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S. HRG. 112–812 

THE POWER OF PENSIONS: BUILDING A STRONG 

MIDDLE CLASS AND STRONG ECONOMY 

HEARING 

OF THE

COMMITTEE ON HEALTH, EDUCATION, 

LABOR, AND PENSIONS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON

EXAMINING PENSIONS, FOCUSING ON BUILDING A STRONG MIDDLE 

CLASS AND STRONG ECONOMY 

JULY 12, 2011 

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

( 

Available via the World Wide Web: http://www.gpo.gov/fdsys/ 
COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS 

TOM HARKIN, Iowa, Chairman 

BARBARA A. MIKULSKI, Maryland 

JEFF BINGAMAN, New Mexico 

PATTY MURRAY, Washington 

BERNARD SANDERS (I), Vermont 

ROBERT P. CASEY, JR., Pennsylvania 

KAY R. HAGAN, North Carolina 

JEFF MERKLEY, Oregon 

AL FRANKEN, Minnesota 

MICHAEL F. BENNET, Colorado 

SHELDON WHITEHOUSE, Rhode Island 

RICHARD BLUMENTHAL, Connecticut 

MICHAEL B. ENZI, Wyoming 

LAMAR ALEXANDER, Tennessee 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

RAND PAUL, Kentucky 

ORRIN G. HATCH, Utah 

JOHN MCCAIN, Arizona 

PAT ROBERTS, Kansas 

LISA MURKOWSKI, Alaska 

MARK KIRK, Illinois 

DANIEL E. SMITH, Staff Director 

PAMELA SMITH, Deputy Staff Director 

FRANK MACCHIAROLA, Republican Staff Director and Chief Counsel 

(II) 
C O N T E N T S 

STATEMENTS 

TUESDAY, JULY 12, 2011 

Page 

COMMITTEE MEMBERS

Harkin, Hon. Tom, Chairman, Committee on Health, Education, Labor, and 

Pensions, opening statement ............................................................................... 1 

Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming, opening 

statement .............................................................................................................. 3 

Prepared statement .......................................................................................... 10 

Franken, Hon. Al, a U.S. Senator from the State of Minnesota .......................... 61 

WITNESSES

Oakley, Diane, Executive Director, National Institute on Retirement Security, 

Washington, DC ................................................................................................... 12 

Prepared statement .......................................................................................... 13 

Stephen, Christopher T., Esq., Employee Benefits Legislative Counsel and 

Senior Associate Director, Government Relations Department, National 

Rural Electric Cooperative Association, Arlington, VA ..................................... 19 

Prepared statement .......................................................................................... 21 

Bertheaud, Edmond P., Jr., Chief Actuary and Director of Corporate Insurance, The DuPont Company, Wilmington, DE .................................................. 47 

Prepared statement .......................................................................................... 48 

Marchick, David M., Managing Director, Carlyle Group, Washington, DC ....... 53 

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

ADDITIONAL MATERIAL 

Statements, articles, publications, letters, etc.: 

Schaitberger, Harold A., General President, International Association of 

Fire Fighters ................................................................................................. 75 

VanDerhei, Jack, Ph.D., Research Director, Employee Benefit Research 

Institute (EBRI) ............................................................................................ 76 

The American Council of Life Insurers (ACLI) .............................................. 88 

The American Society of Pension Professionals & Actuaries (ASPPA) ........ 92 

The U.S. Chamber of Commerce ..................................................................... 100 

The Tower Watson July 2011 Insider Newsletter Report ............................. 104 

Response to questions of Senator Enzi by: 

Diane Oakley ............................................................................................. 108 

Christopher T. Stephen, Esq. ................................................................... 113 

Response to questions of Senator Hagan by Diane Oakley .......................... 117 

Response to questions of Senator Enzi and Senator Hagan by David 

Marchick ........................................................................................................ 117 

Letters: 

American Benefits Council ....................................................................... 118 

The ERISA Industry Committee .............................................................. 136 

(III) 

(1) 

THE POWER OF PENSIONS: BUILDING 

A STRONG MIDDLE CLASS AND 

STRONG ECONOMY 

TUESDAY, JULY 12, 2011 

U.S. SENATE, 

COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS, 

Washington, DC. 

