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SECURING RETIREMENT COVERAGE

FOR FUTURE GENERATIONS

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH, 

EMPLOYMENT, LABOR AND PENSIONS

COMMITTEE ON 

EDUCATION AND LABOR

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

HEARING HELD IN WASHINGTON, DC, NOVEMBER 8, 2007

Serial No. 110–71

Printed for the use of the Committee on Education and Labor

(

Available on the Internet: 

http://www.gpoaccess.gov/congress/house/education/index.html 

(II)

COMMITTEE ON EDUCATION AND LABOR 

GEORGE MILLER, California, Chairman

Dale E. Kildee, Michigan, Vice Chairman 

Donald M. Payne, New Jersey 

Robert E. Andrews, New Jersey 

Robert C. ‘‘Bobby’’ Scott, Virginia 

Lynn C. Woolsey, California 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

Dennis J. Kucinich, Ohio 

David Wu, Oregon 

Rush D. Holt, New Jersey 

Susan A. Davis, California 

Danny K. Davis, Illinois 

Rau ́l M. Grijalva, Arizona 

Timothy H. Bishop, New York 

Linda T. Sa ́nchez, California 

John P. Sarbanes, Maryland 

Joe Sestak, Pennsylvania 

David Loebsack, Iowa 

Mazie Hirono, Hawaii 

Jason Altmire, Pennsylvania 

John A. Yarmuth, Kentucky 

Phil Hare, Illinois 

Yvette D. Clarke, New York 

Joe Courtney, Connecticut 

Carol Shea-Porter, New Hampshire 

Howard P. ‘‘Buck’’ McKeon, California, 

Senior Republican Member 

Thomas E. Petri, Wisconsin 

Peter Hoekstra, Michigan 

Michael N. Castle, Delaware 

Mark E. Souder, Indiana 

Vernon J. Ehlers, Michigan 

Judy Biggert, Illinois 

Todd Russell Platts, Pennsylvania 

Ric Keller, Florida 

Joe Wilson, South Carolina 

John Kline, Minnesota 

Cathy McMorris Rodgers, Washington 

Kenny Marchant, Texas 

Tom Price, Georgia 

Luis G. Fortun ̃ o, Puerto Rico 

Charles W. Boustany, Jr., Louisiana 

Virginia Foxx, North Carolina 

John R. ‘‘Randy’’ Kuhl, Jr., New York 

Rob Bishop, Utah 

David Davis, Tennessee 

Timothy Walberg, Michigan 

Dean Heller, Nevada

Mark Zuckerman, Staff Director 

Vic Klatt, Minority Staff Director 

SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS 

ROBERT E. ANDREWS, New Jersey, Chairman

George Miller, California 

Dale E. Kildee, Michigan 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

David Wu, Oregon 

Rush D. Holt, New Jersey 

Linda T. Sa ́nchez, California 

Joe Sestak, Pennsylvania 

David Loebsack, Iowa 

Phil Hare, Illinois 

Yvette D. Clarke, New York 

Joe Courtney, Connecticut 

John Kline, Minnesota, 

Ranking Minority Member 

Howard P. ‘‘Buck’’ McKeon, California 

Kenny Marchant, Texas 

Charles W. Boustany, Jr., Louisiana 

David Davis, Tennessee 

Peter Hoekstra, Michigan 

Cathy McMorris Rodgers, Washington 

Tom Price, Georgia 

Virginia Foxx, North Carolina 

Timothy Walberg, Michigan 

(III)

C O N T E N T S 

Page

Hearing held on November 8, 2007 ........................................................................ 1

Statement of Members: 

Andrews, Hon. Robert E., Chairman, Subcommittee on Health, Employment, Labor and Pensions ............................................................................ 1

Prepared statement of ............................................................................... 3

Statement of the U.S. Chamber of Commerce ........................................ 73

Kline, Hon. John, Senior Republican Member, Subcommittee on Health, 

Employment, Labor and Pensions ............................................................... 4

Prepared statement of ............................................................................... 4

Statement of Witnesses: 

Calabrese, Michael, vice president and co-director, Next Social Contract 

Initiative, New America Foundation ........................................................... 7

Prepared statement of ............................................................................... 8

Dudley, Lynn, vice president, retirement policy, American Benefits Council .................................................................................................................... 18

Prepared statement of ............................................................................... 19

John, David C., managing director, the Retirement Security Project .......... 41

Prepared statement of ............................................................................... 25

Retirement Security Project policy brief, ‘‘Pursuing Universal Retirement Security Through Automatic IRAs,’’ Internet address and 

executive summary ................................................................................ 33

Iwry, J. Mark, managing director, the Retirement Security Project ........... 24

Prepared statement of ............................................................................... 25

Perun, Pamela, policy director, Aspen Institute Initiative on Financial 

Security .......................................................................................................... 42

Prepared statement of ............................................................................... 43

Aspen Institute policy brief, ‘‘Savings for Life: A Pathway to Financial Security for All Americans’’ ........................................................... 46

Stapley, Michael, president and CEO, Deseret Mutual; chairman, ERIC 

Task Force on New Benefit Platform for Life Security ............................. 50

Prepared statement of ............................................................................... 52

Stein, Norman P., professor, University of Alabama School of Law, on 

behalf of the Conversation on Coverage ...................................................... 54

Prepared statement of ............................................................................... 55

(1)

SECURING RETIREMENT COVERAGE FOR 

FUTURE GENERATIONS 

Thursday, November 8, 2007

U.S. House of Representatives 

Subcommittee on Health, Employment, Labor and Pensions 

Committee on Education and Labor 

Washington, DC

The subcommittee met, pursuant to call, at 10:01 a.m., in room 

2175, Rayburn House Office Building, Hon. Robert Andrews [chairman of the subcommittee] presiding. 

Present: Representatives Andrews, McCarthy, Tierney, Wu, Holt, 

Loebsack, Courtney, and Kline. 

Staff present: Aaron Albright, Press Secretary; Tylease Alli, 

Hearing Clerk; Carlos Fenwick, Policy Advisor for Subcommittee 

on Health, Employment, Labor and Pensions; Jeffrey Hancuff, Staff 

Assistant, Labor; Rachel Racusen, Deputy Communications Director; Michele Varnhagen, Labor Policy Director; Robert Borden, Minority General Counsel; Cameron Coursen, Minority Assistant 

Communications Director; Ed Gilroy, Minority Director of Workforce Policy; Rob Gregg, Minority Legislative Assistant; Alexa 

Marrero, Minority Communications Director; Jim Paretti, Minority 

Workforce Policy Counsel; and Ken Serafin, Minority Professional 

Staff Member. 

Chairman ANDREWS [presiding]. Good morning, ladies and gentlemen. 

We would like to thank the witnesses for their attendance and 

thank the members of the public and the press for their attendance, and we look forward to a very vigorous discussion this morning. I would like to thank my friend, the ranking member from 

Minnesota, Mr. Kline, for his participation, also. 

I have become, because of my daughter’s involvement as an actress—I have a 13-year-old daughter who is an actress—a fan of 

musical theater, and my daughter spent a year on the national 

tour of the Broadway show ‘‘Oliver,’’ and she is in it again playing 

a role this fall, and there is a great scene in ‘‘Oliver.’’ Fagan is the 

leader of a den of thieves. Some would say the House of Representatives sometimes resembles that, but I disagree. 

But Fagan is the leader of a den of thieves, of boys. They are 

pickpockets. And Fagan is an abandoned sort of lonely old man, 

and there is a great scene where he pulls out, when the boys are 

sleeping, a treasure box that has in it a bunch of jewels, and these 

are the main scores that Fagan’s been able to get in his life as a 

2

bandit and a thief, and he refers to the jewels as his pension. He 

says that this is what is going to carry him through his old age 

when he is abandoned in his old age. 

And, of course, I will not spoil the end of the story, but something happens to the jewels at the end of the story. 

Doing what I do for a living, when I watch this scene, I, of 

course, think of ERISA, and I think about the fact that we have 

moved somewhat beyond the Dickens era, where the way you provided for yourself in your old age was to horde something away and 

hope you could hang on to it, hopefully toward a more progressive 

era, where an intelligent social contract between employers and 

employees yields a safe and secure and reliable source of income 

in one’s retirement age. 

I view the ERISA law as a success, not a perfect success, but as 

a significant success since its enactment in 1974. Measured on the 

scale of reliability and security of pension assets, it is an overwhelming success. Failures of pension plans are so rare that they 

are extremely newsworthy if and when they happen, and that is a 

testament to the authors of that law and even more so a testament 

to the integrity and skill of men and women across the country who 

serve as trustees, as fiduciaries, as professionals and others who 

work for plans. The law works. 

Where I do think we have had a shortfall is the 69 million Americans who work for a living and have no pension at all. Now I do 

not think that is the fault of the ERISA statute. I think it is because it is not an issue that was thoroughly contemplated in 1974 

and since then. It is an issue that is long overdue in contemplation. 

In 1999 when I was privileged to serve as the ranking member 

of the subcommittee, then-Congressman Major Owens and I—he at 

the time was the ranking member of the Labor Standards Subcommittee—asked for a GAO report on the number of people without a pension, and that number, as I said, came through at about 

69 million people. There is reason to believe that that number has 

grown since then because of various dynamics in the economy. 

This is a problem, I think, on two levels. 

The first, it is a problem, obviously, for the worker who has 

worked for many, many years and does not have sufficient income 

to carry himself or herself through retirement age. 

This problem becomes especially acute when one thinks about 

the glorious advent of longer life expectancy in our country. We can 

reasonably expect that many of our younger workers will live well 

into their 80s and perhaps their 90s, which is very, very good, but 

it does raise the issue of needing more income to stretch oneself beyond one’s full-time working years. 

So there is sort of a ticking time bomb where the baby boom generation in particular will begin to retire, as it has now, and many, 

many members of that generation will have no retirement income 

other than their Social Security check, and that is a very precarious financial position in which to find oneself. There is, obviously, 

that implication. 

The second implication is more societal and systemic, and I make 

this prediction with no criticism either of Republican or Democratic 

Parties. I make it with an eye toward the way things work in politics. If we continue to have tens of millions of Americans with no 

3

private pension, I think the day is coming when they will retire, 

they will notice that their Social Security check keeps them at or 

below the poverty level, and they will be very unhappy about that. 

And there will be a political movement to blame the government, 

and the political movement will say that it is the government’s 

fault that people do not have this nest egg or security that they 

ought to have, and the remedy, of course, will be to increase Social 

Security benefits, and my fear is that the two parties will get into 

a bidding war as to see who can increase Social Security benefits 

fastest for the highest number of people. 

This would be precisely the wrong prescription for Social Security, given its own fiscal standing. I think that we have a strong 

societal interest in alleviating or at least reducing this problem by 

expanding the number of working Americans who have a private 

pension. So the pressure on their incomes is lessened by the existence of that private pension. 

The purpose of today’s hearing, which I hope will be the first in 

a series of serious inquiries into this question, is what good ideas 

people have to dealing with the needs of the 69 million Americans 

or more who do not have a private pension. I come to this hearing 

with no bias, no preconceived notion of what the right answer is. 

I am frankly not eager to rule anything out or to say that anything 

must be included. 

The only quasi-bias that I have is I do think that an employerbased pension system has a lot to recommend it. I do not think an 

employer-based system should be the sole means of retirement saving by any stretch of the imagination, but I do think history has 

shown us, particularly since 1974, that a retirement system based 

on the employer-employee relationship works. It is stable, it is 

sound, it is well managed, and although, again, I would not rule 

out other possibilities, my initial inclination is to try to build a system for the 69 million people who have no pension that relies heavily upon that employer-employee model. 

So the ground rules for today are there are no ground rules. We 

are interested in hearing what everyone thinks about this broad 

question. The committee would like to follow up on this inquiry 

with further inquiries which I hope will grow out of this. At this 

time, I would like to turn to my friend from Minnesota for his 

opening statement. 

[The statement of Mr. Andrews follows:]

Prepared Statement of Hon. Robert E. Andrews, Chairman, Subcommittee 

on Health, Employment, Labor, and Pensions 

In 2000, under the leadership of the distinguished Minority Leader, Mr. Boehner, 

this subcommittee held a hearing on improving pension coverage for American 

workers. Unfortunately, almost seven years later, the number of working Americans 

without a pension remains unchanged. 

Today, over 75 million working Americans continue without a retirement plan. 

Until recently, retirees with pension benefits received a defined benefit plan. Although many public sector workers continue to enjoy the benefits of a defined benefit plan, many private sector workers must rely on a defined contribution plan for 

their retirement. 

Moreover, Americans working for a small employer are less likely to have access 

to any type of retirement plan. Understandably, many small businesses find it 

unaffordable to implement and maintain such a plan. 

I am gravely concerned with the potential crisis we may face in the next few decades with retirement savings. Retirement participation in employer-sponsored plans 

4

is on the decline and over 80 million baby boomers are quickly approaching retirement with about half of them not adequately prepared for retirement. Coupled with 

over 69 million working Americans without access to a pension plan, the need for 

action is imperative. 

The experts before us today will hopefully provide us with viable solutions to address this concern. I look forward to examining each of their proposals today and 

thank them for their testimony. 

Mr. KLINE. Thank you, Mr. Chairman. 

I want to thank the witnesses for being here. This is truly a distinguished panel of experts, and they have a lot more to offer, I am 

certain, than my musings. So I will ask unanimous consent to submit my prepared statement for the record and just make a couple 

of comments. 

[The statement of Mr. Kline follows:]

Prepared Statement of Hon. John Kline, Ranking Republican Member, 

Subcommittee on Health, Employment, Labor, and Pensions 

Good morning, Mr. Chairman, and welcome to each of our witnesses. 

Last year, this Committee took the lead in enacting the most comprehensive reform of our nation’s pension laws in more than three decades. The Pension Protection Act of 2006 embodied sweeping reform of these laws on every level. We 

strengthened funding requirements for defined benefit pension plans to ensure that 

plan sponsors were meeting their obligations to workers and retirees. We reformed 

the multiemployer pension plan system to ensure that these plans remain stable 

and viable for the millions of Americans who rely or will rely on them. We greatly 

enhanced pension plan financial disclosure requirements to participants, and modernized our defined contribution pension plan system to foster greater retirement 

savings. And we helped shield taxpayers from the possibility of a multi-billion dollar 

bailout by the federal Pension Benefit Guaranty Corporation. 

The Pension Protection Act fixed broken pension rules that no longer served the 

workers who count on their retirement savings being there for them when they need 

it, and represented a major victory for American workers, retirees, and taxpayers. 

The fact that we were able to do it in a bipartisan way—with 76 Democrats supporting the bill, and in an election year, no less—demonstrated the critical nature 

of this issue. 

Of particular relevance to today’s hearing were provisions we included in the Pension Protection Act to ensure that Americans have greater opportunities to save for 

their retirement. These automatic enrollment provisions have encouraged employers 

to automatically enroll workers in defined contribution pension plans, while preserving for workers the choice to opt-out of them. These alone represent a giant leap 

forward for increasing our nation’s savings rate and retirement security for workers. 

The Pension Protection Act represented an enormous step toward moving our nation’s pension system into the 21st Century. That said, there are few who would 

argue that our nation’s retirement security is where it should be, or that more cannot be done to preserve and build on our voluntary, employer-based retirement system. I look forward to hearing suggestions this morning from the range of excellent 

witnesses before us. 

Before we get into the details of testimony, I would stress one point. As we will 

hear today, our nation’s voluntary employer-based pension system is very much a 

story of success. Is it perfect? Nothing is. Is there room for improvement? I’m sure 

of it. But a fundamental principle must be that any further reforms we examine or 

undertake must first ‘‘do no harm.’’ By that I mean to say that we would be doing 

our nation’s workers a tremendous disservice if we adopt policies that ‘‘break’’ the 

parts that are not broken. 

Finally, I’d offer a historical note. The Pension Protection Act we passed last year 

was the culmination of years of legislative preparation, hearings in our committee 

and in others, and a steady evolution of proposals, ideas, and language. As reflected 

in the overwhelming support this bipartisan bill enjoyed, the final product represented a careful balancing of the interest of various stakeholders and supporters, 

and most important, the interests of participants, workers, and beneficiaries. I hope 

that as we continue our examination of retirement security issues, and particularly 

as we contemplate future changes, we adhere to that model of thoughtful deliberation. 

5

With that in mind, I look forward to today’s hearing, and the testimony of our 

witnesses as to their views on what next steps we can take to further retirement 

security for all Americans. I welcome them and yield back my time. 

Mr. KLINE. One, we worked very, very hard on a thing called the 

Pension Protection Act. We brought stakeholders in. If we did not 

bring them in, they came in anyway, and they worked together. 

And we put together a pretty good package that addressed defined 

benefit plans, multi-employer plans, defined contribution plans. We 

looked to protect the PBGC and the taxpayer. This was a very big, 

long collaborative effort. 

And so, as we look to improve the situation, I would ask that we 

be very, very careful here to do no harm, that we do not inadvertently pull a thread on ERISA that leaves over half of Americans 

who get their health insurance now under ERISA out in the cold, 

that we be careful on pulling these threads as we look to make 

things better and stronger. 

I agree completely with my good friend and colleague, the chairman, that we do not want to move the wrong direction in Social 

Security and put an ever-larger burden on that system which is already financially in some peril. 

So the experts are here. I look forward to hearing what you have 

to say. 

And with that, I will yield back. 

Chairman ANDREWS. Thank you, Mr. Kline. 

I would like to proceed to the panel. We have received and read 

your written statements. They will, without objection, be made a 

part of the record. We would ask each of you to give us a 5-minute 

synopsis of your testimony so we can get to questions from the 

members. 

I am going to also remind the witnesses about the way our lighting system works. Many of you have testified here before, so you 

know. The green light means you are on, the yellow light means 

you have 1 minute, and we would like you to wrap up your testimony at that point, and the red light means we would ask you to 

stop so we can move on to the next person. 

Michael Calabrese is managing director of the Retirement Security Project and vice president of the New America Foundation. He 

has previously served as general counsel of the Congressional Joint 

Economic Committee, as pension and benefits counsel at the national AFL-CIO, and as director of domestic policy programs at the 

Center for National Policy. Mr. Calabrese is an attorney and graduate of Stanford Business and Law Schools where he completed the 

joint JD-MBA program in 1984. He received his bachelor’s in economics and government from Harvard College in 1979. 

Welcome, Mr. Calabrese. 

Lynn Dudley is vice president for retirement policy for the American Benefits Council. Prior to joining the council, Lynn was a legal 

consultant for Sungard Employee Benefits Systems in Birmingham, 

Alabama. In addition, she was engaged in the private practice of 

law for several years with the firm of Berkowitz, Lefkovitz, Isom 

and Kushner of Birmingham. After earning her undergraduate degree at Vanderbilt University, Lynn received an LLM in taxation 

6

from the University of Florida in 1983 and a law degree from Cumberland School of Law at Samford University in 1982. 

Lynn, it is good to see you this morning. 

Mark Iwry is principal of the Retirement Security Project, a nonresident senior fellow at the Brookings Institution and a research 

professor at Georgetown University. Mr. Iwry is a graduate of Harvard College and Harvard Law School, has a master’s degree from 

Harvard’s Kennedy School of Government, and is a fellow of the 

American College of Employee Benefits Council and is a member 

of the bar of the United States Supreme Court. 

Welcome. Glad to have you with us. 

David John, welcome. Glad to have you here this morning. 

He 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. Mr. John also serves as managing director of the Retirement 

Security Project, a Pew Charitable Trust-funded joint effort at 

Georgetown University and the Brookings Institution. 

Welcome, Mr. John. 

Dr. Pamela Perun is testifying on behalf of the Aspen Institute. 

She is a lawyer, psychologist and expert on retirement income policy issues. I am sure being a lawyer and a psychologist are useful 

tools in either profession. I said that on Mr. Kline’s proxy there. 

She received a JD from the University of California at Berkeley, 

a Ph.D. in human development from the University of Chicago and 

a BA from Wellesley College. She has practiced employee benefits 

law in Boston and in Washington and has held research positions 

at Duke University, Wellesley College and the Harvard University 

Medical School. 

Doctor, welcome. 

Michael Stapley is chair of the Task Force on a New Benefit 

Platform and serves as a member of the Health Policy Committee, 

the Medicare Task Force for the ERISA Industry Committee, 

ERIC, and is a member of ERIC’s board of directors. He is president and chief executive officer of the Deseret Mutual Insurance 

Company and Deseret Mutual Benefits Administrators. He earned 

a BA in political science in 1969 from Brigham Young University, 

a master’s of public administration in 1972 from the Institute of 

Public Management at Brigham Young University. 

Welcome. Nice to have you with us. 

And finally, last but not least, Professor Norman Stein received 

his BA in 1973 from New College in Sarasota, Florida, and his JD 

in 1978 from Duke University where he was elected to the Order 

of the Coif, which is not a hairdressing society. It is actually the 

legal honors society. I am a member. That is how I know this. 

But Professor Stein is a member of the advisory panel of the 

BNA Pension Reporter, has served as counsel to the American Association of Retired Persons in several pension cases, was a consultant to the GAO, taught in the IRS general counsel’s continuing 

education program, has testified before Congress on pension issues 

and has been chair of the employee benefits section of the American Association of Law Schools and teaching employee benefits 

subcommittee of the American Bar Association. 

7

As Mr. Kline said, truly a distinguished panel. We are very 

happy to have you with us. 

And, Mr. Calabrese, we would ask you to start. 

STATEMENT OF MICHAEL CALABRESE, VICE PRESIDENT, NEW 

AMERICA FOUNDATION 

Mr. CALABRESE. Good morning, Mr. Chairman and members of 

the committee. Thank you for inviting me to testify today. 

I should also mention in addition to that flattering introduction 

that I served also as co-chairman of the Conversation on Coverage 

working group on individual and defined-contribution saving reform, which was a different working group than Norm co-chaired. 

Today’s employer-sponsored pension system works very well for 

workers who have consistent access to a plan and who choose to 

save. Our 401(k) system facilitates savings as well as it does for 

two key reasons. 

First, 401(k)s provide powerful saving incentives, typically both 

matching contributions by employers and federal tax breaks, which 

are particularly valuable to higher income taxpayers. 

A second reason is infrastructure. Employer-sponsored plans provide the convenience, discipline, and protection of automatic payroll 

deduction and professional investment management at relatively 

low cost. These two key features, matching contributions and infrastructure for automatic saving, is what needs to be extended to all 

Americans, to those 69 million—actually, probably closer to 75 million—workers that the chairman mentioned. 

Unfortunately, employer-sponsored plans cover fewer than half of 

all workers. A steadily declining minority of American adults are 

participating in any retirement plan. Since I first proposed a universal 401(k) system in testimony before this subcommittee 7 years 

ago in September 2000, participation in private employer plans has 

fallen by another four million the lowest level in more than 30 

years. Only 43 percent of all private-sector workers participated in 

an employer plan last year, a striking decline from the 50.3 percent 

participation rate in 2000. 

