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39–375 PDF 2007

SUBCOMMITTEE HEARING ON PENSION PARITY:

ADDRESSING THE INEQUITIES BETWEEN

RETIREMENT PLAN OPTIONS

FOR SMALL AND LARGE BUSINESSES

SUBCOMMITTEE ON FINANCE AND TAX 

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

OCTOBER 24, 2007

Serial Number 110-54

Printed for the use of the Committee on Small Business

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house 

HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

WILLIAM JEFFERSON, Louisiana 

HEATH SHULER, North Carolina 

CHARLIE GONZA ́ LEZ, Texas 

RICK LARSEN, Washington 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

HENRY CUELLAR, Texas 

DAN LIPINSKI, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

BRUCE BRALEY, Iowa 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

BRIAN HIGGINS, New York 

MAZIE HIRONO, Hawaii 

STEVE CHABOT, Ohio, Ranking Member 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

STEVE KING, Iowa 

JEFF FORTENBERRY, Nebraska 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

DEAN HELLER, Nevada 

DAVID DAVIS, Tennessee 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KEVIN FITZPATRICK, Minority Staff Director

SUBCOMMITTEE ON FINANCE AND TAX

MELISSA BEAN, Illinois, Chairwoman 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

DEAN HELLER, Nevada, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page

Bean, Hon. Melissa .................................................................................................. 1

Heller, Hon. Dean .................................................................................................... 2

WITNESSES 

Collinson, Catherine, Transamerica Retirement Services .................................... 4

Tripodi, Sal, The American Society of Pension Professionals & Actuaries ......... 6

McCarthy, Jim, Securities Industry and Financial Markets Association ........... 8

Calimafde, Paula, Small Business Council of America ........................................ 10

APPENDIX 

Prepared Statements: 

Bean, Hon. Melissa .................................................................................................. 25

Heller, Hon. Dean .................................................................................................... 27

Collinson, Catherine, Transamerica Retirement Services .................................... 29

Tripodi, Sal, The American Society of Pension Professionals & Actuaries ......... 36

McCarthy, Jim, Securities Industry and Financial Markets Association ........... 41

Calimafde, Paula, Small Business Council of America ........................................ 48

(III) 

(1)

SUBCOMMITTEE HEARING ON PENSION 

PARITY: ADDRESSING THE INEQUITIES 

BETWEEN RETIREMENT PLAN OPTIONS 

FOR SMALL AND LARGE BUSINESSES 

Wednesday, October 24, 2007

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

SUBCOMMITTEE ON FINANCE AND TAX

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

2360 Rayburn House Office Building, Hon. Melissa Bean [Chairwoman of the Subcommittee] presiding. 

Present: Representatives Bean, Ellsworth, Sestak, and Heller. 

OPENING STATEMENT OF CHAIRWOMAN BEAN 

ChairwomanBEAN. Now calling this hearing to order on Pension 

Parity: Addressing the Inequities Between Retirement Plan Options for Small and Large Businesses. 

Retirement security is a universal goal for most Americans. As 

part of their retirement plan, most Americans rely on three very 

important pillars as they plan for their financial future: personal 

savings, Social Security, and employer-based retirement plans. 

As the baby boomer generation ages, raising real questions about 

the sustainability of Social Security benefits, it is critical that all 

employers and their employees have financial security as they 

enter their retirement years. 

A recent Employee Benefit Research Institute study revealed 

that less than half of all workers were participating in a retirement 

plan. While it is clear the overall number needs to be improved 

upon, the story for small businesses is even more disappointing. 

Employee participation for small businesses is alarmingly low. 

Businesses with 25 or fewer employees have only 23 percent of 

their workers enrolled in a retirement plan. Businesses with 25 to 

99 employees have only 43 percent of their workers enrolled in a 

plan, while employers with 100 to 500 employees have a little more 

than half of their employees enrolled in a retirement plan. 

Given that 80 percent of new domestic jobs are created in the 

small business community, this hearing addresses those Americans 

employed in that sector. Employees of large companies often contribute to 401(k) pension plans. Those employees can borrow from 

their plans for certain purposes, including first-time home purchases, college tuition, medical emergencies. Conversely, many reVerDate 0ct 09 2002 09:42 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\39375.TXT LEANN
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tirement plans small businesses are able to provide don’t give their 

employees access to their tax-deferred pension monies. 

This hearing is intended to address those inequities, and others, 

and seeks to identify ways to provide greater pension parity between large and small business offerings. American employees 

should have equal access and flexibility in their pension plans. 

I look forward to today’s hearing, which will allow members of 

the Committee to discuss the current vehicles used by many small 

businesses to provide retirement benefits, and ways in which those 

can be improved upon to encourage small business involvement 

while discussing new solutions. 

I appreciate the participation today from our members and from 

our—those who are here to testify today and look forward to hearing it. I now would like to yield to Ranking Member Heller for his 

opening statement. 

OPENING STATEMENT OF MR. HELLER 

Mr.HELLER. Thank you very much, Madam Chairwoman. I appreciate the opportunity to be here this morning and for you taking 

on this important issue. 

I want to thank all of you for being here today as we examine 

inequities between retirement plan options for small and large 

businesses. I would like to extend a special thanks to our witnesses, some of which have traveled great distances to be here 

today. 

Few debates in Washington have as significant or real world impact on quality of life for older Americans as retirement security. 

Last week a recently retired teacher from New Jersey became the 

first baby boomer to apply for Social Security benefits. A wave of 

nearly 80 million more will follow over the next two decades. In its 

current state, Social Security will struggle to meet the retirement 

needs of the millions of baby boomers, much less future generations. 

In a little more than 10 years, Social Security will reach a critical juncture in its history paying out more in benefits than it takes 

through in payroll taxes. This untenable financial situation must 

be addressed, and I applaud Chairwoman Bean for calling this 

timely hearing. 

America’s 25 million small businesses compose—we are going to 

hear a lot of statistics today—99.7 percent of all employers and are 

responsible for generating 60 to 80 percent of all new jobs. Nevada 

is one of the fastest-growing states for small businesses. Nevada 

alone is home of more than 200,000 plus small businesses. Last 

year alone, 90,000 new businesses incorporated in the State of Nevada, which provides for more than 425,000 jobs in my state. This 

means 44 percent of Nevada’s working population relies on small 

businesses. 

As Secretary of State, I was responsible for registering thousands 

of businesses a year, and I fought to keep Nevada friendly to small 

businesses. And I look forward to continuing to keep small businesses vibrant and healthy in America and the State of Nevada. 

Unfortunately, despite their contributions to our economy, there 

is a substantial discrepancy between large/small businesses’ ability 

to offer employer-sponsored retirement benefits. According to the 

3

Congressional Research Services, only 26 percent of firms with 25 

employees or fewer offered employer-sponsored retirement plans. In 

contrast, 72 percent of firms with 100 or more employees do sponsor plans. 

With small businesses playing such an integral role in our economy, it is important that we identify and remove the barriers that 

prevent our small companies from offering retirement benefits. 

When looking at the specific issues that hinder small businesses’ 

retirement benefit participation, we must expand the scope. Isolating specific concerns neglects the relationship that exists between energy prices, health care costs, taxes, and the price tag of 

complying with government regulations. 

Small business owners are habitually asked to make difficult 

choices about where to dedicate their resources, with extras like retirement benefits often falling at the wayside. Our job on this Committee is to help enable small businesses to succeed. I believe an 

excellent starting point would be to reduce tax and regulatory burdens to allow for small—for more employer benefits. 

Employment in health care plans can make the difference between a new hire and a lost prospect. As companies rigorously compete for talented employees, let us give the little guy the flexibility 

to attract good candidates to develop and grow. 

