent of all 
participants currently deferring the maximum amount allowed.
     In the plans we analyzed, nearly 50 percent of those 
employees age 50+ and deferring the maximum amount are classified as 
non-highly compensated.

    OUR POSITION: Preserve existing tax incentives and contribution 
limits. Increase the limit for catch-up contributions.

    We urge Congress to carefully consider the unintended negative 
consequences of decreasing or removing current tax incentives for 
voluntary retirement programs.

     This survey demonstrates that reductions or elimination of 
current tax incentives would substantially impede savings and decrease 
the number of employer-sponsored plans, resulting in a detrimental 
impact on overall retirement security for Americans and the economy as 
a whole.
     In addition, based on the further analysis \3\ we 
completed to identify groups of participants who are currently 
deferring the maximum into 401(k)/403(b) plans that we service, we find 
that reductions in tax incentives would greatly impact non-highly 
compensated workers and pre-retirees: the very people that many in 
Congress are trying to protect.
    Contribution limits are especially important for those nearing 
retirement. Because they may not have had access to defined 
contribution plans for their entire working careers, pre-retirees are 
deferring more to catch up. To help them save more in the years before 
retirement, we recommend Congress increase the limit for catch-up 
contributions.
                    mandatory plans: not the answer
    In general, employers do not favor mandated retirement savings and 
report it may have a negative impact on the retirement system.

     Only 27 percent of plan sponsors and 32 percent of 
employers not offering a plan agree with the statement that all 
employers should be mandated to offer some type of workplace retirement 
plan for employees.
           benefits and barriers to offering retirement plans
    Survey findings suggest there is a disconnect between employers who 
are plan sponsors and those who are not, regarding the key benefits and 
challenges of offering a DC retirement plan. Current plan sponsors 
recognize the value of a 401(k) plan to their overall business strategy 
and cite regulatory requirements as key challenges.

     The majority (84 percent) of plan sponsors say their DC/
401k plan is a key part of their company's benefit strategy.
     More than a third (36 percent) say their DC/401(k) plan 
helps them compete for talent.
     More than half (52 percent) said allowing all employees, 
including highly compensated, to defer up to Internal Revenue Service 
limits would make it easier for employers to operate their plans. Under 
current safeguards, plan sponsors may need to make additional 
contributions to non-highly compensated employees in order to allow 
this.
     Nearly half of plan sponsors say easing reporting 
requirements (47 percent) and compliance burdens (42 percent) would 
help with plan operation.

    Employers not offering a retirement plan appear to be unaware of 
key business benefits and tax advantages of offering a DC/401(k) plan.

     The most common reason given for not offering a retirement 
plan is employees prefer wages, (31 percent) followed by it costs too 
much to set up and administer (27 percent). Another quarter of 
employers indicate the required company contributions are too 
expensive.
     Just over half of employers not offering a plan (53 
percent) are not aware of the startup tax credit given to employers who 
start a DC/401(k) plan. Only 17 percent are aware of how the startup 
tax credit works. However, more than a third (35 percent) said the 
credit would be a strong incentive when considering to offer a DC/
401(k) plan.
     The top three factors--all selected by a third of 
employers--that would cause employers to consider offering a retirement 
plan include:

          An increase in company revenue.
          A plan with no required employer contributions.
          Greater tax advantages for owners/key employees.

    These responses suggest that these employers who do not sponsor 
plans are not fully aware of plan design alternatives that currently do 
not require an employer contribution. In addition, they suggest that 
increasing tax incentives to employers for sponsoring retirement plans 
may increase willingness to sponsor a plan.

    OUR POSITION: Simplify rules, plan designs and regulations to make 
it easier for employers to offer and plan sponsors to operate 
retirement plans. Promote the benefits of offering a plan.

    To make it easier to operate retirement plans and improve plan 
design, we recommend new rules to reduce bureaucracy and administrative 
requirements for plans that adopt safe harbor and automatic enrollment 
designs. For example, simplifying annual notice requirements to 
employees could save a great deal of time and money for employers.
    To encourage more employers to offer plans, educate employers on 
the business benefits of offering a retirement plan, including the 
valuable role they play as a key part of a company's benefit strategy. 
Almost 7 out of 10 (66 percent) employees rate their defined 
contribution plan as an important to very important benefit to them.\4\ 
These employers also need to be made aware of creative plan design 
solutions that can maximize savings in an efficient manner. Plan 
designs are available that do not require employer contributions, and 
employer matching formulas can be designed within the employer's 
contribution budget while still encouraging employee deferrals.
---------------------------------------------------------------------------
    \4\ Principal Financial Well-Being Index, Third Quarter 2011.
---------------------------------------------------------------------------
    The Department of Labor can also help by promoting the Small 
Business Tax Credit for Start-up Expenses to employers considering to 
offer a DC/401(k) plan. Additionally, we recommend Congress consider 
the following enhancement to the Small Business Tax Credit for Start-up 
Expenses:

     Increase the percentage of startup costs eligible for 
credit.\5\
---------------------------------------------------------------------------
    \5\ The current percentage of startup costs eligible for credit is 
the lesser of 50 percent of startup costs or $500.
---------------------------------------------------------------------------
     Extend the time period for credit and add a tax credit for 
small employers who provide a contribution or match.\6\
---------------------------------------------------------------------------
    \6\ The current time period for the credit is 3 years.
---------------------------------------------------------------------------
            increasing retirement savings to adequate levels
Plan Sponsors Are Aware Participants Need to Save More and Are Willing 
        to Make Changes
    Whether currently sponsoring a plan or not, on average, employers 
believe that employees should be saving approximately 12-16 percent of 
pay over the course of a career (including employer match/
contributions) in order to have adequate income in retirement.