The committee met, pursuant to notice, at 2:35 p.m. in Room 

430, Dirksen Senate Office Building, Hon. Tom Harkin, chairman 

of the committee, presiding. 

Present: Senators Harkin, Hagan, Merkley, Franken, and Enzi. 

OPENING STATEMENT OF SENATOR HARKIN

The CHAIRMAN. The Committee on Health, Education, Labor, and 

Pensions will please come to order. I want to welcome everyone to 

the latest in our series of hearings focusing on retirement security. 

Today we are going to take a close look at the important role pensions can play in building a strong and vibrant middle class, both 

in terms of the economic security that they provide to retired 

Americans and because of the role they play in growing our Nation’s economy and creating jobs. 

This hearing we called the Power of Pensions because traditional 

pensions, defined benefit pensions, really are very powerful. They 

have the power to afford millions of middle class families the opportunity to feel secure in retirement, to enjoy their older years 

without being afraid that their money is going to run out. Retired 

Americans need to know that they can get that check every month 

for as long as they live. That is real retirement security. Plus, studies show that people with pensions are less likely to wind up living 

in poverty. 

Pensions are a powerful economic tool also for employers. They 

have proven to significantly increase retention. Of course, that reduces costs, improves productivity, leads to higher returns. Employers can also use pensions to get people a much cheaper retirement benefit than a 401(k). That’s because pensions typically have 

a better return on their investments and they can take advantage 

of economies of scale to keep down the management fees. So, in 

short, pensions are a better bang for the buck. 

But I believe perhaps one of the most overlooked powers of pensions is the power to grow our economy. There is somewhere between $6 and $9 trillion in the pension system. Now, those dollars 

are not put in a shoe box someplace. They are not buried underground. Those dollars are invested back in the economy, and they 
2 

go toward developing, in many cases, most cases, long-term development for our country—technology, building roads, bridges, and 

schools. Many communities go to pension funds to borrow the 

money that they need for infrastructure projects; good, solid, longterm investments. 

They also invest money in businesses to get them off the ground, 

to fuel innovation, job creation. So I’ve often said, after looking at 

all this, that pensions really are the grease that keeps the economic 

engine running pretty well. 

But despite all of the economic benefits of pensions, fewer and 

fewer people are earning a new benefit every year. Now, most people don’t have any retirement plan at all, let alone a pension. And 

millions of Americans are seeing their retirement dream slip 

through their fingers. Our hearings before this have pointed out 

that a quarter of workers do not have any meaningful retirement 

savings at all, none. One out of every four working Americans have 

nothing, zero. 

Nearly half of the oldest baby boomers, those that are 65 this 

year, are at a risk of not having sufficient resources to pay for basic 

retirement expenditures and uninsured health care costs. That’s 

one out of every two. In other words, they’re going to run out of 

money, basically, is what’s going to happen before they die. 

In September, this committee heard testimony that the gap between what people need for retirement and what they actually 

have is somewhere between $4.6 and $6.6 trillion. I don’t think it 

has to be like that. We can put a retirement system in place that 

offers the promise that if you work hard and play by the rules, you 

have an opportunity to ensure your later years and live with dignity and financial independence. That will go a long way toward rebuilding our middle class, and it will go a long way toward finding 

the money that we need for long-term growth and economic stability, and that’s why this committee has been holding hearings on 

retirement security. 

We’re taking a hard look at the private retirement system, trying 

to figure out how we can make it better, how to work for every 

American. I’ll be the first to admit, it’s not easy. I don’t have all 

the answers. But I think we’re going to have to make some bold 

changes. That means taking the best of what both 401(k)s and pensions have to offer. 

Earlier this year, this committee heard testimony about some of 

the things from 401(k)s that have worked, like automatic enrollment, simplification, transparency. Today, hopefully we’re going to 

hear about some of what has worked so well for defined benefit 

plans, giving people certainty that they’re going to get a check in 

retirement, making sure that they are being prudently and professionally managed. 