The solution, I believe, is a universal 401(k) plan that gives every 

worker access to an automatic, professionally administered retirement saving plan and to a portable individual career account. Designed well, a universal 401(k) plan will supplement and strengthen the existing private pension system, not supplant it. 

Some analysts say, ‘‘Well, why doesn’t that other 57 percent of 

the workforce go out and open an IRA and make regular saving deposits on their own?’’ The answer, of course, rests in part on human 

nature and in part on public policy choices. It is not primarily eligibility for an individual savings account that spurs participation, 

but rather what I call the three I’s—incentives, infrastructure and 

inertia. 

A universal 401(k) would recast federal pension policy by adding 

each of those three components. 

First, incentives: Federal tax expenditures for retirement saving 

exceed $135 billion each year, yet by relying on deductions instead 

of credits, only a fragment of that spending goes to encourage middle-to lower-wage workers who find it most difficult to save. 

8

We need a tax incentive for saving that is more inclusive and potent. This can be done by expanding the saver’s credit, making it 

a refundable matching contribution that is directly deposited into 

the worker’s account rather than rebated. 

Second, we need infrastructure. We need an account-based infrastructure that enables every worker to save by automatic payroll 

deduction into a simple, low-cost, portable and professionally invested account. 

The third ingredient is inertia. We need to harness human nature with default options that convert myopia into positive inertia. 

We should simply require that the default options for retirement 

saving be automatic enrollment, automatic escalation, automatic 

payroll deduction, automatic asset allocation and automatic 

annuitization. 

A universal 401(k) system can extend the most proven, effective 

features of employer-sponsored plans to all Americans. Eligibility 

should be open to all workers not participating in their employer 

plan, including recent hires and part-time employees. All workers 

not participating in a qualified employer plan should be automatically enrolled and contribute by payroll deduction, although an individual could opt out and choose not to save. 

I would like to close by focusing on the first and most critical 

building block for this vision, which is infrastructure. 

Enrollment and access to payroll——

Chairman ANDREWS. Mr. Calabrese, can we just ask you to very 

briefly summarize here that first point, okay? 

Mr. CALABRESE. Okay. Right. Okay. 

And, essentially, it is that this infrastructure has two essential 

pieces, easy access to automatic payroll withholding and a central 

clearinghouse to receive the deposits and manage very low-cost investment accounts, and so, along those lines, I would commend to 

you the Automatic IRA Act of 2007 introduced in the House by 

Representatives Richard Neal and Phil English, although we believe the limits are too low. It is a critical next step. 

[The statement of Mr. Calabrese follows:]

Prepared Statement of Michael Calabrese, Vice President and Co-Director, 

Next Social Contract Initiative, New America Foundation 

Thank you, Mr. Chairman and members of the Committee, for this opportunity 

to testify today. I am Vice President of the New America Foundation, a nonpartisan 

policy institute here in Washington. I co-direct New America’s Next Social Contract 

Initiative, which focuses on updating the nation’s policy framework for promoting 

the basic economic security of workers and their families, particularly with respect 

to health insurance, retirement saving, income security and access to higher education. 

I also served as co-chairman—with John Kimpel, former deputy general counsel 

at Fidelity Investments—of the Conversation on Coverage Working Group on individual, defined-contribution saving reform. That diverse Working Group developed 

a universal ‘‘Retirement Investment Account’’ proposal that is very similar to New 

America’s Universal 401(k) plan that I describe in my testimony today. 

With over $12 trillion in assets, traditional pension trusts and 401(k)-style saving 

plans account for the vast majority of financial assets accumulated by households 

in recent years. For those with access, America’s employer-based private pension 

system provides powerful saving incentives—both tax breaks and employer contributions—as well as the convenience and discipline of automatic payroll deduction. 

Unfortunately, employer-sponsored plans cover fewer than half of all workers. 

America’s real retirement security crisis is not Social Security solvency, nor even the 

many big companies freezing their traditional pension plans. The larger problem is 

9

that a steadily declining minority of American adults are participating in any retirement plan—whether pension or 401(k) plans or Individual Retirement Accounts 

(IRAs). Participation in employer plans peaked back in the late 1970s. Since I first 

proposed this Universal 401(k) reform in testimony before the Subcommittee back 

in September 2000, participation in private employer plans has fallen by 4 million 

to what appears to be the lowest level in more than 30 years.

Only 43.2 percent of all private-sector workers participated in an employer-sponsored retirement plan in 2006, a striking decline from the 50.3 percent participation 

rate in 2000, according to a recently updated Congressional Research Service (CRS). 

Only 54 percent of older workers (aged 45 to 64) participate in a retirement plan. 

The percentage of private sector workers whose employer even sponsors a plan 

(whether or not they are eligible or participate) has fallen steadily to 57 percent in 

2006. 

One result is that fewer than 55 percent of today’s older workers, those aged 47 

to 64, are on track to replace even half of their pre-retirement standard of living 

during retirement, based on projections using the Federal Reserve’s Survey of Consumer Finances. SCF data indicate that even among workers and families with a 

defined contribution account (including 401(k)s, IRAs or Keoghs), the median balance is $25,000—and less than $10,000 for households with incomes below $50,000. 

As a nation, we are saving too little and not doing enough to give lower-paid 

workers the combination of opportunity and security they need to cope with accelerating economic and technological change. A projected 40 percent of today’s baby 

boomers are likely to depend almost completely on Social Security’s poverty-level 

benefit after age 70, just as today’s lower-income seniors do today (see chart above). 

We need to facilitate pension portability while simultaneously shifting the burden 

of subsidizing basic benefits from American business to society as a whole. 

The solution is a Universal 401(k) plan that gives every worker access to an automatic, professionally administered retirement saving plan—what I call an Individual Career Account (ICA). The plan would supplement, not supplant, the existing 

private pension system. 

Individual Career Accounts: A Universal 401(k) 

Today’s private pension system works well for those workers who have consistent 

access to a plan and choose to save. One big reason retirement plans are effective 

in generating saving is the powerful incentives provided by immediate tax deductions and employer matching contributions. Another reason is infrastructure: employer-sponsored plans create the positive inertia of automatic payroll deductions 

while also managing the complexities of investment management at relatively low 

cost. These two key attributes—incentives and an infrastructure for automatic saving—is what needs to be replicated for all Americans. 

Every working American needs access to both a potent tax incentive to save and 

automatic payroll deduction into a portable, professionally-managed account whether or not his current employer sponsors a retirement plan. The fact that so few 

workers save regularly in IRAs reinforces what demonstration projects in assetbuilding among low-income families have found: it is not primarily access to a savings account that spurs participation, but the three ‘‘I’s’’ Incentives, Infrastructure, 

and Inertia. 

A Universal 401(k) would recast federal pension policy by adding: 


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• A tax incentive for saving that is more inclusive—and potent—by expanding the 

Savers Credit, making it refundable and directly deposited into an ICA. 

• An account-based infrastructure that is citizen-based, rather than strictly employer-based, yet enables every worker to save by automatic payroll deduction. 

• Default options that convert myopia into positive inertia, through automatic enrollment, automatic escalation, automatic payroll deduction, automatic asset allocation, and automatic annuitization. 

Under a Universal 401(k) plan with these three key attributes, all workers not 

participating in an employer plan, including recent hires and part-time employees, 

would be automatically enrolled and contribute by payroll deduction, although an 

individual could opt out and choose not to save. The government would match voluntary contributions by workers and their employers with refundable tax credits deposited directly into the worker’s account. Workers participating in their employer’s 

plan would receive stronger tax incentives to save, but otherwise see no difference. 

Contributions for workers not participating in an employer plan would be forwarded 

to a federally-chartered clearinghouse, which would manage small accounts at low 

cost and could even convert account balances into guaranteed income for life at retirement. Individuals could maintain the account throughout their careers, since it 

would remain open as they moved from job to job. This supplemental system would 

make saving easier, automatic, and fair. 

The Limitations of America’s Employer-Based Pension System 

When the landmark Employee Retirement Security Act (ERISA) became law in 

1974, its fiduciary, funding, vesting and other provisions were designed to perfect 

what was then a system of employer-sponsored defined-benefit (DB) pensions. From 

1945 to the late 1970s, the percentage of private-sector workers covered by pension 

plans grew rapidly from 20 percent to just above 50 percent. Employers made all 

the contributions and shouldered all the investment risk, managing pooled trusts 

subject to government oversight at relatively low costs. Workers—at least those who 

clocked more than 20 hours per week—were automatically covered and received, at 

retirement, guaranteed monthly income for life. 

This industrial-era system was based on assumptions of career-long job tenure, 

stable corporate structures, pressure from strong unions, and large doses of employer paternalism—conditions that have been eroding as steadily over the past two 

decades as the prevalence of DB plans. Since the first 401(k) plan emerged out of 

an unintended tax loophole in 1981, the number of U.S. firms with DB plans has 

plunged from 100,000 to fewer than 30,000 now. Today, we are a 401(k) nation. 

More than 60 percent of private-sector workers lucky enough to have any pension 

benefit work at firms that sponsor only a 401(k)-type contribution plan. 

This shift makes perfect sense from the perspective of employers who face increased health benefit costs, more intense competition, less pressure from unions, 

more corporate volatility, shorter job tenures and a desire to appeal to younger 

workers who don’t expect to remain until retirement. But although 401(k)s are less 

expensive and risky to employers, there has been no great increase in plan sponsorship among smaller firms—and a distinct decline in participation among workers at 

every income level, particularly middle-to-low earners, compared to the automatic 

inclusion that characterized traditional DB plans. Clearly the nation needs a new 

approach to promoting retirement saving that can offer the best features of private 

sector 401(k)s to all workers lacking coverage. 

What Is Needed 

A renewed and updated effort to facilitate saving and retirement security for all 

Americans should be designed to address the following unmet needs: 

Improve individual retirement security. 

More than 75 million American workers do not participate in a tax-subsidized, 

payroll deduction saving plan—and therefore they tend to save very little for retirement. While participation is slightly higher among full-time workers (49 percent), 

participation rates are also strikingly lower among workers who are low-income, 

young, work part-time, or work at small firms. Approximately 85 percent of Americans without a pension benefit at work shared one or more of these four characteristics, according to a General Accounting Office study. Whereas 63 percent of full-time 

workers at firms with more than 100 employees participate in retirement plans, 

that rate sinks to 42.6 percent at firms with fewer than 100 employees, and it 

plunges to 23 percent at firms employing fewer than 25, according to a CRS analysis 

of 

Current Population Survey data. Rising numbers of part-time and contingent 

workers are even less likely to be offered coverage. Only 23.3 of part-time workers 

participated in private sector plans in 2006, according to CRS. 

11

A similarly striking disparity in pension participation occurs at different income 

levels—and not primarily because low-income workers choose to save in 401(k) plans 

at lower rates. In 2006, whereas 71 percent of full-time private sector workers in 

the top quartile by earnings worked at a firm offering pension coverage, among 

workers in the lowest-earning quartile, only 36.6 percent worked at a firm sponsoring a retirement plan. Even in the second earnings quartile, only 56 percent 

worked at a firm that sponsored a plan. 

Too many individuals and families are headed toward retirement age with little 

more than Social Security’s safety net. A great deal of the opposition to partial privatization of Social Security undoubtedly related to the average citizen’s keen 

awareness of how many elderly desperately depend on the program’s meager but 

guaranteed (and inflation-adjusted) monthly payment. More than a third of Americans over age 65 rely on Social Security’s poverty-level benefit for 90 percent or 

more of their income—a dependency ratio that is even higher for widows and unlikely to improve for the baby boomer generation, according to government projections. 

Boost national saving and investment. Despite the fact that baby boomers—the 

largest segment of the adult population—are in their prime saving years, the personal saving rate actually turned negative during 2005 for the first time since 1933, 

during the Great Depression, and has averaged less than one-half of one percent 

(0.48 percent) over the past eight quarters. If we truly want to promote national 

saving, reduce dependency on social insurance, and create an inclusive ‘‘ownership 

society,’’ we will need new mechanisms that extend the advantages of private pensions to everyone. After all, accounted for the vast majority of net new personal saving in recent years. Among households with an IRA or 401(k)-type plan, which are 

more affluent on average, retirement account balances represented 62.5 percent of 

their total financial assets, according to an EBRI analysis of the 2004 Survey of 

Consumer Finances.

Not surprisingly, pension participation is lowest among workers whose savings 

would truly add to net national saving: workers who earn less than the median 

wage. While the affluent can respond to tax incentives for saving by shifting rather 

than actually increasing their net saving effort, households that would not otherwise 

save genenew national saving. Indeed, a majority of middle-to-low-income households are not responding to current incentives. Among the bottom 60 percent of all 

workers by income—those earning less than $40,000—only about a third (36 percent) participemployer plans, according to the Congressional Budget Office.


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We might at least expect the workers lucky enough to participate in 401(k)-type 

plans to be accumulating significant savings. Among the subset of high-tax-bracket 

earners with steady access to a 401(k), this is the case. But participation rates in 

the bottom two quintiles of the earning distribution are far lower, and the average 

account balance ibelow $10,000 for this group. One reason for the low participation 

rates and accumulations is that even if a worker has coverage today, he or she may 

not to a plan next year in a new job. Even if the new employer sponsors a plan, 

new hires are not eligible to participate for at least one year. The result is gaps in 

coverage. What is needed is a seamless, lifelong saving system. 

Stronger tax incentives for saving. Even when lower-wage workers have consistent access to an employer plan, the tax incentives for saving are upside-down. 

The tax break for retirement saving is one of Washington’s most expensive programs, costing a projected $134 billion in uncollected federal tax revenue in fiscal 

2007 alone, according to Joint Tax Committee estimates. Yet at least 70 percent of 

those tax subsidies for retirement saving goes to the most affluent 20 percent of taxpayers—and virtually none (3 percent) goes to encourage saving by the lowest-earning 40 percent. The reason is simple but too often overlooked even by liberal policymakers: a program subsidized by tax deductions, as opposed to refundable tax credits, is highly regressive. 

Qualified retirement saving today reduces taxable income, a deduction that is 

worth 35 cents on the dollar to high-bracket taxpayers who need little incentive to 

save. In contrast, a tax deduction for saving is worth zero to the more than 40 million low-earning taxpayers who have payroll tax liability, but who don’t have any 

income tax liability to offset. Even median-income families in the 10 and 15 percent 

income tax brackets receive a weak subsidy compared to the 35 percent subsidy rate 

that applies to those earning over $200,000 a year. In contrast, the effect on higherincome workers—who would likely save anyway—is primarily a shifting of assets 

from taxable to tax-deferred accounts.


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As the chart just below indicates, the fact that the revenue loss from federal tax 

deductions for retirement savings now actually exceeds net new personal saving 

suggests that the current tax expenditure is highly inefficient and needs to be retargeted at low-to-middle-income earners who are not saving (and whose new saving 

would therefore add to net national saving, as well as boost their retirement income 

adequacy). 

The most effective way to target a saving subsidy using the tax code is through 

a credit, which directly reduces taxes due. In fact, the Saver’s Credit, made permanent last year in the Pension Protection Act, creates this incentive and could be 

used as the matching incentive for a Universal 401(k). Unfortunately, because the 

current Savers Credit is limited to very low-income taxpayers with income tax liabilities to offset, it fails to provide a meaningful saving incentive to most workers and 

families who need it most. According to estimates by the Urban-Brookings Tax Policy Center, only one in seven tax filers with incomes low enough to qualify for the 

50 percent credit receives any benefit—and less than one out of every 500 qualified 

filers could receive the maximum credit of $1,000 per person. And while a larger 

share of lower-income workers benefit from the Savers Credit in its 20 and 10 percent phase out range (for single incomes between $15,500 and $26,000), the lower 

benefit and uncertainty that surrounds receiving any subsidy in a given year undermines the effectiveness of the incentive.

The most powerful way to ensure that low-income workers receive an incentive 

at least as generous as an affluent worker is to make the Saver’s Credit refundable, 

as the Earned Income Tax Credit (EITC) is, so that the low-wage worker receives 

it even if she has only payroll tax and not income tax liability. Moreover, directly 

depositing the Savers Credit into a worker’s personal account—rather than rebating 

it, as current law provides—doubles the amount of saving actually accumulated (at 


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14

the 50% credit level and assuming the worker would save the same amount). The 

design of a Universal 401(k) match is discussed further below. 

Increase benefit portability and workforce flexibility. In yesterday’s more stable, 

goods-producing economy, traditional pensions were designed to reward seniority 

and to retain older, long-tenured workers with firm-specific skills. Domestic firms 

were more insulated from foreign competition, unions were stronger, job tenures 

were longer, and a much higher share of the (predominantly male) workforce occupied standard full-time jobs. 

The 21st century workforce is very different. The service and information technology economy puts a premium on younger, more educated workers with transferable skills. Competition, both foreign and domestic, creates enormous volatility for 

companies and workers alike. Median job tenure has declined significantly over the 

past two decades, especially for older workers. Even at firms with retirement plans, 

an increasing number of workers cycle through jobs without earning employer-paid 

benefits, since it typically takes one year to be eligible to participate and multiple 

years to vest. A combination of two-income families and just-in-time labor strategies 

by firms has increased the share of nonstandard work arrangements. Nearly 30 percent of U.S. workers are working in part-time, temporary, or contract arrangements 

that rarely include pension coverage. While this emerging ‘‘free agent’’ workforce 

may be good for flexibility and productivity, it makes the current employer-based 

pension system increasingly inadequate. 

Lighten the social benefit burden on business. It’s clear that most small and startup companies either cannot or prefer not to shoulder the administrative burden and 

financial risk of sponsoring a pension plan. Indeed, despite the ‘‘carrot’’ of tax subsidies for pension plans, a majority of firms with fewer than 500 employees do not 

offer one. In addition, even very large companies with a predominantly low-income 

workforce—the Wal-Marts and McDonalds among employers—have little incentive 

to sponsor a plan for workers who (a) receive little or no financial benefit from a 

tax deduction, and (b) without a strong incentive would prefer a higher wage now 

to an employer contribution for retirement. In contrast, large high-wage employers—the Microsofts and Intels—use retirement plans to steer tens of millions of dollars in pension tax subsidies to their employees every year. 

This creates the anomalous situation whereby the federal government provides 

more than $100 billion in compensation subsidies to the employees of a minority of 

companies—most of which are large firms with workers paid above-average wages. 

Meanwhile, companies with a substantial percentage of low-wage workers that do 

offer good benefits (employers like Starbucks) are paternalistically shouldering a 

cost that should be borne by society as a whole—and which will need to be if we 

want to achieve universal retirement security. If, instead, contributions by both 

workers and firms were matched by a refundable federal tax credit, then—as with 

the EITC—the after-tax value of benefits paid to low-wage workers would be less 

expensive, rather than more so. 

Basic Program Elements: Incentives, Infrastructure, Inertia 

A Universal 401(k) system can accomplish the various national policy objectives 

described above by combining the following basic elements: 

1. Incentives: Matching, Refundable, and Deposited Credits for New Saving. 

Just as most employers match contributions to 401(k) accounts, the government 

could provide the strongest saving incentive by matching voluntary saving with a 

refundable tax credit that would be deposited directly into the worker’s account. 

This would create a far more powerful saving incentive for middle- and low-wage 

workers than current law. As noted above, a tax deduction is neither an effective 

nor an equitable means to encourage pension saving among lower-income and 

younger workers, whether or not they participate in an employer plan. And although the current Savers Credit provides (most commonly) a 10 percent tax credit 

for retirement saving by low-income taxpayers, the lack of refundability means that 

millions of working-poor families—who have payroll tax but no current income tax 

liability to offset—receive no credit at all. 

Instead, a refundable credit would operate just like an employer match in a company 401(k) plan. Studies show that workers are far more likely to save if given 

generous matching credits—and once they develop the habit of saving by payroll deduction, most continue even when the match rate is reduced. A sliding-scale credit 

could give a greater incentive to low-income workers who are least likely to save. 

For example, using the existing limits that apply to the Savers Credit for 2007, 

workers in families (joint filers) earning below $31,000 could receive a $1 per $1 

(1:1) matching credit on their first $2,000 in savings; whereas workers in families 

earning above that level (up to $52,000 if the Savers Credit phase out is mainVerDate 0ct 09 2002 09:56 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\HELP\110-71\38669.TXT HBUD1 PsN: DICK
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tained) could receive a $0.50 per $1 (1:2) matching credit on their first $4,000 in 

savings. This would give all workers the opportunity to receive as much as $2,000 

each year in matching deposits to their accounts, but the higher-wage earners would 

need to make twice the saving effort. 

Like the current Saver’s Credit, the refundable credit should apply equally to contributions to 401(k)s and other employer-sponsored plans. Eligibility for the credit 

would be reconciled annually through the income tax return process, which would 

also be used to encourage taxpayers to save all or a portion of their tax refunds. It is important to note that a $1:1 matching credit that is deposited into the workers’ personal account is equivalent to the 50 percent Savers Credit in terms of cost 

to the Treasury for a given amount of saving. The $1:1 match appears to be more 

generous because the credit adds directly to saving—just like an employer match 

on a worker’s 401(k) contribution—and so the worker can achieve the same net saving with a far lower monthly deduction from pay. For example, if today a low-wage 

worker eligible for the 50 percent Savers Credit contributes $1,000 to their company 

401(k), at tax time the $500 credit reduces other taxes owed—and new net retirement saving for that year is $1,000. In contrast, a worker who receives a $1:1 match 

deposited into his account would only need to make a $500 contribution upfront to 

end up with net new retirement savings of $1,000. If this worker contributes $1,000 

over the course of the year, he ends up with $2,000 in new saving. While more research is needed to compare the behavioral impact of these two approaches, it seems 

likely that a dollar-for-dollar match will be perceived as a more generous incentive 

and, since it also requires the worker to save less each pay period to achieve the 

same outcome, yield more savings over time. 

Matching credits should be available for both individual and employer contributions. This would give employers a greater incentive to make deposits on behalf of 

their low-wage workers. Yet, by extending pension saving incentives to all workers 

as individuals, employers would have the option to provide a pension benefit without the need to administer a pension plan. Employers would have the flexibility to 

decide from year to year whether to contribute to their workers’ accounts, in many 

cases doing so as a type of year-end, profit-sharing bonus depending on circumstances. Employer contributions should also be deductible from income and payroll tax liability, as they are with other qualified pension contributions. However, 

employer contributions should be limited to a flat percentage of wage income, or a 

flat dollar amount, and made on behalf of all payroll employees, including part-time 

workers. Without such a requirement, ICAs could undermine ERISA antidiscrimination rules to ensure that employers are not using the tax subsidies to favor only 

their higher-wage employees. In fact, the Conversation on Coverage Working Group 

that developed the similar RIA plan was concerned enough about this risk that they 

decided to initially limit contributions to workers. 