We have an excellent panel that will shed some light on the challenges small businesses confront in offering retirement packages. I 

look forward to hearing the testimony. I appreciate Chairwoman 

Bean for calling this hearing, and I yield back. 

Thank you. 

ChairwomanBEAN. Thank you, Congressman Heller. And thank 

you for your leadership on this issue as well. 

We are now going to move to testimony. Witnesses will have five 

minutes to deliver their prepared statements and/or a summary of 

those prepared statements, since we have them. The timer begins 

when the green light is illuminated. When one minute of time remains, the light will turn yellow. The red light will come on when 

time is up. 

I know a number of us have other hearings going on simultaneously today, as it just so works out here in many cases. So I am 

going to try to urge you to stay on the time, because I think what 

we are most interested is getting to the Q&A and discussing that 

testimony, since we have already had a chance to review it. 

Our first witness is Catherine Collinson. Ms. Collinson is the 

Senior Vice President of Strategic Planning for Transamerica Retirement Services. She also directs the Transamerica Annual Retirement Survey, which explores the attitudes and behaviors of 

American workers and employers regarding retirement security 

and workplace benefits. With over a decade of experience, she has 

become a recognized voice on retirement trends for the industry. 

The companies of Transamerica offer a wide array of innovative financial services, including retirement plan options. 

Thank you. 

4

STATEMENT OF CATHERINE COLLINSON, SENIOR VICE PRESIDENT, STRATEGIC PLANNING, TRANSAMERICA RETIREMENT 

SERVICES, LOS ANGELES, CALIFORNIA 

Ms.COLLINSON. Good morning, and thank you for this opportunity to testify. 

Employer-sponsored retirement plans play a critical role in facilitating our savings in our society. Americans are far more likely to 

save for retirement by participating in their company’s retirement 

plan versus contributing to an IRA. The Eighth Annual Transamerica Retirement Survey found that 71 percent of small businesses with 10 to 499 employees sponsor a 401(k) or similar defined contribution plan. And that is in contrast to 95 percent of 

companies with over 500 employees. 

Only 24 percent of small businesses surveyed sponsor a defined 

benefit plan. Therefore, this testimony will focus on defined contribution plans. 

Of the small business employers that do not currently sponsor a 

defined contribution plan, the Transamerica survey found that 73 

percent are not likely to do so in the next two years. The most frequently cited reasons include perceptions that their company is not 

large enough, lack of interest, concerns about cost, administrative 

complexity, and potential fiduciary liability. 

The Transamerica survey also found disparity in plan participation rates, with 70 percent of small business employees indicating 

that they participate—that is, 70 percent who have access to a 

plan—compared to 76 percent, 70 percent at small businesses, 76 

percent at large companies. 

The Economic Growth and Tax Relief Reconciliation Act of 

2001—EGTRRA—and the Pension Protection Act of 2006—PPA—

took important steps to increase retirement savings rates and employer plan sponsorship, yet much more work needs to be done to 

bridge the gap between benefits offered by small businesses relative to large companies. 

On behalf of Transamerica Retirement Services, I would like to 

set forth the following recommendations. Opportunities to increase 

plan coverage in the small business sector—one, offer additional 

tax incentives for small business employers to establish a retirement plan. 

Under a provision of EGTRRA that was made permanent by 

PPA, small businesses may claim a tax credit for establishing a retirement plan equal to 50 percent of qualifying costs up to $500 per 

year for the first three years. Consideration should be given to increasing the available amount of the credit and increasing the 

number of years that it may be claimed. 

Second, non-discrimination rules, compliance testing, and the 

costs associated with correcting failures increased the employer’s 

overall cost of sponsoring a plan, especially for small businesses. 

Further simplification of the administrative requirements can be 

achieved while preserving the basic spirit of fairness. 

Third, for small businesses in which a stand-alone plan is not 

feasible, consideration should be given to enabling and providing 

incentives for them to join a multiple employer plan to be provided 

by a financial institution. 

5

And, lastly, any new legislation and regulatory relief should be 

broadly promoted to help ensure that small businesses are aware 

of the advantages and feasibility of sponsoring a plan. 

Next, I would like to talk about increasing opportunities to our 

important opportunities to increase plan participation and savings. 

The saver’s credit, a tax credit which was created by EGTRRA and 

made permanent by PPA, offers a meaningful incentive for low to 

middle income Americans to save for retirement. However, very 

few are aware of it. 

Earlier this year, Transamerica commissioned a survey and 

found that only 11 percent of adults who fall within the credit’s income eligibility requirements are familiar with it. Further, 29 percent of qualifiers indicated that they have filed or plan to file their 

taxes with a 1040EZ form, which does not mention, nor has provisions for, claiming the credit. So, conceivably, they are missing out 

simply because they don’t know about it. 

Further compounding the issue, while it is most commonly 

known as the saver’s credit, the IRS forms and publications refer 

to it as the retirement savings contribution credit and a number of 

other terms. Therefore, it is highly recommended that the IRS 

should broadly promote the saver’s credit, update the tax forms 

and instructions to consistently refer to it as the saver’s credit, and 

add it to the 1040EZ form. Further, consideration should be given 

to expanding the saver’s credit in terms of increasing the income 

requirements and making it refundable. 

On a different note, while much emphasis is placed on saving for 

retirement, it is also important for employees to have the tools to 

manage their savings at retirement. Congress should consider creating incentives that encourage individuals to convert a portion of 

their savings into a guaranteed lifetime income. 

In conclusion, Transamerica Retirement Services appreciates the 

opportunity to present its views and recommendations and commends Subcommittee Chairwoman Bean and Ranking Member 

Heller on their consideration of these issues. 

Thank you. 

[The prepared statement of Ms. Collinson may be found in the 

Appendix on page 29.]

ChairwomanBEAN. Thank you for your testimony. 

Our next testimony is going to come from Sal Tripodi, currently—who currently maintains a nationally-based consulting 

practice in the employee benefits area, TRI Pension Services. 

Mr. Tripodi started his employee benefits career with the IRS, 

and since 1983 has been in the private sector consulting on employee benefit matters, writing reference materials concerning employee benefit plans, and conducting numerous seminars. He is 

President of the American Society of Pension Professionals and Actuaries. ASPPA is the premier national organization for career retirement plan professionals with more than 6,000 members. 

Please proceed. 

6

STATEMENT OF SAL TRIPODI, TRI PENSION SERVICES, HIGHLAND RANCH, COLORADO, ON BEHALF OF THE AMERICAN 

SOCIETY OF PENSION PROFESSIONALS AND ACTUARIES 

Mr.TRIPODI. Thank you. Good morning, Madam Chair, Ranking 

Member Heller, and other members of the Committee. I am Sal 

Tripodi, President of ASPPA, and we appreciate this opportunity to 

testify before the Committee on the issue of pension parity in the 

workplace. 

I, too, have some statistics with me on establishment of plans by 

smaller employers versus larger employers, but I think we have 

those on the record here. It will help me stay within my five minutes. 

There is no question that the most effective way to get Americans to save for retirement is through the workplace retirement 

system. And in fact—and I will add another statistic to the mix 

today—the lower income workers in particular making $30- to 

$50,000 per year are almost 20 times more likely to save for retirement when covered by a workplace plan as opposed to saving on 

their own. 

One effective way to increase coverage of small business workers 

would be to require employers who do not maintain a retirement 

plan to provide some mechanism at the workplace by which its employees have an opportunity to save for retirement through payroll 

deduction IRAs. A number of proposals like this have recently been 

discussed by several members. 