We have an excellent panel of witnesses. I’m looking forward to 

all of your testimony. I thank you all for being here. There’s so 

much that we need to learn about this important topic. I hope 

those in the academic and research communities will continue to 

look at the economic benefits of pension plans so that lawmakers 

here in Washington have the information they need to make smart 

policy decisions. 
3 

I’m also looking forward to working with my colleagues on this 

committee in the search for a way to solve the retirement crisis, 

and that’s what it is, a retirement crisis. When one out of four 

don’t have anything, when the baby boomers, they say about half 

of them will not have enough money to last them through the years 

until they die, we have a crisis out there. 

Retirement issues have always been an area of great bipartisan 

interest, so there’s a real opportunity to work together to improve 

retirement security for families all across America, and I’m confident that the hearing today will give us a lot to think about. And 

again, I thank all of you for taking the time to be here today. 

And with that, I’ll recognize Senator Enzi. 

STATEMENT OF SENATOR ENZI

Senator ENZI. Thank you, Mr. Chairman. 

Over the past couple of years we’ve looked at various systems 

within our Nation’s retirement security system. Back in February, 

we looked at the defined contribution systems, specifically at 401(k) 

and Individual Retirement Accounts, and last year we looked at the 

multiemployer pension system. Today we will review the state of 

our defined benefit retirement system known by many as the traditional pension. 

Looking back at statistics compiled by the Department of Labor 

and the Pension Benefit Guaranty Corporation, the height of the 

traditional defined benefit plan occurred in the mid-1980s, when 

there were more than 112,000 plans that were counted by the 

PBGC. 

By 2008, that number shrunk to a little bit more than 27,000 

plans, and I’m sure that the economic downturn caused that number to go down even further. More sobering are the statistics of traditional defined benefit plans that have 100 or more participants, 

the medium to large-size plans. According to the Department of 

Labor, there are only 9,500 of these plans left. 

We also have to keep in mind that when companies promise too 

much and can’t maintain those promises, then those pensions get 

dumped onto the PBGC. The number of legacy industry companies 

that tried to game the system or promised more than they could 

shoulder led us to the passage of the Pension Protection Act in 

2006 in order to shore up the PBGC’s insurance trust fund. Looking back at the beginning of 2008, nearly all defined benefit plans 

were coming close to being 100 percent fully funded. However, 

since that time, the number of pension plans that dropped to less 

than 90 percent funded has increased, and the PBGC’s high deficits 

are back. 

Through the years I’ve been a supporter of the traditional defined benefit plan system as it forms one of the key legs of our 

three-legged stool of retirement system, along with the 401(k)s, 

IRAs and Social Security. I also recognize that if people do not save 

enough through their 401(k)s and IRAs for retirement, then these 

people will place a greater strain on our very shaky Federal entitlement programs. The Congressional Budget Office tells us that 

these entitlement programs are currently not fiscally sustainable 

programs, especially in light of all the anticipated enrollees stemming from the President’s health care law. 
4 

However, we have to be realistic. The private sector traditional 

defined benefit system is going toward extinction. The system has 

become too burdensome, too complex, too volatile, and too costly for 

companies to maintain. As an example of the complexity of the systems, Hillside Family of Agencies, a nonprofit organization that 

provides services to the juvenile and adoption systems, put together 

a 6-page chart showing the number of notices to employees required by Federal employee benefit laws. I request unanimous consent to have this chart entered in the record. 

[The information referred to follows:] 
5 

Law Notice Requirement Notice Timing (based on calendar plan year) 

Consolidated Omnibus COBRA election notice Plan administrator must provide the election notice 

Reconciliation Act (COBRA) within 14 days after being notified by the employer 

(continued) or qualified beneficiary of the qualifying event (or 

44 days after qualifying event if the employer is 

also the plan administrator). 

Notice of unavailability of COBRA Plan administrator must provide this notice within 

14 days after being notified by the individual of the 

qualifying event (or 44 days after qualifying event if 

employer is also the plan administrator). 

Notice of early termination of COBRA Plan administrator must provide as soon as 

coverage practicable following the plan administrator's 

determination that coveraae will terminate. 

Notice of insufficient payment Plan administrator must provide reasonable period 

of time to cure deficiency before terminating 

COBRA coveraoe (e.o., 30-dav orace period). 