2. Infrastructure: Automatic Payroll Deduction and Account Administration. 

Equally important is replicating the retirement plan infrastructure that is key to 

the success of employer-sponsored 401(k) plans. As with 401(k) plans, every worker 

should have access to the convenience, discipline, and protections provided by automatic payroll deduction and professional asset management. This will require two 

essential pieces of infrastructure: access to automatic payroll withholding and a central clearinghouse to receive the deposits and manage very low-cost investment accounts. We are very encouraged to see legislation in both the House and Senate this 

year that addresses both of these critical needs: the Automatic IRA Act of 2007 

(H.R. 2167), introduced in the House by Reps. Richard Neal and Phil English. 

Enrollment and access to payroll-deducted saving should be easy and automatic 

for every employee whether or not their firm sponsors a retirement plan. When a 

worker fills out the required IRS Form W-4 (used to calculate tax withholding), he 

or she can simply specify a monthly saving deduction. That’s the only decision a 

worker needs to make—a choice to save. In fact, as described in the next section, 

it would be even better to combine this with automatic enrollment, so that the W4 actually indicates that 3 percent of pay (initially) will be deducted for saving unless the worker either opts out or chooses a different saving level. 

The sole burden on employers would be to forward this automatic payroll deduction to the employer’s own retirement saving plan (if there is one and the employee 

participates) or to a government clearinghouse. Since most employers today use 

automated payroll processing services, there would be virtually no cost to forward 

the deduction to a central clearinghouse. Even employers who do not automate payroll must forward income and payroll tax withholding to the Treasury, so including 

withholding amounts for saving would be a minor burden. It appears that small 

business owners recognize that given today’s technology, payroll withholding is not 

overly burdensome compared to the benefit. The Economic Opportunity Institute, 

16

based in Seattle, conducted focus groups with owners and managers of small firms 

(between 5 and 25, and between 25 and 100 employees). Although two-thirds of the 

firms participating provided no retirement saving program for their workers, 17 out 

of 18 participants supported a proposed state-level program, called Washington Voluntary Accounts, even if employers were required to withhold and forward payroll 

deductions for participating workers. 

With respect to cost, the Conversation on Coverage Working Group investigated 

the mechanics and cost of payroll deduction and account administration during a 

day-long session in Boston with the defined-contribution experts at Fidelity Investments. They confirmed that for any firm using a payroll processing service or software (which is typical for all but the smallest employers), multiple deductions and 

electronic fund transfers have become so routine that it should not increase the cost 

of payroll processing at all. This would particularly be the case if—like income tax 

and FICA withholding—the saving deduction for each worker is sent to a common 

clearinghouse. The Conversation on Coverage Group nevertheless observed that 

Congress could initially exempt the very smallest employers (e.g., under 10 employees) and/or enact as part of the program a tax credit for small businesses to offset 

the cost of implementation. The Automatic IRA Act of 2007 sensibly adopts both of 

these approaches, allowing startups and employers with fewer than 10 employees 

to opt out, while providing a tax credit of up to $250 during the first two years for 

participating small employers. 

The second critical piece of ‘‘plumbing’’ is a new entity—a clearinghouse akin to 

the Federal Thrift Savings Plan (TSP), which manages very low-cost 401(k)-style 

saving accounts for 3 million federal military and civilian personnel. The clearinghouse would receive all deposits and be the default administrator for small accounts. 

Record keeping should be centralized—primarily because of the need to coordinate 

with the IRS—but the investment management would be contracted out to private 

investment firms, as TSP does today. The clearinghouse would strive to keep costs 

and complexity to a minimum. 

As the Auto IRA Act proposes, participants should have at most a choice among 

a small number of very low-cost index funds, similar to the approach used by TSP. 

Although payroll-deducted savings and matching tax credits would flow through the 

clearinghouse, the assets should be fully portable and transferable at any time at 

the worker’s request to another qualified financial institution, or to a future employer’s pension plan. Indeed, because the primary function (in addition to record keeping) is to manage relatively small accounts that would be unprofitable to a private 

money manager, we would expect that as account accumulations grow over time, 

most participants will eventually roll over to a more full-service IRA provider. 

The Neal-English Automatic IRA Act of 2007—and its Senate companion, S. 1141, 

introduced by Senators Jeff Bingaman and Gordon Smith—is an essential step toward giving every American worker access to an easy, automatic and professionallyadministered saving system. We applaud the co-sponsors for their well-designed and 

carefully balanced proposal. 

Although the Auto IRA Act would be a very positive first step, the one design 

issue where the bill falls short is in restricting contributions to today’s meager IRA 

limits ($4,000 or $5,000 for workers over age 50). While this may be as much as 

we can realistically expect very low-income workers to save in a year, most middleincome workers—of whom there are tens of millions who lack access to a 401(k), 

SIMPLE or other employer-sponsored plan—simply cannot hope to achieve retirement adequacy with their saving restricted at this level. Moreover, while higher-income earners can contribute $15,500 to a 401(k)—receiving $5,425 in tax breaks (at 

the 35 percent bracket)—the bill would limit the majority of American workers limited to far less. We concur with the concern that an Auto IRA—or Universal 

401(k)—not undermine the incentives for business owners to sponsor a SIMPLE or 

401(k). However, as the Conversation on Coverage Working Group agreed, we believe the best way to balance these concerns is with a contribution limit that is between today’s IRA and SIMPLE limit (which is $10,500). An individual limit in the 

neighborhood of $8,000 would still leave business owners with the incentive to 

‘‘graduate’’ up to the higher SIMPLE or 401(k) limits if they personally wish to save 

more. The reality, however, is that for a variety of reasons, a very substantial number of new, small and even medium-sized employers will not sponsor a qualified 

plan and may welcome the ability to facilitate an adequate level of saving by their 

employees—and even to contribute to those accounts if it could be done at their discretion and with minimum regulation (as proposed in the section above). 

17

3. Inertia: Default Options for Enrollment, Escalation, Investment and 

Annuitization. 

The W-4 form required of every worker would provide a simple means of indicating how much an individual wants withheld and saved each pay period. Even 

better, the Universal 401(k) system could convert myopia into positive inertia by 

making participation the default option for everyone. Studies have shown that automatic enrollment has boosted 401(k) participation rates as high as 95 percent (when 

there is also an employer match) and to 80 percent among low-income workers. 

Although the Pension Protection Act clarified that plan sponsors can choose to implement automatic enrollment, it is not required. It should be. The Economic Benefit 

Research Institute estimated this year that if automatic enrollment was required for 

all employer-sponsored plans, it would raise the median replacement rate for lowestearning 20 percent of workers from 23 to 37 percent (with a 3 percent default contribution rate) or to 52 percent (with a 6 percent default). 

Under a Universal 401(k) plan, unless the worker decided to opt out, the W-4 

should give notice of the amount to be deducted and saved each pay period. The 

initial default contribution could be modest—probably the 3 percent currently specified in the Pension Protection Act. This default contribution rate should escalate 

automatically by 1 percent a year thereafter, as pay increases, until it reaches a 

level likely to achieve an adequate accumulation over time (probably up to 6 or 8 

percent of pay on a default basis). 

Unless a worker opts out—or participates in his employer’s plan—the payroll deduction would flow automatically each pay period to the federal clearinghouse and 

into his or her Individual Career Account. Although the worker should be able to 

switch, periodically, between a very limited number of broad and low-cost index 

funds, there would be a default asset allocation for workers who made no choice at 

all—most likely a life-cycle fund, or other balanced fund, that would automatically 

adjust the mix of stocks and bonds to match the worker’s age and years until retirement age. 

Finally, at retirement age, the default payout option should be in the form of an 

annuity: monthly payments, rather than a lump-sum withdrawal, to ensure that retirees do not outlive their benefits. Although individuals could choose to withdraw 

(or roll over) all or part of their nest egg, there should be incentives to encourage 

and facilitate annuitization, which is one of the great (and disappearing) advantages 

of a defined-benefit plan. This annuity benefit could be contracted to one or several 

private insurers, as DB plan sponsors do when they purchase a Guaranteed Investment Contract, or taken on by the Pension Benefit Guarantee Corporation, the federal pension insurer that currently manages guaranteed annuity payments each 

month for millions of private-sector retirees who were participants in a defaulted 

employer plan. 

Although the Universal 401(k) system proposed here would be voluntary and rely 

on the stronger incentives of a refundable matching tax credit, a similar system of 

universal ‘‘add-on’’ accounts could be implemented on a non-voluntary basis. My colleague Adam Carasso, and Jon Forman of the University of Oklahoma, have proposed a universal pension system (‘‘UPS ’’) comprising a system of individual retirement savings accounts financed by a compulsory 3 percent of payroll contribution 

by individual workers. They propose to collect these individual savings account deposits automatically by piggybacking onto the existing Social Security withholding 

system. The individual accounts would be taxed like 401(k)s and traditional IRAs 

under their proposal. Carasso and Forman’s rationale for making a base contribution mandatory is the likelihood that even with retargeted tax incentives and employer matching contributions, many young and middle-to-low-income workers will 

not save consistently for retirement on a voluntary basis. Mandatory savings proposals are not new. In 1981, for example, the President’s Commission on Pension 

Policy recommended adoption of a Mandatory Universal Pension System (MUPS). 

That proposal would have required all employers to contribute at least 3 percent of 

wages to private pensions for their workers. 

While Americans clearly support retaining Social Security’s defined-benefit safety 

net, neither Social Security nor the inadequate coverage of today’s private pension 

system are providing enough income in retirement. Thus, the combination of a citizen-based, portable, and automatic system—providing those who find it most difficult to save with both powerful right-side-up tax incentives and an infrastructure 

for automatic saving—may be exactly the retirement revolution we need. 

Chairman ANDREWS. I have looked at that bill. I think it is an 

excellent starting point for discussion. 

18

As I say, your written testimony is a part of the record. We appreciate very much your statement. 

And, Ms. Dudley, we turn to you. 

STATEMENT OF LYNN DUDLEY, VICE PRESIDENT FOR 

RETIREMENT POLICY, AMERICAN BENEFITS COUNCIL 

Ms. DUDLEY. Thank you, Mr. Chairman and members of the subcommittee. I am here today on behalf of the American Benefits 

Council whose members directly sponsor or service health and retirement plans covering more than 100 million Americans. 

My comments today are drawn from Safe and Sound, a 10-year 

plan promoting personal financial security which was published by 

our board of directors in 2004. The report contains nine measurable 

goals that the retirement and health system can and should attain 

within 10 years. Three and a half years into this 10-year plan, we 

will be issuing in the coming months a more formal evaluation of 

how far the country has come in meeting the goals of Safe and 

Sound. The purpose of Safe and Sound is to help Americans 

achieve personal financial security with regard to their health, retirement and long-term care needs. 

After much consideration, our board of directors concluded that 

in the future, individuals, government, and employers will continue 

to be the key stakeholders in employee benefits, but that their roles 

would change. Indeed, we have already begun seeing individuals 

take on more responsibility for ensuring their financial security. 

This does not mean the government and employers have less of 

a role. Demographic challenges lying ahead dictate that all stakeholders will need to do more. 

Employers and government are already being called upon to provide individuals with the tools they need to more successfully assume a larger and more direct role. 

I would like to focus the rest of my comments on five key points. 

First, raising financial literacy is essential to achieving personal 

financial security. Knowledge about the value of savings and the 

importance of retirement coverage will empower future generations 

to be more active in preparing for retirement. Proficiency in financial literacy should be made a high school and college graduation 

requirement. 

Second, given the tremendous evolution in plan design, there are 

lots of new ideas for alternative retirement saving vehicles, many 

of them represented here today. The council has actively participated in the Conversation on Coverage and applauds the conversations and others’ important contributions to the discussion on coverage. 

The council, however, believes that the current voluntary system 

has many valuable plan designs as well, both personal and employer-sponsored, that hold promise for retirement plan coverage in 

the future, and we urge policymakers to both look at new vehicles 

and to continuously evaluate how government can make the rules 

governing existing plans more administrable. 

Third, debate as to which type of plan is preferable, defined benefits or defined contributions, focuses on the wrong question. Both 

types of plans serve a valuable purpose, and the more important 

19

question is how to make those plan designs more workable so employers will feel comfortable maintaining them. 

We are gratified that many defined contribution proposals included in Safe and Sound were incorporated in the Pension Protection Act, including automatic enrollment in 401(k) plans and the 

delivery of investment advice in the workplace, as well as making 

permanent the retirement provisions of the 2001 EGTTRA law. 

This included the catch-up contribution you may be familiar with 

for those people who are age 50 and older. 

We believe these changes will foster greater retirement plan coverage. However, Congress must be wary not to inadvertently discourage defined contribution plans, such as 401(k) plans, either 

through excessive new regulation or exposure to liability. 

To the extent that the country does transition for greater use of 

defined contribution plans, we encourage Congress to consider access to, and incorporation of, defined benefit pension features that 

promote retirement security. Of course, one area for which Congress deserves much credit is the confirmation of the legitimacy of 

cash balance in other hybrid plan designs. Congress made clear 

that the future of the defined benefit plan system may well fall 

within the hybrid plan model. 

Unfortunately, Congress’s intent is being undermined by regulatory interpretations that discourage hybrid plan sponsorship, including the fact that some of the most participant-favorable transition rules are being questioned on audits. Congress must send another clear and unequivocal message that this is not the result intended. 

Fourth, health care coverage is an essential component of personal financial security, and health care costs are inextricably connected to retirement security, since it does use up dollars that 

would otherwise be used for retirement income purposes. Neither 

employees, nor workers, nor Congress can consider health and retirement as separate silos. 

If you will bear with me, I have one last point. 

Finally, policymakers should not allow federal tax revenue projections to dictate retirement policy. The tax preferences accorded 

private retirement plans make possible a level of retirement income 

that would be far more costly if provided through a vastly expanded Social Security or other government-provided retirement 

system. Our retirement system is a great bargain for all of us. 

Thank you, and I would be happy to answer questions. 

[The statement of Ms. Dudley follows:]

Prepared Statement of Lynn Dudley, Vice President, Retirement Policy, 

American Benefits Council 

Mr. Chairman, thank you for the opportunity to appear before this Subcommittee. 

My name is Lynn Dudley, Vice President, Retirement Policy for the American Benefits Council. The Council is a public policy organization representing principally 

large companies and other organizations that assist employers of all sizes in providing benefits to employees. Our members either sponsor directly or provide services to retirement and health plans covering more than 100 million Americans. 

Mr. Chairman, I commend you and Ranking Member Kline for your leadership 

in retirement policy. Your knowledge and commitment contribute enormously to a 

successful voluntary employer-based retirement system that provides a secure retirement for millions of workers and their families. I also commend you and the 

other Members of the Committee for shining the spotlight on the need to improve 

retirement coverage for future generations. The Council’s members offer some of the 

20

most generous health and retirement benefits programs available to workers, but 

remain committed to addressing the continuing problem of coverage among employees of other organizations. Retirement plan coverage is integral to achieving personal financial security. Achieving personal financial security provides employees 

and their families the ability to successfully meet both their retirement and health 

care needs. 

We urge you to continue to be active in fostering policies that encourage American 

employers to offer retirement programs to their employees. The voluntary employersponsored retirement system is a bright spot on the savings landscape. As of 2005 

(the most recent year for which data is available), American families had accumulated more than $14 trillion in retirement. This tremendous pool of capital is an essential source of retirement income security for millions of Americans and a major 

driver of the U.S. economy. The nation’s private sector defined benefit pension system provides coverage to one-fifth of all working Americans, totaling nearly $2.3 

trillion in assets, and remains a cornerstone retirement program for many. Meanwhile, the defined contribution plan system has expanded over the last 20 years, 

now covering more than half of all working Americans, and represents a great 

source of retirement income security. Financial assets in 401(k) and similar defined 

contribution plans now total almost $3.3 trillion. 

While individuals can save on their own without an employer-sponsored plan, savings rates are much higher when employees have the opportunity to save through 

an employer plan. Though there are proposals for designs that would create new 

universal retirement vehicles, the value of the role of the employer who has designed a plan with a specific workforce in mind should not be underestimated. While 

there is a certainly a role for personal non-workplace savings vehicles in achieving 

personal financial security, we firmly believe more can and should be done to promote the voluntary establishment and maintenance of retirement plans by employers. 

In 2004, the Council released a long-term public policy strategic plan, Safe and 

Sound: A Ten-Year Plan for Promoting Personal Financial Security, which is attached to this testimony. It assembles in one document a comprehensive analysis 

of the dimensions of the health, retirement and demographic challenges facing our 

nation. The report sets forth very specific measurable goals for the retirement (and 

health benefits) system to be achieved by the year 2014. During the last Congress, 

we saw the passage of the Pension Protection Act which contained a number of very 

important changes to the rules governing retirement plans, many of which were advocated by the Council, including the permanence of EGTRRA dollar limits applicable to retirement plans, the promotion of automatic enrollment and automatic increase features and access to investment advice. Safe and Sound contains additional 

important recommendations we believe will lead to greater coverage of workers in 

employment-based retirement plans and increased savings by those that are covered. 

Employment-Based Retirement Plans Increase Savings 

The success of the employment-based retirement system at spurring employee 

savings, even when not supplemented by employer contributions or other employerfunded benefits, is largely attributable to the characteristics of the employment setting. For example, savings are greatly enhanced by the opportunity for payroll deduction. If workers can elect to have a portion of their pay regularly set aside for 

savings, rather than having to affirmatively make a decision to set aside funds, it 

is clear that more is saved. Further, pooling money in employer-sponsored retirement savings vehicles enables individual participants to benefit from economies of 

scale and to lower their transaction costs, thereby increasing asset accumulation 

and wealth. 

That the system has been a success with respect to spurring savings is nearly indisputable. Of the $14 trillion in the U.S. retirement system in 2005, more than $5.5 

trillion had been put aside through the use of private employer-sponsored retirement plans, including defined benefit and defined contribution plans. An additional 

$3.7 trillion had been collected through the use of federal, state and local government plans and individuals had accumulated more than $3.5 trillion in IRAs—

amounts which are largely attributable to rollovers from employment-based plans. 

While some of these funds undoubtedly would otherwise have been contributed to 

other types of accounts, it seems apparent that much of the savings in the U.S. retirement system is new savings. 

Many of the new individual savings programs that have been proposed are modeled on this idea and include payroll deduction and pooled money. Their proponents’ 

goals, like the Council’s, are to improve savings opportunities and coverage. Virtually all Council members already sponsor retirement programs that provide very 

21

meaningful benefits across the income spectrum. Any new savings vehicles need to 

complement the employer-based system. New ideas should not be structured so as 

to undermine the maintenance of retirement plans by employers and participation 

in employer-based plans by employees. Policymakers need to weigh the objectives 

of new proposals with an eye towards (1) whether they create new savings or pull 

savings away from existing retirement vehicles, (2) whether they create new administrative complexities, and (3) whether they replace savings features carefully designed for a particular workforce with savings features based on bureaucratic determinations far removed from the people they are intended to help. 

American workers value their employer-sponsored retirement plans and so do 

American businesses. A recent survey by Watson Wyatt concluded that an attractive 

retirement plan plays a significant role both in attracting and retaining employees. 

Employers of all sizes have an interest in attracting and retaining workers and voluntarily offer retirement plans to meet these challenges. Additionally, evidence indicates that satisfaction with retirement plans increases worker productivity and improves shareholder returns. These are powerful business incentives upon which employers—given a good regulatory and legal framework—are likely to act. 

It has been suggested that the size of the employer and the income range of the 

workers are often determinative of the employer’s commitment to maintaining a 

plan. However, we believe employers of all sizes have reasons to attract and retain 

talented workers. It is simply that there are unique issues that affect small employers’ decisions about retirement plans that have more to do with capital needs and 

stability in their business. Once stable, there is every reason to believe that small 

employers would be interested in maintaining a retirement plan for their workers. 

In addition, we find that plan sponsors provide retirement plans even where significant portions of their workforces have more modest incomes. 

However, the voluntary retirement system involves a careful balancing of interests designed to encourage employers to maintain plans while ensuring that retirement savings are accumulated for the benefit of workers at all income levels. Generally, this entails not overburdening the sponsors with costs, complexities or administrative burdens and yet providing reasonably objective criteria for determining 

whether plans are providing widespread coverage. Increasingly, concerns about unanticipated liability are playing an important role in the decision as to whether to 

offer a retirement plan. 

For many workers who are living from paycheck to paycheck, the savings created 

by employer contributions and other employer-funded benefits are their only savings. For others, matching contributions offer an important incentive to save more. 

Even for active savers, the convenience of payroll deduction encourages greater savings. In one recent study conducted on behalf of the National Bureau of Economic 

Research (NBER), economists found that in addition to increasing retirement savings, employer-sponsored retirement plans significantly increase overall savings. 

The study even suggests that having a retirement plan may ‘‘induce an increase in 

the holding of other assets,’’ thereby resulting in a further increase in total savings. 

In this regard, the employment-based retirement system serves two essential public policy goals. It increases overall capital accumulation and wealth, and it enhances retirement security of American families. In both respects, the U.S. retirement system has been an enormous success. 

Recent Law Changes Encourage Coverage 

We believe the recent passage of the Pension Protection Act (PPA), including the 

permanence of EGTRRA contribution limits coupled with provisions promoting automatic enrollment and automatic increase designs, will significantly improve coverage amongst employees that have access to a retirement plan but do not take advantage of it and will increase the employees’ savings levels. According to a recent 

survey conducted by Hewitt Associates, 36 percent of plan sponsors offered automatic enrollment to new employees in 2007, with more than half of the remainder 

very or somewhat likely to implement it within the year. 

Expanding access to investment advice in the PPA was also an enormously important step. It will improve participation amongst employees who have access to a retirement plan and will contribute significantly to a culture of savings that helps employees remain committed to savings programs and increased savings levels. We applaud the leadership of Congress and this Committee in the efforts to expand access 

to investment advice while ensuring appropriate protections for employees using the 

advice. We also commend the sensitivity to the importance of limiting plan sponsors’ 

exposure to fiduciary liability in connection with the provision of such advice in the 

workplace. 

However, more can and should be done to expand the number of employers maintaining retirement plans and to encourage employers to remain in the system. This 

22

is not limited to small employers where there is less likely a retirement plan already being sponsored. Small start-up companies often do have the fundamental 

issues associated with worrying about sufficient capitalization and stability of their 

business. However, all employers are struggling with the current health care system. The health care issues are inextricably related to a successful employer-sponsored retirement system. Addressing the spiraling health care costs and quality 

issues will free resources of both employers and employees currently being drained 

to pay for health care. Finally, in addressing retirement plan coverage, the need for 

integrated savings and benefit vehicles that address growing longevity and retiree 

health needs cannot be ignored. 

The nine aspirational goals contained in Safe and Sound to be achieved within 

10 years, would greatly improve the benefit security of the American workforce, and 

would strengthen overall personal financial security. They include goals relating 

both to retirement income and goals relating to improving the ability of the individual to meet health care needs as they arise. While all of the goals and recommendations included within the report are important elements of the Council’s 

vision for the future, I would like to focus specifically on two of them in this testimony. 

Raise Financial Literacy 

The first goal relates to enhancing financial literacy. Specifically, Safe and Sound 

states the following goal:, ‘‘by 2014, virtually all households will have access to some 

form of investment education and advice and 75 percent of households will have calculated the amount of retirement savings needed to maintain their standard of living throughout retirement, as well as the savings rate necessary to achieve this target.’’