     Employers who sponsor plans say employees should save an 
average of 12 percent of pay in order to provide adequate income during 
retirement, including employer contributions.
     Employers who don't currently sponsor a plan say employees 
should be saving an average of 16 percent of pay.

    Many plan sponsors would be willing to modify their defined 
contribution plan features if they were shown research that such 
modifications would increase employee participation or retirement 
savings levels.

     Over one out of five plan sponsors (22 percent) who do not 
have automatic enrollment would be more likely to add automatic 
enrollment if shown research that shows it increases employee 
participation rates.
     40 percent of plan sponsors offering automatic enrollment 
would consider a 6 or 8 percent default deferral rate for employees who 
are auto enrolled in the plan.
     32 percent of plan sponsors who have automatic enrollment 
and automatic escalation would be willing to implement a 6 percent 
default rate/1 percent annual auto increase up to 15 percent if they 
were shown research that indicates participants would not opt out of 
the plan. Only 12 percent of these plan sponsors said they would not 
consider this design.
     Two-thirds of plan sponsors would be willing to improve 
education to promote savings levels of at least 11-15 percent of pay 
(including employer match) if shown research recommending plan 
participants save at least that amount throughout their entire working 
career.

    OUR POSITION: Promote adequate savings levels and encourage use of 
plan designs that increase participation and savings.

    The most challenging question facing participants is how much to 
save to have adequate income in retirement. We advocate basing that 
answer on a target income replacement ratio. In other words, saving 
enough to replace a percentage of projected pre-retirement income. We 
suggest a target income replacement ratio of 85 percent of pre-
retirement salary as the standard for determining if an individual is 
on track. This figure is based on our analysis that, on average, an 
individual will need an 85 percent replacement ratio to generate 
sufficient income for retirement, especially with the high cost of 
health care.
    Our analysis further shows that to reach that 85 percent income 
replacement ratio target--which includes Social Security benefits, 
personal savings and employer-sponsored contributions via retirement 
plans--an individual needs to achieve a savings rate over their working 
life of between 11 and 15 percent of pay (including employer 
contributions).\7\
---------------------------------------------------------------------------
    \7\ The savings rate estimate of 11-15 percent of pay (including 
employer contributions) is calculated based on a goal of replacing 85 
percent of salary, while drawing 4 to 5 percent of the retirement funds 
annually and assumes a 40-year span of accumulating savings, as well as 
the following:

      Retirement at age 65;
      Social Security providing 40 percent of replacement pre-
retirement income;
      Long-term annual market returns of 8 percent;
      Annual inflation rate of 3 percent; and
      Annual wage growth of 4 percent over 40 years in 
workforce.
---------------------------------------------------------------------------
    This savings range will be higher or lower depending on several 
factors, including the age at which retirement savings begins and 
whether other assumptions,\7\ including market performance, are met. 
Our current market performance assumption of 8 percent is developed by 
Ibbotson Associates based on 30 years of historical performance of 
various industry benchmarks, and is considered a long-term view of the 
marketplace, which we believe is appropriate for long-term retirement 
savings. Ibbotson updates projections annually, at which time we re-
assess our assumptions.
    There are plan design changes plan sponsors can make now to help 
motivate participants to save more effectively. In our 2011 white 
paper, Our View on Retirement Readiness: How to move from a ``popular'' 
plan to a successful plan, we outline design changes that enable 
employees to boost contributions and participation. Those plan designs 
include:

      Redesigning employer matching formulas to encourage 
higher employee deferral levels. The following chart \8\ illustrates 
three different employer match formulas for the same employer dollar 
expenditure. The average overall deferral by participants increases as 
the employer match formula is stretched.

    \8\ Principal Financial Group Analysis, Dec. 2010. Data based on a 
group of 6,560 contracts that show a stated match formula.

 
----------------------------------------------------------------------------------------------------------------
                                                             Maximum      Average        Total        Average
                                                             employer     overall    contribution  participation
                      Match formula                           amount      deferral    to the plan       rate
                                                            (percent)    (percent)     (percent)     (percent)
----------------------------------------------------------------------------------------------------------------
100 percent on deferrals of up to 2 percent of pay.......           2          5.3           7.3            66
50 percent on deferrals of up to 4 percent of pay........           2          5.6           7.6            67
25 percent on deferrals of up to 8 percent of pay........           2          7.0           8.8            65
----------------------------------------------------------------------------------------------------------------

     Redesigning automatic enrollment features by:

          Setting an appropriate default rate of at least 6 
        percent,
          Coupling automatic enrollment with auto-escalation, 
        and
          Re-enrolling all employees each year.