Premium charge notice Plan administrator should provide at least one 

month prior to effective date. 

COBRA conversion notice (1BO-day Plan administrator must provide conversion 

letter) information to COBRA participants 6 months prior 

to the termination of their COBRA coveraoe. 

Health Insurance Portability Notice of special enrollment rights Must provide notice at or before the time an 

and Accountability Act employee is initially offered the opportunity to enroll 

(HIPAA) in the group health insurance plan. 

General notice of pre-existing condition Must provide notice as part of any written 

exclusion application materials distributed for enrollment. If 

the plan does not distribute such materials, the 

notice must be provided by the earliest date 

following a request for enrollment that the plan, 

acting in a reasonable and prompt fashion, can 

provide the notice. 

Individual notice of pre-existing Must provide notice as soon as possible following 

condition exclusion the determination of creditable coveraoe. 

HIPAA portability (certificate of Must be provided automatically when covered 

creditable coverage) individuals lose group health plan coverage, 

become eligible for COBRA coverage, and when 

COBRA coveraoe ceases. 

HIPAA privacy and security - Notice of Must be provided when a participant enrolls in 

privacy practices health plan coverage, upon request, and within 60 

days of a material revision to the notice. At least 

once every three years, participants must be 

notified about the availability of the Notice of 

privacy practices. 

HIPAA privacy and security - Notice of Covered entities (includes Hillside) and their 

breach of unsecured PHI business associates must provide notification 

following a breach of unsecured PHI without 

unreasonable delay and in no case later than 60 

days followina the discoverY of a breach. 

Well ness program disclosures - Notice Must disclose the availability of an alternative 

of alternative standard standard in all materials describing wellness 

program. 
6 

Law Notice Requirement Notice Timing (based on calendar plan year) 

Childrens Health Insurance Annual CHIP notice First annual notice must be sent by the first day of 

Program Reauthorization the first plan year beginning after 214/10 (1/1/11). 

Act (CHIPRA) Ongoing notice requirement each 1/1. Must be 

sent as a separate document, cannot be bound in 

enrollment materials, must be sent to all 

employees, not just those enrolled in the health 

plan. 

Mental Health Parity and Notice of cost exemption Plans claiming the increased cost exemption must 

Addiction Equity Act promptly notify the appropriate federal and states 

(MHPAEA) agencies, plan participants and beneficiaries. 

Michelle's Law Michelle's law notice Must include notice with any notice regarding a 

rElquirement for certification of student status. 

Newborns' and Mothers' NMHPA notice Must include notice within SPD (or SMM) 

Health Protection Act timeframes. 

_{NMHPA\ 

Women's Health and Cancer WHCRA notice Must provide notice upon enrollment in the plan 

Rights Act (WHCRA) and annually thereafter. 

Uniformed Services USERRA notice Must provide notice by posting where other 

Employment and employee notices are customarily posted, or 

Reemployment Rights Act provide to employees by alternate means. 

(USERRA) 

Medicare Part 0 Disclosure notices for creditable or non- Notices need to be sent to active health insurance 

creditable coverage plan participants and their spouses, and retirees 

and their spouses, who are Medicare eligible at the 

following times: 

· Prior to each annual Medicare Part D 

election period; 

· Prior to an individual's initial enrollment 

period for Part D; 

· Prior to the effective date of coverage for 

any Medicare eligible individual that joins 

the plan; 

· Whenever prescription drug coverage 

ends or changes so that it is no longer 

creditable or becomes creditable; and 

· Upon request by a Medicare Part D 

eligible individual. 

Note - because employers have no way of 

knowing whether employees' eligible dependents 

may be Medicare-eligible, it is recommended that 

this notice be sent to all active employees. Notice 

must be a separate document or if bound in other 

materials there must be a prominent reference to 

the notice in 14 point font on the first page. 

Medicare Part 0 - Retiree Retiree drug subsidy application At least 90 days before the beginning of each plan 

Drug Subsidy year, plan sponsors must apply for retiree drug 

subsidy, unless CMS approves request for 

extension. 

Medicare Secondary Payer MSP reporting requirements Quarterly report requirement to the CMS. 

