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32–520—PDF 2006

S. HRG. 109–810

SMALL BUSINESS PENSION PLANS:

HOW CAN WE INCREASE WORKER COVERAGE?

HEARING

BEFORE THE

SUBCOMMITTEE ON LONG-TERM GROWTH

AND DEBT REDUCTION

OF THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JUNE 29, 2006

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

SUBCOMMITTEE ON LONG-TERM GROWTH AND DEBT REDUCTION

GORDON SMITH, Oregon, Chairman

CHARLES E. GRASSLEY, Iowa JOHN F. KERRY, Massachusetts

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Smith, Hon. Gordon, a U.S. Senator from Oregon, chairman, Subcommittee

on Long-Term Growth and Debt Reduction ....................................................... 1

Bingaman, Hon. Jeff, a U.S. Senator from New Mexico ...................................... 2

PUBLIC WITNESSES

Copeland, Dr. Craig, senior research associate, Employee Benefit Research

Institute, Washington, DC .................................................................................. 4

Bjerke, Steve, investment representative, Edward Jones, Pendleton, OR ......... 5

Hall, Daniel, regional pension manager, The Standard, Stancorp Equities,

Inc., Portland, OR ................................................................................................ 8

Calimafde, Paula, chair, Small Business Council of America, Bethesda, MD .... 10

John, David C., senior research fellow, The Heritage Foundation, Washington,

DC .......................................................................................................................... 13

Iwry, J. Mark, senior advisor, The Retirement Security Project, Washington,

DC, and nonresident senior fellow, The Brookings Institution, Washington,

DC .......................................................................................................................... 16

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Bingaman, Hon. Jeff:

Opening statement ........................................................................................... 2

Bjerke, Steve:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 23

Calimafde, Paula:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 28

Copeland, Dr. Craig:

Testimony .......................................................................................................... 4

Prepared statement .......................................................................................... 44

Hall, Daniel:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 54

Iwry, J. Mark:

Testimony .......................................................................................................... 16

Prepared statement with attachments ........................................................... 61

John, David C.:

Testimony .......................................................................................................... 13

Prepared statement with attachments ........................................................... 61

Kerry, Hon. John:

Prepared statement .......................................................................................... 131

Smith, Hon. Gordon:

Opening statement ........................................................................................... 1

COMMUNICATIONS

AARP ........................................................................................................................ 133

American Society of Pension Professionals & Actuaries (ASPPA) ...................... 135

Transamerica Retirement Services ........................................................................ 140

(1)

SMALL BUSINESS PENSION PLANS: HOW CAN

WE INCREASE WORKER COVERAGE?

THURSDAY, JUNE 29, 2006

U.S. SENATE,

SUBCOMMITTEE ON LONG-TERM GROWTH

AND DEBT REDUCTION,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 2:35 p.m., in

room SD–215, Dirksen Senate Office Building, Hon. Gordon Smith

(chairman of the subcommittee) presiding.

Present: Senator Bingaman.

OPENING STATEMENT OF HON. GORDON SMITH, A U.S. SENATOR FROM OREGON, CHAIRMAN, SUBCOMMITTEE ON

LONG-TERM GROWTH AND DEBT REDUCTION

Senator SMITH. Good afternoon, ladies and gentlemen. Welcome

to the Subcommittee on Long-Term Growth and Debt Reduction

hearing. Our topic today is ‘‘Small Business Pension Plans: How

Can We Increase Worker Coverage?’’ Thank you all for being here.

Small businesses are the heart of the American economy. Small

business owners are out there every day, taking risks and creating

jobs. They know what it is like to sign both sides of a paycheck.

When running a small business, these is no set calendar which

guarantees your vacations, or even your weekends off. You are

working all the time, sometimes even Christmas. Owning a small

business is work, and I certainly applaud all small business owners. They are the spark plugs of the American economy and creators of the American dream.

Over the last decade, small businesses have generated the vast

majority of new jobs—60 to 80 percent of net new jobs annually.

With approximately 26 million small businesses in America, they

represent over 99 percent of all employer firms in the United

States.

Small businesses have also contributed measurably to America’s

innovation and technological advances as well. They employ roughly 40 percent of high-tech workers and produce 13 to 14 times more

patents per employee than large patenting firms.

The contributions of small businesses to our economy are many

and manifold; unfortunately, they tend to be under-appreciated and

over-regulated in the halls of government. But small businesses are

central to the progress of our country, and they are central to increasing America’s retirement savings.

2

More than half of all private sector employees are employed by

small business, yet small businesses are less likely than large employers to sponsor an employer retirement plan.

Moreover, employee participation rates are shockingly low. Businesses with fewer than 20 employees have only 15 percent of their

employees enrolled in a retirement plan. Businesses with 20 to 90

employees have only 43 percent of employees covered by an employer-provided plan. Employers with 100 to 500 employees have

little more than half of their employees participating in an employer-provided retirement plan.

The question then becomes: why are these rates so low? Small

businesses face significant barriers to establishing a retirement

plan. There is the cost factor: the cost of setting up a plan and administering it are often high.

There is also the potential for additional Federal regulation requirements and liability ramifications. Small companies with fewer

than 20 employees already spend 45 percent more per employee

than larger firms to comply with Federal regulations and tax compliance.

Add to this the complexity and volume of pension plan regulations, and I believe small businesses are systematically discouraged

from offering their employees a retirement plan.

This is a problem that needs a solution. I have heard from many

small business owners in Oregon who say they want to offer retirement plans, but the cost, complexity, and liability outweighs their

benefits, benefits such as recruiting and retaining key employees,

as well as increasing employee satisfaction and loyalty.

These benefits are all very important to small business owners,

because without good, hardworking employees, their future economic success is limited.

If we are serious about increasing Americans’ savings in order to

be financially secure in retirement, we need to assist small businesses in the retirement plan area. They are integral to any national savings solution.

Today we are here to focus on small employer coverage and employee participation to begin what will be a fruitful conversation on

what we in Congress can do to help small businesses and Americans save for retirement.

I am very pleased to have my colleague from New Mexico, Senator Bingaman with us, and for your opening statement.

OPENING STATEMENT OF HON. JEFF BINGAMAN,

A U.S. SENATOR FROM NEW MEXICO

Senator BINGAMAN. Thank you very much, Senator Smith, for

having this hearing and chairing it, and your leadership in this

area.

This is a very serious issue, particularly in a State like mine,

where most people work for small businesses. Most employees are

employed in small businesses. I think I have seen some statistics—

not recently; maybe some of you have it in your testimony—some

sort of a State-by-State analysis of the percentage of private sector

employee participation in some type of pension plan, and I think

New Mexico is about the bottom of that list.