    Concerns are often raised when considering to increase the default 
deferral rate that the result will be substantially higher numbers of 
employees opting-out of automatic enrollment entirely. However, based 
on analysis we have completed, it indicates that when plan sponsors set 
a higher automatic enrollment default rate it can result in higher 
savings rates without negatively affecting participation.\9\ 
Additionally, we found:
---------------------------------------------------------------------------
    \9\ Principal Financial Group Analysis, Dec. 2010. Data based on a 
group of 115,728 participants in active auto-enroll contracts with a 
default deferral percentage of 3 percent.

     Nearly twice as many participants (61 percent) reach an 
overall savings rate greater than 11 percent when their employers' 
plans default them to 6 percent versus 3 percent (32 percent).\10\
---------------------------------------------------------------------------
    \10\ Principal Financial Group Analysis, Dec. 2010. Data based on a 
group of 44,782 participants.
---------------------------------------------------------------------------
     Participants have the option to opt out of the plan or the 
automatic deferral rate. However, automatic enrollment at 6 percent 
increased opt outs from the plan by just 4 percentage points over the 3 
percent auto enrollment level.\11\
---------------------------------------------------------------------------
    \11\ Principal Financial Group Analysis, Dec. 2010. Data based on a 
group of 203 retirement plans that offer automatic enrollment at a 6 
percent default rate.

    Congress can help encourage re-designed automatic enrollment 
---------------------------------------------------------------------------
features that encourage savings:

     Update existing automatic enrollment arrangements to 
encourage setting a default deferral level higher than 3 percent.
     Remove the 10 percent cap on default deferrals and auto 
escalation in the Qualified Automatic Contribution Arrangement.
     Provide an additional tax incentive for employers who use 
auto escalation that could be used to help provide the match above a 
certain amount if auto escalation is used.

    For employers with plans that are not a good fit for automatic 
enrollment, such as employers who have high turnover or a high number 
of seasonal employees, there are other plan design changes that can 
help break through the inertia that prevents individuals from enrolling 
in plans or not maximizing savings. These designs may include changes 
to entry and vesting requirements and limiting withdrawal options.
    Finally, we are working with financial professionals to help plan 
sponsors with a more effective measure of retirement plan success. 
Rather than the traditional method of looking at participation rates, 
we encourage plans sponsors to look at plan income replacement ratios 
as a more accurate measure of whether a plan is helping employees save 
successfully for retirement.
               securing income to last through retirement
Plan Sponsors Need Regulatory Clarity to Address Retirement Income 
        Challenges
    Plan sponsors say their employees are unprepared to manage their 
money in retirement, though there is less agreement on the employer's 
role in helping employees with retirement income management.

     Only 15 percent of plan sponsors say their employees are 
prepared to manage their money in retirement.
     Nearly one-third (30 percent) of plan sponsors state they 
should play a role in helping employees turn retirement savings into 
retirement income, while a little over a third (38 percent) say they 
should not play a role. The remaining (31 percent) of plan sponsors are 
not sure if they should play a role.
     The majority of plan sponsors (79 percent) are not in 
favor of the government mandating that all employees must put a portion 
of their retirement savings into an annuity.
     While the majority (75 percent) of plan sponsors say that 
requiring retirement income projections on defined contribution 
employee statements would be helpful, two-thirds are concerned that the 
assumptions made in calculating income projections may be wrong and 
that the employer could be liable if employees do not receive this 
amount.

    Employers support making financial literacy education more 
available.

     Three-quarters (76 percent) of plan sponsors and 67 
percent of employers who do not sponsor a plan agree that financial 
literacy education should be made more available to employees.
     early three out of five plan sponsors (57 percent) say 
retirement plan providers should be the entity to provide financial 
literacy education, followed by schools (13 percent).

    OUR POSITION: Publicize and promote savings levels for adequate 
retirement income. Enhance each part of the retirement system.

    Many individuals simply do not have a realistic understanding of 
how much money they need in retirement or how much they can spend 
before they run out of income from their savings. To address this need, 
the industry must work with plan sponsors through education strategies 
to promote savings at sufficient levels such as 11-15 percent or more 
of pay over a working career.
    We also advocate broader use of retirement income illustrations on 
benefit statements to drive home how long savings are estimated to last 
in retirement and help change how employees think about saving for 
their futures. Approximately 75 percent of the retirement plans we 
service use such illustrations.\12\
---------------------------------------------------------------------------
    \12\ Principal Financial Group Analysis, Aug. 2011. Data based on a 
group of 29,000 retirement plans that allow income projections to be 
displayed and have provided required 415 salary information for 
participants.
---------------------------------------------------------------------------
    We have asked the Department of Labor to address employer concerns 
about their potential liability and encourage these illustrations as a 
best practice by:

     Providing regulatory guidance that the retirement income 
illustration is an estimate and not a guarantee to alleviate fiduciary 
concerns for plan sponsors.
     Encouraging employers to voluntarily provide education 
about and access to income annuities at the worksite by clarifying 
ERISA regulations to alleviate fiduciary concerns.