One of the most basic elements of savings is understanding the need to save. Yet 

financial literacy is deficient across all generations and socio-economic levels. The 

National Council for Economic Education Studies (NCEE) reports that nearly two 

thirds of American adults and students do not understand basic economic principles 

such as ‘‘inflation.’’

One aspect of financial literacy is understanding how much one needs to save to 

reach one’s retirement goals. The goal of 75 percent was chosen because it represented a significant increase from the peak level reported in the 2000 Retirement 

Confidence Survey conducted by the Employee Benefit Research Institute (EBRI). 

The 2007 Retirement Confidence Survey by the Employee Benefit Research Institute 

(EBRI) underscores the continuing need to promote financial literacy, noting that 

the majority of Americans—57 percent—have not calculated how much money they 

will need to save in order to live comfortably in retirement. Of those individuals 

that have considered retirement, data from the survey suggests that many of these 

individuals may be underestimating how much savings they will need for a secure 

retirement. The calculation regarding the amount needed to save was chosen as a 

critical benchmark because it indicates that a worker has achieved enough financial 

literacy to begin retirement planning and is prepared to take steps to act on what 

has been learned. 

Another aspect of financial literacy is managing the investment of retirement assets. Many lack the knowledge necessary to make prudent investment decisions. 

Even participants who are relatively knowledgeable may lack the time to make and 

update investment decisions in a consistent and well-informed manner. While the 

number of people who have access to investment advice is small, it is growing. According to a Hewitt Associates 2007 survey, 31 percent of the employers surveyed 

offer investment education (education regarding asset class allocation) and 30 percent offer third-party investment advice. However, of the employers who do not currently offer either ‘‘education’’ or ‘‘advice,’’ 59 percent and 52 percent, respectively, 

indicated they were somewhat likely to begin offering it in 2007. We believe, however, that offering advice is a first step in a two step process. The participants have 

to avail themselves of the advice and then act on it. As regulations are issued in 

this area and more employers adopt investment advice, we look forward to continuing to work with policymakers to consider ways in which the government and 

employers can partner to encourage use of these important programs. 

It is clear that savings would be materially enhanced if Americans were more financially literate. Listed below are initial policy recommendations drawn from Safe 

and Sound for achieving the goal of raising financial literacy. 

Policy Recommendations 

• Support efforts to expand financial education. Provide public sector and private 

foundation funding to develop educational tools that can be used by employers, the 

government and other stakeholders in educating workers about saving, investment 

23

and income management principles. First and foremost, the value of participating 

in employer-sponsored and individual savings programs needs to be emphasized. 

Education efforts should also include information about the impact of debt and the 

trade-offs of spending versus saving. Fundamental is the amount needed to be saved 

and the level of replacement income likely to be needed. Education must include information about the longer life spans people are expected to have in the future, how 

working longer in the same or another job can enhance savings and how workers 

can financially prepare for longevity risk. 

• Establish financial literacy educational requirements. Financial education 

should be a high school and college graduation requirement. More states need to be 

encouraged to adopt financial literacy requirements. 

• Promote a focus on retirement planning. Include in the Social Security Administration annual statement mailed to workers information on how to calculate a rough 

estimate of the amount one needs to save that, when combined with one’s projected 

Social Security benefit, will provide a replacement income of 70 percent of one’s preretirement earnings (generally considered a benchmark goal of income replacement). 

Increase the Share of Workers in Workplace Retirement Plans 

Safe and Sound’s second goal is to increase employer-sponsored retirement plan 

coverage and participation. Specifically the goal states that: ‘‘by 2014, 96 million (74 

percent) of full-time and part-time private sector employees will participate in workplace retirement plans.’’ According to the most recent federal data from a survey of 

employers, about 74 million full-time and part-time private sector workers in 2006—

approximately 51 percent of 146 million workers—were covered by a workplace retirement plan. 

If participation is to increase, more employers will have to offer retirement plans. 

This outcome, in turn, depends on devising innovative and flexible plans that are 

attractive to employers, especially small- and mid-sized businesses. 

Defined benefit plans remain a critical part of how many large and mid-sized employers provide retirement security to their workers. All types of defined benefit 

plans, including hybrid plans, can play a role in increasing participation rates in 

workplace retirement plans. To the extent that new, innovative hybrid designs can 

attract more employers to offer defined benefit plans or plans with defined benefit 

type features, it can help increase both coverage and participation rates. In this regard, it is critical that workable regulations relating to defined benefit pension plans 

and hybrid plans that implement the intent of Congress in the Pension Protection 

Act be issued. 

Enrolling more employees in defined benefit plans of various designs can provide 

more workers a guaranteed income in retirement. We are supportive of simplified 

designs that address employer concerns about volatility and administrative complexity in addition to efforts to support existing arrangements already covering millions of workers. 

For many employers, the defined contribution plan design provides flexibility and 

allows for a more active role for employees in preparing for retirement. Recognizing 

that even sponsorship of a defined contribution plan is a significant commitment 

with respect to cost, administration and liability, the Council continues to be supportive of improving simplified defined contribution plans, such as SIMPLE IRAs, 

that ease employers into the voluntary system without overburdening them with excessive requirements. We believe improvements can be made to these programs to 

facilitate their use among small employers. 

In addition, we believe there is reason to support inclusion in our overall retirement system of an additional savings mechanism that would ensure continuous coverage for individuals, but we recognize it raises numerous administrative questions 

and problems including the management of very small accounts and the identification and location of missing participants. 

Listed below are initial policy recommendations drawn from Safe and Sound for 

achieving the goal of increasing the number of workers in employer-sponsored retirement plans. 

Policy Recommendations 

• Provide a ‘‘clearinghouse’’ plan. Authorize the creation of a ‘‘clearinghouse’’ 

model plan through federal legislation so workers who change jobs frequently can 

contribute to one retirement plan. This plan would be modeled on a multi-employer 

plan model that could provide individuals with one account that would stay with 

them when they change jobs. Employer contributions to the plan would be voluntary 

and no financial or administrative requirements would be imposed on employers 

(other than transferring worker contributions to the plan). This model plan would 

accept differing levels of employee contributions and employer contributions, and 

24

would be able to accommodate different investment vehicles. Any financial services 

firm meeting certain qualification criteria would be able to offer the ‘‘clearinghouse’’ 

model plan. Facilitate new models for retirement. The Pension Protection Act reduced the age at which employees can begin receiving retirement benefits and remain employed. More should be done, however, to encourage flexible working relationships and benefits arrangements through phased retirement programs. 

Conclusion 

The current voluntary employer-sponsored retirement system has been an enormous success. While individuals can save on their own without an employer-sponsored plan, savings rates are much higher when employees have the opportunity to 

save through an employer-provided plan. A broad array of demographic, workplace 

and economic changes in the decade ahead will provide challenges to personal financial security and the employment-based retirement system. These challenges include 

the aging of America, changes in the composition of the workforce, evolving changes 

in social structure and families, and continuously rising health care costs. 

Our nation’s employer-based retirement system will continue to be an engine for 

increased retirement coverage and retirement security if policymakers remain committed to partnering with business to ensure a legal and regulatory framework that 

both promotes establishment and maintenance of retirement plans by employers 

and fosters education of Americans on the importance of personal financial security. 

Chairman ANDREWS. Thank you, Ms. Dudley. 

Now my understanding is that Mr. Iwry, who is from Brookings, 

and Mr. John from Heritage are going to share 5 minutes. I think 

that is remarkable in and of itself. [Laughter.] 

I think that is great. So anything the two of you need to say 

must be very profound and important, as I know your statements 

were. So, please, proceed. 

STATEMENT OF MARK IWRY, MANAGING DIRECTOR, 

RETIREMENT SECURITY PROJECT 

Mr. IWRY. Mr. Chairman, thank you. It is good to be with you 

again. Mr. Kline, distinguished members. 

And, Mr. Chairman, you are right. The medium is the message 

here to a great extent. In addition to our Brookings and Heritage 

affiliations respectively, David John and I are both principals of a 

nonprofit Retirement Security Project, a Brookings-Georgetown 

University partnership, which is supported by the Pew Charitable 

Trust, and we are here to present a joint proposal, the automatic 

IRA, which Mr. Calabrese has referred to, that is intended to create common ground but transcends partisan or ideological differences. 

Mr. Neal, Mr. English, Mr. Emanuel and others have introduced 

H.R. 2167, and a companion Senate bill has been introduced, the 

Automatic IRA Act of 2007, that combines the basic building blocks 

that we have seen work effectively in our current private pension 

system. 

One of those is saving through 401(k)-type payroll deposits, a 

second is automatic enrollment which we have already started talking about today, and a third is IRAs. The IRAs are eminently portable, they make sense in a market-led proposal, such as this one, 

and they have a $5,000 maximum contribution starting in 2008 

which is high enough to serve the needs of most Americans. 

The average 401(k) contribution for people who could contribute 

up to $15,500, the average, is less than $3,000. So $5,000 is ample 

for most folks. But it is low enough—and, Mr. Kline, this goes to 

your do no harm point in your introductory remarks—to avoid comVerDate 0ct 09 2002 09:56 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\HELP\110-71\38669.TXT HBUD1 PsN: DICK
25

peting with employer plans or encouraging any employers that 

have a 401(k) or even a SIMPLE IRA plan to drop it in favor of 

this sort of universal coverage vehicle. Employer plans allow employees and employers combined to contribute up to $45,000 a year, 

compared to the IRA $5,000 starting next year. 

We would give those 69 million people you referred to, Mr. Chairman, and, as you say, it has grown some. We think it is 75 million, 

actually about 78 million by 2007, unfortunately. These people 

have no employer-sponsored plan, the opportunity through automatic enrollment to save and build wealth using their employer’s 

payroll system to send their own pay to an IRA. 

And to accomplish that, we would call upon employers, the ones 

that are not able or willing to sponsor a plan for their employees 

now, not in neither a 401(k), nor a DB, nor anything else, and that 

have more than 10 employees and that have been in business for 

at least a couple of years. We would call upon those employers to 

act as a forwarding agent, a conduit, for their employees’ contributions to IRAs. 

[The joint statement of Mr. Iwry and Mr. John follows:]

Prepared Statement of David C. John and J. Mark Iwry, Managing 

Directors, the Retirement Security Project 

Chairman Andrews and Ranking Member Kline, we appreciate the opportunity to 

testify before you.1 We are submitting our testimony as a single joint statement because we believe strongly in the need for a common strategy to expand retirement 

savings in a manner that transcends ideological and partisan differences. 

Our statement focuses on our joint proposal—introduced as H.R. 2167 and S. 

1141—to expand retirement savings for small business workers—the Automatic 

IRA.2 We are pleased by the positive reaction the proposal has received and are 

grateful to our colleagues, including those in government and in various stakeholder 

organizations, who have contributed to these ideas.3

With the looming retirement security crisis facing our country, policy-makers from 

both parties are focused on ways to strengthen pensions and increase savings. Our 

proposal for automatic IRAs would provide a relatively simple, cost-effective way to 

increase retirement security for the 75 million Americans working for employers 

(usually small businesses) that do not offer a retirement plan.4 It would enable 

these employees to save for retirement by allowing them to have their employers 

regularly transfer amounts from their paycheck to an IRA. 

These people—half of our workforce—have no effective way to save at work. This 

fact, a national saving rate that has been declining steadily since the 1980s, and 

the expectation that Social Security is unlikely to provide increased benefits, make 

inadequate retirement saving a major national problem. Research and experience 

both point to a simple and effective solution, which we call the ‘‘automatic IRA.’’

We are by no means suggesting that the automatic IRA proposal is the only step 

that should be taken to expand retirement savings for small business workers or 

others. In fact, we have long believed in the primacy of employer-sponsored retirement plans as vehicles for pension coverage.5 Additionally, the Retirement Security 

Project continues to advocate strongly for the expansion of pension coverage through 

automatic features in 401(k) and similar retirement savings plans6 and for several 

other initiatives designed to expand retirement security, especially for the moderateand lower-income households that comprise a majority of the U.S. population.7

Making saving easier by making it automatic has been shown to be remarkably 

effective at boosting participation in 401(k) plans, but roughly half of U.S. workers 

are not offered a 401(k) or any other type of employer-sponsored plan. We would 

extend the benefits of automatic saving to a far wider array of the population by 

combining several key elements of our current system: payroll deposit saving, automatic enrollment, low-cost, diversified default investments, and IRAs. 

The automatic IRA approach we propose offers most employees not covered by an 

employer-sponsored retirement plan the opportunity to save through the powerful 

mechanism of regular payroll deposits that continue automatically. The employer’s 

administrative functions are minimal and should involve no out of pocket cost. In 

addition, the arrangement is market-oriented and realistic: it uses a well estabVerDate 0ct 09 2002 09:56 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\HELP\110-71\38669.TXT HBUD1 PsN: DICK
26

lished and familiar vehicle, IRAs, provided by the same banks, mutual funds, insurance carriers, brokerage firms, credit unions, and other private financial institutions 

that currently provide them. As a fallback, if individuals or employers could not find 

an acceptable IRA on the market, they would be able to use ready-made, low-cost 

automatic IRA accounts provided by a consortium or pool of private-sector financial 

institutions or another nonprofit or government-contracted entity that contracts out 

asset management and other functions to the private sector. 

The Basic Problem 

In 2004 half of all households headed by adults aged 55 to 59 had $13,000 or less 

in an employer-based 401(k)-type plan or tax-preferred saving plan account.8 The 

U.S. personal saving rate has declined steadily over the last two decades and has 

been negative since 2005.9

Moreover, traditional corporate defined benefit pension plans are declining, and 

few expect Social Security to provide increased benefits in the future. The households that tend to be in the best financial position to confront retirement are the 

41 percent of the workforce that participate in an employer-sponsored retirement 

plan.10

The most vulnerable employees are those lacking access to an employer-sponsored 

plan. In a recent survey conducted by AARP with 700 private sector workers at companies with 10-250 employees that do not offer a 401(k) or some other retirement 

plan, fewer than half of these workers without access to an employer plan said they 

had taken the following actions: Saved money in a non-retirement account (45%); 

Saved money in a retirement account (35%); Read articles or other information 

about retirement (35%); Talked with friends, relatives, and/or coworkers about retirement (31%); Used a retirement calculator (14%).11

Generally, the rate of participation (those who contribute as a percentage of those 

who are eligible) for 401(k) plans is on the order of 7 or 8 out of 10. An increasing 

share of plans are including automatic features that make saving easier and raise 

participation, often to levels exceeding 9 out of 10. While more can and should be 

done to expand 401(k) and other employer plan coverage,12 the fraction of the workforce that is covered by employer plans has hovered around half for at least three 

decades. The uncovered employees have no effective way to save at work. IRAs do 

not cover enough people because many fail to exercise the initiative required to 

make the decisions and take the actions necessary to save in an IRA. More broadly, 

many people find it too difficult or lack the financial sophistication to plan for retirement and defer consumption. As a result, only about 1 in 10 eligible individuals contributes to an IRA. 

The AARP-commissioned study also shows that workers at companies that would 

be covered by the Auto IRA legislation favor the concept of automatic IRAs and are 

likely to participate: Over seven in ten (71%) of those without access to an employerprovided retirement savings plan agree that ‘‘employers who do not offer a 401(k) 

or other retirement plan should be required by law to offer workers the option to 

regularly save a part of their paycheck in an individual retirement account’’ and 

nearly eight in ten (79%) of those without access say they would be likely to participate if their company offered them the option to regularly save a part of their paycheck in an IRA through payroll deduction. 

The Automatic IRA 

The automatic IRA approach is intended to help households overcome the barriers 

to saving by building on the successful use in 401(k) plans of automatic features 

which encourage employees toward sensible decisions while allowing them to make 

alternative choices. The automatic IRA would feature direct payroll deposits to a 

low-cost, diversified IRA. Employers above a certain size (e.g., 10 employees) that 

have been in business for at least two years but that still do not sponsor any plan 

for their employees would be called upon to offer employees this payroll-deduction 

saving option. The automatic IRA would apply many of the lessons learned from 

401(k) plans so that more workers could enjoy automated saving to build assets—

without imposing any significant burden on employers. Employers that do not sponsor plans for their employees could facilitate saving—without sponsoring a plan, 

without making employer matching contributions, and without complying with plan 

qualification or fiduciary standards. They would simply offer to act as a conduit, remitting a portion of employees’ pay to an IRA, preferably by direct deposit, at little 

or no cost to the employer. 

The automatic IRA is also designed to address the concern that financial providers have found it less profitable to serve groups of people with a small average 

account size. The proposal would provide a backstop arrangement contracted to the 

27

private sector that would give an option to any employee groups that the financial 

services industry is not currently interested in serving. 

Little or No Cost to Employers 

Direct deposit to IRAs is not new. In the late 1990s, Congress, the IRS, and the 

Department of Labor all encouraged employers not ready or willing to sponsor a retirement plan to at least offer their employees the opportunity to contribute to IRAs 

through payroll deduction.13 However, employers did not respond to this option. 

Very few employers have ever adopted direct deposit or payroll-deduction IRAs—at 

least in a way that actively encourages employees to take advantage of the arrangement. 

With this experience in mind, we propose a new strategy designed to induce employers to offer, and employees to take up, direct deposit or payroll deposit saving. 

For many if not most employers, offering direct deposit or payroll deduction IRAs 

would involve little or no cost. The employer would not be maintaining a retirement 

plan, and employer contributions would be neither required nor permitted. Firms 

would not be required to 

(1) comply with plan qualification or ERISA 14 rules, 

(2) establish or maintain a trust to hold assets, 

(3) determine whether employees are actually eligible to contribute to an IRA or 

are complying with the limits on contributions, 

(4) select investments for employee contributions, 

(5) select among IRA providers, or 

(6) set up IRAs for employees. 

Employers would be required simply to allow employees to make a payroll-deduction deposit to IRAs. This dovetails with what employers are already required to do 

by way of withholding income (and payroll) tax from employees’ pay (based partly 

on employee elections on IRS Form W-4) and remitting those amounts to the federal 

tax deposit system. 

Tax Credit for Employers that Serve as Conduit for Employee Contributions 

Firms that do not provide employees a qualified retirement plan, such as a pension, profit-sharing, or 401(k) plan, would be given a temporary tax credit to establish automatic IRAs. The tax credit would be available to a firm for the first two 

years in which it offered payroll deposit saving to an IRA and would be designed 

to avoid competing with the tax credit available under current law to small businesses that adopt a new employer-sponsored retirement plan. Also, it would be 

available both to those employers required to offer payroll deposit and to very small 

or new firms that are not required to but do so voluntarily. 

Tax Credit for Employers that Adopt a New Employer-Sponsored Retirement Plan 

Under current law, an employer with 100 or fewer employees that starts a new 

retirement plan for the first time can generally claim a tax credit for startup costs. 

The credit equals 50 percent of the cost of establishing and administering the plan 

(including educating employees about the plan) up to $500 per employer per year 

for three years. To maintain employer incentives to adopt an employer plan, the 

automatic IRA tax credit would be lower, e.g. $25 per employee enrolled, capped at 

$250 in the aggregate per employer. Employers could not claim both the new plan 

startup credit and the proposed automatic IRA credit. 

Direct Deposit and Automatic Fund Transfers 

The automatic IRA would capitalize on automated or electronic fund transfers. 

Many employers retain an outside service provider to manage payroll, including 

withholding, federal tax deposits, and direct deposit of paychecks to accounts designated by employees or contractors. For the numerous firms that already offer their 

workers direct deposit, direct deposit to an IRA would entail no additional cost, even 

in the short term. A large proportion of the employers that still process their payroll 

by hand would be exempted under the exception for very small employers. As a result, our proposal focuses chiefly on those employers that already use electronic payroll but have not used the same technology to provide employees a convenient retirement saving opportunity. Employers that do not use electronic payroll would have 

the option of ‘‘piggybacking’’ the payroll deposits to IRAs onto the federal tax deposits they currently make, whether online, by mail, or by delivery to the local bank. 

Employees Covered 

Employees eligible for the automatic IRA would include those who have worked 

for the employer on a regular basis (including part-time) for a specified period of 

time and whose employment there is expected to continue. Employers would not be 

required to offer automatic IRAs to employees who are already covered by a retireVerDate 0ct 09 2002 09:56 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\HELP\110-71\38669.TXT HBUD1 PsN: DICK
28

ment plan or are excludable from coverage (such as recently-hired employees, those 

who work less than 1,000 hours a year, union-represented employees or nonresident 

aliens without US source income) under the qualified plan rules. Accordingly, the 

proposal is not intended to apply to employers that offer 401(k), SIMPLE, pension 

or other qualified retirement plans to their employees.15

Portability of Savings Through Choice of Roth or Traditional IRA 

Like a 401(k) contribution, the amount elected by the employee as a salary reduction contribution generally would be tax-favored. It either would be a contribution 

to a Roth IRA, which receives tax-favored treatment upon distribution, or a ‘‘pretax’’ contribution to a traditional, tax-deductible IRA. To spare households the need 

to undertake the comparative analysis of Roth versus traditional IRA, one or the 

other would be the default or presumptive choice. Of course, presented with an automatic or standard option, many households will simply go along with it, while others will consider whether to choose the other alternative. Accordingly, the automatic 

approach strikes a balance between simplicity and individual choice. In either case, 

the use of IRAs maximizes portability of savings. IRAs generally continue in existence without regard to changes in the owner’s employment status and, in general, 

are freely transferable by rollover to other IRAs or qualified plans. 

Expanding Saving through Automatic Features 

Obstacles to Participation 

Today, individuals who want to save in an IRA must make a variety of decisions 

to open an account. In addition, they must overcome a natural tendency to delay 

making important decisions until the last minute. At least five key questions are 

involved: 

• whether to participate at all; 

• which financial institution to use to open an IRA (or, if they have an IRA already, whether to use it or open a new one); 

• whether the IRA should be a traditional or Roth IRA; 

• how much to contribute to the IRA; and 

• how to invest the IRA. 

These obstacles can be overcome by making participation easier and more automatic. 

Automatic Enrollment or an Explicit ‘‘Up or Down’’ Employee Election 

Automatic enrollment (more often applied to newly hired employees but now increasingly applied to both new hires and other employees) has produced dramatic 

increases in 401(k) participation.16 In view of the basic similarities between employee payroll-deduction saving in a 401(k) and under a direct deposit IRA arrangement, the law should, at a minimum, permit employers to automatically enroll employees in direct deposit IRAs. 

However, simply allowing employers to use automatic enrollment with direct deposit IRAs may not be enough. Requiring employers to use automatic enrollment in 

conjunction with the payroll deduction IRAs (with a tax credit and legal protections) 

likely would increase participation dramatically while preserving employee choice. 

However, a workforce that presumably has not shown sufficient demand for a retirement plan to induce the employer to offer one might react unfavorably to being 

automatically enrolled in direct deposit savings without a matching contribution. In 

addition, some small business owners who work with all of their employees closely 

each day might regard automatic enrollment as unnecessary. 