3

I believe we are sort of the bottom of that list because we probably have the largest number of reasonably small employers relative to the rest of the workforce. We have very few large employers, I guess is another way to say it. So this is an extremely important issue.

I do think the statistics I have seen indicate that the trends are

going in the wrong direction. Companies are bailing out of defined

benefit plans, of course, but in addition to that, just the number

of employees who have any type of pension coverage is declining

rather than increasing, which is obviously the wrong direction.

Particularly, I want to thank Mr. Iwry and Mr. John for their

proposal on automatic IRAs. I think that is very useful. Years ago

I introduced some legislation that had some of the same characteristics, but we were not able to get a lot of folks interested at that

time.

I know Senator Smith is very focused on this and interested in

trying to move ahead with something of this type, which I think

is terrific, and perhaps, working with Heritage and with Brookings,

we can build enough momentum to actually pass something.

So I look forward to working with Senator Smith to see what we

can do in that area, and I look forward to the testimony. Thank

you all for being here.

Senator SMITH. Thank you, Senator Bingaman.

Senator Conrad and I, in fact, have an automatic enrollment for

those companies that have pension plans or 401(k)s, but the problem is, not enough of them have 401(k)s to automatically enroll

people in.

But it is just such a pressing national problem, because we literally have a negative savings rate in our country now. There just

has to be some streamlining, some additional incentive to help people to prepare for the demographic bulge that we are simply unprepared to receive when it comes to our retirement years.

Let me give, for the record, a brief introduction of each of you.

Our first witness is Dr. Craig Copeland. He is a senior research

associate at the Employee Benefit Research Institute. Dr. Copeland

researches participation in employer-based retirement plans, contribution behavior in defined benefit contribution plans, and adequacy of savings for retirement.

Then I want to introduce my neighbor, Steve Bjerke. He is from

my hometown of Pendleton, OR. He is an Edward Jones investment representative and has been doing this work for over 20

years. Thank you for coming here, Steve.

Mr. Daniel Hall is also from Oregon. He is a regional pension

manager for Standard Insurance, based in Portland. His responsibilities include sales of new retirement plans, communication of

retirement plans to employees, and overseeing businesses in the

Pacific Northwest region.

Then we have Ms. Paula Calimafde. Paula is the chair of the

Small Business Council of America and a practicing tax attorney

for over 20 years, specializing in qualified retirement plans.

Mr. David John is a senior research fellow at The Heritage Foundation. Mr. John serves as Heritage’s lead analyst on issues relating to pensions, financial institutions, asset building, and Social Security reform.

4

Mr. Mark Iwry is a senior advisor for The Retirement Security

Project and is a senior fellow at The Brookings Institution. Mr.

Iwry was Benefits Tax Counsel at the Treasury Department from

1995 to 2001.

We appreciate all of you joining us. Senator Kerry, the Ranking

Member of this subcommittee, may be joining us. But in the event

he is not able to, we have his statement. If there is no objection,

we will include his statement in the record. [No response.]

[The prepared statement of Senator Kerry appears in the appendix.]

Senator SMITH. Dr. Copeland, take it away.

STATEMENT OF DR. CRAIG COPELAND, SENIOR RESEARCH

ASSOCIATE, EMPLOYEE BENEFIT RESEARCH INSTITUTE,

WASHINGTON, DC

Dr. COPELAND. Thank you, Mr. Chairman and members of the

committee.

My focus today is on providing statistics on the participation of

employment-based retirement plans for small employers and the

demographic characteristics of small employers that affect participation in these plans.

I also examined the breakdown of retirement plan participants

into each type of plan, either defined contribution or defined benefit.

A small employer is defined as one with fewer than 100 employees. The main data source is the Census Bureau’s March 2005 Current Population Survey. From this data, 45 percent of private sector wage and salary workers aged 21 to 64 were found to have

worked for a small employer, with 18 percent for an employer with

fewer than 10 employees, 12 percent with 10 to 24 employees, and

15 percent with 25 to 99 employees.

A gap in retirement plan participation between small and large

employers has existed for many years, and, in 2004, 27 percent of

workers working for employers with fewer than 100 employees participated in an employment-based retirement plan, compared with

56 percent who worked for an employer with 100 or more employees.

This lower level of participation among smallest-employer workers persists across earnings levels, industries, and work status of

the employees. For workers at firms with fewer than 10 employees

earning less than $15,000 annually, 5 percent were participants,

compared with 17 percent of workers in firms with 1,000 or more

employees.

For workers earning $75,000 or more annually, 36 percent participated in the smallest employers, compared with 86 percent in

the largest employers. The percentage of workers participating in

the personal services industry ranged from 11 percent in the smallest firms to 33 percent in the largest firms. This compares to other

industries where the percentage of employees participating ranged

from just under 25 percent to just over 60 percent.

Among full-time, full-year workers, the percentage participating

increased from 20 percent in the smallest firms to 68 percent in the

largest firms. In contrast, among part-time, part-year workers, the

percentage participating ranged from 6 percent to 14 percent.

5

While the percentage of workers who participated in plans was

lower across the various characteristics of workers or employers,

important differences in the types of workers in the small versus

large employers remain. In particular, small employers have a disproportionate percentage of workers with annual earnings below

$15,000.

There are 31 percent at firms with fewer than 10 employees,

compared with 20 percent at employers with 100 or more employees. Small employers are also more likely to be in the personal

service industry and less likely to be in the manufacturing industry, the industries with the lowest and highest overall levels of participation, respectively.

Small employers have lower shares of full-time workers and

higher shares of part-time workers when compared with large employers. However, when we look at other important characteristics

of the workforce—age, race and education level—it did not differ

markedly.

While CPS data that have been previously cited do not include

the plan type of these participants, the Federal Reserve Board Survey of Consumer Finances does. Participants of employment-based

retirement plans working for small employers are more likely to

have a defined contribution plan as their only plan relative to participants in larger employers.

For example, 77 percent of participants with 10 to 19 employees

were in a defined contribution plan only. This compares with 57

percent at firms with 500 or more employees.

While rates of having only a defined benefit plan are similar

across employer sizes, participants from the largest employers are

significantly more likely to have both types of plans, 21 percent for

large employers, compared with 6 percent for the small employers.

This higher likelihood of having a defined contribution plan for participants in smaller employers persists across all the industries.

Despite the lower likelihood of workers at small employers being

in employment-based retirement plans, there is some good news for

them. The probability of being in a plan has increased since 1991.

In 1991, 20 percent of workers at firms with 10 to 24 employees

participated in an employment-based plan, before growing to 27

percent by 2004. In contrast, for employers with 1,000 or more employees, participation has actually declined during that time period,

from 62 percent to 59 percent.