    Voluntary worksite retirement plans like the 401(k) plan are only 
one component of the retirement system. To tackle the key challenges to 
retirement savings, all facets of the system must be addressed.
    We encourage legislators to support existing defined benefit plans 
with funding rules that help provide predictability. Lawmakers should 
also carefully consider the potential negative impact of any changes to 
Pension Benefit Guaranty Corporation (PBGC) premiums.
    We must also take action now to ensure solvency of Social Security 
benefits. Addressing Social Security solvency sooner rather than later 
will help lessen the number of changes needed and minimize the negative 
effect on the security of Americans. We believe a combination of 
benefit adjustments and tax changes could be made now to reduce the 
current financial imbalance and spread the sacrifice across 
generations.
    Finally, there is a clear need to expand financial literacy. 
Employers look to the financial industry to take the lead in providing 
financial literacy in the workplace. Any solution needs to include a 
renewed commitment to financial literacy from elementary school through 
the working years.
                               conclusion
    The Nation's retirement savings challenges can be overcome. It is 
critical that any steps taken to address those challenges preserve and 
build on the firm foundation of the current voluntary worksite 
retirement system. That is why it is so important to take into account 
how proposals would impact the employers who voluntarily set up and 
operate these plans. The financial services industry will continue to 
take steps to improve plan design to better ensure retirement 
readiness, but it is clear that regulators and legislators can play a 
role in encouraging more employers to sponsor plans and employees to 
save more in those plans. Working together, we can help ensure a more 
secure future for American workers.
                           survey methodology
    This survey was conducted online within the United States by Harris 
Interactive on behalf of the Principal Financial Group from May 17-June 
17, 2011 among 507 U.S. adults aged 18 and older who are employee-
benefit decisionmakers for companies with 10-500 employees and do not 
currently offer defined contribution retirement plans. Seven-hundred 
and ninety-eight employee-benefit decisionmakers for companies with 3-
1,000 employees that do offer defined contribution retirement plans 
were also surveyed. These decisionmakers were selected from a Principal 
Financial Group client list, and their data was not weighted. This 
online survey is not based on a probability sample and therefore no 
estimate of theoretical sampling error can be calculated. For complete 
survey methodology please contact Sarah Ehlinger at 
[email protected].
                  about the principal financial group
    The Principal Financial Group (The Principal)\13\ is a retirement 
and global asset management leader. The Principal offers businesses, 
individuals and institutional clients a wide range of financial 
products and services, including retirement, investment services and 
insurance through its diverse family of financial services companies. A 
member of the FORTUNE 500, the Principal Financial Group has $335.8 
billion in assets under management \14\ and serves some 16.5 million 
customers worldwide from offices in Asia, Australia, Europe, Latin 
America and the United States. Principal Financial Group, Inc. is 
traded on the New York Stock Exchange under the ticker symbol PFG. For 
more information, visit principal.com.
---------------------------------------------------------------------------
    \13\ The Principal Financial Group and ``The Principal'' are 
registered service marks of Principal Financial Services, Inc., a 
member of the Principal Financial Group.
    \14\ As of June 30, 2011.
---------------------------------------------------------------------------
       Response by Aliya Wong to Questions of the HELP Committee
                                summary
    The U.S. Chamber of Commerce is the world's largest business 
federation, representing the interests of more than 3 million 
businesses of all sizes, sectors, and regions, as well as State and 
local chambers and industry associations.
    More than 96 percent of the Chamber's members are small businesses 
with 100 or fewer employees, 70 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.
    Besides representing a cross section of the American business 
community in terms of number of employees, the Chamber represents a 
wide management spectrum by type of business and location. Each major 
classification of American business--manufacturing, retailing, 
services, construction, wholesaling, and finance--is represented. Also, 
the Chamber has substantial membership in all 50 States.
    The Chamber's international reach is substantial as well. It 
believes that global interdependence provides an opportunity, not a 
threat. In addition to the U.S. Chamber of Commerce's 115 American 
Chambers of Commerce abroad, an increasing number of members are 
engaged in the export and import of both goods and services and have 
ongoing investment activities. The Chamber favors strengthened 
international competitiveness and opposes artificial U.S. and foreign 
barriers to international business.
    Positions on national issues are developed by a cross section of 
Chamber members serving on committees, subcommittees, and task forces. 
More than 1,000 business people participate in this process.
                                 ______
                                 