While ASPPA supports these proposals, we believe they must be 

structured to preserve the incentive for employers to sponsor a 

qualified retirement plan. To this end, we believe that any payroll 

deduction IRA requirement should apply only to employers that do 

not maintain a qualified retirement plan with broad-based coverage. We believe it is vital to continue to encourage employers to 

offer qualified retirement plans which, because of non-discrimination rules, will provide more substantial retirement benefits for 

workers than payroll deduction IRAs. 

Forcing small businesses to maintain two separate programs 

would discourage such businesses from forming or graduating to a 

qualified plan. Encouraging such programs is critical to the realization of adequate retirement savings, especially for lower income 

workers. 

In addition, any such exemption should not be limited to employers that maintain plans that have elective savings features, such 

as 401(k), and employers should be able to maintain a broad-based 

retirement plan that is funded solely by the employer, such as a 

defined benefit plan or a profit-sharing plan, without having to 

incur the additional administrative expense of a separate payroll 

deduction savings program. 

Another important initiative is to have major expansion of the 

current law, saver’s credit. We have heard some discussion already 

on the saver’s credit, which has become permanent due to the PPA. 

But what we would like to see is increasing the number of households that would be eligible for the credit, and to have more gradual phaseouts of the credit over a wider income bracket of eligibility. 

7

In addition, the credit should be transformed into a government 

match by requiring that the saver’s credit be deposited directly into 

the taxpayer’s IRA, or the taxpayer’s account in an employer-sponsored plan, if the employer is willing. Thus, small businesses that 

would be required to offer a payroll deduction IRA program at the 

workplace would be able to provide a government-subsidized 

matching program for lower income workers. 

And employers who maintain a broad-based qualified plan, or 

choose to install one in lieu of a payroll deduction IRA program, 

would be able to provide their lower income workers a double 

match, meaning a government match on top of any employer-provided match in the workplace plan. 

The lack of coverage in the employer-sponsored retirement plan 

system has often been cited as a chief reason to propose the creation of high dollar limit tax-favored individual savings accounts. 

ASPPA believes that a payroll deduction IRA program presents a 

far better alternative for American workers and small businesses 

than expanded individual savings accounts that would undermine 

existing qualified retirement savings programs. 

With employers required to have either a payroll deduction IRA 

program, or a broad-based retirement plan, virtually all American 

workers would have access to an employer-based retirement savings program. Additionally, for lower income workers, those most 

at risk respecting retirement savings, the expanded saver’s credit 

would offer them an enhanced incentive to save. This greater targeted incentive will likely produce a much higher level of savings 

by lower income individuals than savings through expanded individual account proposals. 

Also, and not insignificantly, a payroll deduction IRA requirement would serve to institutionalize the employer-based model for 

delivering retirement benefits, which statistically is the most effective way to enhance the level of retirement savings for American 

workers. It will require tens of thousands of businesses, most of 

them smaller businesses, to have to consider offering a retirement 

savings program for workers, either through the payroll deduction 

IRA or a workplace retirement plan. 

Many of these businesses might be persuaded to take the further 

step of offering a qualified plan, such as a 401(k) or a defined benefit plan, where the business owners can save even more, and 

through non-discrimination testing standards the rank-and-file employees would enjoy higher levels of retirement savings as well. 

Further, even if businesses do not initially step up to a qualified 

plan, the fact they would then be familiar with offering a retirement savings program through the payroll deduction IRA will 

make it more likely that they would be willing to move up to a 

qualified retirement plan at some point in the future. This would 

be significant wind for the state of retirement savings in this country. 

Thank you for your time. 

[The prepared statement of Mr. Tripodi may be found in the Appendix on page 36.]

ChairwomanBEAN. Our next witness is Jim McCarthy, who is 

head of retirement and solutions for the Global Wealth ManageVerDate 0ct 09 2002 09:42 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\39375.TXT LEANN
8

ment Group, Morgan Stanley, and serves as a member of the 

group’s Operating Committee. One of the largest businesses of its 

kind in the world, with over $680 billion in client assets, Morgan 

Stanley provides a range of wealth management products and services to individuals, businesses, and institutions. 

Mr. McCarthy is testifying on behalf of the Securities Industry 

and Financial Markets Association. SIFMA represents more than 

650 member firms of all sizes in all financial markets in the U.S. 

and around the world. 

Thank you. 

STATEMENT OF JIM McCARTHY, MANAGING DIRECTOR, RETIREMENT SERVICES, MORGAN STANLEY, PURCHASE, NEW 

YORK, ON BEHALF OF THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION 

Mr.MCCARTHY. Thank you. Madam Chairwoman, Ranking Member Heller, members of the Subcommittee, thank you for holding 

this hearing on retirement coverage for small business, and for offering SIFMA the opportunity to testify on this important issue. 

In my testimony today, I will focus on three areas. First, I will 

highlight the barriers that discourage small businesses from establishing retirement programs for their employees, then discuss milestones that actually must be achieved before a small business offers retirement plan coverage, and, finally, suggest legislative reforms that would lead to more small business pension coverage. 

Surveys consistently report that cost and complexity are the 

leading barriers to plan formation. The owner of a newly-formed 

business is, first and foremost, concerned with the capital requirements of that business. Adequate capital is key to early survival. 

In general, small business does not embark on the search for a 

retirement plan without the assistance of a professional. Advice, in 

consultation with a business or personal advisor, such as the owner’s personal financial advisor, an accountant, or another trusted 

professional, is a common starting point for discussions about the 

potential benefits of offering a plan. 

When this conversation occurs, the businesses most typically 

enter in years where profitability has been reached, survival is 

more likely, and revenue is more certain. At the point of profitability, the tax incentives available are an important factor that 

encourage the business to start a plan. 

A small business plan that provides health care is probably a 

prospective retirement plan client. However, we don’t limit ourselves to firms that are offering health care. Once the business begins to grow, it needs to attract good, stable employees. For those 

small businesses that do offer a plan, retention and recruitment is 

a key benefit of offering this type of program. They are easily understood by potential employees who are weighing the pros and 

cons of relative offers between employees. 

In terms of recommendations, Congress has been a strong advocate of initiatives to expand participation in retirement savings 

programs for small businesses. In ’96, it created the SIMPLE IRA. 

The SIMPLE IRA has proven itself in the marketplace, gaining 

quick acceptance. For example, in statistics from 2001, a mere four 

9

years after the SIMPLE was created, there were nearly two million 

taxpayers with SIMPLE IRAs. 

SIFMA believes that the SIMPLE IRA offers the most potential 

for growth. The SIMPLE IRA is unique among retirement savings 

programs, in that any employer who participates in a SIMPLE IRA 

will always receive a benefit under the program. The employer 

must make employee contributions up to three percent of compensation, must match contributions up to three percent of compensation, or make non-elective contributions for all eligible employees, which is inclusive of part-time and seasonal workers—a 

major component of the small business labor force and a major 

source of the flexibility in labor staffing that is a key component 

of the small business owners’ ability to adapt to changing business 

conditions. 

There is also immediate ownership of that contribution. Employees will not forfeit a benefit if they terminate employment. To 

make SIMPLEs more attractive, SIFMA believes the following enhancements should be enacted. We believe that the contribution 

limit should be raised to put it on par with that at 401(k) plans. 

SIMPLE plans require that employees either match or make a contribution, thus the business owner who installs a SIMPLE is providing employees with substantial benefits. We believe the inducement to the owner by increasing the contribution limit will create 

more SIMPLE plans and bring more workers along with the owners who adapt—who adopt. 

We would also advocate adding the ability to make additional 

non-elective employer contributions. Currently, employers can’t—

we see no reason why a simple plan should not be allowed to receive, for example, in a good year or as part of an ongoing retention 

strategy, non-elective contributions up to 10 percent in terms of additional contributions. 