However, this increase is mitigated somewhat by the relative decline in the last couple of years of participation across the board.

Thank you. I will be happy to answer any questions you have.

Senator SMITH. Thank you.

[The prepared statement of Dr. Copeland appears in the appendix.]

Senator SMITH. Steve?

STATEMENT OF STEVE BJERKE, INVESTMENT

REPRESENTATIVE, EDWARD JONES, PENDLETON, OR

Mr. BJERKE. Mr. Chairman, thank you for holding this hearing

on expanding retirement coverage for workers in small businesses,

and for the opportunity to testify on behalf of Edwards Jones Investments.

6

Edward Jones is one of the largest investment firms in the country, and a leader in the financial service industry, with over 8,500

offices throughout the country. We applaud your commitment to

ensuring that Americans have adequate retirement savings.

You have championed in this area, and we are pleased that the

pension bills currently in conference contain critical provisions

from the Smith-Conrad bill such as automatic enrollment. We also

have been following your initiative, which focuses on narrowing the

retirement income gap between men and women. We certainly

want to offer our assistance on that initiative.

Mr. Chairman, this is an important hearing. Edward Jones

strongly supports proposals to help employees of small businesses,

where retirement coverage need is the greatest. We serve over 6

million clients, of whom approximately 20 percent are small business owners.

Our small business clients are often very small, many with under

10 employees, and it is our experience that small business owners

can be reluctant to adopt a retirement plan. There are many surveys as to why small businesses do not have plans. I can tell you

this firsthand.

When I visit with small business owners, they tell me setting up

a plan is too complicated and too expensive. Fortunately, an opportunity to address some of these issues in the current pension conference will help.

Let me highlight a few of the provisions that will help with small

businesses. The House bill makes permanent the very helpful savings provisions of the 2001 Tax Act.

The 2001 Tax Act updated and increased the limits on retirement plan contributions, which makes it possible for Americans to

save more in a qualified plan. That, in turn, makes it attractive for

small business owners to establish a retirement plan.

The 2001 Act created the Saver’s Credit, which provided a muchneeded savings incentive for low- and middle-income individuals,

and it eliminated a lot of the complicated procedures that required

employers to set up two plans if they wanted to provide enhanced

contributions for their employees. The Act also provides a tax credit for certain small businesses to help offset the costs of starting

a plan.

Mr. Chairman, these pro-small business savings provisions will

expire in 2010. We support making these provisions permanent as

soon as possible, and this is our top priority in the pension bill.

If we wait, uncertainty regarding their possible expiration will

make small business owners hesitant to set up a plan for fear that

the rules will change. Sometimes we only have one chance or one

opportunity to establish a plan within these small businesses. If we

lose that opportunity because of uncertainty regarding the rules,

the business may never have a plan.

The pending pension bills also make beneficial modifications to

SIMPLE plans. SIMPLE plans have low administrative costs and

are proving to be an excellent retirement savings arrangement for

small businesses that would otherwise not have a plan. The Senate

pension bill would make the SIMPLE plan even more attractive to

small businesses by allowing portability and a more reasonable

withdrawal penalty.

7

Both the House and Senate bills recognize that employees need

access to investment advice in order to achieve their retirement

goals. We support the inclusion of the advanced provisions in both

bills. The House bill, in particular, would be very helpful in stimulating the delivery of the much-needed advice.

Finally, the Senate bill would remove a significant obstacle preventing many small businesses from maintaining a retirement plan

by relieving the smallest businesses from filing the multi-paged

5500 reports, which are very burdensome. We hope that the conferees will include all of these beneficial provisions.

Mr. Chairman, Edward Jones is also reviewing a number of nextgeneration proposals that would enhance small business pension

coverage. We understand you are considering several measures,

such as tax credits for contributions to new plans, equalization of

treatment of retirement plan contributions of the self-employed,

and allowing sponsors of SIMPLE plans to make additional employer contributions.

I talked to several people this week, and they were really excited

if something like that would happen; not that they would put it in,

but they would have the opportunity to put it in. We believe these,

along with several suggested by Senator Max Baucus, will be very

helpful.

Mr. Chairman, the retirement savings crisis is real, and we applaud your recognition that small businesses have unique challenges in trying to help their workers save more for retirement. We

look forward to working with you to ensure that all Americans are

prepared for retirement.

Thank you.

Senator SMITH. Steve, after the 2001 Act, with those beneficial

provisions that it contained, did you see an increase in enrollment

or creation of pension plans?

Mr. BJERKE. In the next year, I saw a 20- to 25-percent increase

in small businesses jumping in to do something. They were just

really excited that they knew what was going on.

Senator SMITH. Does that go away if we do not make them permanent?

Mr. BJERKE. Absolutely.

Senator SMITH. And if we do make them permanent, will even

more get involved in it?

Mr. BJERKE. Yes. And even right now, when I am talking to people, there is a real hesitation, to say, I do not know what is going

to happen in a couple of years, let us wait and see. For those who

wait to see, most likely it does not happen. Running a small business is a big enough challenge. Any uncertainty that you can take

away is good.

You start out facing that payroll, not knowing if you can hire

enough employees and keep your business going. It is just one

more uncertainty that makes it really tough on small businesses.

And absolutely, that would be the number-one priority, in my

mind.

[The prepared statement of Mr. Bjerke appears in the appendix.]

Senator SMITH. We will, next, go to Daniel Hall. Senator Bingaman, if you have any questions as we go along, we will just be real

informal. Just ask them as they come up.

8

Senator BINGAMAN. All right. I will try to hold off.

Senator SMITH. All right.

Senator BINGAMAN. But if it occurs to me, I may ask.

Go ahead.

STATEMENT OF DANIEL HALL, REGIONAL PENSION MANAGER,

THE STANDARD, STANCORP EQUITIES, INC., PORTLAND, OR

Mr. HALL. Thank you, Mr. Chairman and Senator Bingaman.

My name is Dan Hall, and I am a Regional Pension Manager for

Standard Insurance Company. The Standard is a financial services

provider in Portland, OR, which provides employee benefits, investment advice, annuities, and retirement plan products and services

to more than 7 million customers nationwide.

The Standard has been in the retirement planning business since

1939, and we introduced our first 401(k) product in 1982. Our expertise is in the small plans market. We have been consistently

rated a top provider by our customers and independent third

parties.

I have been in the retirement planning business for 23 years,

and I thank you for the opportunity to share my perspective today

on barriers to small business pension coverage.