    The U.S. Chamber of Commerce would like to thank Chairman Harkin, 
Ranking Member Enzi, and members of the committee for the opportunity 
to participate in today's Roundtable discussion on Pension 
Modernization for a 21st Century Workforce. I am Aliya Wong, executive 
director of retirement policy for the U.S. Chamber of Commerce. The 
Chamber is the world's largest business federation, representing more 
than 3 million businesses and organizations of every size, sector and 
region. Over 96 percent of the Chamber members are small businesses 
with fewer than 100 employees.
    The topic of today's hearing--Pension Modernization for a 21st 
Century Workforce--is of significant concern to our membership. 
Businesses in America, large and small, maintain a long-held commitment 
to providing voluntary benefits that support the welfare of their 
workers. Retirement security in particular is a significant focus of 
voluntary benefit offerings. As Americans live longer, healthier lives, 
retirement security becomes a greater concern. The private employer-
provided retirement system has contributed greatly to the current 
retirement security of millions of Americans.
    While the focus of today's Roundtable is on defined benefit plans, 
I would be remiss not to mention the success of the entire private 
retirement system which also includes defined contribution and 
individual account plans. Today, 82 million households have defined 
benefit plans, defined contribution plans, or individual retirement 
accounts. These households have a combined $17.9 trillion earmarked for 
retirement.\1\ Moreover, income from defined benefit and defined 
contribution plans represented 19 percent of retiree income in 1975; 
whereas, by 2009, it accounted for 26 percent of retiree income. The 
number of retirees receiving retirement income from employment-based 
plans has also grown, from 20 percent of retirees in 1975 to 31 percent 
in 2009.\2\ Much of this growth can be attributed to defined 
contribution plans. Since 1975, the number of defined contribution 
plans has almost quadrupled, from 207,748 to 659,530 in 2007.\3\ In 
1992-93, 32 percent of workers in private industry participated in a 
defined benefit plan, while 35 percent participated in a defined 
contribution plan.\4\ According to the 2008 National Compensation 
Survey, private industry workers' participation in defined benefit 
plans decreased to 21 percent, while participation in defined 
contribution plans increased to 56 percent.\5\ These numbers show that 
participation in the entire retirement system is steadily increasing.
---------------------------------------------------------------------------
    \1\ Investment Company Institute, Retirement Assets Total $17.9 
Trillion in Fourth Quarter 2011, April 2, 2012, http://www.ici.org/
research#retirement_research. These figures also include assets held in 
government-sponsored plans because there is overlap in participation 
between private and government plans and participation in government 
plans is also an important part of retirement security.
    \2\ Investment Company Institute, Helping Working Americans Achieve 
a Financially Secure Retirement: How the 401(k) System Is Succeeding, 
July 2011, http://www.ici.org/pressroom/speeches/11_pss_ayco_401k.
    \3\ U.S. Department of Labor, Employee Benefits Security 
Administration, Private Pension Plan Bulletin Historical Tables, 
December 2011, p. 1, http://www.dol.gov/ebsa/pdf/historicaltables
.pdf.
    \4\ Allan Beckman, ``Access, Participation, and Take-up Rates in 
Defined Contribution Retirement Plans Among Workers in Private 
Industry, 2006,'' Bureau of Labor Statistics, December 27, 2006, http:/
/www.bls.gov/opub/cwc/cm20061213ar01p1.htm (accessed August 11, 2010).
    \5\ Bureau of Labor Statistics, ``Percent of Workers in Private 
Industry With Access to Retirement and Health Care Benefits by Selected 
Characteristics: 2008,'' http://www.census.gov/compendia/statab/2010/
tables/10's0639.pdf (accessed August 11, 2010).
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    In April of this year, the Chamber issued a white paper entitled 
``Private Retirement Benefits in the 21st Century: A Path Forward'' in 
response to concerns about retirement security. The paper was developed 
with members of the Chamber's Employee Benefits Committee to offer 
guidelines on initiatives and reforms that will continue to bolster the 
voluntary employment-based retirement benefits system and retirement 
security for workers. The answers to the Roundtable questions below 
reflect the ideas and positions contained in the white paper as agreed 
upon by our membership.