We think we should eliminate the higher penalty on simple distributions. It was enacted in a prophylactic means to make sure 

that there wasn’t early leakage out of the programs. There is no 

data on file to support that there is relatively more leakage out of 

these programs than any comparable retirement programs, and we 

think that the current 25 percent withdrawal tax is confusing and 

inequitable. 

From a portability standpoint, we believe that SIMPLE participants should be able to port their balances to other plans. The inability to rollover assets causes taxpayers to have very fragmented 

retirement savings, and what we observed from a leakage perspective is that small balances get dissipated, while larger aggregated 

balances get nurtured and built up. 

Finally, we would allow a mid-year change from a SIMPLE IRA 

to another plan. We believe that that—if a workforce wants—excuse me, if a business owner wants to enhance their plan during 

the year, they should be able to do so. 

And, lastly, we would enhance the tax credit. We see little use 

of the tax credit, and we think that’s a major way, if we made it 

a refundable tax credit, the businesses that don’t have a tax liability today could still put in a plan and avail themselves of the tax 

credit. 

10

We look forward to working with you on ways to improve the situation. 

[The prepared statement of Mr. McCarthy may be found in the 

Appendix on page 41.]

ChairwomanBEAN. Thank you very much. 

Paula—is it Calimafde? 

Ms.CALIMAFDE. Wow. Yes. 

ChairwomanBEAN. It was okay? 

Ms.CALIMAFDE. Yes. That is a first. 

ChairwomanBEAN. I wanted to make sure I got that right. Ms. 

Calimafde is a principal at the law firm of Paley, Rothman located 

in Bethesda, Maryland, and is testifying on behalf of the Small 

Business Council of America. Ms. Calimafde’s practice encompasses 

sophisticated estate planning and advising individuals with significant assets, including retirement plan assets. She is the current 

chair, past president, and a member of the Board of Directors of 

the SBCA, which is an organization representing the tax, pension, 

and other benefit interests of privately-held and family-owned businesses. 

Thank you for being here. 

STATEMENT OF PAULA CALIMAFDE, CHAIR, SMALL BUSINESS 

COUNCIL OF AMERICA 

Ms.CALIMAFDE. Thank you, and I—at the outset, I want to thank 

you, Chairwoman, and Congressman Heller for holding these hearings, and for the interest of the other members of the Subcommittee, and also to thank you, the entire Small Business Committee of the House, for the work you have done over the years, 

because you are really a beacon to small businesses. And over the 

years you have distinguished yourself as someone that we can come 

to and talk about our problems, and it is very appreciated. 

I am going to try to do a whirlwind tour in five minutes, and I 

am going to try at some point to talk about 409A, which I hope I 

can get in, because talk about problems for small business, that is 

probably the biggest problem facing us today. It is in the non-qualified world, not the qualified, but hopefully we will get to it. 

We do know some things about retirement plans now after the 

last, what, 30, 40 years together working on it since ERISA. What 

we know is that if you take money out of a person’s paycheck before they get it, they tend to save it. And we also know if that 

money goes into a trust plan, like a 401(k) plan, where there is not 

easy access to the money, they tend to keep the money in the plan, 

because they have to. 

With a 401(k) plan, you can get to money by loans, which are rigidly enforced, and there is all sorts of requirements, as you can 

imagine, when IRS gets involved. And there is also—you can get 

to money in a 401(k) through hardship distributions, but that is it. 

Also, with 401(k) plans, we know that companies take the educational component very seriously. They work with advisers to 

come up with a group of mutual funds that will work for the employees, and very often there is web sites. The employees can go 

on the web sites, they can see what their account balances are, 

11

they can change between investments. It is a very interactive plan, 

and plan people like a lot. 

Mr. McCarthy was talking about the SIMPLE plan and why the 

SIMPLE plan should be given the same contribution limits as a 

401(k) plan. And I would say that the Small Business Council of 

America is really opposed to that, and the reason why is that a 

SIMPLE plan is exactly that—it is simple, because it allows the 

employer to make the contributions directly into an IRA and then 

walk away, so it is amazingly popular with small business owners. 

The problem with it is that walking away part of the SIMPLE 

is what is wrong with it, because it an IRA, so employees can go 

and access their money any time they want to. You know, their 

daughter needs a dress for the prom, and they love their daughter, 

and there is that money in the IRA, and let us just go to the IRA 

and get the money. Very unlikely they will go to their employer 

and say, ‘‘I need to take a loan out of the 401(k) plan and pay $150 

to get the loan out for the dress that is going to cost $150.’’ So it 

is a completely different dynamic. 

The 401(k) plan is a more serious plan. It is got—there is fiduciary obligation on the part of the employer. They are taking it on. 

But, today, working with brokerage houses, insurance companies, 

and banks, this 401(k) plan is now much more accessible and much 

easier for small business employers to deal with. 

By the way, the small business system is covering 19 million 

small business employees, which is a pretty good number. And 

when you look at the numbers you say, ‘‘Oh, they only cover a third 

of all workers in the small business area,’’ that is true, but those 

numbers do not take into account the fact that, unfortunately, almost a third of all small businesses fail within the first two years 

of going into—coming into existence, and almost half fail within the 

first four years. 

So if you take those numbers into account, I think the fact that 

small business is only covering a third of all employees may not 

work. I think if you took into account small businesses who have 

been around for five years, and then saw the coverage numbers, I 

have a feeling the numbers would be much more realistic and 

would jump up to the 50 percent category or higher. 

As far as interesting proposals out there, one is the proposal put 

forth by the administration back in 2004, and they have put it 

forth every year. They put it together with two other proposals. 

One is called the Lifetime Savings Account, or LSA, and the Retirement Savings Account called sometimes RSA, and then the Employer Retirement Savings Account called ERSA. 

And we are completely opposed to the LSA account, because we 

think small business would just take their money and put it into 

that account. But the ERSA has never been given any serious consideration by anyone as far as we can tell, and we think it is a terrific attempt to try to simplify a number of different retirement 

plans that all have developed over the years and all have separate 

rules, but really could be made into a much more simple plan. And 

so we would suggest that the ERSA be sort of given some serious 

consideration, and we think that from a retirement plan viewpoint 

it is a very positive plan. 

12

I see I am running out of time, so I just want to mention 409A 

quickly, which is—this is this new monster code section that was 

put in I guess a couple of years ago to meet the situation in Enron 

and WorldCom, where right before the company was going down 

key top executives literally were taking millions of dollars out of 

the company through non-qualified deferred comp plans. 

And you all decided, we have to stop this. This isn’t fair to the 

investors, it is not fair to the employees, something has to be done. 

And you came up with 409A, which at first no one thought applied 

to small businesses. Why? Because small businesses don’t have 

non-qualified deferred comp plans. 

But the way Treasury and IRS has interpreted 409A, it now applies to employment agreements, corporate stock agreements, LLC 

operational agreements. Almost any agreement you can imagine 

small business has out there may in fact be a 409A issue. And 

these—under 409A, there is 20 percent penalties involved by IRS. 

IRS came out with 400 pages of regulations that we are trying 

to read—and, believe me, I don’t want to read this—and all I can 

say to you is that it is a huge, huge, monster section that is going 

to cost small business tons and tons of dollars, and really there is 

no abuse in the small business world. 

So we would respectfully ask you to come up with some kind of 

exemption that gets small business out of 409A, which it really 

never needed to be in. 

Thank you. 

[The prepared statement of Ms. Calimafde may be found in the 

Appendix on page 48.]

ChairwomanBEAN. Or exemption. Well, thank you for that. 

We are going to move to questions, and I am sure we will come 

back to that. 