I would also like to take this opportunity to address some issues

that inhibit employee participation in retirement plans. I have submitted copies of my full testimony, and I will be summarizing my

written testimony.

It is imperative for the financial health of our citizens and our

Nation that employers and government continue to work together

to provide improved coverage and encourage individual participation in plans.

There are perceptual and real barriers to implementing retirement plans. The first perceptual barrier is that the current generation of business owners and employees has not adjusted investment

habits to mirror the movement from company-provided pensions to

401(k)-type plans.

The second perception of the small business owner is that his or

her company is the retirement plan, therefore, money spent on infrastructure has priority over putting money into retirement.

The final perception among small business owners is that retirement plans are complicated, over-regulated, and expensive.

Three real barriers encountered by small businesses in implementing a plan are: one, competing priorities with other employee

benefits, primarily health care. The most immediate needs today

often take precedence: health care is today; retirement is tomorrow.

Second, compliance testing and top-heavy rules which can limit the

business owner’s participation in the plan are often redundant, and

the top-heavy rule is outdated. Finally, the current rule requiring

a third party audit if a plan has more than 100 employees represents a significant cost and burden to the small business. Recent

legislation allowing plans to offer the Safe Harbor solution is a

major step in the right direction, a win-win for both employer and

participant.

Other solutions that would encourage small businesses to provide

coverage are: (1) to offer a tax credit to small businesses to offset

employer contributions or administrative costs; (2) as mentioned

9

earlier, to eliminate or modify top-heavy rules and simplify discrimination testing to ease the administrative burden for owners,

as well as to allow providers to lower their fees; and (3) to consider

changing the 100-employee audit rule, as expensive external audits

offer only limited returns for such plans.

Solutions that would help increase employee participation include: (1) implementing Federal regulations that make automatic

enrollment rules consistent nationwide; (2) allowing plan providers

to offer unbiased and revenue-neutral investment advice from an

investment advisor—a significant barrier to individual participation is the lack of knowledge about funds and investment strategies; (3) encouraging automatic deferral increase programs; (4) considering lowering the current catch-up age of 50 to age 45; (5) considering implementing a minimum loan amount, say $5,000 per

loan, from a retirement account or requiring loans for hardship reasons only; (6) revising roll-over rules even further to discourage

cash-outs; and (7) allowing favorable taxation on distributions that

are annuitized at retirement.

It is wise public policy of this Congress to promote personal retirement savings. The key to increasing both employee and employee participation is simplicity and incentives.

Simplicity in the 401(k) arena can be achieved through eliminating unnecessary administrative requirements for small employers. The right incentives will promote employer sponsorship of retirement plans and employee participation in those plans.

Thank you for allowing my testimony. I would be happy to answer any questions members of the committee may have.

Senator SMITH. Dan, those suggestions you made for adjustments, are any of those related to ERISA? Obviously, ERISA was

put into place to get rid of a lot of abuses that were occurring in

some pension plans.

Mr. HALL. I believe that the one that is most directly related to

ERISA is top-heavy. All of the ones that followed that are much

later than ERISA. ERISA has become so much the doctrine that we

follow, but I think top-heavy was the first one that was a direct result of ERISA.

Senator SMITH. And from your experience, is there some streamlining that we could do with ERISA without compromising safety

for employees? Is it just so cumbersome that it simply is too great

a financial impediment?

Mr. HALL. I am not sure how to answer that. ERISA, in our

world, is kind of big news. We have all followed it. There are always streamlines. Top-heavy is a well-intended rule that newer

tests, like anti-discrimination testing, have trumped, so that makes

top-heavy not such an issue.

So when plans become top heavy, it is a little bit of a nuisance,

as opposed to really preventing abuses within the plan. It discourages people. If an employer has sponsored a plan where they have

had testing issues, he may say, you know, I am not going to set

up another plan again. I remember 10 years ago where I did not

benefit from that. So, I think there are some things you can do.

Senator SMITH. All right.

[The prepared statement of Mr. Hall appears in the appendix.]

10

STATEMENT OF PAULA CALIMAFDE, CHAIR, SMALL BUSINESS

COUNCIL OF AMERICA, BETHESDA, MD

Ms. CALIMAFDE. Mr. Chairman, Senator Bingaman, thank you

very much for holding these hearings on this vital topic.

The Small Business Council of America is a nonprofit national

organization that represents small businesses only in the tax, employee benefits, and health care areas.

My message is a little different, I think, from everyone else on

the panel. I consider, and the SBCA considers, the small business

retirement plan system to be a major success. It covers 19 million

employees, and that is a lot of employees; keep in mind, this is a

voluntary system.

Many of these small business plans provide significant contributions to these employees. Now you might ask, why would a small

business plan provide significant contributions? It is because, in

many cases, that is the owner’s best way to save for retirement. Because of the discrimination tax laws in the tax code, the owner

must provide significant contributions for everyone else in the plan.

By and large, these plans are properly funded and carefully invested. Again, why? Because the owner’s money is in the plan, so

the owner wants to make sure that the money is safe and the

money is in there. In addition to a significant employer contribution, these plans very often provide employee saving through payroll deduction. That is your 401(k) plan and your SIMPLE.

The importance of payroll deduction cannot be over-emphasized.

There are data that show that when employees have the ability to

save through payroll deduction, they are 11 times more likely to

save than they would if they had to put the money in by themselves outside of payroll deduction.

An easy way of thinking about this, of course, is if you give me

the money, I will find a way to spend it. If you take it out of my

paycheck before I get it, I forget I even saved it.

Another corollary to this rule is, if I put money in an IRA and

I can easily take it out, chances are I probably will. If I put money

in a retirement plan that locks it down, chances are I will not access it.

Now, the coverage numbers that everyone is talking about that

make small business coverage look relatively low do not take into

account two factors. One factor is that most of these numbers only

look at all workers, they do not look at workers who work more

than 20 hours a week. In most small business retirement plans,

coverage is for people who work 20 hours a week.

The other factor which is critically important is that one-third of

all start-ups fail within 2 years, and more than 50 percent of those

start-ups will fail within 4 years.

So when you put this shifting bottom of small businesses going

in and out, they are not contributing to retirement plans because

they are fighting for their lives. In fact, as we know, many of them

do not make it.

I agree with—I think it was—Mr. Bjerke that the single most important thing that can be done to increase coverage right now in

the small business area is to make the pension provisions in the

tax bill of 2001—which we refer to as EGTRRA—make those provisions permanent.

11

They are incredibly important provisions to small business. This

is the time to make them permanent. They sunset in 2010. The

closer we get to 2010, the more uncertainty there will be whether

we can count on those proposals. As Mr. Hall mentioned, certainty

is incredibly important to small business owners.