Accordingly, automatic enrollment would be the presumptive or standard enrollment method, but employers could opt out of it in favor of an alternative approach, 

which is in effect a variation on automatic enrollment. The alternative requires all 

eligible employees to submit an election that explicitly either accepts or declines 

payroll deposit to an IRA. Requiring an ‘‘up or down’’ election picks up many who 

would otherwise fail to participate because they do not complete and return the enrollment form due to procrastination, inertia, inability to decide on investments or 

level of contribution, and the like.17 Any employee who fails to comply with the election requirement is automatically enrolled. In either case, to maximize participation, 

employers receive a standard enrollment module reflecting current best practices in 

enrollment procedures.18

In addition, employees like automatic enrollment. Retirement Made Simpler—a 

coalition of advocacy, regulatory and policy organizations, including AARP, the Financial Industry Regulatory Authority (FINRA), and the Retirement Security 

Project (RSP)—was launched to encourage employers to help their employees be better prepared financially for retirement. Retirement Made Simpler recently released 

a survey on employee satisfaction with automatic enrollment. The survey, a first of 

29

its kind, reached out to employees who work at firms that use automatic enrollment. 

The results are striking. Of these employees, 97% agreed that they were satisfied 

with automatic enrollment, and 74% of them were ‘‘very satisfied.’’ Agreement that 

automatic 401(k) has helped them start saving for retirement earlier than planned 

is 85%, with 62% at ‘‘Strongly agree’’. And agreement that automatic enrollment has 

made saving for retirement easy is 95%, with 71% at ‘‘Strongly agree.’’ Even among 

those who opted out of their company’s 401(k) plan, a full 79% were glad their company offered automatic enrollment to employees. 

Compliance 

Whether using automatic enrollment or explicit ‘‘up or down’’ elections from employees, employers would be required to obtain a written (including electronic) election from each nonparticipating employee. That way, no one would be left out by 

reason of inertia. If the employer chose to use automatic enrollment, the notice 

would also inform employees of that feature (including the automatic contribution 

level and investment and the procedure for opting out), and the employer’s records 

would need to show that employees who failed to submit an election were in fact 

participating in the payroll deduction saving. Employers would be required to certify 

annually to the IRS that they were in compliance with the payroll deposit saving 

requirements.19

Making a Saving Vehicle Available To Everyone 

Under the automatic IRA, individuals who wish to direct their contributions to a 

specific IRA can do so. To make this happen, the employer has the option of either • following employee directions as is ordinarily done when employers make direct 

deposits of paychecks to accounts specified by employees, or • remitting all employee contributions in the first instance to IRAs at a single private financial institution (chosen by the employer), from which employees can transfer the contributions, without cost, to their own IRA. 

However, if an employer or employees could not find an IRA provider willing to 

serve their market for an acceptably low fee, they could resort to a standard fallback 

IRA account, as described below. 

A Low-Cost Standard Automatic Account 

The fallback arrangement, which might take the form of an industry consortium 

or nonprofit organization, would make a standard IRA account automatically available to receive direct deposit contributions from employees. These accounts would 

be maintained and operated by private financial institutions under contract with the 

federal government. By contrast to the wide-open array of investment options provided in most current IRAs (which can be daunting for many savers) and the high 

(and costlier) level of customer service provided in many 401(k) plans, the standard 

account would provide only a few investment options (to maximize economies of 

scale and reduce cost). It would permit individuals to change their investments only 

once or twice a year, and would emphasize transparency of investment and other 

fees and expenses. Like the investment options under the federal Thrift Savings 

Plan for federal employees, it is contemplated that costs would be minimized 

through the use of passive investments such as index funds provided and managed 

by private financial institutions. This would not limit anyone’s choices: individuals 

who preferred other IRA investments could simply continue contributing to an IRA 

outside the context of these proposed new arrangements. 

Automatic Investment Fund Choice 

The IRAs selected by employees or employers from among those offered by private 

financial institutions as well as the fallback standard IRAs would provide low-cost 

professional asset management to millions of savers, with a view to improving their 

aggregate investment results. To that end, these IRAs would offer an automatic or 

default investment fund (generally similar, at least initially, to the kinds of investments described as ‘‘Qualified Default Investment Alternatives’’ in Department of 

Labor regulations) 20 for all deposits unless the individual chose otherwise. This 

automatic investment choice could be a highly diversified ‘‘target asset allocation’’ 

or ‘‘life-cycle’’ fund comprised of a mix of equities and fixed income or stable value 

investments, and probably relying heavily on index funds. It could also make available some elements of guarantee against loss of principal, in exchange for a limited 

reduction in the rate of return. Because it is desirable to maintain a degree of flexibility in order to accommodate and reflect market creativity, best practices, and the 

evolving consensus of expert financial advice over time, the proposed legislation 

would not fully specify the automatic investment. General statutory guidelines 

would be fleshed out at the administrative level after a process of extensive consultation with private-sector investment experts. In addition, the IRAs employees or 

30

employers select from private financial institutions would also offer at least a few 

investment alternatives, consistent with normal market practice, but would not be 

limited to any prescribed array of investment options. 

Employers Protected from any Risk of Fiduciary Liability 

Employers making payroll deposits would be insulated from potential liability or 

fiduciary responsibility with respect to the manner in which direct deposits are invested in automatic IRAs, regardless of whether the IRA provider is selected by the 

employer or the employee. Nor would employers be exposed to potential liability 

with respect to any employee’s choice of IRA provider or type of IRA. This protection 

of employers would be facilitated by regulatory designation of standard investment 

types that reduces the need for continuous professional investment advice. In addition, employers could avoid responsibility even for the selection of an IRA provider 

for their employees by allowing employees to designate their preferred IRA providers (or by specifying the government-contracted fallback automatic IRA). 

The Importance of Protecting Employer Plans 

The automatic IRA proposal is designed carefully to avoid competing with or 

crowding out employer plans. Probably the most important protection for employer 

plans is the use of IRAs, which have maximum permitted contribution levels of 

$4,000 (for 2007; $5,000 beginning in 2008, with an additional $1,000 if the contributor is age 50 or older). This is sufficient to meet the demand for saving by millions 

of households but not high enough to satisfy the appetite for tax-favored saving of 

business owners or decision-makers, who can contribute up to $15,500 of their own 

salary to a 401(k) (or $20,500 if age 50 or older) plus matching or nonmatching employer contributions that can bring the total annual 401(k) contributions on their 

behalf to $45,000 a year ($46,000 in 2008).21 In addition, by design, the employer 

tax credit for providing access to automatic IRAs is significantly less than the small 

employer tax credit for sponsoring a new 401(k), SIMPLE or other retirement plan. 

In fact, the automatic IRA is designed to actually promote more employer plans. 

First, any employer that wants to match its employees’ contributions must adopt a 

qualified plan or SIMPLE; to preserve that incentive, the automatic IRA does not 

allow employer contributions. Second, the automatic IRA gives consultants, thirdparty administrators, financial institutions, and other plan providers a new way to 

penetrate the small business pension market with 401(k)s, SIMPLEs and other taxfavored employer plans. Because these plans can now be purchased at very low cost, 

it would seem natural for many small businesses—especially those whose owner 

would like to save more or to match employees’ saving—to graduate from payroll 

deduction saving and complete the journey to a qualified plan. 

Encouraging Contributions by the Self-Employed and Independent Contractors 

For the self-employed and others who have no employer, regular contributions to 

IRAs would be facilitated in four principal ways: • Expanding access to automatic debit arrangements, including through professional and trade associations that could help arrange for automatic debit and direct 

deposit to IRAs. Automatic debit essentially replicates the power of payroll deduction insofar as it continues automatically once the individual has chosen to initiate 

it. 

• Extending the payroll deposit option to many independent contractors through 

direct deposit with firms from which they receive regular payments (without affecting the individual’s status as an independent contractor); 

• Enabling taxpayers to direct the IRS to make direct deposit of a portion of their 

income tax refunds to an IRA (which became possible for the first time earlier this 

year); and 

• Allowing the self-employed to transmit IRA deposits with their quarterly estimated income taxes. 

Matching Deposits as a Financial Incentive 

A powerful financial incentive for direct deposit saving by those who are not in 

the higher tax brackets (and who therefore derive little benefit from a tax deduction 

or exclusion) would be a matching deposit to their payroll deposit IRA. By increasing assets under management, a match would also increase private financial institutions’ interest in providing IRAs. One means of delivering such a matching deposit 

would be via the financial institution that provides the payroll deposit IRA. For example, the first $500 contributed to an IRA by an individual who is eligible to make 

deductible contributions to an IRA might be matched by the private IRA provider 

on a dollar-for-dollar basis, and the next $1,000 of contributions might be matched 

at the rate of 50 cents on the dollar. The financial provider would be reimbursed 

for its matching contributions through federal income tax credits.22

31

Evidence from a randomized experiment involving matched contributions to IRAs 

suggests that a simple matching deposit to an IRA can make individuals significantly more likely to contribute and more likely to contribute larger amounts.23

Matching contributions—similar to those provided by most 401(k) plan sponsors—

not only would help induce individuals to contribute directly from their own pay, 

but also, if the match were automatically deposited in the IRA, would add to the 

amount saved in the IRA. The use of matching deposits would require procedures 

to prevent gaming—contributing to induce the matching deposit, then quickly withdrawing those contributions to retain the use of those funds.24

Guaranteed Lifetime Income 

The automatic IRA could also serve as a natural platform or proving ground for 

best practices in retirement savings, possibly including, over time, an expanded use 

of lifetime guaranteed income. There is reason to believe that many households with 

savings but no lifetime income stream to supplement Social Security would be better 

off if they converted a portion of their savings to (appropriately priced) guaranteed 

income. Yet most are reluctant to do so. The same automatic strategy used to promote enrollment and sensible investment could encourage more workers to obtain 

the security of an annuity or other guaranteed lifetime income, including perhaps 

‘‘longevity insurance’’ that provides a deferred annuity beginning at age 80 or 85, 

for example. The uniform default investment and the backstop automatic IRA for 

any employees who cannot find an appropriate IRA in the market may lend themselves to exploring means of encouraging greater use of low-cost guaranteed income 

in IRAs generally as well as in 401(k) and other employer plans.25

As former Chair of the Council of Economic Advisers Laura Tyson pointed out in 

a Wall Street Journal op-ed article last week endorsing the automatic IRA, ‘‘[j]ust 

as the Automatic 401(k) and Automatic IRA would help to ensure that employees 

have enough retirement savings, automatic guaranteed lifetime income would help 

to ensure that they do not outlive their savings’’ 26 and have an income stream they 

can count on. 

Conclusion 

American households have a compelling need to increase their personal saving, 

especially for long-term needs such as retirement. This testimony summarizes a 

strategy to make saving more automatic—hence easier, more convenient, and more 

likely to occur. By adapting to the IRA universe practices and arrangements that 

have proven successful in promoting 401(k) participation, the automatic IRA approach holds considerable promise of expanding retirement saving for millions of 

workers. 

ENDNOTES

1Mark Iwry is a Managing Director of the Retirement Security Project, a Nonresident Senior 

Fellow at the Brookings Institution, Research Professor at Georgetown University, and formerly 

the Benefits Tax Counsel, in charge of national private pension policy and regulation, at the 

U.S. Department of the Treasury. David John is a Managing Director of the Retirement Security 

Project and a Senior Research Fellow for Retirement Security and Financial Institutions at the 

Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation. (Biographical 

information attached and at footnote 5.) 

The Retirement Security Project is supported by The Pew Charitable Trusts in partnership 

with Georgetown University’s Public Policy Institute and the Brookings Institution. 

The views expressed in this testimony are those of the two witnesses and the Retirement Security Project, but should not be attributed to The Heritage Foundation, the Brookings Institution, Georgetown University’s Public Policy Institute, The Pew Charitable Trusts, or any other 

organization. 2This testimony is based on a more detailed proposal the witnesses have set forth in a series 

of research and policy papers (see, e.g., Retirement Security Project Publication No. 2007-2 ‘‘Pursuing Universal Retirement Security through Automatic IRAs ’’) which are available at 

www.retirementsecurityproject.org. (Major portions of this testimony are taken verbatim from the 

witnesses’ research and policy papers cited above.) The proposal has been introduced in the 

110th Congress as the ‘‘Automatic IRA Act of 2007’’, H.R. 2167, sponsored by Rep. Richard Neal 

(D-MA) and Rep. Phil English (R-PA), and S. 1141, sponsored by Senators Jeff Bingaman (DNM) and Gordon Smith (R-OR). 3See http://www.retirementsecurityproject.org/pubs/File/AutoIRAQuoteSheetFinal7.6.07.pdf. 

Crenshaw, Albert, ‘‘Automatic IRAs—a Quick Fix for Workers Without Pensions?’’ Washington 

Post, February 19, 2006; ‘‘The Way to Save’’ Editorial, New York Times, February 20, 2006; Bernard, Tara, ‘‘Groups Propose Payroll Deductions for IRAs,’’ The Wall Street Journal, February 

16, 2006; Editorial, Newsday, February 22, 2006; Marketwatch.com (February 16, 2006); 

Lambro, Donald, ‘‘A Broader Retirement Plan,’’ The Washington Times, April 12, 2007; ‘‘Another 

Black Eye for H&R Block’’ Editorial, New York Times, March 18, 2006; Quinn, Jane Bryant, 

‘‘A Nest Egg for Low Earners,’’ Newsweek, February 26, 2007; Commission on the Regulation 

of U.S. Capital Markets in the 21st Century, Report and Recommendations, March 2007. The 

32

automatic IRA proposal emerged as one of the leading recommendations of the 2006 National 

Summit on Retirement Savings (Saver Summit). 4 Craig Copeland, ‘‘Employment-Based Retirement Plan Participation: Geographic Differences 

and Trends, 2005: Employee Benefit Research Institute Issue Brief No. 299,’’ November 2006 

(referred to below as ‘‘Copeland, EBRI Issue Brief No. 299 ’’), Figure 1, p. 7. An additional 16 

million workers either are not eligible for their employer’s plan or are eligible but fail to participate. Similar but updated figures for 2006 are available in the Employee Benefit Research Institute Issue Brief 311. 5We have previously written and testified before Congress on various aspects of employersponsored retirement plans. David John has written and testified about the funding problems 

faced by defined benefit pension plans and about the United Kingdom’s pension situation. Mark 

Iwry led the Executive Branch efforts in the 1990s to develop the SIMPLE plan for small business, the startup tax credit for small employers that adopt new plans, and the saver’s credit 

for moderate- and lower-income workers, as well as the Executive Branch initiatives to define, 

approve and promote 401(k) automatic enrollment, automatic rollover to restrict pension leakage, and automatic 401(k) features generally. See also William G. Gale, J. Mark Iwry and Peter 

R. Orszag, ‘‘The Saver’s Credit’’ (The Retirement Security Project, Policy Brief No. 2005-2; available at www.retirementsecurityproject.org). 6William G. Gale, J. Mark Iwry and Peter R. Orszag, ‘‘The Automatic 401(k): A Simple Way 

to Strengthen Retirement Savings,’’ (The Retirement Security Project, Policy Brief No. 2005-1; 

available at www.retirementsecurityproject.org); William G. Gale and J. Mark Iwry, ‘‘Automatic 

Investment: Improving 401(k) Portfolio Investment Choices’’ (The Retirement Security Project, 

Policy Brief No. 2005-4; available at www.retirementsecurityproject.org). 

See also the description of the joint AARP, FINRA, Retirement Security Project ‘‘Retirement 

Made Simpler’’ campaign on page 10, below. 7See, for example, the following (all of which are available at 

www.retirementsecurityproject.org): J. Mark Iwry, William Gale, and Peter Orszag, ‘‘The Potential Effects of Retirement Security Project Proposals on Private and National Saving: Exploratory Calculations,’’ Retirement Security Project Policy Brief No. 2006-2; Peter Orszag and Eric 

Rodriguez, ‘‘Retirement for Latinos: Bolstering Coverage, Savings and Adequacy,’’ Retirement 

Security Project Policy Brief No. 2005-7; William G. Gale, J. Mark Iwry and Peter R. Orszag, 

‘‘The Saver’s Credit,’’ Retirement Security Project Policy Brief No. 2005-2; J. Mark Iwry, ‘‘Using 

Tax Refunds to Increase Savings and Retirement Security,’’ Retirement Security Project Policy 

Brief No. 2005-9; Peter Orszag, ‘‘Protecting Low-Income Families’ Savings: How Retirement Accounts Are Treated in Means-Tested Programs and Steps to Remove Barriers to Retirement Saving,’’ Retirement Security Project Policy Brief No. 2005-6. 8 Even among those households that had savings in 401(k)s and IRAs, the median account bal- ance was only $69,000. Authors’ calculations using the 2004 Survey of Consumer Finances. 9 As measured in the National Income and Product Accounts. 

10 Copeland, EBRI Issue Brief No. 299, Figure 1, page 7. Similar but updated figures for 2006 

are available in the Employee Benefit Research Institute Issue Brief 311. 11Thayer, Colette, ‘‘Automatic IRAs: Worker Attitudes and Likelihood of Participation,’’ April 

200712See William G. Gale, J. Mark Iwry, and Spencer Walters, The Pension Protection Act of 

2006 and the Unfinished Agenda. (Retirement Security Project Publication No. 2007-1, April 

2007). 13 In the Conference Report to the Tax Reform Act of 1997, Congress stated that ‘‘employers 

that choose not to sponsor a retirement plan should be encouraged to set up a payroll deduction 

[IRA] system to help employees save for retirement by making payroll-deduction contributions 

to their IRAs’’ and encouraged the Secretary of the Treasury to ‘‘continue his efforts to publicize 

the availability of these payroll deduction IRAs’’ (H.R. Rep. No. 220, 105th Cong., 1st Sess. 775 

[1997]). IRS and Labor guidance was given in IRS Announcement 99-2, ‘‘Payroll Deduction 

IRAs,’’ and Department of Labor Interpretive Bulletin 99-1 (June 18, 1999), 29 C.F.R. 2509.99-

1(b). 14 Employee Retirement Income Security Act of 1974, as amended. 15The only exception would be an employer that sponsored a retirement plan but excluded 

a major portion of its workforce—for example, excluding an entire division or subsidiary that 

is not union-represented or foreign—in which case the employer would be required to offer payroll deposit saving to the rest of the workforce. 16 Brigitte Madrian and Dennis Shea, ‘‘The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior,’’ Quarterly Journal of Economics 116, no. 4 (November 2001): 1149-

87; and James Choi and others, ‘‘Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance,’’ in Tax Policy and the Economy, vol. 16, edited by 

James Poterba (Cambridge, Mass.: MIT Press, 2002), pp. 67-113. See also Sarah Holden and 

Jack VanDerhei, ‘‘The Influence of Automatic Enrollment, Catch-Up, and IRA Contributions on 

401(k) Accumulations at Retirement,’’ Employee Benefit Research Institute Issue Brief No. 283 

(July 2005). 17 James Choi, David Laibson, Brigitte Madrian, and Andrew Metrick, ‘‘Optimal Defaults and 

Active Decisions,’’ NBER Working Paper No. 11074 (January 2005). 18 A national website could provide firms these standard enrollment and election forms, as 

well as provide an opportunity to promote employee education and best practices as they evolve, 

such as automatic enrollment and potentially, lifetime guaranteed income. 19This might be done in conjunction with the existing IRS Form W-3 that employers file annually to transmit Forms W-2 to the government. Failure to offer payroll deposit saving would 

ultimately be backed up by an excise tax similar to (but much lower than) that imposed for employer violations of the COBRA health care continuation coverage requirements. The intent is 

that employers would never have to pay such an excise tax; it is simply a deterrent to noncompliance, accompanied by a rather forgiving array of exceptions, opportunities for correction, 

33

and relief for unintentional noncompliance that is generally patterned after the corresponding 

COBRA provisions. Compare Internal Revenue Code Section 4980B. 20 ‘‘Default Investment Alternatives Under Participant Directed Individual Account Plans; 

Final Rule,’’ Department of Labor Employee Benefits Security Administration, Federal Register 

(Vol. 72, No. 205), October 24, 2007. See also letter from J. Mark Iwry, Principal, Retirement 

Security Project, to Department of Labor Employee Benefits Security Administration, dated November 13, 2006 (available at www.retirementsecurityproject.org), commenting on the Department’s proposed regulations. 21These 401(k) limits apply to both 2007 and 2008. IRA and 401(k) contribution limits (as 

well as the limits applicable to SIMPLE plans) are indexed for cost-of-living. 22This raises a number of issues. For further discussion, see discussion of proposed reforms 

of the Saver’s Credit, e.g., William G. Gale, J. Mark Iwry, and Peter R. Orszag, ‘‘The Saver’s 

Credit: Expanding Retirement Savings for Middle- and Lower-Income Americans’’ (Retirement 

Security Project Publication No. 2005-02, March 2005). 23 Esther Duflo, William Gale, Jeffrey Liebman, Peter Orszag, and Emmanuel Saez, ‘‘Saving 

Incentives for Low- and Middle-Income Families: Evidence from a Field Experiment with H&R 

Block’’ (Retirement Security Project, May 2005). 24 Among the possible approaches would be to place matching deposits in a separate sub-account subject to tight withdrawal rules and to impose a financial penalty on early withdrawals 

of matched contributions. 25 Accordingly, H.R. 2167 and S. 1141 require a joint study by the Labor and Treasury Departments of the feasibility and desirability of promoting the use of low-cost annuities, longevity insurance, or other guaranteed lifetime income arrangements in automatic IRAs, including consideration of—(i) appropriate means of arranging for , or encouraging, individuals to receive at 

least a portion of their distributions in some form of low-cost guaranteed lifetime income, and 

(ii) issues presented by possible additional differences in, or uniformity of, provisions governing 

different IRAs. Section 4(b)(1)(B). The bills also would provide for a joint study of the feasibility 

and desirability of extending to automatic IRAs spousal consent requirements similar to, or 

based on, those that apply under the Federal employees’ Thrift Savings Plan, including consideration of whether modifications of such requirements are necessary to apply them to automatic 

IRAs. Section 4(b)(1)(A). 26Laura D’Andrea Tyson, ‘‘Some No-Brainer Savings Ideas,’’ Wall Street Journal, October 30, 

2007, page A-18. 

[Additional materials submitted by Mr. John follow:] 

[Internet address to the Retirement Security Project policy brief, 

‘‘Pursuing Universal Retirement Security Through Automatic 

IRAs,’’ follows:]

http://www.retirementsecurityproject.org/pubs/File/RSPAutoIRALongpaperFINAL7.10.2007.pdf 

[Executive summary of the Retirement Security Project policy 

brief, ‘‘Pursuing Universal Retirement Security Through Automatic 

IRAs,’’ follows:]

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STATEMENT OF DAVID JOHN, MANAGING DIRECTOR, 

RETIREMENT SECURITY PROJECT 

Mr. JOHN. And although these employers would make no contributions or other outlays, they would receive a small temporary 

tax credit, as would smaller or newer employers that would be exempt from this requirement but choose to offer this voluntarily to 

their employers. 