Some of my questions, to start out, have to do with—and I spoke 

to a couple of you prior to the hearing—regarding access to tax-deferred pension dollars. And I mentioned it in my opening statement 

as well. 

For those who have worked in corporate America or large organizations who have access to 401(k)s, they make their contributions 

and then for various purposes they can access those dollars on a 

loan basis—first-time home purchase, college loans, medical emergency. They move to their own business as entrepreneurs and start 

a company, they don’t necessarily have access. 

Now, I know there are simpler 401(k)s available today than there 

were years ago, but I guess I would like to know where you still 

see disparity relative to the small business community who maybe 

isn’t the new one-person 401(k), which is new and available, but, 

you know, are using SEPs, and so they don’t have access to that. 

And one of my questions also is: what degree of awareness do 

you think there is for those who have been in other vehicles and 

haven’t had access, that there might now be a simpler way to do 

it? And, number two, is there a way, or should there be, for them 

to move those funds to a different vehicle where they would then 

have access to them? And is there a retroactive way for them to 

get access to those funds? 

Whoever wants to take that. Sal, did you want to maybe? 

13

Mr.TRIPODI. Well, I—you know, I think there are—there is access 

for them to do this. I think the key is to make sure that we don’t 

pile on regulatory burdens that dissuade them from using the 

qualified retirement vehicles that are available to small businesses 

on an equal basis with other companies, other size companies. 

And as you noted, the cost of maintaining these plans has significantly been reduced over the last decade. That has made that more 

attractive. 

We would prefer at ASPPA to continue to see that, as through 

the employer-sponsored retirement programs, that some of this additional access is available, particularly loan programs where there 

is more likelihood of being administered in a way that is not going 

to—it is going to include fiduciary standards, for example, rather 

than having employees have enhanced access through the IRA vehicles. 

And once the company is able to establish a qualified plan, they 

are able to take those IRA monies and roll them in. We have expanded the rollover opportunity, so that in effect will—those will 

not retain their taint as IRA assets, if you will, from—

ChairwomanBEAN. From IRAs and from SEPs? 

Mr.TRIPODI. That is from SEPs as well, yes. So that once they 

are in the workplace-sponsored plan they can become eligible for 

the loan program, for example. 

ChairwomanBEAN. Even the past contributions. 

Mr.TRIPODI. Even the past contribution. 

ChairwomanBEAN. Okay. Others want to make a comment on 

that? 

Ms.CALIMAFDE. I wanted to make a comment about parity. There 

is one place where there isn’t parity, and that is the so-called top 

heavy rules. And these rules apply primarily to small businesses, 

because the way you determine whether a plan is top heavy is you 

look at how much of the account balances are for the owners compared to how much the account balances are for everyone else. And 

most small businesses, as we know, are owner heavy. 

So because of that, we have these top heavy rules, and I could 

argue with different people across the country that in the cash balance plan the top heavy rules make sense, and even in a defined 

plan they make sense. But when you get to the 401(k) plan area, 

the top heavy rules do not make any sense at all. They don’t do 

anything anymore. 

When they first came in, they did do—they did provoke—they did 

provide extra contributions for staff people, and they accelerated 

vesting. As the years have gone by, they don’t do either of those 

things any longer. And, unfortunately, what they do is the top 

heavy rules often make small businesses not give immediate eligibility to new participants coming in to 401(k) contributions, because they don’t want to trigger the top heavy rules. 

So a large business, when a company—when an employee comes 

in, they are almost always eligible for the 401(k) plan part. They 

may not be eligible for the employer contribution part, but they are 

able to start saving their own money. In the small business area, 

we can’t do that because of the 401(k) rules—I mean, sorry, because of the top heavy rules. 

ChairwomanBEAN. So it becomes a disincentive. 

14

Ms.CALIMAFDE. It is a disincentive, and I that—I think it—I 

would like to hear anybody who could tell me what the top heavy 

rules are doing today in the 401(k) area that protects an employee. 

I really don’t think they do anything anymore. 

ChairwomanBEAN. All right. Thank you for that. 

Another question I would like to ask about before we move to 

other questions is relative to the automatic enrollment that is now 

available, and what impact you have seen on overall pension savings, not just small business community but the degree to which 

it has or has not been helpful for the small business community. 

Mr.MCCARTHY. I think that we at Morgan Stanley have seen a 

little bit of hesitancy to move toward open enrollment until the 

most recent pronouncements about qualified default investment vehicles. So when you do automatic enrollment, inherent in that is 

the selection of the qualified default investment, and it has just 

been in the last few days that there has been clarity as to what 

that is likely to include in terms of balance funds and target date 

funds, and so forth, and not necessarily stable value options. 

So since some of those rules become effective 1/1/08, I think a lot 

of people are gearing up for fall of ’07, kind of during the open benefit enrollment period, to move forward with automatic enrollment, 

and in certain cases reenrollment. You have a population who 

doesn’t get—as people on-board, right, there will be a new paradigm. But for the older population, which constitutes the majority 

of your workforce at least in the near future, those who didn’t get 

caught up in automatic enrollment, many companies are going 

back and doing reenrollment of their existing populations. 

ChairwomanBEAN. Okay. Others? 

Ms.COLLINSON. From Transamerica Retirement Services’ perspective, we are still seeing the small business community and the 

marketplace assimilating all of the changes that were enacted with 

the Pension Protection Act, including the QDIA. So there is still a 

lot of unanswered questions, and there are some concerns out 

there, would—especially for a small business employer, would it 

create additional administrative complexity that they—you know, 

that they are not ready to take on yet? 

Interestingly—and we will see how it plays out over time—a 

number of small businesses feel like they already automatically 

employ their—enroll their employees, because it is a small company, it is a single location, and when people hire on, they give 

them the form, they sign up, and they are automatically enrolled. 

ChairwomanBEAN. Okay. 

Ms.COLLINSON. So I think it is going to take some time to play 

out. One comment on the saver’s credit—since there is such a low 

level of awareness, with the proliferation of automatic enrollment 

plans and people becoming automatically enrolled, which are typically going to be low to middle income workers, because the higher 

income people already contribute, that could actually perpetuate 

the gap of people who are eligible to claim the credit who aren’t because they don’t know about it, it is coming out of their W-2 income, so there is no decisive action they have to take to say, ‘‘Oh, 

I need to do the 1040A form versus the 1040EZ form.’’ And they 

are still most likely to be using the 1040EZ form. 

15

So that is some dots that—with automatic enrollment and lower 

to middle income workers that should be connected. 

ChairwomanBEAN. Okay. Thank you. Yes? 

Ms.CALIMAFDE. On the auto enrollment, I think it is going to 

work fine with the larger companies. I think it is not going to work 

very well with the small business area. The input we are getting 

from our members is that they are not interested in doing it, which 

is a shame, because the statistics on auto enrollment are astounding. Like if you auto enroll, something like 85 percent of the people 

just stay in the plan. It is just inertia, but it works. 

And, really, when we are thinking about what we are really talking about today, it is how do we get people into the system, and 

how do we keep them saving? And auto enrollment to me is an obvious answer. 

The problem with auto enrollment in the small business area is 

that the 401(k) safe harbors that you all created many years ago 

to help out small businesses be able to take advantage of the 

401(k) plans are very good, they are very effective, and they work. 

The auto enrollment safe harbor is—I think there is a slight difference in the amount of the required company match that has to 

be made, and everything else is the same as the regular safe harbor. 

So a small business client could easily say to me, ‘‘Well, why 

should I go to auto enrollment safe harbor and pick up all this additional burden, including having people who say, ’I don’t want to 

be in the plan, pay me back the money,’ and I have to do all of this 

stuff, when it is not going to change my incentive that I get under 

the Tax Code at all?’’ And that is the problem. 