Because time is so limited, I want to go over a few major items.

Senator SMITH. Paula, could you elaborate on which of those, the

Saver’s Credit, the capital gains dividend, which ones to make permanent or are so important?

Ms. CALIMAFDE. Well, the capital gains, unfortunately, almost

works against the pension provisions. If you make capital gains

rates go down too low, there is a disincentive for owners and other

people to contribute to the retirement plans. Because keep in mind,

when the money comes out of the retirement plan it comes out as

ordinary income.

But, yes. I was referring to, actually, the items—I think Mr.

Bjerke mentioned them—like increased contributions. Those provisions allowed a company that had to sponsor two plans to be able

to only sponsor one plan and get the same level of contribution. So

for small businesses, that was a major savings.

The 401(k) Roth contribution came in under EGTRRA. The

EGTRRA provisions were really well-vetted. They were discussed

for about 6 years by you all and you took into account what big

business had to say, small business had to say, nonprofits, governmental entities, governmental employees, union employees, employee groups, so what you put together was a really well-crafted

bill.

Senator SMITH. Thank you very much. [Laughter.]

Ms. CALIMAFDE. No. The small business community thanks you,

by the way. You have, literally, helped millions of employees with

that bill.

But because time is limited, I want to just go through a couple

of major things that I think are important. The pension bill in conference right now—that is where you are able to make those

EGTRRA pension provisions permanent—also has an automatic enrollment feature for 401(k) Safe Harbor plans, an automatic

enrollment/Safe Harbor feature.

First off, Safe Harbors only apply to small businesses. They are

the only ones who care about them. The automatic enrollment is

an incredibly important device, which I believe, actually, Mark

Iwry brought to the attention of most folks. The statistics are startling.

If an employee is automatically enrolled, by and large something

like 70 percent of them forget they are being enrolled and they just

stay enrolled. It is sort of inertia, but they get there and they keep

putting money into the plan.

Those same people who stay enrolled stay with the default investment as well. So you can imagine this kind of passive group

of people who just stay in, but once they are in, they are saving

for retirement.

The House version in the pension bill that is in conference is almost right on the automatic enrollment Safe Harbor. However, it

has one huge flaw: it provides enough of an incentive for small

business to do automatic enrollment—because, keep in mind, this

12

is an extra burden that small business has to do, and they are not

going to do it just because they are nice, they are going to do it

because there is some reason to do it.

These folks are running a business and, as you know, most of

these businesses run very close to the margin. So there is a reason

to do the automatic enrollment in this Safe Harbor that the House

version put out, but then they added a requirement—the Safe Harbor will only work if 70 percent of the employees who are automatically enrolled stay automatically enrolled. Well, business owners

have no ability to tell their employees, you must stay enrolled.

A business owner meeting with Mr. Hall, Mr. Bjerke, or myself,

if we say to them, you should amend your plan for the Safe Harbor,

you will need to amend your summary plan description, you will

have to explain this to your employees, you will have to tell your

administrator about this, and by the way, if the folks you enroll do

not stay in, it doesn’t work, you have wasted your money, I can tell

you right now, they are just going to say, thanks very much, forget

it.

So you need to get rid of that 70-percent requirement. If you do

that, you have, I think, a really good automatic enrollment Safe

Harbor there.

Cash balance plans. Some people have this image that cash balance plans are bad. Cash balance plans, in the small business area,

are the Cadillac plan. The reason why is because individuals have

their own account balance, so they know what they have in the

plan, and the investment returns are guaranteed. You cannot get

much better if you are an employee.

We need the certainty from you all to say that these plans are

not inherently age-discriminatory. I know there are all sorts of

issues in the cash balance world that are not easy that you are

dealing with, and those are the conversion issues.

But the small business world does not deal with conversion

issues, because they did not go from a defined benefit to a cash balance. These are new start-up cash balances.

So the small business world needs that certainty, that if they put

in the plan it will not be deemed to be age-discriminatory. Again,

going back to what other members have said on the panel here, if

they do not have the certainty, they are not going to put money in

the plan.

Finally, funding. People talk about a problem with funding: why

are businesses not funding their defined benefit plans properly? I

would say this is where we have the elephant in the room, and the

elephant is called the reversion tax.

Before the reversion tax, companies did not care if they overfunded, because when the plan terminated, if there was extra

money in the plan, they would get it back. Today, if they terminate

the plan and there is over-funding, the government takes 50 percent.

So you are now in a situation of, if you did not fund the plan

properly, the company has to provide the benefits for the employees. They are guaranteeing the investment results. But if they do

too well, the government takes 50 percent.

So we are almost in a heads-I-win/tails-you-lose situation, and I

think if you start tinkering with that reversion tax you may end

13

up seeing companies going closer to the proper funding levels voluntarily.

Two other items I want to bring up, quickly. One is that, even

though I have spent my time today on these issues, the Small Business Council of America endorses the testimony prepared by

ASPPA, the written testimony. It goes into a number of specific

issues that I understand, I think, Mr. Smith, you are working on.

Every single one of those are good ideas and they will work very

well, in my opinion, to increase coverage.

Finally, we also endorse the IRA proposal which has been developed, I believe by Mark Iwry and David John. I know they will be

discussing it today.

Thank you.

Senator SMITH. Thank you very much, Paula. I want to point out,

I think your clarification on sort of the numbers I was giving about

small businesses and the availability of pensions is absolutely

right. You were right in clarifying that.

The dilemma we have is, how do we reach those people who are

working but who are not planning for retirement? So, we are just

looking for more vehicles, because I do agree, when a small business starts, it is saving for its life, not saving for retirement.

Ms. CALIMAFDE. Right. Well, we know education is critical.

Senator SMITH. Yes.

Ms. CALIMAFDE. Because if you can get to those younger employees and get them saving in a tax-free environment, the results are

amazing. So we know education is a key in this whole thing.

[The prepared statement of Ms. Calimafde appears in the appendix.]

Senator SMITH. Mr. John?

STATEMENT OF DAVID C. JOHN, SENIOR RESEARCH FELLOW,

THE HERITAGE FOUNDATION, WASHINGTON, DC

Mr. JOHN. Thank you, Mr. Chairman, and thank you, Senator

Bingaman, for putting on this hearing on this rather crucial area.

Mark Iwry and I are presenting joint testimony, and we are living proof that left and right can go beyond the restrictions of ideology into common ground on occasion.

Senator SMITH. Senator Bingaman and I are working on that,

too, actually. [Laughter.] But, congratulations.

Mr. JOHN. Thanks.

Well, my interest in pensions comes from my daughter, my older

daughter Meredith, who is 20 and in her second year of nursing

school.