Employers would have three choices. They could tell their workers to ‘‘go out and find your own IRA.’’ They could say, ‘‘All of these 

automatic IRAs at my company will be with X Financial Company.’’ 

Or last but not least, they could take advantage, if they cannot find 


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42

any other cost-effective means for these accounts, through a national default investment platform. 

This platform could be a consortium of private financial institutions, it could be a risk pool, it could be a consortium of nonprofit 

financial institutions, or, as is in the bill, it could be something 

similar to the Federal Thrift Savings Plan that currently is available to federal employers. 

Now the budgetary impact of this is relatively low. We estimate, 

and we are still doing a lot of work on trying to get the exact numbers, that this will be somewhere in the neighborhood of $250 million annually and could be significantly lower than that. 

It would also encourage smaller employers and the self-employed—and I think here of my daughter, Meredith, who is about 

to become a nurse when she graduates in February. She would be 

able to also have a retirement account if she was working as a private-duty nurse perhaps through a nursing association using direct 

debit from her checking account or a variety of other methods. 

The one major advantage that we believe we have got here is 

that it is simple, it uses pieces that are already in existence, and 

last but not least, we do have a cross-ideological and bipartisan 

consensus. 

This is not the solution to the problem, but it is a solution to the 

problem, and we think it would make an advance. 

Thank you. 

Chairman ANDREWS. Thank you very, very much. We appreciate 

that. 

Dr. Perun, we look forward to your testimony. 

STATEMENT OF PAMELA PERUN, POLICY DIRECTOR, THE 

ASPEN INSTITUTE 

Ms. PERUN. Thank you, Mr. Chairman. 

The mission of IFS is to promote increased savings in the United 

States so that all Americans can save, invest, and own, from cradle 

to grave. As part of that process, we have worked and continue to 

work closely with the financial services sector. Our advisory board 

consists of leaders of Bank of America, H&R Block, Goldman Sachs 

and ING, among others. 

Last May, after 3 years of work, Aspen IFS issued its report, 

Savings for Life. Included in that report is the proposal about 

which I will speak today: America’s IRA. 

Mr. Chairman, I do not need to tell you, but it is worth reiterating: At any given moment, 59 percent of Americans who make 

less than $50,000 a year do not have access to pension benefits on 

the job. That is 62 million Americans. 

Congress has tried to rectify this. As our recent report, ‘‘Towards 

a Sensible System for Saving’’ documented, there are now no fewer 

than eight different vehicles specifically designed for retirement 

saving, and yet pension coverage rates have not budged for decades. In fact, a study we recently conducted with the Center for Retirement Research at Boston College found that pension participation in 2004 was actually lower than it was in 1979. 

It is time to accept the fact that a significant portion of employers cannot or will not sponsor a plan, no matter what the incentives or mandates are. It is time to think differently and to find alVerDate 0ct 09 2002 09:56 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\HELP\110-71\38669.TXT HBUD1 PsN: DICK
43

ternative ways to use employers to facilitate retirement savings. 

That is what we have tried to do with our proposal, America’s IRA. 

America’s IRA would be available to any worker without an employer-sponsored plan. It would work just like any other IRA, a private-sector account opened at a private financial institution, with 

the usual cap placed on the amount of annual contributions. 

But here is the difference, and here is the important point: 

America’s IRA would have additional features designed to encourage new savings by those who are saving very little today. Specifically, for individuals with incomes under $30,000, the government 

would provide a starter contribution to encourage the opening of 

accounts. Then, to replicate the employer contributions that successfully encourage 401(k) savings, a government-matching contribution placed directly into an individual’s IRA would be available to savers with incomes under $50,000. 

We do not, unlike other proposals, impose any mandates on employers. A mandated product may expand coverage, but it does 

nothing to ensure that there will be an adequate level of savings 

at retirement. It does us very little good to say that more people 

will have IRAs if there is almost no money in them. That is why 

the start-up contributions and matching funds in our proposal are 

so important. 

While we do not support mandates, we do believe there is a role 

for employers. They should be encouraged to voluntarily participate 

in an employee’s pension savings. For example, federal law should 

be changed to allow employers to make matching contributions to 

employee IRAs without incurring the full legal burden of plan 

sponsorship. 

And just how well will America’s IRA work? Our financial models 

show what would happen to a 35-year old worker who makes 

$20,000 a year, if he or she contributes only 4 out of every 5 years, 

and just 3 percent of his or her income, about $50 a month at the 

start. 

The result is that this worker will have over $133,000 at age 65. 

That is a significant supplement to Social Security. If converted to 

an annuity, it is nearly $500 more per month in today’s dollars. 

And it would begin to make true retirement security a reality for 

millions of Americans. 

For low-to moderate-income workers, their America’s IRA savings, combined with Social Security benefits, would come close to 

replacing 80 percent of pre-retirement earnings, the target for a 

safe and secure financial retirement. 

Mr. Chairman, building enough saving for a comfortable retirement is an essential part of the American dream. For too many 

Americans, however, that dream has been deferred. America’s IRA 

would put it back within reach. 

Thank you. 

[The statement of Ms. Perun follows:]

Prepared Statement of Pamela Perun, Policy Director, Aspen Institute 

Initiative on Financial Security 

Thank you, Mr. Chairman. 

My name is Pamela Perun, and I am the Policy Director of the Aspen Institute 

Initiative on Financial Security—or IFS. It is an honor to be here today. 

44

The mission of Aspen IFS is to promote increased savings in the United States 

so that all Americans can save, invest, and own—from cradle to grave. 

As part of that process, we have worked, and continue to work, closely with the 

financial services sector. Our Advisory Board consists of leaders of Bank of America, 

H&R Block, Goldman Sachs, and ING, among others. We specifically reached out 

to the private sector because we believe that rather than creating an entirely new 

savings system at taxpayer expense, we should partner with existing companies 

that have a long-term interest in sustained financial relationships with individuals. 

Last May, after three years of work, Aspen IFS issued its report, Savings for Life. 

Included in that report is the proposal about which I will speak today: America’s 

IRA. And, I would ask that the America’s IRA chapter of that report be included 

in the Record at the end of my statement. 

Mr. Chairman, I do not need to tell you, but it is worth reiterating: at any given 

moment, 59 percent of Americans who make less than $50,000 per year do not have 

access to pension benefits on the job. 

That is, 62 million Americans are working hard every day and making less than 

$50,000 a year, but when they retire, the only protection they may have is Social 

Security. 

Social Security is a vital program that provides a solid foundation for retirement 

security. But it is not—and never was—intended to be the only source of a person’s 

retirement income. 

For millions of Americans, a private pension and private IRAs help to supplement 

Social Security. But, far too many Americans—hard-working Americans—have no 

supplement at all. For fully one in every five Americans aged 65 and older, Social 

Security is their sole source of income. 

Congress has tried to rectify this. As our recent report—Towards a Sensible System for Saving—documented, there are now no fewer than eight different vehicles 

specifically designed for retirement savings. And yet, pension coverage rates have 

not budged for decades. In fact, a study we recently conducted with the Center for 

Retirement Research at Boston College found that pension participation in 2004 was 

actually lower than it was in 1979. 

It is time to accept the fact that a significant portion of employers cannot or will 

not sponsor a plan, no matter what the incentives or mandates. It is time to think 

differently—it is time to find alternative ways to use employers to facilitate retirement savings. 

That is what we have tried to do with our proposal—known as America’s IRA. 

America’s IRA would be available to any worker without an employer-provided 

pension plan. It would work just like any other IRA—a private sector account 

opened at a private financial institution, with a cap placed on the amount of permitted annual contributions. 

But, here’s the difference—and here’s the important point: America’s IRA would 

have additional features designed to encourage new savings by those who are saving 

very little today. 

Specifically, for individuals with incomes under $30,000, the government would 

provide a ‘‘starter’’ contribution to encourage the opening of the accounts. 

Then, to replicate the employer contributions that successfully encourage 401(k) 

savings, a government matching contribution—placed directly into an individual’s 

IRA—would be available to savers with incomes under $50,000. 

We do not, like other proposals, impose any mandates on employers. 

A mandated product may expand coverage, but it does nothing to ensure that 

there will be an adequate level of savings at retirement. Our America’s IRA proposal 

is the only plan that seeks to ensure not just that more people have IRAs, but that 

the balance in those IRAs at retirement will be big enough to make a difference. 

It does us very little good to say that more people will have IRAs if there is almost no money in them. That is why the start-up contributions and matching funds 

in our proposal are so important. 

While we do not support mandates, we do believe there is a role for employers. 

They should be encouraged to voluntarily participate in an employee’s pension savings. For example, federal law should be changed to allow employers to make 

matching contributions to employee IRAs without incurring the legal burden of plan 

sponsorship. 

Our underlying goal is to make it easier for Americans to save. Mandates will not 

work—but simplified voluntary cooperation will. 

And just how well will this work? We used our financial models to see what would 

happen to a 35-year old worker who makes $20,000 a year. We assumed he or she 

would contribute to an America’s IRA only 4 out of every 5 years and would contribute just 3 percent of his or her income—about $50 a month at the start. This 

45

modest individual contribution and the modest government match will result in that 

worker having over $133,000 at age 65—over $60,000 in today’s dollars. 

That is a significant supplement to Social Security. If converted to an annuity, 

it is nearly $500 more per month in today’s dollars. And, it would begin to make 

true retirement security a reality for millions of Americans. 

For low- to moderate-income workers, their America’s IRA savings, combined with 

Social Security benefits, would come close to replacing 80 percent of pre-retirement 

earnings—the target for a safe and secure financial retirement. 

Now I understand in this age of massive budget deficits, there is some concern 

about the cost of our proposal. And we acknowledge there will be a cost. But we 

believe this cost is necessary to achieve the ultimate objective. 

Government contributions to encourage savings and to encourage people to save 

their own money are the linchpins of a successful savings policy and the key to helping low-income families attain adequate retirement savings. In fact, research demonstrates that workers—even low- and moderate-income workers—can and will save 

if given the right opportunities and incentives. 

In exchange for a ten-year cost of $42.5 billion, the total asset accumulation in 

America’s IRA at the end of that 10-year period will be more than $100 billion. 

And let’s put this cost in context. According to the Joint Committee on Taxation, 

over the next five years, the tax-preferred treatment of employer-provided pensions 

plus existing Individual Retirement Accounts—which largely benefit middle and 

upper-income Americans—will cost the federal government $701.4 billion. America’s 

IRA would only cost the equivalent of about 3 percent of that total. 

The bottom line is that the benefits—for individuals in terms of greater retirement security, and for the economy as a whole in terms of increased national savings—far outweigh the costs. 

Finally, Mr. Chairman, I realize that this is not within the jurisdiction of this 

Subcommittee, but I want to just briefly mention the other retirement income proposal included in our report, Savings for Life. It is a proposal we call, Security Plus. 

I mention this because while it is important to find ways to increase the number 

of Americans with retirement savings, it is also necessary to start thinking about 

what happens with those savings once a person reaches retirement age. 

Security Plus would make it easier for all Americans to turn their savings into 

income that will last throughout their retirement, by allowing retirees to convert up 

to $100,000 in savings into a lifetime annuity. The annuities would be underwritten 

by the private sector, but the federal government would select annuity providers 

through a competitive-bid process and would distribute the annuity payments each 

month through Social Security checks. 

Mr. Chairman, building enough savings for a comfortable retirement is an essential part of the American Dream. For too many Americans, however, that dream has 

been deferred. America’s IRA would put it back within reach. 

Thank you. 

[Additional material submitted by Ms. Perun follows:]

46


aspen-1.eps
47


aspen-2.eps
48


aspen-3.eps
49


aspen-4.eps
50

Chairman ANDREWS. Doctor, thank you very much. You win the 

prize for finishing before the red light comes on, too. 

No, thanks very much for your testimony. 

Mr. Stapley, welcome. 

STATEMENT OF MICHAEL STAPLEY, PRESIDENT AND CEO, 

DESERET MUTUAL 

Mr. STAPLEY. Mr. Chairman and members of the committee, 

thank you very much for this opportunity. We are here today to 

present to you a new and forward-thinking idea about the way we 

deliver life security benefits to Americans. 


aspen-5.eps
51

The voluntary participation of employers in the American system 

for providing medical, retirement and other similar life security 

benefits has, over time, as you have mentioned, Mr. Chairman, improved the health and financial well-being of hundreds of millions 

of Americans. 

However, there are significant challenges facing our current benefit system that cannot be ignored. 

First, the benefit system does not, even after three decades, serve 

all Americans. Fewer than half of U.S. workers have a retirement 

plan through their employer, and of those that do, many do not 

save enough to achieve retirement security. 

Second, employers that today provide retirement, medical, and 

similar life security benefits are under stress. In addition to increased national and global competition, U.S. employers face complex, inflexible, and often contradictory rules, as well as exposure 

to litigation that has increased over time. 

In many cases, the administration of retirement, health, and 

other benefits has itself become a major enterprise within companies that often diverts their focus from competitive business challenges. 

Because the benefit security needs of all Americans is a troubling 

issue of increasing importance to employers and to society as a 

whole, we created a design that took the best of the current system 

and developed an entirely new platform that would maximize the 

opportunity for life security for all Americans. 

The following is a brief description: 

One, benefit administrators would manage benefit plans competing for business and customers on the basis of product quality, 

service and cost. 

Number two, retirement short-term savings plans and medical 

plans would be included. Retirement plans would include both defined benefit and defined contribution plans. Other benefits, such 

as life insurance and disability, could be added at a later date. We 

strongly believe that integrating retirement savings and health 

coverage is critical. 

Three, a uniform national regulatory structure would be established to ensure that there is effective and fair competition among 

administrators and that there is total transparency for consumers. 

The structure could be developed by the federal government or a 

federally enabled nongovernmental entity. 

Four, employers would have the option of continuing in the current system, purchasing benefits for their employees from a regional benefit administrator, or providing benefit funding to their 

employees who could purchase benefits from the administrator of 

their choice. 

Five, individuals would be guaranteed the opportunity to purchase benefits directly from benefit administrators on the same 

basis as those accessing benefits through an employer. 

Six, benefits would be portable among benefit administrators. 

Seven, employers and individuals would share in funding, and 

the tax treatment of qualified lifetime security benefits would be 

uniform for all Americans. 

52

*The ERISA Industry Committee (ERIC) is a non-profit association committed to the advancement of employee retirement, health, and welfare benefit plans of America’s largest employers. 

ERIC’s members provide comprehensive benchmark retirement, health care coverage, compensation, and other life security benefits directly to tens of millions of active and retired workers 

and their families. The association has a strong interest in proposals affecting its members’ ability to deliver those benefits, their cost and their effectiveness, as well as the role of those benefits in the American economy. 

Eight, benefit administrators would provide financial planning 

services through salaried financial planners to optimize the potential for retirement security. 

Nine, all individuals would be required to establish a retirement 

savings account apart from Social Security, and, eventually, we 

would support a subsidy for low-income savers. 

And, ten, we believe that many of the ideas of other stakeholders 

could be incorporated into this proposal. 

The new system combines a market-based structure with individual choice and enhanced group risk sharing, ensuring the voluntary continuation and expansion of the employers’ role. It leaves 

employers to do what they do best and administration to those that 

do it best. 

In summary, ERIC’s proposal significantly simplifies and 

rationalizes the current retirement system by: expanding opportunities for individuals and employers to participate in retirement 

plans; enhancing competition by leveling the playing field and providing better tools and improved information to consumers; providing simple, clear and easy-to-understand choices for employers 

and consumers; establishing equity and fairness in the tax structure that supports the benefits system. 

We recognize that our proposal is controversial and exceeds the 

breadth of proposals that would simply create additional burdens 

or build upon components of the current system. ERIC’s proposal 

is designed to spark new thinking about replacing such limiting 

silos with more creative options. It permits us all to do what Americans do best: create and innovate. 

This is an urgent debate. The life security of millions of Americans and the vitality of many American businesses depends on the 

outcome. 

Thank you, Mr. Chairman and members of the Committee. 

[The statement of Mr. Stapley follows:]

Prepared Statement of Michael Stapley, President and CEO, Deseret Mutual Chairman, ERIC* Task Force on New Benefit Platform for Life Security 

Thank you, Mr. Chairman and members of the committee. 

We are here today to present to you a new and forward thinking idea about the 

way we deliver life security benefits to Americans. 

The voluntary participation of employers in the American system for providing 

medical, retirement and other similar ‘‘life security’’ benefits has, over time, improved the health and financial well being of hundreds of millions of Americans. 

However, there are significant challenges facing our current benefit system that 

cannot be ignored. 

First, the benefit system does not, even after three decades, serve all Americans. 

Fewer than half of U.S. workers have a retirement plan through their employer and 

of those that do, many do not save enough to achieve retirement security. 

Second, employers that today provide retirement, medical and similar life security 

benefits are under stress. In addition to increased national and global competition, 

U.S. employers face complex, inflexible, and often contradictory rules as well exposure to litigation that has increased over time. In many cases, the administration 

53

of retirement, health, and other benefits has itself become a major enterprise within 

companies that often diverts their focus from competitive business challenges. 

Because the benefit security needs of all Americans is a troubling issue of increasing importance to employers and to society as a whole, we created a design that took 

the best of the current system and developed an entirely new platform that would 

maximize the opportunity for life security for all Americans. 

The following is a brief description: 

1. Benefits Administrators would manage benefit plans, competing for business 

and customers on the basis of product quality, service, and cost. 

2. Retirement, short-terms savings plans and medical plans would be included. 

Other benefits such as life insurance and disability could be added at a later date. 

We believe that integrating retirement, savings, and health coverage is critical. 

3. A uniform national regulatory structure would be established to ensure that 

there is effective and fair competition among administrators and that there is total 

transparency for consumers. The structure could be developed by the Federal government or a federally enabled non-governmental entity. 

4. Employers would have the option of continuing in the current system, purchasing benefits for their employees from a regional Benefit Administrator, or providing ‘‘benefit funding’’ to their employees who could purchase benefits from the 

Administrator of their choice. 

5. Individuals would be guaranteed the opportunity to purchase benefits directly 

from Benefit Administrators on the same basis as those accessing benefits through 

employers. 

6. Benefits would be portable among Benefit Administrators. 

7. Employers and individuals would share in funding; the tax treatment of qualified lifetime security benefits would be uniform for all Americans. 

8. Benefit Administrators would provide financial planning services through salaried financial planners to optimize the potential for retirement security. 

9. All individuals would be required to establish a retirement savings account 

apart from Social Security. We would support a subsidy for low-income savers. 

10.Many of the ideas of other stakeholders could be incorporated in a New Benefit 

Platform. 

Thus, the new system combines a market-based structure with individual choice 

and enhanced group risk sharing, ensuring the voluntary continuation and expansion of the employers’ role. It leaves employers to do what they do best and administration to those that do it best. 

In summary, ERIC’s proposal significantly simplifies and rationalizes the current 

retirement system by: 

• Expanding opportunities for individuals and consumers to participate in retirement plans; 

• Enhancing competition by leveling the playing field and providing better tools 

and improved information to consumers; 

• Providing simple, clear, and easy—to-understand choices for employers and consumers; 

• Establishing equity and fairness in the tax structure that supports the benefits 

system. 

We recognize that our proposal is controversial and exceeds the breadth of proposals that would simply create additional burdens or build upon components of the 

current system. ERIC’s proposal is designed to spark new thinking about replacing 

such limiting silos with more creative options. It permits us all to do what Americans do best: create and innovate. 

This is an urgent debate. The life security of millions of Americans and the vitality of many American businesses depends on the outcome. 

Thank you, Mr. Chairman and members of the Committee. 

Chairman ANDREWS. Mr. Stapley, thank you very much for your 

very succinct and comprehensive statement. Thank you. 

Mr. Stein, welcome back. Good to have you with us. 

Mr. STEIN. Well, thank you. 

I am owed 12 seconds from 2 weeks ago when I testified before 

the House Ways & Means Committee. So——

Chairman ANDREWS. You just used them. [Laughter.] 

54

STATEMENT OF NORMAN STEIN, PROFESSOR, UNIVERSITY OF 

ALABAMA SCHOOL OF LAW 

Mr. STEIN. Mr. Andrews, Mr. Kline, members of the subcommittee, I am Norman Stein, a law professor at the University 

of Alabama. I am testifying today about and on behalf of the Conversation on Coverage, an unprecedented public policy initiative to 

increase pension coverage rates for American workers, particularly 

those with low and moderate incomes. 

Convened by the Pension Rights Center, the Conversation on 

Coverage brought to the table experts from widely varying perspectives who shared a common goal: to push pension coverage rates 

upward from the roughly 50 percent level at which they have been 

stalled for the past 40 years. 

The Conversation’s viewpoint diversity is illustrated by its generous financial backers: the Ford Foundation, the Annie Casey 

Foundation, Atlantic Philanthropies, AARP, MetLife, Nationwide, 

Motorola, Fidelity Investments, ASPA, the Chamber of Commerce, 

the AFL-CIO, Prudential, EBRI, the International Association of 

Machinists, CWA, TIAA-CREF, the National Committee to Preserve Social Security, SCI, Vanguard, the Retirement Security 

Project, the American Academy of Actuaries, the American Benefits 

Council and the American Council of Life Insurers. 

That probably took 30 seconds of my time. 

The Conversation had three working groups, and, today, I will 

briefly discuss their proposals, whose richness of detail is more 

fully described in our report, Covering the Uncovered. The proposals were each designed to work in complementary fashion rather than in competition with the existing voluntary system. Let me 

describe the proposals. 

Working Group I developed two new types of plans with defined 

benefit-type features designed for small-and medium-size firms. 

The first plan is the Plain Old Pension Plan, or POPP The POPP 

is a bare-bones version of the traditional employer-sponsored pension plan. The POPP is easy for employers to adopt, fund and administer. The POPP’s basic features include: first, a basic benefit 

for all employees equal to at least 1 percent of career average pay 

multiplied by years of service; second, the possibility of bonus benefits which an employer could fund in good financial years; and, 

third, annual contributions that the employer calculates by referencing standardized conservative funding tables published by the 

Department of Treasury which show the year’s contribution for 

each employee based on the employee’s age in that year and the 

benefit accrued for that year. 

The second plan is the Guaranteed Account Plan, or the GAP. 

The GAP is a hybrid plan combining features of defined benefit and 

individual account plans. The GAP’s key features include: first, an 

account for each employee, which is annually credited with a paybased contribution and a guaranteed rate of return; second, a simple funding method with contributions based on standardized conservative funding assumptions; and, third, an innovative sidecar 

trust which an employee can use to increase funding flexibility and 

benefit security. 

55

Working Group II’s mission was to encourage individuals without 

access to traditional employer plans to save for retirement, and this 

is similar to the proposals that Mike and Mark proposed. 

To do this, the Working Group developed the Retirement Investment Account plan, or RIA. RIA’s key features are: first, the opportunity for employees not covered by a traditional employer plan to 

contribute to a RIA account through automatic payroll deduction; 

and, second, the investment of contributions through a central 

clearinghouse which would offer private-sector investment finds 

similar to the Federal Thrift Savings Plan. 