    Question 1. Defined benefit pension plans have provided a secure 
retirement for millions of middle-class Americans, but it is clear that 
the traditional pension system is in decline and that existing defined 
benefit pension models may not be well-suited for some of our 21st 
century workforces. What should our pension system look like to meet 
the challenges of the global economy and the need to provide retirement 
security for working Americans?
    Answer 1. In order to meet the challenges of the global economy and 
the need to provide retirement security, it is important that the 
private system remain voluntary, flexible, and include incentives for 
saving. In addition, we believe that any changes to the current system 
should focus on simplicity, and encourage innovation.
    The Chamber believes that the key element of the private retirement 
system is its voluntary nature. While there is widespread agreement on 
the importance of retirement savings and programs, not every employer 
is able to offer a retirement program. Employers that have extremely 
small profit margins cannot afford mandatory benefits without losing 
employees. In addition, concerns about liability and administrative 
burdens could also negatively impact the productivity of business.
    No single plan design is perfect for every company or every worker. 
Therefore, the private retirement system has encouraged innovation in 
plan design, and many employers have more than one type of plan as part 
of their retirement program. One of the great successes of the private 
retirement system has been the ability of employers to implement new 
plan designs to accommodate changing demographics and evolving 
workforce needs. Innovation in plan design has encouraged employers to 
continue to participate in the private retirement system.
    For employers that choose to implement retirement programs, 
flexibility and choice are key considerations. The mix of types of 
benefit plans in the future will be diverse--defined benefit, defined 
contribution, multiemployer, and hybrid plans. Demographic and 
competitive needs will spur the creation of plan designs that we have 
not even begun to contemplate. Consequently, it is more important than 
ever to ensure that there are no statutory, practical, or political 
barriers to innovation that would discourage participation in the 
private retirement system.
    In addition to innovations in plan designs, we are witnessing an 
evolution of another type. Retirement in America is changing, a fact 
that can be attributed both to hard economic times and evolving views 
of what retirement should be. Many of today's older workers see 
retirement as a whole new life chapter rather than a time to wind down. 
There is no longer a monolithic vision of retirement. Therefore, 
flexible laws are needed to continue to serve retirees who no longer 
work while also encouraging those who are able and willing to continue 
to work.
    While we work to enhance the current private retirement system and 
reduce the deficit, we must not eliminate one of the central 
foundations--the tax treatment of retirement savings--on which today's 
successful system is built. Employer-sponsored retirement plans have 
introduced tens of millions of American workers to retirement saving. 
Eliminating or diminishing the current tax treatment of employer-
provided retirement plans would jeopardize the retirement security of 
tens of millions of American workers, impact the role of retirement 
assets in the capital markets, and create challenges in maintaining the 
quality of life for future generations of retirees.

    Question 2. What would make it easier and attractive for 
businesses--especially small businesses--to provide their employees 
with a traditional pension benefit? Would reducing the employers' risk 
and plan complexity help?
    Answer 2. There is no silver bullet that will resolve the issues of 
retirement coverage and savings. Small businesses members have stated 
that the Chamber cannot over-emphasize the need for simplification and 
a reduction in unnecessary regulatory requirements in the current 
retirement system. Small businesses are focused on running a business; 
therefore, anything that avoids increasing their liability and 
decreases their administrative burdens is important. In addition, 
stability, predictability and consistency among the regulatory agencies 
would go a long way toward encouraging greater participation in the 
private retirement system. We have several suggestions for making 
traditional pension benefits more attractive. Nonetheless, even with 
greater incentives and changes to defined benefit plans, we do not 
believe that traditional pension plans will be appropriate for every 
employer or employee. For example, the average job tenure is now less 
than 5 years. In certain industries--particularly retail--turnover 
rates are significantly higher. As such, a traditional pension plan 
would not be appropriate.