(MSP) 
7 

Law Notice Requirement Notice Timing (based on calendar plan year) 

Family Medical Leave Act General notice Must be posted conspicuously (it can be done 

(FMLA) electronically, as long as it's accessible to 

employees and applicants). This notice must also 

be distributed to employees, either as part of the 

employee handbook or other written materials or 

as part of the paperwork Qiven to each new hire. 

Eligibility notice Must be provided to employees who request FMLA 

leave. The notice must indicate whether the 

employee is eligible for leave; if not, the notice 

must state at least one reason why the employee is 

ineligible (e.g., the employee has not yet worked 

for the employerfor 12 months). This notice must 

be provided within five business days after the 

employ.ee's r!l..quest. 

Rights and responsibilities notice Provides a variety of information about FMLA 

leave, including whether the employer will require a 

medical certification and/or fitness for duty 

certification, payment of healthcare premiums, 

using paid leave, and more. This notice must be 

provided within five business days after the 

employee's request. 

Designation notice Either designates time off as FMLA leave or 

notifies the employee that time off will not be 

designated as FMLA leave. For FMLA leave, the 

notice must indicate how much leave will be 

counted against the employee's 12-week 

entitlement. This notice must be provided within 

five business days after the employer has obtained 

the necessary information to make the 

determination. 

Genetic Information Non· Health plan provisions No general notice requirement. To satisfy the 

Discrimination Act (GINA) requirements for the research exception, plans 

must provide participants with a written request 

and must complete a Notice of Research Exception 

and file it with the designated federal agency. 

Employment provisions No general notice requirement. Individual notice 

required if genetiC information used for toxic 

substance monitoring or for certain disclosures of 

genetic information. 

Employee Retirement Qualified Medical Child Support Orders Upon receipt of medical child support order, plan 

Income Security Act (ERISA) (QMSCOs) - Medical child support must promptly issue notice, including plan's 

order notice procedures for determining its qualified status. 

Within a reasonable time after its receipt, plan must 

also issue separate notice as to whether the 

medical child support order is qualified. 

Qualified Medical Child Support Orders Within 20 days after the date of notice or sooner, if 

(QMSCOs) - National medical support reasonable, plan must send Part A to NYS agency. 

notice Plan must promptly notify affected persons of 

receipt of notice and procedures for determining its 

qualified status. Plan must within 40-business days 

after its date or sooner, if reasonable, complete 

and return Part B to NYS agency and must provide 

required information to affected persons. 
8 

Federal Notice Requirements - Health and Welfare & Retirement Benefits 

Law Notice Requirement Notice Timing (based on calendar plan year) 

Employee Retirement Income Summary plan descriptions (SPDs) Plan must provide SPD automatically to 

Security Act (ERISA) participants within 90 days of becoming 

covered by the plan. Updated SPD must be 

furnished every 5 years if changes made to 

SPD information or plan is amended. 

Otherwise, must furnish every 10 years. 

Summary of material modifications (SMMs) Plan must provide SMM automatically to 

participants within 210 days after the end of 

the plan year in which the change is adopted. 

If benefits or services are materially reduced, 

participants must be provided notice within 60 

days from adoption; or, where participants 

receive such information from the plan 

administrator at regular intervals of not more 

than 90 days, notice of materially reduced 

benefits or services must be provided within 

the reQular internal. 

Plan documents Plan must provide copies of plan documents 

no later than 30 days after a written request. 

Notification of benefit determination (claims Notice requirements vary depending on type of 

notices, adverse benefit determinations, plan and type of benefit claim involved. 

appeals procedures) 

Summary annual reports (SARs) Must provide SAR automatically to participants 

within 9 months after end of plan year, or 2 

months after due date for filing Form 5500 

(with approved extension). 

Summary of material reduction in covered Must provide within 60 days of adoption of 

services or benefits material reduction in group health plan 

services or benefits. 

Federal Notice Requirements - Retirement Plans 

Law Notice Requirement Notice Timing (based on calendar plan year) 

Employee Retirement Income Special tax notice (402(Q Notice) Must be provided to participants 30 days prior 

Security Act (ERISA) to taking a distribution/rollover (although the 

participant can waive 30-day notice period). 