So I would suggest that if you really want the 401(k) auto enrollment safe harbor to work in the small business area, the incentives 

have to be greater. Either the match has to be less or the non-elective contribution has to be less or something has to be done to 

make it work better. 

ChairwomanBEAN. Well, that is helpful, and I want to do one follow up question with you before I come over to you. I think you 

also mentioned earlier that there is issues relative to the IRS rules 

around the safe harbor, and that it is delaying—they are delaying 

the actual implementation. 

And if the whole point of getting new employees to participate, 

and to increase their pension savings, is to—if it is out of sight out 

of mind, and you take those monies early and they learn to live on 

that smaller paycheck, they are going to stick. But if you give them 

the bigger paycheck, and then you wait 90 days to implement it, 

now you are going to give them a smaller check because you are 

enrolling them, they are less likely to want to stick with it. 

So that was also one of the concerns you have had? 

Ms.CALIMAFDE. Exactly. Now, the regulations have not been 

issued, and what I told you as hearsay from an ABA Tax Section 

meeting where one of the folks who are writing those regs said that 

they are going to stay with a required notice to employees between 

60 to 90 days that there is going to be an auto enrollment taken 

out. 

ChairwomanBEAN. Right. 

16

Ms.CALIMAFDE. Well, you know, you might as well raise a red 

flag saying, ‘‘Guess what is going to come up? The company is 

going to take the money away from you.’’ Whereas, if day one you 

are automatically enrolled, and you don’t have that money, the 

likelihood is you are not really going to miss it. 

And, unfortunately, IRS tends to do this to you all. You know, 

you pass something that makes a lot of sense, and then by the time 

all the regulations come out very often your intent is somewhat 

lost, and—

ChairwomanBEAN. It sort of undermines congressional intent in 

this case, so—

Ms.CALIMAFDE. And the complexity they add. So, you know, here 

the goal should be, if we are going to do auto enrollment, let us 

make everything as easy as possible for the companies to deal with 

it, and then you end up with, you know, 100 pages of regulations 

that nobody wants to read. 

ChairwomanBEAN. Thank you. I am going to let you finish, and 

then I am going to move on. 

Mr.TRIPODI. I just want to make one other additional point, 

which I think is helping the small business community in embracing the automatic enrollment, and that was the coupling of it with 

the legislation, with this mandate to have the default investment 

rules, because small business owners tend to fall into the position 

of fiduciary of these plans. 

And that was providing a fiduciary relief for them to offer some 

safe way to invest the money for employees who did not take the 

steps to affirmatively elect their investment. So believe that it is 

going to increase at least the exploration of using that feature in 

the plan. 

ChairwomanBEAN. All right. I appreciate that. 

Okay. And let me recognize Mr. Heller for his questions. 

Mr.HELLER. Thank you. I appreciate it—bouncing around quite 

a bit, because you guys are giving some great examples of what can 

be done here. I will share some of my concerns, and that is that 

I served as Secretary of State of Nevada for 12 years, and just in 

the last year I was there 90,000 new small businesses came into 

the State of Nevada—incredible amount, number, for a small State 

like Nevada. No personal income tax in the State, no corporate income tax in the State, and for that reason I believe it was quite 

the incentive. 

That being the case, I hear a lot from my constituents in Nevada 

that benefit from the saver’s credit. And just the fact that it is so 

underutilized is a concern for me, that for some reason they are out 

there and they don’t realize it, this is what is going on and the 

ability to do that. 

Now, I spent a tremendous amount of time trying to explain to 

people who were on a plan or that were in a retirement system how 

important it is to expand that system. The underlying problem I 

think here that I see, at least through my experience, is that people still believe Social Security is going to be there for them and 

take care of them, and they don’t realize that they have to supplement that plan, even more today than ever before, if in fact that 

plan will even be there available to them. 

17

Even if they are in a retirement system, a public employees retirement system, they need to supplement that plan, because of the 

actuaries, the fact that people are living longer and there will be 

very, very difficult times in their older age, if they don’t supplement some of these plans. 

Having said all of that, one of the things that I find out there 

is that more individuals are receiving lump sums, and the fact that 

they are not prepared to receive lump sums of money as opposed 

to a defined contribution plan—or, excuse me, benefit plan, they 

are receiving lump sums, and they are not prepared. 

I served on the—I worked both sides of the securities industry. 

I was a broker, worked on the Pacific Stock Exchange, wasn’t a retail broker, but was a stockbroker, an institutional broker. But the 

more I follow this, the more I watch it, the more I am convinced 

that people are unprepared to—with their money, once they do receive it after they retire. 

Having said all of that, I would like to ask Mr. McCarthy a couple of questions. And that has to do with, what is more stable, defined contribution or defined benefit plan? 

Mr.MCCARTHY. More stable in terms of the source of income to 

the—

Mr.HELLER. To the individual. 

Mr.MCCARTHY. Without a doubt, the defined benefit—the value 

of a defined benefit plan, if it is available to the worker, is tremendous. There is no—there is no debating that. The fact that you 

have taken longevity risk and a few other things off the table, very 

few defined benefit plans, at least in the private sector, have cost 

of living adjustments, so inflation still is a significant issue. 

But defined benefit plans are an incredibly valuable resource, 

and, in fact, I think the two panelists on the outside would tell you 

that there has been some small resurgence of defined benefit in the 

small kind of profitable sector, where people have been coming 

back to defined benefit despite the down draft in the larger employer market. 

So from that perspective, DB is the answer. We do see, in both 

our institutional and in our retail businesses, a lot more focus on 

education about the de-accumulation phase. So everybody conceptually understands the accumulation phase. Money in plus earnings builds up, and people either in a DB context or a DC context 

have a number in mind that they want to hit at an age. 

The deaccumulation phase is they are not trained for, and they 

are not necessarily prepared for, so it is the equivalent of a marathon where instead of getting additional sustenance out on the 

course, the race director gives you all your water and Gatorade and 

energy bars day one and says, ‘‘Make this last,’’ right? And, unfortunately, the course is getting longer, because longevity is—

Ms.CALIMAFDE. Well, that might be fortunate. 

[Laughter.] 

Mr.MCCARTHY. Unfortunate in terms of the complexity of the calculus that you have to do. But, yes, excess longevity is—I guess is 

not the way you would think of it if you were having the longevity, 

but—

Ms.CALIMAFDE. If you were enjoying it, yes. 

Mr.MCCARTHY. Right. 

18

Ms.CALIMAFDE. Could I just add to your comments? Because I 

think—I think you are right; there is a slight resurgence in the defined benefit area in small business, particularly in the cash balance area, which is if you look at it from the viewpoint of small 

business, that is probably the most powerful plan a small business 

employee will ever get, because it is a defined contribution plan sitting on a defined benefit chassis. 

So you have individual accounts, so employees know what they 

have got in their retirement plan. And what drives employees crazy 

about defined benefit plans is they never know what they have. It 

is just some kind of formula that they don’t really get. But at the 

same time, the company assumes all investment risk in the cash 

balance plan, so employees are not able to individually direct. 

I would say—actually, the question as to which one is better, I 

would say it depends on who you are. If you are a young employee 

and you are going to work at a company for three years, I would 

rather have a 401(k) any day with a match. But if I am going to 

stay with a company for a long time, and this is my work for life, 

then I would much rather have a defined benefit plan. 

So, but going to your question about lump sums, my hope is that 

as people are educated in their 401(k) plans about the different 

choices, and folks are coming in and talking to them about what 

bonds are, and, you know, what a large cap fund is, and stuff, that 

training is going to carry them over. 