     Reform Single-Employer Defined Benefit Funding 
Requirements. The number of defined benefit plans has been declining. 
Plan sponsors face a number of challenges, the greatest of which is the 
need for predictability and flexibility. Since 2002, Congress has 
passed five laws that address defined benefit funding. For more than a 
decade, the legality of hybrid plans was unresolved, and plan sponsors 
of those plans were unable to get determination letters. Since the 
recent financial crisis, inflexible funding rules have created 
unexpected financial burdens for plan sponsors. All of these scenarios 
have had a negative impact on the employer-provided retirement system. 
Therefore, the Chamber urges Congress to keep in mind the need for 
predictability and flexibility to ensure that employers can continue to 
maintain plans that contribute to their workers' retirement security.
    Policymakers can take several steps to encourage sponsorship of 
defined benefit plans. To improve defined benefit plan funding, the law 
should allow for unlimited prefunding up to the amount of projected 
future benefits in the plan. Additionally, the Internal Revenue Service 
(IRS) should eliminate the tax penalty for the reversion of assets in a 
pension plan after all promised benefits have been paid out to 
participants.
     Clarify the Hybrid Plan Rules and Regulations. The Chamber 
views hybrid plans as an important part of the private retirement 
system. Therefore, the Chamber worked for several years toward the 
confirmed legality of hybrid plans in the Pension Protection Act (PPA) 
(and as amended by the Worker, Retiree, and Employer Recovery Act of 
2008). However, because of the previous controversy surrounding hybrid 
plans, they are less widespread than they should be. Therefore, we 
believe that the rules provided under the PPA and the ensuing guidance 
from the Treasury and the IRS should provide plan sponsors with enough 
certainty to establish and maintain hybrid plans and to allow for 
greater participation in these plans. Specifically, we urge the 
Treasury and IRS to set forth a clear and rational approach to PPA 
compliance for Pension Equity Plans. More broadly, because of the 
complexity of hybrid plans and their regulation, additional guidance is 
critical to ensure that plan sponsors have enough clarity and 
flexibility to adopt and maintain hybrid pension plans with legal 
certainty.
     Streamline Notice Requirements and Allow for Greater Use 
of Electronic Disclosure. Consolidating and streamlining certain notice 
requirements would make retirement plan sponsorship more attractive for 
business and for small businesses in particular. Currently, plan 
sponsors and participants are overwhelmed by the disclosure 
requirements. This feeling is particularly acute for small businesses 
that may not have a human resources department to focus on notice 
requirements. Furthermore, the notice requirements do not occur in a 
vacuum--employers are required to provide many other notices outside of 
the ERISA context. A thorough congressional review could identify many 
ways of relieving unnecessary administrative burdens of little or no 
utility while ensuring that participants receive information that is 
meaningful and relevant.
    In addition to consolidation and elimination, it is important for 
regulators to recognize the benefit of electronic delivery, which is 
faster, cheaper, and better than any other form of delivery. We believe 
that it is critical for the Department of Labor, Department of the 
Treasury, and the Pension Benefit Guaranty Corporation (PBGC) to create 
a single, uniform electronic disclosure standard and we recommend that 
all of the agencies change their standards to encourage the use of 
electronic delivery and to allow, for plan sponsors that wish, 
electronic delivery to be the default delivery option for benefit 
notices. The Chamber believes that modernizing the restrictive rules on 
electronic delivery is a critical element in the larger task of 
reforming employee benefit plan notice and disclosure requirements. 
These changes can allow important information to be provided without 
being submerged in an avalanche of rarely used information.
     Create Greater Transparency in Accounting Standards for 
Employer-Provided Benefit Plans. Under Sarbanes-Oxley, the Securities 
and Exchange Commission designates an accounting standard-setter and 
sets its budget. The Financial Accounting Standards Board (FASB), a 
quasi public-private organization, has been designated as this 
accounting standard-setter. The Chamber fully supports independent 
standard-setting. However, dialog and input from stakeholders is 
important to the process, and we believe that process improvements, 
such as transparency and cost-benefit analysis, are needed to ensure 
appropriate levels of input.
    Various accounting rules and practices in the past have discouraged 
the continuation of defined benefit pension. Despite the best efforts 
of policymakers to create an environment that encourages more assertive 
action in these areas, these efforts can be significantly affected or 
undone by the actions of FASB. The negative impact of FASB standards 
has been seen in the area of retiree health care plans, single-employer 
defined benefit plans, and, most recently, multiemployer defined 
benefit plans. To ensure that employers are not unintentionally 
discouraged from participation in the retirement system, it is 
necessary to address the accounting practices associated with voluntary 
benefit plans.
     Give Small Businesses a Dedicated Voice on Advisory 
Councils. Small businesses play an important role in the debate over 
the effectiveness of the voluntary employer-provided system; therefore, 
it is important to increase their representation in the debate. The 
advisory councils to the DOL, IRS, and PBGC are important sources of 
input to those agencies. However, none of them have a seat specified 
for small business. An important way to increase the voice of small 
business in the discussion of the employer-provided system is to have a 
small business representative on each of these advisory councils.

    Question 3. What do employees need from a pension plan to ensure 
that they will have a secure retirement?
    Answer 3. Much like employers, employees also need flexibility and 
innovation. While asset accumulation has long been the focus of 
retirement planning discussions, the decumulation of those assets in 
retirement has become an important consideration. As people live longer 
in retirement, they must consider ways to manage assets to provide a 
steady retirement income stream. Policymakers, industry, and employers 
are increasingly focused on ways to help individuals convert their 
accumulated savings into retirement income streams (including 
guaranteed options and systematic withdrawals) that will see them 
through a retirement that could last more than 30 years. The Chamber 
supports greater education for participants, innovation among products, 
and flexibility for employers to try new products and programs.

     Phased Retirement. Given current unemployment numbers, it 
is difficult to imagine an employment shortage. However, because of the 
demographics of our population, we can expect employment strains in 
certain industries and regions. Although there is no official 
definition of phased retirement, it generally refers to any arrangement 
whereby a worker at or near regular retirement age continues to work, 
but at a reduced schedule, a reduced salary, reduced responsibility, or 
a combination of all three. Sometimes the phased retiree will continue 
receiving health benefits or will begin receiving a pension. Many 
phased retirement arrangements are informal, but some employers--
particularly universities--have formal phased retirement programs.
    Employers looking at a possible brain drain want to keep their 
experienced and skilled workers in order to remain competitive. 
However, several barriers exist to phased retirement. Legal barriers 
restrict when benefits can be paid out. Fiscal barriers include the 
costs associated with employing older workers, such as increased 
pension payments and higher health care coverage costs. Policy and 
practical barriers include how accruals should be calculated during 
phased retirement or how to apportion the payout. These barriers have 
prevented many employers from implementing phased retirement programs. 
In summary, we believe the following principles are necessary in 
discussing any phased retirement policy:

          Continue to treat phased retirement programs and 
        practices as discretionary arrangements;
          Legislative and regulatory modifications required 
        (for example, to the anti-cutback rules and the non-
        discrimination rules);
          Allow, but not require, employers to continue to 
        offer health benefits.