Periodic benefit statements DC Plans - quarterly (for participant directed 

accounts) or at least once per year (for nonparticipant directed accounts). 

DB Plans - at least once every three years, or 

notice provided at least once per year 

informing participants on how to obtain benefit 

information, and upon request (up to one 

request per year). 

Qualified domestic relations orders Plan, upon receipt of the DRO, must promptly 

(QOROs) issue the notice (including the plan's 

procedures for determining its qualified 

status). The second notice, regarding whether 
9 

Senator ENZI. We also have three Federal agencies overseeing 

the defined benefit system, the Employee Benefit Security Administration at the Department of Labor, the PBGC, and the Internal 

Revenue Service. One only has to look at the regulatory dockets for 

the Department of Labor’s fiduciary rule proposal, the IRS’ proposal for hybrid pension plans, or the PBGC rule proposal on plant 

closures to recognize that the agencies do not work in tandem but 

each have their own agendas for how the retirement system should 

be run. This is not only detrimental to the retirement system, but 

it also discourages the business community from participating in 

the voluntary retirement systems that we have today. I’m very disappointed that there was not a greater inclusion of retirement employee benefit issues by these agencies in carrying out the Presi-
10 

dent’s recent Executive order to reduce regulatory burden and overlap. 

There’s little doubt about the power of retirement dollars in our 

economy. The Investment Company Institute recently reported that 

$18.1 trillion of U.S. retirement assets are invested in our economy. 

However, the greatest share of that comes from 401(k) and Individual Retirement Accounts and not from traditional pensions. 

Mr. Chairman, I thank you for holding this hearing. I’m looking 

forward to hearing from our witnesses today on what can or should 

be done to help encourage greater participation in the private sector and our retirement system, and whether the traditional defined 

benefit system can be saved or is it indeed heading for extinction. 

Unfortunately, I will not be able to stay for all of the hearing because I had a number of things that were already scheduled before 

this, and many of them involve Wyoming people. So I’d like to 

thank the witnesses for taking the time out of their jobs and lives 

to be with us here today. 

Ms. Oakley, thank you for sharing on behalf of the Institute. 

In addition, I’d like to thank Mr. Bertheaud, who I invited. He’s 

with the DuPont Company, which has an excellent pension plan, 

and he’s also representing members of the American Benefit Council. 

I also would like to acknowledge Mr. Stephen with the Rural 

Electric Cooperatives as we did a lot of work with the co-ops during 

passage of the Pension Protection Act in 2006. 

And finally, I understand that Mr. Marchick’s family is from 

Cheyenne, WY. 

So we invite all of you, of course, to come to Wyoming. 

I do have questions for the record for each witness, and I thank 

the Chairman for holding this hearing. 

[The prepared statement of Senator Enzi follows:] 

PREPARED STATEMENT OF SENATOR ENZI

Mr. Chairman, in addition to my full statement above I would 

like to supplement my statement to further illustrate how we got 

to where we are with our traditional defined benefit system. 

For its July 2011 newsletter Insider, Towers Watson released a 

report entitled, ‘‘Prevalence of Retirement Plan Types in the Fortune 100 in 2011: Account-Based Benefit Plans Dominate.’’ I am 

submitting the entire Towers Watson report for the committee’s 

hearing record. This report looks at the types of pension plans held 

by Fortune 100 companies since 1985. Towers Watson found that 

in 1985 there were 90 out of the 100 companies sponsoring defined 

benefit plans with only 10 companies offering a defined contribution or 401(k)-type plans. Even in 1998, these figures were the 

same—90 companies sponsoring defined benefit plans and 10 companies sponsoring defined contribution plans. However, in 2011, 

there were only 13 companies that offered a defined benefit plan 

to new hires while 70 companies offered a defined contribution 

plan. The change in statistics is a clear indication that defined benefit plans are heading towards extinction. 

The reasons cited by Towers Watson for the decline in defined 

benefit plans include, ‘‘a desire to reduce overall retirement costs, 

. . . greater mobility in the workforce, the popularity of account- 
11 

based designs with employees, government and accounting regulations, market trends and board pressures, and a belief that such 

a shift reduces financial risk.’’ 