Working Group III designed the Model T plan. The Model T is 

a multiple-employer arrangement that is designed to be a basic, nofrills, low-cost savings plan, much like Henry Ford’s famous car 

was designed to be a basic, no-frills, low-cost automobile. 

The key features of the Model T are: first, it is a basic individual 

account plan with standardized features that would make it attractive for financial institutions to market to small employers; second, 

the financial institution would relieve employers from most of the 

administrative responsibility for the plan; and, fourth, employers 

would be encouraged to contribute by providing a higher overall 

contribution limit for plans where the employer makes contributions. 

At the moment, the Conversation is in the process of creating 

task forces to help implement the proposals, perhaps initially as regional demonstration projects. We are working with an economist 

at the Employee Benefits Research Institute to survey employers to 

estimate the probable take-up rate for GAP and POPP. 

We truly believe that these proposals have substantial potential 

to expand retirement plan coverage and, thereby, help more Americans create the financial security to which a lifetime of hard work 

and productive labor should entitle us all. 

We look forward to working with the subcommittee and others 

to move these proposals from the drafting table to the brick and 

mortar of the real world. 

Thank you. I look forward to your questions. 

[The statement of Mr. Stein follows:]

Prepared Statement of Norman P. Stein, on Behalf of the Conversation on 

Coverage 

Mr. Chairman, Members of the Subcommittee, thank you for giving me the opportunity to testify. I am Norman Stein, a professor at the University of Alabama 

School of Law, where I am privileged to hold the Douglas Arant Professorship. This 

semester, I am a visiting professor at Catholic University’s Columbus School of Law 

here in Washington, D.C. Today I am testifying on behalf of and about the Conversation on Coverage, an unprecedented six-year national public policy initiative to 

develop innovative and detailed proposals to increase pensions and retirement savings—particularly among low- and moderate-income wage-earners. 

The Conversation is unlike any other initiative in the retirement arena in its composition, duration, focus and accomplishments. The Conversation on Coverage, convened by the Pension Rights Center, brought together experts from widely varying 

perspectives—from businesses and from organized labor, from financial institutions 

and from consumer organizations, from consulting firms and from retiree groups, 

from academics and from think tanks, from women’s organizations and trade 

groups. These experts came together with a common goal and a common cause: to 

push pension rates upward from the 50% rate at which they have been stalled for 

the past quarter-century. The animating focus was to put our creative elbows to the 

wheel and create common ground solutions for the common good. 

56

The supporters of the Conversation on Coverage have included the Ford Foundation, the Annie E. Casey Foundation, the Atlantic Philanthropies, AARP, MetLife, 

Nationwide, Fidelity Investments, the U.S. Chamber of Commerce, the AFL-CIO, 

the Communication Workers of America, and many other organizations that are listed in the Conversation on Coverage’s final report, Covering the Uncovered—which 

I respectfully request be submitted into the record of this hearing. 

Today I will discuss the four detailed and innovative recommendations that were 

developed by the Conversation’s three Working Groups whose approximately 50 

spent collectively hundreds of hours in intensive discussions and whose final recommendations are detailed in Covering the Uncovered. The proposals include two 

new types of guaranteed pension plans; a proposal for a new clearinghouse structure 

to administer individual accounts; and a new proposal aimed at increasing coverage 

in the small business sector. Each Working Group worked to develop achievable 

short-term solutions that are consistent with and complementary to the voluntary 

pension system, ensuring that the plans would not directly compete with alreadyexisting pension plans. 

Now, let me describe the four recommendations of the Conversation on Coverage. 

Working Group I 

Working Group I, which I co-chaired with Melissa Kahn, Vice President of Government and Industry Relations for MetLife, developed new approaches to encourage small and medium-sized businesses to adopt plans that have features of defined 

benefit plans—that is, plans that are employer funded and professionally invested, 

and which provide a guaranteed stream of benefits to employees and their spouses. 

The results of our collaboration were two model plans: the Plain Old Pension Plan 

(POPP) and the Guaranteed Account Plan (GAP).. 

In a nutshell, POPP, or Plain Old Pension Plan, is a simplified version of a traditional employer-sponsored defined benefit pension plan that is easy for companies 

to create, fund and administer, and which should shield employers from cash flow 

issues that reflect the volatility of the Internal Revenue Code’s minimum funding 

standards.. 

• Employers who set up a POPP can pay employees and themselves a pension 

based on a percentage of their career average salaries, which can be as low as one 

percent multiplied by years of service. 

• Employer contributions will be easy for employers to determine and budget for 

because they would be based on conservative tables published by the government 

and would allow a seven-year period to fund any shortfalls that did occur. 

• POPP allows for a special ‘‘bonus benefit’’ meaning that employers can increase 

benefits in years when they have good financial performance and then go back to 

providing the plan’s basic benefit in other years, without having to formally amend 

the plan and without the risk that the IRS would make the amendment permanent. 

• Employers can provide generous past service credit, which will make the plan 

attractive to many small firms. 

• All benefits are paid as an annuity for employees and their spouses, except for 

very small benefits GAP is a hybrid pension plan that combines some of the features 

of traditional pension and 401(k) plans. The GAP can be looked at as a cash balance 

plan in reverse. Rather than start with a defined benefit plan that has notional accounts, the GAP adds employer guarantees to the regulatory framework of an individual account money purchase pension. Some of the GAP’s key features include: 

• Each participant’s guaranteed account is credited with an annual contribution 

that is based on a percentage of pay. 

• The GAP credits each employee’s account with a guaranteed annual rate of return, which can be a fixed interest rate or a variable rate of return. 

• Employers who sponsor a GAP will employ professional asset managers to invest plan assets. 

• Employer contributions will be based on standardized conservative funding assumptions. 

• The GAP can be designed to allow employees to invest additional pre-tax contributions in either the GAP or a traditional individual account plan. 

• The normal form of benefit in a GAP is a joint and survivor annuity. 

• The GAP permits employers to establish a unique side-car trust to increase 

funding flexibility and ensure security for the promised benefit. 

• The GAP permits employers to use flexible non-discrimination testing methods 

in exchange for a gateway contribution of 6.5% for all employees. 

• The GAP will be subject to a lower PBGC premium than other defined benefit 

plans because of the requirement that the employer fund the GAP on the basis of 

mandated conservative assumptions. 

57

Both the GAP and POPP incorporate conservative funding rules that should substantially reduce the year-to-year fluctuation in the employer’s annual contribution. 

From a marketing perspective, this should make both plans more attractive than 

those that are currently available. 

Working Group II 

Working Group II’s mission was to encourage more individuals to save. To accomplish this goal, the Working Group developed a proposal for an all-new portable Retirement Investment Account plan (RIA), which would be administered by a new national government-authorized clearinghouse. 

The key features of the RIA plan are: 

• A Central Clearinghouse that would contract out the investment of funds to the 

private sector. This is similar to the approach used by the Federal Thrift Savings 

Plan. • All workers—whether full-time, part-time or self-employed—could contribute to 

their accounts through payroll deduction. • Employers are required to provide access to the RIA to all employees who are 

not covered by an employer-sponsored savings plan. • Individuals who don’t have access to payroll deduction from their employer can 

contribute directly to the plan when they file their quarterly income taxes. • Individuals can contribute more than they could in an Individual Retirement Account—with the annual contribution limit set somewhere between $6,000 and 

$10,000 annually. • Contributions would be automatically placed in an appropriate default investment unless employees choose another of three investments. These investments include a bond index fund, Treasury Inflation-Protected Securities, and at least one 

investment choice that is low risk and preserves the principal. • The broad contours of a tax credit were designed by the Group and could be 

added to the RIA to provide incentives for low- and moderate-income wage earners. 

Working Group III 

Working Group III designed the Model T—named after Henry Ford’s basic, yet 

functional, car, which was designed for a mass audience. The Model T is a low-cost, 

simplified multiple employer plan that would be sold by financial institutions to 

small employers. Because it was designed as a multiple employer plan, it would be 

an efficient way of reaching numerous businesses at once. 

Our hope is that if the Model T were effectively marketed, potentially in a demonstration project in a particular region of the country, it could help to significantly 

increase coverage among small businesses and their employees. 

Key features of the Model T include: 

• The Model T is a simplified plan that would be marketed by financial institutions to small employers. • The Model T is a souped-up SIMPLE IRA with a few additional elements from 

the 401(k) world. • The administrative features of the plan are simple and handled mostly by financial institutions. • All employees—full-time and part-time—can participate. Self-employed individuals will also be able to contribute. • Employee contributions are made through payroll deduction. • While employer contributions are voluntary, the Group designed a unique twotiered contribution scheme that encourages employers to contribute on behalf of employees. • Funds are placed in simplified investment options that are consistent with the 

U.S. Department of Labor’s default investment regulations. • The Model T features a recommended ‘‘Standardized Performance Report,’’ that 

will be produced by the financial institutions offering the plan. This report will help 

employers compare fees, services and investment performance of the plan on an apples-to-apples basis. 

Conclusion 

The Conversation on Coverage has created innovative and workable proposals. 

However, these recommendations should be viewed as ‘‘living proposals,’’ an array 

of well-developed detailed proposals that hold the promise of truly increasing coverage but that still have room to grow in the public policy process. The proposals 

are substantive and well-conceived, and, by virtue of the fact they were created in 

a compromise process, they are good approaches—not necessarily perfect products. 

In addition, the Conversation on Coverage proposals were developed separately by 

each Working Group and are meant to significantly increase coverage, but not 

achieve universal coverage. However, because these proposals were created in a 

58

common ground process, they already have the input and stamp of approval of more 

than 45 individuals from all sides of the issue. 

The Conversation on Coverage is now forming Implementation Task Forces that 

we hope will be able to move all the proposals forward. For example, we are preparing surveys of pension plan advisors on the potential appeal of both the GAP and 

POPP. The survey is being conducted by the Employee Benefit Research Institute 

and will be sent to the membership of the American Society of Pension Professionals 

and Actuaries. The results of this survey will help determine whether employers 

have an interest in the GAP and POPP and what the likely impact on both coverage 

and eventual retirement income would be if these plans were introduced in the marketplace. We look forward to sharing the results of this survey with this Subcommittee. 

As the surveys are completed, the Conversation on Coverage and Working Group 

members will seek to promote GAP and POPP, which have features that are not 

available under current law. In addition the Conversation on Coverage will continue 

to promote the Retirement Investment Account framework. We are closely monitoring how RIA-type plans are being adopted by states. These states can serve as 

laboratories to test how clearinghouse approaches for individual accounts might 

work. 

With the Model T plan, our hope is to partner with a financial institution to 

launch a demonstration project, marketing the plan to employers in a specific regional market. 

We look forward to working with the Subcommittee in further developing these 

proposals, in whole or in part. And we are hoping to explore ways of potentially enabling the Conversation on Coverage to test some of its ideas by establishing permanent demonstration projects—possibly for POPP, the GAP and the Model T—which 

would allow us to evaluate how these proposals might expand coverage for employers and their employees. 

Thank you. I look forward to your comments and questions. 

Chairman ANDREWS. Thank you very much. 

Certainly, our optimism about the quality of the panel was thoroughly validated, both by the written statements and by the oral 

ones. Thank each of you very, very much. 

There is good news and bad news about the schedule. The bad 

news is a vote on the floor is imminent, but the good news is it 

is only one vote. So, when the buzzer rings, we will very briefly adjourn, I will come back immediately, and the members are welcome 

to do so as well so we can get to questions. 

It appears to me that the issues that the panel raises fall into 

two categories, and the first is: Should we consider options in the 

more traditional defined benefit world to help the individuals that 

I talked about at the beginning of the hearing? 

And Mr. Stein talked about two of the proposals from his organization, and Ms. Dudley had some comments about hybrid plans, 

and I think we need to keep both of those comments under consideration. 

I did want to focus on the second set of issues, though, which is 

how we might construct a defined contribution model that would 

reach as many of the people we are trying to reach as possible, and 

it strikes me, within that discussion, we have heard three different 

main issues. 

The first is: What should the infrastructure be? And I think 

there is a pretty broad consensus that there should be a shared infrastructure. Whether it is, you know, a contracted for-profit organization, a nonprofit, a government entity, there is some dispute 

about that, but there should be a shared infrastructure that the 

employers and employees operate under. 

The second issue is: To what extent participation should be voluntary or involuntary? And I think the Heritage-Brookings reVerDate 0ct 09 2002 09:56 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\HELP\110-71\38669.TXT HBUD1 PsN: DICK
59

quires the employer to at least offer participation. It does not require the employer to pay for anything in terms of a contribution, 

as I understand it. 

And I think, Mr. Stapley, the proposal you talked about required 

employer participation, although, again, it is more in the offering 

nature, not in a mandatory contribution. I think I heard you say 

that. Was that right? 

Mr. STAPLEY. It requires employee participation. 

Chairman ANDREWS. Employee. So it is an individual mandate 

rather than an employer mandate. 

The others appear to be saying it is a voluntary participation by 

employers. Did I hear that correctly? Did everybody else say that 

there——

Mr. STEIN. We have two proposals that deal with that kind of 

structure, and one required employers to use automatic payroll deduction. 

Chairman ANDREWS. That is the RIA proposal? 

Mr. STEIN. Yes. 

Chairman ANDREWS. Okay. So you would be required——

Mr. STEIN. Close to——

Chairman ANDREWS. Okay. More like the Heritage-Brookings approach on this. 

Mr. STEIN. Yes, yes. 

Mr. CALABRESE. And that is also what I said as well. 

Chairman ANDREWS. Gotcha. Okay. 

Mr. STAPLEY. And that could be incorporated into our proposal 

very easily. 

Chairman ANDREWS. Okay. So there is some real common ground 

on that. 

I think where there is the broadest departure is on the question 

of whether there should be subsidies or not from the public treasury, and I have heard sort of three positions on that. One is maybe 

or no. The second is a significant public subsidy. Dr. Perun’s position, I think, costs out to $42 million over 10 years, according to 

her testimony. 

And I would tell you, Dr. Perun, I share your sense that an IRA 

with no money in it is not a great value, and I also share your implicit assumption that without significant subsidies, there will not 

be a whole lot of money in people’s IRAs. 

And then I was curios——

Ms. PERUN. Mr. Chairman? 

Chairman ANDREWS. Yes? 

Ms. PERUN. I would just like to say that Aspen IFS does not support the shared infrastructure idea——

Chairman ANDREWS. Okay. 

Ms. PERUN [continuing]. That we are purely a private-sector individual connection——

Chairman ANDREWS. Gotcha. 

Ms. PERUN [continuing]. And we would rather see government 

dollars going into accounts and to building a separate program. 

Chairman ANDREWS. So you prefer a thoroughly private infrastructure that is in part contributed to by public subsidy dollars? 

Ms. PERUN. Yes. 

Chairman ANDREWS. Okay. I misstated that. 

60

Now in the Heritage-Brookings proposal—I want to ask either 

Mr. Iwry or Mr. John this question—you use the number $250 million a year. How many people do you think that would induce to 

enroll, and what is that cost based on? What are we buying for that 

$250 million? 

Mr. JOHN. We estimate that our proposal, out of the 60-plus million workers, would affect somewhere in the neighborhood of the 

high 30 million. 

Chairman ANDREWS. Well, that is a lot of people. 

Mr. JOHN. So it depends, of course, on what proportion actually 

participate in that. The assumption that we are making is $250 

million roughly a year, and it could be less. They are scoring people. The Urban-Brookings Tax Policy Center is actually still working on that. 

Chairman ANDREWS. But is that exclusive of any public subsidy 

contribution in that? 

Mr. JOHN. Yes, it is exclusive of any public subsidy. 

Chairman ANDREWS. Okay. That is simply the cost of setting up 

the infrastructure to get this done. 

Mr. JOHN. Actually, it is more in the form of forgone taxes on——

Chairman ANDREWS. Okay. So your assumption would be voluntary contributions that are, therefore, sheltered from taxes deprive the Treasury of revenue. That is what the $250 million is 

based on? 

Mr. JOHN. Yes, that is where we are. 

Chairman ANDREWS. But that does not assume any public 

match? 

Mr. JOHN. It does not at this point. 

Mr. IWRY. The Retirement Security Project, Mr. Chairman, has 

separate initiatives, and there is separate proposed legislation too 

and the saver’s credit. You and I have talked about this in past 

years. 

Chairman ANDREWS. We have. 

Mr. IWRY. And, in essence, that does bring this very much in the 

same zone in terms of ideas, as a number of the other proposals, 

that these IRAs with even the current law saver’s credit would 

have some public subsidy for people earning up to a certain 

amount, but we have advocated that the saver’s credit be refundable, be a 50 percent credit across the board, extend more into the 

middle-class, et cetera. So a substantial tax credit for all the savings. 

Chairman ANDREWS. Gotcha. I want to make sure there is time 

for my friend if he wants to ask questions before the vote. I will 

leave it up to him. 

Mr. KLINE. Either way. What do you think will be smoothest? 

Chairman ANDREWS. I think it is smoothest if we came back, to 

be honest with you, so as to not rush the people’s answers. 

I would just ask Mr. Iwry and Mr. John to supplement my questions with one. If the annual tax avoidance cost is $250 million, the 

deprived revenue, I would assume that that would assume roughly 

that about $1.25 billion would be contributed to these accounts because people in this bracket are round the 15 percent, 20 percent 

bracket. So you would multiply that number by five or six? 

61

Mr. IWRY. Mr. Chairman, there are a number of other factors. 

You are going down, I think, the right road, but the tax brackets 

are, in many cases, lower. We are dealing with the uncovered population. So many of them have a 0 percent bracket. 

Chairman ANDREWS. Okay. All right. Because of the EITC and 

others. 

Mr. IWRY. Exactly. 

Chairman ANDREWS. I just want to try to reconcile, if you could 

for me in writing, the amount of money you think people would voluntarily put into these accounts and the tax revenue avoidance 

number. Because it seems to me that that number is so low—$250 

million a year is almost nothing here because it would not, you 

know, it is not given the scope of things. 

Mr. IWRY. It is a low number, yes. 

Chairman ANDREWS. Yes. Okay. I hope it is right, but I——

Mr. IWRY. In many cases——

Chairman ANDREWS. I guess what I would like to see is a sepa- rate written analysis of where that $250 million comes from. That 

is all. 

Mr. IWRY. We would be happy to do that, and the Roth IRA 

versus the deductible IRA accounts for a huge difference in the 

numbers. 

Chairman ANDREWS. Okay. 

Mr. IWRY. We are assuming that most people would end up going 

with the Roth, not all of them, and that shows a much smaller revenue cost. 

Chairman ANDREWS. All right. 

We are going to go vote, and I am going to come right back, and 

members that would like to come back and ask their questions, 

thank you. I assume it will be about 10 minutes. 

Thank you. 

[Recess.] 

Chairman ANDREWS. Ladies and gentlemen, we will reconvene. 

We thank you for your patience. 

And at this time, I will yield for questions to the ranking member, Mr. Kline. 

Mr. KLINE. Thank you, Mr. Chairman. 

I want to say again what the chairman has said and what I indicated at the beginning of the hearing. This truly is a panel of experts. Taking nothing away from other panels we have had in other 

hearings and perhaps other committees, sometimes we do not get 

such a distinguished group, and so it is a real pleasure to have you 

here. 

I am also limited by the clock. So let me sort of cut to the chase 

on a couple of things. 

Mr. Stapley, your proposal differs significantly from some of the 

others, and it is a change from the status quo, which is what we 

are looking for. So I can better understand who this would apply 

to, can you give me some idea of what sorts of employers or employees would find this new benefit platform more palatable, better 

than the existing? What are we talking about here? Who would this 

apply to? 

Mr. STAPLEY. I will get this right. I think it potentially applies 

to any employer. I mean, I have talked to large employers. When 

62

you look at the issues associated with the sponsorship of employment benefits, they are looking for a way out, and the foundation 

for that is—it is like I said in my testimony—I have to have more 

expertise in the administration of sponsorship of benefits than I 

have in my core industry. 

So I think you have seen a change over the last several years 

where employers are saying, you know, you really need to have entities, like these benefit administrators, that their core expertise is 

the administration of benefits. 

If you look at small employers, I talked just the other day to a 

small employer that has got about 300 employees. I had him read 

this, and I just asked him, ‘‘From your standpoint as this small employer, how does this sound to you?’’ and he said, ‘‘If this were 

available, I would take it tomorrow.’’

Mr. KLINE. If I could interrupt for just a second, thinking of 

smaller employers—and 300 is not a mom-and-pop operation, but 

it is a smaller operation than say 3M or something from Minnesota—are you focusing this on the smaller employer, or are you 

considering the very large employers as preferring this as well? 

Mr. STAPLEY. My sense is this has potential application for employers of any size the way that it is structured. Now some employers, large employers, may want to continue the sponsorship and administration of their own benefits, but it certainly has the potential 

to apply to their circumstances as well. 

Mr. KLINE. Okay. Thank you. 

I wanted to pursue some safeguards issues, but perhaps someone 

else will bring those up. 

I want to now follow up on what the chairman was getting at 

when he was sort of trying to compare the different proposals. 

It looks like, Mr. Calabrese, that your proposal and the one 

brought forward by Mr. Iwry and Mr. John are very similar. We 

will start. We will see if we have time to go both ways. There is 

a potential difference in matching funds, but, other than that, can 

you point out the distinct difference between your proposal and the 

Brookings-Heritage proposal? 

Mr. CALABRESE. Well, it is very compatible. I am looking at what 

would be the entire system, and so looking at both, you know, proposing the matching tax credits, requiring, you know, automatic defaults, and then, you know, the payroll deduction and clearinghouse as the infrastructure. And so really what I think Brookings 

and Heritage have done here is they have focused in on the automatic payroll deduction, you know, and a basic account clearinghouse. So that is one component. 

But on that component, on that infrastructure piece, I think that 

is the critical first step we need to take and, you know, I am in 

almost complete agreement with what they have proposed. I think 

the only major difference that I point out in my testimony is, particularly, you know, with the bill that has been introduced by Congressmen Neal and English, that I would set the limits higher. 

The Conversation on Coverage also had a consensus that the 

limit should not be as low as today’s IRA because most middle-income people cannot achieve an adequate replacement rate for retirement by saving, you know, $4,000 or only $5,000 a year, particularly in the second half of their career, and I think if we put 

63

that limit somewhere between today’s IRA and a SIMPLE, which 

is $10,500, around, say, $8,000, that that would not threaten employers, for example, dropping their 401(k)s for this. 

Mr. KLINE. But it would presumably cost more when you look at 

the avoidance tax deferral piece of it. It would cost more to the 

Treasury. 

Even if I were to steal Mr. Stein’s 12 seconds, I see that I am 

out of time. So I will yield back, Mr. Chairman. Thank you. 

Chairman ANDREWS. Thank you very much, Mr. Kline. 

Mrs. McCarthy is recognized for 5 minutes. 

Mrs. MCCARTHY. Thank you, Mr. Chairman. Thank you for holding this hearing. 