     Encourage Additional Distribution Options. To encourage 
continued innovation and growth of financial products, it is important 
that lawmakers approach decumulation issues in a product-neutral 
manner. Public policy in this arena should encourage education on the 
various distribution options and to encourage product innovation to 
meet the varied needs of savers and retirees. Employers should not be 
required to offer specific distribution options in their retirement 
plans. Rather, lawmakers should encourage and incentivize employers to 
implement additional payout options beyond the lump-sum option.
     Encourage Employers to Offer Voluntary Products. There are 
a number of voluntary products that participants might find helpful in 
managing retirement assets. However, not every product will be 
appropriate or necessary for every participant. Therefore, we recommend 
that employers be able to make these products available to their 
workers in the most efficient and flexible way possible, such as 
through a cafeteria plan or with 401(k) plan savings.

          Retiree Health Care. Rather than requiring that 
        employers offer specific products or implement retiree health 
        plans, the Chamber recommends that plan sponsors be allowed to 
        offer insurance products and retiree health savings accounts 
        through cafeteria plans. This step would provide important 
        tools for employees to manage future costs in retirement. It 
        could also reduce retiree reliance on State and Federal 
        Government support systems.
          Long-term Care Insurance. The increase in life 
        expectancy is spurring a need for long-term care. Encouraging 
        the purchase of long-term care policies could have far-reaching 
        benefits. It would reduce the extreme financial burden of long-
        term care costs to individuals and their families, and to 
        government support systems. To help pay for long-term care 
        insurance premiums while they are affordable, employees should 
        be able to access 401(k) plan assets during their working 
        years. Another alternative is to encourage employers to offer 
        long-term care insurance through a cafeteria plan on a pretax 
        basis.
          Longevity Insurance. The increase in life expectancy 
        also increases the chances that retirees will outlive their 
        retirement income. To avoid this situation, a retiree could 
        purchase longevity insurance, a form of deferred annuity with a 
        payment start date that begins at a later age in retirement. 
        One way to encourage the purchase of longevity insurance is to 
        exclude money used to buy the product from the required minimum 
        distribution rules. Also, as with long-term care insurance, 
        longevity insurance could be purchased through a cafeteria plan 
        or with 401(k) plan savings.

    In conclusion, the Chamber encourages action by policymakers that 
will maintain the success of the current system and ensure that 
employer-provided plans continue to play an important role in 
retirement security. We look forward to working with this committee and 
Congress to forward ideas that will encourage further participation in 
the employer-provided system rather than driving employers out of it. 
Thank you for your consideration of this statement.
        Response by Jim Davis to Questions of the HELP Committee
    Question 1. Defined benefit pension plans have provided a secure 
retirement for millions of middle-class Americans, but it is clear that 
the traditional pension system is in decline and that existing defined 
benefit pension models may not be well-suited for some of our 21st 
century workforces. What should our pension system look like to meet 
the challenges of the global economy and the need to provide retirement 
security for working Americans?
    Answer 1. The goal of any pension system should be to provide for a 
safe and secure retirement.
    A pension plan should be mandatory. If voluntary worked, we would 
not find ourselves in this dire situation.
    It should be professionally managed. Investing for retirement 
requires a very consistent, disciplined effort applied without emotion.
    Funds should be allocated over a wide variety of investments in 
order to minimize risk.
    A modern pension system should be predicated on the reality that we 
now live in a global financial system.
    An employee should have 1 year of service at their employment 
location in order to be eligible to receive a pension. The pension plan 
should be subject to a 5-year vesting schedule.

    Question 2.  What would make it easier and attractive for 
businesses--especially small businesses--to provide their employees 
with a traditional pension benefit? Would reducing the employers' risk 
and plan complexity help?
    Answer 2. Employers want a system that makes it easy to participate 
in without additional burdensome and time-consuming paperwork.
    Employers do not want it to be so costly that it makes their 
business uncompetitive.
    Employers want a competent fiduciary to manage the funds so that 
they are not forced to spend time managing a plan. Employers do not 
want to make allocation decisions for which they are not capable. 
Employers do not want to own any pension plan.
    Employers should expect to provide 3 to 5 percent of an employee's 
annual salary for a pension program.
    Employers should be able to provide additional retirement benefits 
without costly testing or rules.

    Question 3. What do employees need from a pension plan to ensure 
that they will have a secure retirement?
    Answer 3. Employees want to have a pension plan that provides a 
supplement to their monthly income.
    Employees want the peace of mind that comes from knowing their 
assets are safe and secure.
    Employees need reassurance that measures have been taken to prevent 
the reoccurrence of the financial meltdown of 2008.
    Individuals should not be left to fend for themselves. No matter 
how capable an individual may be in their particular occupation, they 
will not have the ability to make complex investment decisions.
    Employees should match the percentage contributed by their 
employer.
    Studies show that the happiest people are those that have good 
pensions.

    [Whereupon, at 12:20 p.m., the hearing was adjourned.]

                                   [all]
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