And we are starting now, and we talked to our employees to say 

you don’t want to take this into income. When you leave us, just 

immediately transfer this to an IRA and let it just sit there until 

you are 65. So we give like a whole extra speech that we never 

used to give at all because of that. 

The other thing that is strange is the required beginning date 

today is 70-1/2 if you are a small business owner. But if you are 

not a small business owner, then your required beginning date to 

take money out of a retirement plan or an IRA—or your retirement 

plan is when you actually retire from the business. 

So, you know, these rules where you say, ‘‘Where is parity between big business and small business?’’ the owner of a small business has to start taking money out before the same type of person 

in a big business would have to. And that makes no sense, really. 

Mr.HELLER. Yes. Yes. 

Mr.TRIPODI. I would like to comment, too, if I may. 

Mr.HELLER. Absolutely. 

Mr.TRIPODI. There are three things I think that are important on 

this issue. One we actually have moved a lot towards with the help 

of Congress, and that was enacting encouragement to have both 

types of plans actually. And in the small business community we 

are seeing an increase of that because of some tax incentives that 

were part of the Pension Protection Act. 

Secondly, we can offer some tax incentives for employees to 

annuitize in the distribution stage out of defined contribution 

plans, not necessarily just through true life annuity type of products, although that would be part of it, but even through just life 

expectancy type of dribble out, where they would get tax incentives 

to do that. 

19

And the third thing is I think we are getting to a point that we 

need to start having a conversation about how better to coordinate 

the use of your retirement benefits with health care and long term 

care issues, and how we can perhaps create some tax incentives or 

other types of incentives to allow employees some flexibility during 

that increased longevity risk, because you don’t know for sure how 

much of this I am going to need for health care and how much of 

this I am going to need for true retirement-type income approach. 

And I think we can brainstorm some good ideas to help that flexibility. 

Mr.HELLER. Okay. 

Ms.COLLINSON. I would also like to chime in with the question 

regarding defined benefit plans in the small business community. 

One of the—in theory, defined benefit plans are wonderful, and yet 

there is reality. And one of the realities that we are facing right 

now is, as we have alluded to earlier, that the business startup 

rates and failure rates, so there is a lot going on in the small business sector. 

And then, we have a workforce that changes jobs far more frequently than our parents’ generation. So one of the real keys is: 

how can we create something that achieves the same end result or 

a similar end result as a defined benefit plan, but also can factor 

in, you know, the current dynamics of our society today with startup companies and failure rates and mergers and acquisitions and 

employee turnover? 

So the other issue with that is—so a solution to do that, and 

right now we have seen some statistics, I shared some statistics on 

companies that are loathe to set up a 401(k) plan, so the challenge 

of convincing them to set up a defined benefit plan would be that 

much greater. We are really excited about the DBK plans that 

came out of the Pension Protection Act, but we anticipate a lot of 

the adoption is going to take place with employers that already 

have plans. the startup rate—it is going to be a greater challenge 

to go to the small businesses that don’t have a plan to get them 

to do that, to encourage them to do that. 

Also, I couldn’t agree more on the lump sum issue at retirement, 

and I think the education needs to start early on. One of the issues 

is, a lot of people in their lump sum haven’t saved enough to really 

create a meaningful annuity stream. So we have a—we need incentives to help educate people in their earlier years to build up balances and even start saving in their twenties and thirties into 

something that will create an annuity stream, as well as help people understand at retirement age what their overall assets are and 

how to achieve some sort of lifetime income from it. 

Mr.HELLER. Well, I appreciate your mentioning that. We had 

several educational programs. I actually believe that children now 

are learning more about investments. They are taking courses now 

in elementary, middle school, junior high, and high school that I 

didn’t get until I was in college. 

We had a game—we had a program called the Stock Market Game where we gave them X amount of dollars, $100,000 in play 

money, and they had six weeks to nine weeks to invest that, and 

whoever came back with the best return, you know, won a trophy, 

and so on and so forth, to have that kind of experience at that level 

20

where, in fact, elementary schools were competing against elementary schools across the state, and for that matter across the country, junior highs against other junior highs. 

But just as a side note, fascinating enough, one group of children 

who went after everything—did everything wrong, invested in one 

stock that went nuts, went crazy, there was like a 600 percent return in a nine-week period, ended up winning the whole program 

and did everything wrong, so we weren’t quite sure if we were—

[Laughter.] 

—actually sending the right message out there. It was probably 

GAP or something or cell phones. I can’t remember what it was. 

Needless to say, I think I have taken up my time. I have more 

questions, but I will yield back to the Chairwoman. 

ChairwomanBEAN. Thank you. And, obviously, you had some 

good questions, and everybody weighed in. 

The gentleman from Pennsylvania, Mr. Sestak, did you have 

some questions? 

Mr.SESTAK. Thank you. 

ChairwomanBEAN. You have five minutes. 

Mr.SESTAK. Thank you. I am sorry I was late. I had another 

hearing, and I am going to leave right after this for another one. 

And so—but I read your testimony and also what the staff prepared, and they were both very good, I thought. 

The reason I am interested is I am on the—I have asked to be 

on the Subcommittee and the Education and Labor that does—and 

that is why I liked your comment about fungibility, ability to have 

maybe something go into health and something move over into 

the—because on the Health, Employment, Labor, and Pensions 

Subcommittee, which I purposely asked to be on. 

My only question, and probably since I missed most of what you 

all had to say, if you had to prioritize the top three things of all 

the great ideas that both the staff have put in preparation and you 

had talked about—I mean, from pooling small businesses so that 

the administrative burden might be shared rather—so that is not 

so much, to removing or exempting small businesses from any liability—fiduciary liability or, you know, removing the limitations 

that are in some of the plans, or, you know, SEP, you know, how 

much—or the penalties for withdrawal. 

Which of these, you know, from portability to other tax incentives, if you just had to quickly say, what were the top three? And 

I know that it matters which type of plan and all, but if you really 

had to focus on—and I had to walk out of here being on this Subcommittee, and also the Health, Employment, Labor, and Pension 

one, what were the top three out of all of those lists that you would 

say really focus upon? If you just quickly could go through. 

Mr.TRIPODI. You want me to start? 

Mr.SESTAK. Please. 

Mr.TRIPODI. I guess what I—I would say that one of the top 

three would be the expansion of the saver’s credit that I discussed 

in my testimony, including creating that government-type match 

approach where the saver’s credit would come back—part of the 

saver’s credit would come back into the plan system for accumulation. 

21

I would say, and this is piggybacking on Paula’s comment earlier, 

for the small business community whether it is complete repeal or 

it is simplification of the top heavy rule impediments to establishing the savings programs for their employees, that would be 

very helpful. And I can—

Mr.SESTAK. Do you mean the top heavy ones that have—the big 

businesses do? 

Mr.TRIPODI. No, that is—the top heavy issue is for small businesses. 

Mr.SESTAK. But I thought it was that—you are talking about defined benefits right now, correct? 

Mr.TRIPODI. No. 

Mr.SESTAK. Then, I have got it wrong. 

Mr.TRIPODI. The top heavy issue that we were talking about had 

to do with the impediment with the 401(k) type of system for the 

small business to establish that. The business owner is really being 

penalized in saving through the 401(k) program with the rules 

that—that the top heavy rules have in what they have to then deliver to the workforce through a non—

Mr.SESTAK. Oh, I am sorry. I thought that had pertained to trying to establish the defined benefit plan. And if you wanted it there 

for a small business, some of these heavy—overarching ones that 

big businesses have to deal with would be removed. I have got it 

wrong. Thanks. 

Mr.TRIPODI. It would be more focused on the 401(k), delivery of 

the 401(k). 