You know, listening to all the proposals. I also happen to sit on 

Financial Services, and one of the things that we have been noticing—I remember your testimony going back to the year 2000. I did 

not remember the year, but I knew that you were in front of us 

once before. 

What I find interesting is that I have been trying to push those 

interested parties from the Financial Services people that we need 

to do more financial literacy, and they say they are. Now I am 

watching everything. I am in schools. I am asking if they have programs in the schools for financial literacy. I am asking just about 

anybody. If we do not educate our young people—and, yes, when 

I say young, I am talking from 18-to the 30-year-old group—to get 

them to start saving, we are going to be in big trouble when they 

start reaching towards 65. 

Those that are baby boomers that are retiring today did save, 

and they prepared, and they happen to be in a very good economy, 

so most of them have done all right. 

But, Dr. Perun, when you were talking about someone saving 

$50 a month and, at the age of 65, they would have $165,000 in 

their IRA, most likely, they will probably still be working after 65. 

Actually, Social Security will probably be 67, 69 possibly. So he 

would probably still live to 85, 90 most likely. That is not counting 

any health care costs. No one can survive on that. I mean, they are 

not going to be able to survive on that. 

So what I am looking for is—you know, we talk about how much 

you should save, but I go back to the financial literacy. How are 

we going to say, ‘‘By the time you are, say, 67, this is the amount 

of money you are going to need to live on or need to have. Some 

costs in your life will go down, but this is how much you are going 

to need,’’ without scaring them, saying, ‘‘Well, I am not going to be 

able to do that so I am not going to save for it.’’

Do you have an answer to that? 

Ms. DUDLEY. Well, I have a couple of thoughts. The first is I 

agree with you wholeheartedly. As part of Safe and Sound, a cornerstone of our proposal is to advance the number of people who 

actually understand the amount that they need to save. We think 

that is the fundamental first step in financial literacy, teaching 

people how much they are going to need in retirement, and, therefore, how much they need to save in order to meet that goal, and 

I think in doing that, I think there are a couple of different ways 

that you can approach it. 

64

The typical way that it is looked at is to look at how much replacement income you will need, and one of a newer kind of concept 

is to look at how much you will spend in retirement and to work 

from those ultimate goals back to how much you need to save. 

But the problem with that is a lot of times people do not really 

have an appreciation for that until they are much older in their careers, and so you really have to go all the way back to even elementary school and high school to teach them about the concept of 

compounding interest, about the concept of debt. One of the big 

problems is understanding debt versus investment and how to balance the two as you go through your life. 

Mrs. MCCARTHY. I know the banks are basically doing a better 

job today. When I was young, we saved every week. People had a 

couple of pennies, and you put it. But when the banks started 

charging an account that might have $5 in it, they actually ended 

up charging more than what was in the account, so they all pulled 

away. They are turning that around now, thank goodness. 

But, again, what I will say—you know, we have thrift savings 

here, and I have a couple of young people that started with me 

when I started here 11 years ago. They were in their very early 

20s, and I sat down with them and I said, you know, ‘‘You need 

to do this.’’ The excuse was they did not have the money. I said, 

‘‘What does a hamburger and a beer cost you 1 day a week?’’

And, anyway, they all joined, and that is why I am one of those 

that you can opt out, but as soon as you start a job, a certain percentage should be taken out because if you do not see in the beginning, you are going to—and, by the way, all those young people 

today are very, very happy that they got into the program. Some 

have been able to buy a house or at least put down a down payment anyhow. 

So we have a long way to go. 

Ms. DUDLEY. We do actually think that automatic enrollment 

and the automatic increase that you all thoughtfully included in 

the Pension Protection Act are ways that help employees, when 

they first get into a job, to start saving and to start being part of 

the program and to gradually increase the amount that they save, 

and as they get into the plan, we find that very few people pull 

back out. 

Mrs. MCCARTHY. Oh, no. It is like volunteerism. Once you start 

it, you get used to it and will continue. That is the challenge that 

I think we all face. 

With that, I yield back. 

Chairman ANDREWS. Thank you very much, Mrs. McCarthy. 

Mr. Courtney is recognized for 5 minutes. 

Mr. COURTNEY. Thank you, Mr. Chairman. 

I want to thank the witnesses also, and I also want to thank Mr. 

Kline and Mr. Andrews for helping. 

When I got this testimony last night, I was reading through it. 

It reminded me going to IHOP and getting one of these menus 

where you are trying to figure out, you know, which combination 

is the right one, and then sorting through, as Mr. Andrews did, in 

terms of the common elements and the separating ones is something I needed certainly in the testimony. 

65

And, Mr. Stein, in your written testimony, you indicated that the 

Conversation will seek to promote GAP and POPP which have features not available under current law and will continue to promote 

retirement investment account framework. I mean, it sounds like 

you are sort of taking the agnostic approach as much as possible—

or the group is—in terms of trying to get a wide array out there 

for employers. I mean, is that an accurate statement? 

Mr. STEIN. Well, there were three working groups, and they each 

had sort of different missions, and one of the working groups, the 

one that developed POPP and GAP, had a mission of trying to encourage new coverage through defined benefit plans, and that 

group sort of had a split focus because, on the one hand, they wanted to increase coverage, on the other hand, they thought defined 

benefit framework offers certain advantages to employees that individual saving account approaches do not. 

The other two groups were focused more on defined contribution 

plans, and one of the things that I want to note—one reason our 

Group II proposal sounds so similar to the Heritage-Brookings proposal and Mike Calabrese’s proposal is because they were on that 

work group and, in fact, I think 71.4 percent of this panel were 

participants in the Conversation on Coverage. 

I mean, I think our idea was, you know, almost shotgun, if we 

had lots of different ideas and, you know, each of them hit a different kind of segment of the workforce, that would yield better 

dividends than just focusing on one type of proposal. 

But the RIA proposal, I think, is very promising, and it is very, 

very, very similar to what you have heard from Brookings and Heritage and from Mike. 

Mr. COURTNEY. Right. I mean, I am new. A year ago, I was a 

small employer with a 401(k) plan, administering it. And, you 

know, one of the things is we would have our annual get together 

to go through the portfolio with all the staff, but you really as a—

and I think this is true of small business, which is, at some point, 

you just want to practice law or medicine or run your machine 

shop, and you really do not want to get into the business of running, you know, benefits as a big chunk of your day, and that is 

the only concern I have about sort of just throwing too much out 

there in terms of businesses because at some point——

Mr. STEIN. Well, the Model T plan, which is more like existing 

pension plans, except that the ideas to let the employer say, ‘‘I 

want to sponsor this’’ and try and relieve the employer of a lot of 

the administrative burdens and a lot of the fiduciary responsibility 

and to shift that to a financial institution which would market 

these plans to small employers. 

Mr. COURTNEY. Right. And I guess the Brookings-Heritage group, 

I mean, what is your reaction to the POPP and GAP proposals? 

Mr. IWRY. Mr. Courtney, as Professor Stein said, I was a member 

of that Conversation on Coverage effort and shared the pride that 

many of us have, I think, that overall the effort has been just terrific and unique. I think there is a lot to be said for those proposals, as well as for the one that is almost identical to the automatic IRA that we have been talking about and similar to the New 

America one. 

66

I think it is striking, and I hope you are encouraged, to see the 

convergence of themes here. Automatic enrollment, the power of 

enlisting inertia in the cause of saving is, obviously, one of those 

common ground themes. The power of a progressive matching contribution, some kind of deposit saver’s credit expansion is the way 

most people have put it. We have got right now a tax credit for 

folks that helps people in the lower brackets, not just people in the 

top bracket, and expanding that in some fashion is, I think, something a lot of us have been talking about as well. 

Mr. Chairman, apropos to Mr. Courtney’s question, the cost issue 

really ties into those themes, and I think for all of us perhaps the 

cost is not as great as one might think in the case of the infrastructure and the revenue cost of increased saving. The greater cost 

comes if you add a matching deposit and expanded saver’s credit, 

but I bet that everyone on the panel would agree, and I invite them 

to disagree if they do, that it is well worth it. 

But even if there are many billions of dollars of cost associated 

with a separate matching deposit, a tax credit that induces people 

to save and puts more in the accounts, it is well worth it, that the 

benefits to the nation to prepare for retirement and to the economy 

to increase our abysmally low national saving rate, and thereby increase national productivity and the gross domestic product, make 

it a good investment. 

Chairman ANDREWS. Thank you, Mr. Courtney. 

With the consent of the ranking member, he and I may ask another question or two. I will ask one. 

I do want to go to Mr. Iwry’s point about cost because I do think 

there is significant conversion—convergence on other issues—

maybe some conversion, too—but there are some questions about 

cost. I want to understand this. I hear three elements of cost that 

we would be talking about here. 

One is the administrative cost of administering the common platform, whether it is in the private sector, the nonprofit sector, the 

public sector. Someone has to bear the cost. 

The second is the lost revenue to the Treasury because more people would be making tax-deductible contributions. 

And then the third would be the cost of any credits that would 

be extended to employers, employees or both. 

So I have that framework correct? Are there any other costs that 

we failed to identify? 

Mr. IWRY. No, the credits are potentially the hugest part, if there 

are matching credits to individuals. 

Chairman ANDREWS. And really in response, again, to Dr. 

Perun’s earlier testimony, I think that a $42 billion outlay over 10 

years is a small fraction of the benefit that we would get over time 

because of less political pressure on Social Security, more consumer 

spending, healthier people. I think it is a very, very good investment. I agree with that. 

I want to ask a slightly different question to Mr. Iwry and Mr. 

John about the crowding-out problem. 

You know, I think there would be a consensus on both sides of 

the podium up here that there is sympathy for public expenditures, 

whether it be for tax avoidance or subsidiaries, that would provide 

pensions for those who would not otherwise have it, but we would 

67

want to avoid the unwelcome outcome of simply shifting people 

who are getting pensions now with a modest public subsidy to one 

that would get pensions with a great public subsidy. 

Your claim is that your proposal avoids that crowding-out problem. How does it do it? 

Mr. IWRY. Very simply, Mr. Chairman. We have two goals. One 

is to promote universal coverage, cover the people who are not covered, that 69 million, 75 million, 78 million. The other goal is to 

promote more qualified employer plans. 

We actually believe that by keeping the limits low on the new 

vehicle—and the new vehicle in our case is the old vehicle, the existing familiar IRA—whose limits, $5,000 starting next year, are 

nowhere near even the limits of the SIMPLE plan, much less the 

401(k) and other qualified plans. So the employer does not have an 

incentive. It is not only the employee contribution limits, but the 

employer contribution. We would not allow the employer to match 

in the IRA because we want them to graduate to a 401(k). 

Chairman ANDREWS. So your argument essentially is that an employer who is already providing this benefit would be disadvantaged in the labor marketplace because he or she would be stepping 

backward to such a great extent, it would be such a cut in employee benefits, they would not do it because they would not want 

to lose valued employees? 

Mr. IWRY. Absolutely. 

Chairman ANDREWS. Okay. 

And let me ask the other side of the coin then. Are the benefits 

generous enough that they would be meaningful to help the people 

who would be newly having a pension? I mean, the contribution 

limits are so low, would they be so low that they would not produce 

a significant benefit to the employee? 

Mr. IWRY. Our rough estimate is that about $15 billion of additional deposits, contributions to IRAs, would likely be generated by 

this kind of proposal. It could well be a lot more. 

Chairman ANDREWS. Per year? Per year? 

Mr. IWRY. Per year. Per year. And so over a 10-year period, we 

are looking at something like $150 billion or maybe $100 billion as 

it ramps up. 

Chairman ANDREWS. Okay. 

Mr. IWRY. That could easily be a lower bound. We are trying not 

to be unrealistic. 

Chairman ANDREWS. That sort of goes to the question I know you 

are going to answer for us in the supplemented, the record, which 

is that you must be implicitly assuming that a huge percentage of 

those contributors are people that pay no federal income tax or get 

the EITC, right? 

Mr. IWRY. We think that something like approaching twothirds——

Chairman ANDREWS. See, that would be good. I mean, that is——

Mr. IWRY [continuing]. Have 0 percent federal income tax liability, are in the 0 bracket, and so that the average bracket, when you 

take into account the 10 percent bracket and 15 percent bracket 

people who comprise most of the rest of that group, is going to be 

probably in single digits. 

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Chairman ANDREWS. Well, if you take into the account the EITC, 

it may be a negative rate of taxation. 

Mr. IWRY. That is right. There is interaction there. 

Chairman ANDREWS. In fact, it is a good thing because that is 

the target population which we are trying to help. 

Mr. IWRY. Exactly. And when you add in the automatic enrollment as an incentive or as a vehicle, it gets people actually saving. 

Chairman ANDREWS. Could I just pose one quick question? Is 

there anyone here who opposes automatic enrollment as the default 

position? Is there anyone who thinks that is a bad idea? Okay. 

Mr. Kline? 

Mr. KLINE. Thank you, Mr. Chairman. 

I think there is universal agreement even up here on the dais 

that that is a good idea. 

I just want to ask one question continuing on our sort of sorting 

out the differences. We see that there is a great deal of commonality, automatic enrollment certainly being one of them. In one 

or two sentences, because we are going to quickly run out of time, 

I would like to ask each of you what is the single most important 

feature of your proposal that you would like us to keep in mind as 

we are looking at this. What is really the defining or the most important or the distinguishing feature of your proposal that you 

would like us to take away? 

And we will just work right down the line if we could. I know 

that is hard, but——

Mr. CALABRESE. Yes, it is. It is hard because I think they need 

to work in combination, but I would say, again, the most important 

first step, you know, the fulcrum for this, is to give every worker 

automatic payroll deduction to a clearinghouse, you know, to a 

platform where they can at least have a low-cost default account 

that is managed for them. 

Mr. KLINE. Okay. Thank you. 

Ms. Dudley? 

Ms. DUDLEY. I think the one takeaway for the American Benefits 

Council is the importance of educating the public and employers 

about personal financial security and the importance of saving and 

participating in some sort of retirement plan coverage. 

Mr. KLINE. Thank you. 

Mr. JOHN. Yes. For the Retirement Security Project, we would 

say it is simple, it is very low cost and, therefore, it is something 

that can be enacted quickly and easily, and it can make a difference very quickly. 

Mr. KLINE. Yes. Thank you. 

Dr. Perun? 

Ms. PERUN. Yes. Our goal is to have all Americans included in 

a first-class saving system in the private sector, and we view America’s IRA as a way of connecting millions of Americans to the financial mainstream who currently have no attachment to it. 

Mr. KLINE. Okay. Thank you. 

Mr. Stapley? 

Mr. STAPLEY. I think from our perspective, it would be to extend 

the significant advantages of the employment-based system into a 

structure where every single American and every single employer 

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could access the same thing that larger employers get in today’s 

market. 

Just very quickly for example, we provide to our plan participants an S&P 500 index fund at 3 basis points. If you go to the 

marketplace, a financial planner, and you get yourself an IRA, you 

are probably going to pay around 50 basis points, and there are 

some financial planners that are selling them for 500 basis points. 

I would simply ask the question: Why do we have this disparity? 

Why does it make sense? Why shouldn’t every individual American 

have the capacity to purchase an IRA on the same basis? 

Chairman ANDREWS. If the gentleman would just yield for a second. 

Mr. KLINE. Happy to yield. 

Chairman ANDREWS. You would be happy? 

I think the committee’s looking very closely at exactly those 

questions. There are some discussions of the ways we should regulate disclosure for 401(k) fees, and the committee is very actively 

looking at those questions. 

Mr. KLINE. Mr. Stein? 

Mr. STEIN. We have three proposals, so I will need three to six 

sentences. 

Mr. KLINE. You get your 12 seconds back. 

Mr. STEIN. Working Group I was, I think, most concerned with 

increasing coverage but providing employees with the features of a 

guaranteed pension. Group II, I think, very similar to a number of 

the other proposals, looked to create a framework that people who 

do not have access to employee plans could use to save. And Group 

III, I think, was interested in creating a very simple version of an 

employer plan that financial institutions would then have an incentive to market to employers that do not now have plans. 

Mr. KLINE. Okay. Thank you very much. 

I yield back, Mr. Chairman. 

Chairman ANDREWS. Thank you, Mr. Kline. 

I do notice that two of our colleagues have joined us, and I would 

first recognize Mr. Wu for 5 minutes for questioning. 

Welcome. 

Mr. WU. Thank you very much, Mr. Chairman, and I apologize 

for—well, we just have multiple things going on, and that is not 

unique to us, and, you know, you all do, too, and thank you very 

much for being here. 

I think that this automatic opt-in proposal is something, I mean, 

that is just commons sense, and I fully, fully support it. 

But I am concerned about one other matter—and if it has been 

covered earlier, you know, just let me know how you covered it—

and that is with the mobility of our workforce, I am deeply concerned about vesting periods. And we had to make this decision for 

our own law firm before I came to Congress, and, you know, this 

is not the first time that I have admitted it in public, so I am 

happy to say it again. 

I thought that we should have a vesting period of a year or 2, 

and it was my Republican law partner who actually said, having 

an employee hang around to vest is the worst thing in the world. 

We want someone who wants to be here and who wants to work 

hard and who is enthusiastic about it, so, you know, any benefit 

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plans or employer match ought to vest immediately, and, you 

know, people stay because they want to stay, not because they 

want to vest. 

I would like any of you all who want to comment on that to comment. 

Mr. IWRY. Mr. Wu, I very much agree with you, and when I was 

at the Treasury Department overseeing the regulation of the nation’s private pension system and policy in this area, we initiated 

the movement of vesting from a 5-year to a 3-year period in our 

nation’s 401(k) and defined contribution plans. We have also suggested that defined benefit plans perhaps move to a faster vesting, 

but we need to be cautious about discouraging defined benefit 

plans, of which we have done too much already, and so I very much 

agree with you. We did not propose 3 because we thought that was 

necessarily the ultimate long-term answer, but because we wanted 

to do something that would be politically realistic and enactable as 

it was. 

Mr. WU. Well, the then-chairman and now minority leader, I 

think, proposed 3-year vesting when this committee considered it 

in the last Congress. I believe I then tried to push him to 1 year, 

not because I believed in 1 year but because it was pushing the envelope far enough, but I would like to see the fastest vesting——

Mr. IWRY. Well, if I could just add, Mr. Wu, that our proposal 

here today, the automatic IRA, has faster vesting than what you 

are aspiring to. There is 100 percent immediate vesting. That is 

also true of a number of the other proposals. 

Chairman ANDREWS. Yeah, I want to be clear on that, that the 

proposal is that the minute you put a dollar in that account, it is 

yours. 

Mr. IWRY. Correct. 

Chairman ANDREWS. Period. 

Mr. STEIN. That is the rule today for 401(k) plans with your 

money. 

Chairman ANDREWS. Yes. 

Mr. STEIN. And the other thing that I think is interesting in response to this point is when ERISA was enacted there a number 

of people who testified that we should have immediate vesting. 

Even back in 1974, there were people advocating for that. 

Ms. DUDLEY. If I could just add one thought, that you have to 

be very sensitive to the cost for small employers. In fact, if you 

make the vesting requirement too low, you can actually result in 

fewer matching contributions. Some small employers in particular 

may not even be able to afford it, so they just will not add a matching contribution whereas if the vesting schedule is something more 

like 3 years or 2 years or 5 years, they are much more likely to 

have a matching contribution, and where employees do typically 

stay that length of time, then people will end up with more money. 

Chairman ANDREWS. The gentleman’s time has expired. 

I want to make sure we get to Mr. Tierney for his questions, and 

then we will adjourn the hearing. 

But Mr. Tierney is recognized for 5 minutes. 

Mr. TIERNEY. Good morning. 

Chairman ANDREWS. Is that your knee, John? [Laughter.] 

Mr. TIERNEY. Pretty much at this age. 

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Thank you, Mr. Chairman, for having the hearing. As well, I 

really do not want to take too long. 

Did any of you in these plans, which I have not had a great deal 

of time to go over yet, deal with any type of universal thrift savings 

plan, anything comparable to what we had? All of them did something on that basis? Does somebody just want to address the 

thought on that, and then I will call it a day on that? 

Mr. John, did you want to address it? 

Mr. JOHN. Well, our proposal does include something like a TSP2 

to make sure that we have a universal platform that is available 

for everyone, and that would especially be true of people who live 

in a central city location without major financial services presence 

or in some of the rural areas where they do not have quite the 

same availability of products. 

Likewise, however, it could also be handled by a nonprofit consortium somewhat similar to a corporate central credit union or 

something along that line. It could be handled by a for-profit consortium or any variation in there, but the key to us is to make sure 

that it is set up so that every worker who wants to have an account 

does have the account and at a price that makes it reasonable to 

have. 

Mr. CALABRESE. The universal 401(k) plan, you know, that I described also relies on a clearinghouse, and one reason I just want 

to add is that, you know, we see that also as a way of reducing the 

burden on employers because if you are going to ask every employer to forward, you know, the payroll-deducted saving of the 

workers who are not, you know, otherwise in retirement plans, it 

is much easier, you know, if it is all going to the same place and 

out from there, you know, and there could be behind that clearinghouse a number of different platforms, whether they are, you know, 

like TSP, a contracted investment management. You know, that 

administration could be contracted or there could be several different options, but we would like to make the burden on the employer as simple and straightforward for the employer as possible. 

Mr. TIERNEY. Okay. Well, thank you all very much. 

Thank you, Mr. Chairman. 

I appreciate that, and we appreciate your materials as well 

which we will read. 

Chairman ANDREWS. I thank my colleagues. 

I thank the panel for very thoughtful, very comprehensive testimony. 

My intention from here is to take the good work that you have 

done, probably ask more questions about it. I think it is very encouraging that we have the convergence of views that we do. Obviously, some of the issues that arise are outside the committee’s jurisdiction, within that of the Ways & Means Committee, but the 

fact that Mr. Neal and Mr. English are already thinking along 

these lines is very encouraging. 

You know, the best pension policy in this country has been made 

with very broad bipartisan support. The Portman-Cardin efforts of 

the last 10 years, the Retirement Act of 2006 were very broadly 

supported. That is the template that I would like to try to follow 

here, that we could build a very broad consensus between the two 

parties, between the House and the Senate, and try to get someVerDate 0ct 09 2002 09:56 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00075 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\HELP\110-71\38669.TXT HBUD1 PsN: DICK
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thing done that would address the needs of the people we have 

talked about here this morning. 

Your contribution has been very, very important, and we appreciate it very much. 

Mr. Kline, did you have any closing comments? 

Mr. KLINE. Thank you. 

Chairman ANDREWS. We thank the witnesses. 

I do have to read. As previously ordered, members will have 14 

days to submit additional materials for the hearing record. Any 

member who wishes to submit follow-up questions in writing to 

witnesses should coordinate with the majority staff within 7 days. 

Without objection, the hearing is adjourned. Thank you. 

[Statement of the U.S. Chamber of Commerce submitted by Mr. 

Andrews follows:]

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[Whereupon, at 11:44 a.m., the subcommittee was adjourned.]

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