Now, when Meredith graduates—and the good news, being a

nurse, she will always have a job—she is going to go to work for

one of the big hospitals and she will have a 401(k) plan.

Meredith and I have discussed this over the years, and we have

finally gone beyond the, ‘‘Oh, Daddy, not that again, that is boring,’’ to the, ‘‘Oh, yes, that really is important’’ phase of the discussion.

But Meredith is not going to stay at a big hospital. She has plans

to move to small practices, perhaps a public health agency, something along that line. The simple fact is, for Meredith’s retirement

and for kids her age’s retirement, first off, we cannot assume that

14

Social Security’s benefits are going to get any larger than they are

right now. Anyone who is planning on retiring on just Social Security is going to have a very hard time of it.

Second, we cannot make the assumption that defined benefit

pension plans are going to expand either. The fact is, there are

probably going to be far fewer of them in the future than there are

now.

If that is the case, Meredith, and people her age, have to start

to participate in a defined contribution pension plan from the day

they go to work, and they have to continue participating until the

day they retire. It is the only way they are going to come up with

a decent retirement income.

But the simple fact is that, in 2004, out of 153 million American

workers, 71 million of those worked for a company that did not

offer any sort of a pension plan. Now, we can say that an IRA is

an option, but the simple fact is that it is not, in most cases.

The most optimistic study that I have seen on IRA coverage is

about 17 percent or so, and realistically probably not more than 5

to 10 percent of the people who are eligible for IRAs (because they

do not have any other pension plan) participate on a regular basis

in those.

In many cases it is because they simply do not have outlets. If

you are in the central city, you do not have banks and you certainly

do not have stock brokerages on every corner.

If you live in the eastern panhandle of West Virginia, as I do,

in most of the small towns, the financial center is the ATM at the

7–11, and they have not gotten to the point where they are selling

IRAs yet, although one of the owners did tell me she was working

on that.

So we have come up, Mark and I, with a proposal we call Auto

IRA. Auto IRA would be for employers that have 10 or more employees and have been in business for 2 years or more and do not

offer any other sort of pension plan.

These employers would be encouraged to give their employees—

as a matter of fact, they would be required to give their employees—the opportunity to make regular payroll deductions to an IRA.

All the employer would have to do is to get a simple ‘‘yes’’ or ‘‘no.’’

Employers with less than 10 employees could participate if they

wanted to; it would be a voluntary way. We also have a method

that we believe, on a voluntary basis, would get independent contractors and people who are working, say, professionals in private

practice, or something along that line.

Our plan uses the existing IRA. It is not an ERISA plan. It is

simple and it is cheap. It is not intended to compete with any of

the existing employer-offered pension plans.

It does not require—in fact, it does not allow—employer contributions at this level. We have no incentive—we hope—in our plan,

that if you are offering a 401(k) now, that you would want to move

down to an Auto IRA. This is the first step.

Heritage’s Center for Data Analysis, in some rough numbers that

they prepared for us—and they are working on better numbers at

the moment—says that Auto IRA would affect about 40 million of

the 71 million people who currently work for a company that does

15

not offer a pension. These are workers who are employed by about

675,000 businesses at this point.

It appears that about 60 percent of those 40 million actually

have no Federal income tax liability or they receive a refundable

tax credit equal to their Federal tax liability.

The median income of these workers is about $17,000 a year, although the household income may be higher because some of these

workers have more than one job. Again, this is a rough estimate.

We would urge employers to select an IRA from one of three

sources. Source number one would be that, if the employer so

chooses, he or she could simply say to the employees, if you have

an IRA, we will put money in your IRA.

Second, if the employer has a relationship with a particular financial institution, the employer may choose to have all the employees send their money to this one particular financial institution.

Third, there would be a default national platform, which is very

similar in nature to the TSP plan that is offered to Federal employees and uniformed military personnel now. It is a simple, low-cost

alternative. Investment would be in a lifestyle fund—that would be

the choice—unless the employee chooses to invest their money in

something else.

This is similar to what has been said by some of the earlier witnesses here: we are basically depending on inertia. We are going

to have it so that people will have the right decision made for

them, unless they choose something else.

Now, the national platform is actually very similar to something

that is being discussed right now in the United Kingdom and is actually being implemented in New Zealand at the moment. Sweden

actually has a slight variation of this as part of their Social Security system. Let me stress, what we are talking about is not part

of Social Security.

It could be structured as a TSP, which is basically governmentsponsored, where the actual investment in other activities is contracted out to private professionals. It could be structured as a nonprofit or a consortium of nonprofits, it could be done on a regional

basis, it could be on a national basis.

Senator SMITH. Is this a payroll deduction?

Mr. JOHN. Yes. Yes. In all cases, this would be a payroll deduction. Payroll deduction is the most important thing here.

And last, but not least, it could be done by a consortium of financial companies. Younger workers need to have something like Auto

IRA. Meredith needs to participate in a defined contribution system, again, from the day she first goes to work until the day she

retires.

It does not matter how large her employer is, where the employer is located, or even if she is working for herself. She has to

participate, and she has to participate, inasmuch as possible, seamlessly. Otherwise, she is going to reach age 64, 65, and she is going

to look back at us and say, well, how come you set me on this path

to failure?

Thank you.

Senator SMITH. That is a fascinating idea. While I was not a

backer of the President’s idea on private accounts, I was in a way.

16

The way I was proposing to do them was that those young people,

not 55 and below, but those young people, under current law, who

are guaranteed to suffer a 25-percent cut in Social Security benefits, just through the operation of existing law, that we should set

up for them that kind of an account.

The government can be the matcher, and it would cost something, but it would give them the opportunity to make up what

they are guaranteed to lose. To me, that still makes the most

sense.

I am sure you will want to sign onto it, Senator Bingaman.

[Laughter.] It does not touch the Social Security trust fund, but it

does create this new generation of investors and increases, frankly,

financial literacy in our country, which is somewhat lacking.

[The prepared statement of Mr. John appears in the appendix.]

Senator SMITH. Mr. Iwry?

STATEMENT OF J. MARK IWRY, SENIOR ADVISOR, THE RETIREMENT SECURITY PROJECT, WASHINGTON, DC, AND

NONRESIDENT SENIOR FELLOW, THE BROOKINGS INSTITUTION, WASHINGTON, DC

Mr. IWRY. Thank you. I will pick up where my colleague, David

John, left off.

The payroll deduction is the driver of this concept. As Paula

Calimafde said, people are far more likely to save when they have

the automatic payroll deduction mechanism going for them. We all

know that.