And then, the third, I guess I would just reiterate my point that 

I really believe we have to start in keeping in this theme of focusing not just on accumulation but proper use of these benefits in the 

distribution stage is to explore ways we can coordinate the use of 

these monies for health and long-term care along with retirement. 

Mr.SESTAK. Be more fungible. 

Mr.MCCARTHY. I would actually yield back one of my three options, and say that there is two things that I am focused on. The 

first one is I believe that the savings challenge, while brought forward and advanced by plans in the workplace, the problem gets 

solved when people stop being spenders and start becoming savers. 

And all of the data that we see across all of the industry says 

that at some point your retirement balances become big enough 

that you stop thinking of them as the equivalent of a large screen 

TV or getting rid of that credit card bill that has been hanging 

around, or the leakage out of the system, which is a problem, right, 

in absolute terms for all forms of programs, right? I don’t think 

that there is a relative difference between things like SIMPLE and 

401(k). All small balances are prone to dissipation. 

So where I am going with this is a couple of things. It is undeniable that a program like SIMPLE, for example, is the farm system 

to more sophisticated programs, be they 401(k)s, be they defined 

benefits, paired plans, right? I do think that whatever we can do 

to make that farm system so we greenhouse savers, get more people into the system, is important. 

It seems like the data indicates, it is clearly a personal issue, but 

the data indicates that around$15- to $20,000 of accumulated retirement savings, the rate at which that dissipates or leaks out of 

22

the system, when, for example, you turn over—Ms. Collinson 

talked a little bit about workplace mobility. Leakage in the system 

comes not at all, as far as I can tell—and I have run this business 

at Morgan Stanley, at Fidelity Investments, and at Merrill Lynch, 

so I have a—you know, people like Dallas Salisbury at EBRI have, 

you know, great data sets. I would argue I have a pretty good one. 

We don’t see leakage with people running in and raiding, for example, their SIMPLE plan today. Where we see the leakage is with 

job turnover. When tenure is, you know, on average four or five 

years, we see small balances at the point of the job switch get dissipated. So I think—

Mr.SESTAK. So that argues for portability? Is that what you are—

Mr.MCCARTHY. Right. So, a) a robust farm system that is getting 

people in and starting to save, and 2) really simple portability, and 

an aggregation and concentration, because it is the small balance, 

the quick cycling through jobs, and the fragmentation of the issue 

that I—of your savings. Not only can you not—you know, people 

are busy. They can’t go through having five or six statements and 

reading them and trying to asset allocate this $1,800 and this 

$4,200. 

To the extent that they can get it to a place where it is 12 or 

13, you know, that starts to become something that is serious 

money to which you have to pay some serious attention. 

Mr.SESTAK. Got it. Thank you. 

Ms.COLLINSON. Okay. Top three priorities—one, increasing plan 

sponsorship and plan coverage rates in the small business sector 

by creating greater incentives for small businesses to sponsor a 

plan as well as simplifying some of the administrative complexity 

that exists today. 

Mr.SESTAK. And those are tax incentives? 

Ms.COLLINSON. Tax incentives, correct. 

Mr.SESTAK. And the increase in membership would be automatic, 

or just incentives? 

Ms.COLLINSON. Incentives. In my testimony I discussed expanding the tax credit that exists today for establishing a plan—

Mr.SESTAK. Right. 

Ms.COLLINSON. —expanding that credit. The second thing would 

be expanding the saver’s credit in ways that I have discussed as 

well as the other panelists have testified. And then, lastly, creating 

incentives for savers of all ages, not just people approaching retirement, to convert—invest or convert part of their savings into some 

sort of guaranteed lifetime income, to start looking towards the future to help start creating that defined benefit result in the absence of a true—in the absence of access to a defined benefit plan. 

Mr.SESTAK. So to some extent, that is a corollary to what you 

said, Mr. McCarthy, correct? I mean, in the sense of the farm system and eventually—I mean, it is not the same thing, but it kind 

of parallels that, correct? 

Mr.MCCARTHY. That, and the fact that with the education, right, 

financial literacy—Mr. Heller talked about the Stock Market Game, 

which is in fact a SIFMA creation. Reorienting people’s paradigm 

that a four to six percent withdrawal rate is kind of what a sustainable income plan looks like, as opposed to their expectation, 

23

which might be set at seven, eight, and nine, which is not really 

a sustainable type of withdrawal rate. 

Mr.SESTAK. Thank you. 

Ms.COLLINSON. And, lastly, any changes that are made should be 

broadly promoted, because we have seen a lot of great changes over 

recent years. However, our sense in the marketplace is there is still 

not the level of awareness that we would like to see, especially in 

the small business community and low to middle income workers. 

Mr.SESTAK. Thank you. 

Ms.CALIMAFDE. I will try to be brief. The first thing I would do 

is I would eliminate the top heavy rules in the 401(k) area. I think 

that would really simplify the system and give us parity with bigger business. The second thing I think I would do is fix the automatic enrollment 401(k) safe harbor, which is designed primarily 

for small businesses and does not give enough of a tax incentive 

to encourage them to do it. 

The third would be to keep the current balance between the SIMPLE limits and the 401(k) limits, and this is—I am really directly 

opposing what Mr. McCarthy is saying. I understand what he is 

saying, because that IRA plan is so desirable for small business. 

But if you make the farm system too good, no one is going to 

graduate to the trusteed 401(k) plan, and I think the educational 

component of a 401(k) plan, the ability to learn how to go and invest on web sites, and the fact that you don’t have easy access to 

the money, I think those factors make the 401(k) such a stronger 

plan that the system needs the balance that it has right now today, 

the SIMPLE is not as good as the 401(k) plan, and that is why you 

often hear from small business, ‘‘Make the SIMPLE as good as the 

401(k).’’

Well, if you make the SIMPLE as good as the 401(k), there isn’t 

a small business around who is going to be—go into a 401(k) plan. 

Mr.SESTAK. Thank you all. And I like that last point, although 

I do understand yours. I mean, we are at a negative savings rate 

for the first time in America since the Great Depression. And somehow getting us into somehow getting going, however it is, is going 

to be important. 

Thank you very much. I am sorry I went over. 

ChairwomanBEAN. They were good questions and a good summary across the board. 

I want to thank all of you for your testimony and bringing your 

subject matter expertise to this important subject. I want to thank 

Ranking Member Heller for his leadership on this issue, and Congressman Sestak for some very good questions. 

I know there was a lot to cover. We didn’t get through all of it 

in depth, but your testimony certainly did, and I anticipate we will 

be doing more on this and we will be following up with you personally. 

Actually, before I adjourn, we are going to let the Ranking Member ask a follow up question. 

Mr.HELLER. Mr. Tripodi, as President of ASPPA, aren’t you guys 

here for a conference this week? 

Mr.TRIPODI. We are. 

Mr.HELLER. You are? 

Mr.TRIPODI. We just finished it today. 

24

Mr.HELLER. Okay. Because I had a couple in my office. Are you 

an actuary yourself? 

Mr.TRIPODI. I am not. I am an attorney. Our organization is represented by all diverse retirement plan professionals. 

Mr.HELLER. I was given a definition of an actuary, someone—

[Laughter.] 

—someone who wanted to be an accountant but didn’t have the 

personality. 

[Laughter.] 

Mr.TRIPODI. As President now, I would never subscribe to that. 

[Laughter.] 

ChairwomanBEAN. And you couldn’t quite go there. Yes. 

I ask unanimous consent that members will have five days to 

submit statements and supporting materials for the record. Without objection, so ordered. 

This hearing is now adjourned. 

[Whereupon, at 11:13 a.m., the Subcommittee was adjourned.]

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