This is a ‘‘set it and forget it’’ kind of arrangement. Once it

starts, that money keeps coming out of the person’s paycheck until

they do something to stop it or to change it.

What we would add to that is encouragement to make the setting

of it automatic as well—that is, picking up on your legislation, Mr.

Chairman, and the success of the automatic enrollment, automatic

401(k).

We would promote as much of that automatic enrollment—and

Senator Bingaman, your legislation of a similar nature—as possible

in these payroll deduction or payroll deposit IRAs so that the employer, if it was willing to, would be automatically enrolling people

in them. If the employer did not want to do that, we would not

make it do that.

They know their own workforce, they know their institutional

culture. It is a small business. We would let them make the decision, but we would make it easy for small business to use automatic enrollment. We would have a uniform website with standard

forms that an employer could use to sign people up.

The success of automatic enrollment in bringing 401(k) participation up from something like an average of 3 out of 4 to more than

9 out of 10, 90 or 95 percent, is what we would hope to build on

here. We think this could make a huge difference in small business

coverage.

Now, I want to emphasize, as David John did, our first priority

is employer plans. If we can get an employer, small business, to

adopt a 401(k), to adopt a defined benefit, profit-sharing, a SIMPLE, that is the best path to go down. But so many of them have

not been willing to do that. Inevitably, there will be many who will

17

not. We would like to give their employees the benefit of the power

of payroll deduction.

Senator SMITH. And would this be for employees of any sized

company? In other words, if you have a job in America, one of the

deductions is going to be for this Saver’s?

Mr. IWRY. We would let the employer that already has a plan——

Senator SMITH. It would be exempted from it?

Mr. IWRY. It would be exempted from it. Obviously, if they wanted to add this kind of thing on for some of their employees who

might not be in the plan, that would be great. It would be easy for

them to do because this infrastructure would be all set up.

Senator SMITH. Would there be an employer match?

Mr. IWRY. No.

Senator SMITH. It is just a deduction from the employee.

Mr. IWRY. That is right. This is all funded out of the employee’s

own wages, so the employer is not looking at cost burden. By hypothesis, we are talking about employers not willing to offer a plan.

If we can persuade them to buy a plan, that is where we ought

to be. But these are the ones that we have not been able to sell

to. We would like their employees to at least get the benefit of that

payroll deduction without putting any costs on the employer. It

looks like we have really got that opportunity, a kind of unused capacity in the form of payroll-deposit saving.

It does not really cost the small business, because it is doing it

anyway. It is taking people’s FICA and HI tax, FUTA, income tax

withholding, and it is deducting it and sending it on to the Federal

tax depositary.

We could use that same channel, that same schedule, the same

envelope that they use to make those deposits, or the same click

of the mouse they use to do that electronically, if that is how they

do it, to send this saving deposit to an IRA.

Senator SMITH. What percentage would it be?

Mr. IWRY. It would be, first of all, whatever the employee decides. If the employee feels they do not want to save, they do not

save, and it would be zero. If the employee wants to save a fair

amount, they could save that amount up to the IRA limits.

Senator SMITH. Would there be tax deferral on the earnings?

Mr. IWRY. Absolutely. It would be a regular IRA contribution, so

they would get a deduction up front if it is a traditional IRA, or

they would get the Roth treatment if it is a Roth, and the tax-free

build-up.

The employer would not have to worry about compliance. The

employer would not be responsible for making sure that the contributions are within the IRA limits, any more than an employer

is today when an individual writes a check to their IRA. The individuals are responsible for making sure that the check does not go

over the dollar amount, and the same would apply here.

In fact, small business really would not be doing anything other

than enrolling people, telling people that this opportunity exists,

which they could do by just downloading the standard form and

giving it to people, taking note of who wanted to participate and

who did not, and then, really, make the contribution in the way

they send people’s paychecks by direct deposit to a bank account.

Most people have that done—your employer will, instead of handVerDate 11-MAY-2000 14:52 Mar 01, 2007 Jkt 095484 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 32520.000 SFIN1 PsN: SFIN1
18

ing you a paycheck, send it to a bank account or some other account. It is the same thing for the employer in this case. They are

just sending saving money to an IRA account rather than a paycheck to a bank account.

Senator SMITH. That is a great idea.

Mr. IWRY. We would very much hope that this encourages more

employer plans. Mr. Chairman, our thought is that——

Senator SMITH. Is there an incentive that it would not?

Mr. IWRY. We do not think so. The reason we do not think so is

that the contributions you can make to an IRA are $4,000 a year,

as you know. Contributions you can make to a 401(k) are $15,000

a year, a SIMPLE IRA, $10,000; of course, a little more if you are

50 or older.

The difference in incentive is very dramatic. If an employer or

the employees have a lot of demand or appetite for tax-favored saving, they will go with that 401(k), or at least they will go with the

SIMPLE employer-sponsored plan that has employer contributions,

matching or non-matching.

Senator SMITH. The only obligation of the employer is, if you hire

someone, as an American employer, you have to make known to

the employee this opportunity?

Mr. IWRY. Right. If you do not sponsor a plan.

Senator SMITH. If you do not.

Mr. IWRY. And if you have been around for more than 2 years

and if you have more than 10 employees. You get a tax credit for

providing this facility. That is, even though we do not think it is

really going to cost employers any meaningful amount, there are no

out-of-pocket costs.

They have to pay attention. And small business owners are always short on time and attention, so we appreciate that. We value

the fact that they are making their business run and they are not

there to be a plan administrator, so we have tried to cut out all

of those tasks, all that compliance.

All they have to do is tell employees this exists, and honor the

employees’ election. That should really not cost anything. But, as

a gesture of good faith, we have suggested that Congress give a

small tax credit for employers, whether they are doing it per the

requirement because they have more than 10 people and they have

been there for more than 2 years and they do not sponsor a plan,

or voluntarily.

So if they are a little smaller, or Paula had suggested the idea

of exempting the short-term employers, the ones that have not

been in business for more than two years, because so many of them

go out of business, they are just struggling to survive, we have

taken that suggestion.

But let us say that they have only been around for one year, but

they are ready to do this. They say, it does not cost me anything.

I am happy to send people’s paycheck to their account, so I will

send something to their IRA. If they want to contribute their own

money to an IRA as well, they would get a tax credit for the

voluntary——

Senator SMITH. So the individual and the company.

19

Mr. IWRY. The company would get a tax credit. The individual,

under current law, if their income is below $50,000, they would get

a Saver’s Credit.

Senator SMITH. So the amount of the credit is the Saver’s Credit.

Mr. IWRY. For the individual, it is the Saver’s Credit. For the

company, we would have a special employer tax credit that would

be similar to, but smaller than, the tax credit that a small business

now gets for setting up a new plan.

So we would make sure, if you set up a plan, you would get twice

the reward, compared to setting up a payroll deduction IRA. But

setting up a payroll deduction IRA is a lot better than what we

have today with a majority of our small businesses.

Senator SMITH. That is great stuff.

[The prepared statement of Mr. Iwry appears in the appendix.]

Senator SMITH. Senator Bingaman? The vote has just started,

but there is plenty of time.

Senator BINGAMAN. Well, let me just ask a question or two. One

of the criticisms of the IRA is that it is too easy to take money out

of IRAs. If our whole idea is that we want people to get to age 65,

or whatever age they retire, with a nest egg of money that they can

use in retirement, should we also be trying to fix that problem?

Mr. IWRY. Senator, I think that that is a judgment call. We

would resolve it in the negative, for the following reason. Although—and David John may have a different sort of rationale for

this, but we are coming up with the same answer—I think the IRA

is pretty leaky, as you are suggesting, it seems to be, as a practical

matter, fairly sticky, that you can take the money out any time

with a 10-percent penalty, in most cases, but people do not seem

to do it all that often. Once it is in there, again, it is inertia.

People tend to leave it there and think of it as their retirement

funds. So, it seems like the fact that it is leakier than one might

ideally want it to be may not be as big a practical problem as one

might expect.

If we were writing on a clean slate, I think there would be a lot

to be said for locking up the money more tightly. But we are trying

to be as practical as possible. We have gone 32 years since ERISA

was enacted with this same small business coverage problem, with

the same half of the workforce that is not able to have an employer

plan.

We would love to see you and your colleagues finally make a

major dent in that. So, we would advise that you take the IRA as

it is, not try to design a whole new individual account, much as I

think all of us would enjoy that process of creating the ideal individual account.

We would take the IRA as something that is in existence, practical, and that would enable you, if you persuaded your colleagues,

to enact something in 2007 and get something going in our lifetime.

Senator BINGAMAN. Let me ask, also on this default national

platform which you talk about, would it not make sense to go the

next step and say anybody who has an IRA, whether they get it

through this device, if this is enacted, or they set it up themselves,

ought to be able to do it through this default national platform so

that they then could, wherever they go to work, if the employer is

20

doing a payroll deduction, fine, they can ask the employer to do a

payroll deduction into that?

If the employer is not doing a payroll deduction, they themselves

can send money to this default national platform, but they would

know that no matter what job they had, they would continue to see

money contributed, either they themselves would do it or their employer would do it through a payroll deduction each year.

Mr. JOHN. It would make sense to do that, to a large extent. The

one thing that you do not want to do, necessarily, is to compete too

directly with the private financial services market.

So ideally, if it could be set up where an individual has the

choice, that they could put it in the national default, or perhaps

once they reach a certain size, if they choose, if they want to have

it managed by somebody else, they could make that decision also.

So, essentially it could move from provider to provider.

Senator BINGAMAN. Well, they have the choice of doing it

through the private providers now. The only question is, if you set

up a default national platform similar to a TSP, would you limit

participation in that to the people who had their IRA contributions

deducted from their payroll pursuant to this automatic one?

Mr. IWRY. We would not limit participation in that way. We

would very much be building on your legislation, Senator Bingaman, from several years ago. Self-employed individuals, independent contractors, even unemployed people, to the extent they

are able to save anything, would be hooked up to the national platform to the fullest extent that we could arrange.

We would encourage the same automatic mechanism that makes

the payroll deduction/payroll deposit work so well and the automatic 401(k) work so well. We would encourage that in IRAs

through automatic debit.

So if a person has no connection to a payroll, they could do what

many of us are increasingly doing to pay our bills, that is, have the

recipient of the funds automatically debit our financial account,

take the agreed upon payments out on a regular basis so that it

continues without our having to take the initiative every month to

make that payment. People can do that to save, as well as to pay

their bills, of course.

What we would do is to encourage voluntary associations, trade

groups, professional associations and so forth to get their members

hooked up to an automatic debit arrangement, if the members

want. It is on a purely voluntary basis all around, but to make it

easy for people to have an IRA.

David uses the example of the American Nurses Association, because his wife is a nurse. They could have an IRA, a single IRA,

a sort of prototype for all their members, and automatic debit available for all their members who want to use those, and that would

be part of the national default platform, unless the association

wanted to use a private financial institution that they were working with.

Senator BINGAMAN. Thank you very much. I think it is a very

useful suggestion. Thank you all. I appreciate the testimony.

Senator SMITH. Do any of our other witnesses have any comment, as it affects the worlds you are in, on what these gentlemen

have presented in terms of this deduction?

21

Ms. CALIMAFDE. I have one comment, which is, I think it is important to understand, when Mark says this is sort of your last

best plan or least best plan, this is sort of the safety net, is what

he is describing. So it is important that the incentives in the tax

code stay so that the 401(k) plan is your first-choice plan, because

that does lock down the money.

Second is your SIMPLE, because there the employer is making

a match or making a contribution, but it is not as good as your

401(k) because it is not a trustee plan, you do not have investment

choices selected for you, and you can make higher contributions to

the 401(k) than the SIMPLE.

This would be, the way I look at it, a safety net plan. As long

as it is understood that you do not ever want an employee to go,

oh, boy, I have my automatic payroll, versus, oh, boy, I have my

automatic enrollment in the 401(k) plan. That is where you want

them to be.

Mr. IWRY. We see it as a stepping stone, exactly, as Paula says,

a stepping stone that would help people like Dan and Steve and

their colleagues sell more real plans to employers, get their foot in

the door, get the employer used to the idea that it is helping employees and get appropriate appreciation from the employees for

the saving that it is encouraging, and getting the employer to step

up to a plan after an appropriate time, and maybe from the getgo.

Senator SMITH. But it really is a new strand in the savings safety net.

Mr. IWRY. Yes.

Senator SMITH. And it is fully convertible to their products later.

Exactly.

Mr. JOHN. This is the training wheels.

Senator SMITH. Well, it is a great idea. I suggest we make it law,

soon.

Senator BINGAMAN. Good idea.

Senator SMITH. I will work with Senator Bingaman.

Senator BINGAMAN. Good.

Senator SMITH. I apologize, but there is a vote. The clock is running out on it. But this has been a most instructive and interesting

hour, hour and a half you have spent with us. We thank you for

it, and we will do something with it.

Ms. CALIMAFDE. Thank you very much.

Senator SMITH. We are adjourned.

[Whereupon, at 3:42 p.m., the hearing was concluded.]

(23)

A P P E N D I X

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

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COMMUNICATIONS

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Æ