Based upon this list, it is clear that fundamental changes must 

be made to the system if we ever hope for defined benefit pensions 

to make a comeback. Hybrid and cash-balance pension plans might 

be a good way to go but Towers Watson found that there was a significant decline in the number of companies willing to sponsor hybrid pension plans. The regulatory uncertainty and regulatory burdens make these plans unappealing as well. 

In my statement above, I mention three regulatory initiatives by 

the three Federal agencies with direct oversight of the defined benefit pension system. To demonstrate the concerns of the business 

community with the regulatory system and its uncoordinated nature, I am submitting the following comment letters from the business community: 

(1) Letter from the American Society of Pension Professionals 

and Actuaries dated January 12, 2011, in response to a request for 

comment on proposed additional rules regarding hybrid retirement 

plans issued by the Internal Revenue Service on October 19, 2010, 

(REG–132554–08); 

(2) Letter from the American Benefits Council dated February 3, 

2011, in response to a request for comment on proposed regulations 

addressing the definition of fiduciary issued by the Employee Benefits Security Administration of the Department of Labor on October 

22, 2010 (RIN1210–AB32); and 

(3) Letter from the ERISA Industry Committee dated November 

12, 2010, in response to a request for comment on proposed rules 

regarding liability for termination of single-employer plans: treatment of substantial cessation of operation issued by the Pension 

Benefit Guaranty Corporation on August 10, 2010 (RIN1212– 

AB20). 

[The above referenced information may be found in Additional 

Material.] 

Mr. Chairman, thank you again for holding this hearing and 

bringing this distinguished panel of witnesses together. 

The CHAIRMAN. Thank you very much, Senator Enzi. 

Again, we’re fortunate to be joined by the distinguished panel. 

Diane Oakley, executive director of the National Institute on Retirement Security. Before joining the Institute, Ms. Oakley served 

as the senior policy advisor to Congressman Earl Pomeroy and held 

leadership positions with TIAA–CREF, a leading financial services 

provider. 

Chris Stephen is an employee benefits legislative counsel and 

senior associate director for the National Rural Electric Cooperative Association. Prior to joining NRECA in 2001, Mr. Stephen 

worked for Baker and Hostetler, LLP, the U.S. Attorney’s Office, 

and the Office of Counsel to the President. 

Mr. Bertheaud is the chief actuary and director of Corporate Insurance for DuPont, where he leads the in-house actuarial consulting team that oversees global pension funding and accounting. 

He also serves as DuPont’s representative on the policy board of directors of the American Benefits Council. 
12 

Finally, Dave Marchick, managing director of the Carlyle Group. 

Prior to joining Carlyle, Mr. Marchick was a partner and vice-chair 

of the International Practice Group at Covington and Burling. 

All of your statements will be made a part of the record in their 

entirety. I’d like to ask if you could sort of sum it up in 5 minutes 

so we could have a discussion; I would certainly appreciate that. 

We’ll start with Ms. Oakley and work across. 

Ms. Oakley, again, welcome, and if you can sum up in 5 to 7 minutes, I’d appreciate it. 

STATEMENT OF DIANE OAKLEY, EXECUTIVE DIRECTOR, NATIONAL INSTITUTE ON RETIREMENT SECURITY, WASHINGTON, DC 

Ms. OAKLEY. Chairman Harkin, Ranking Member Enzi, Senators 

on the committee, I’m the executive director of the National Institute on Retirement Security. NIRS and all the research I’m going 

to talk about today is available on our Web site at nirsonline.org, 

and Americans, we found, are very anxious about retirement. 

Eighty-four percent of Americans are concerned about their retirement prospects and worry that stock market volatility makes it impossible for them to accurately predict what they need in retirement savings. 

Americans also believe that the disappearance of traditional pensions makes it harder to achieve the American dream. This occurs 

at a time when 15 percent of workers are covered by a defined benefit plan, and yet we still find in our survey that 81 percent of 

Americans believe that all workers ought to have access to a defined benefit pension so that they can be independent in retirement. They appreciate that pensions deliver what I’d like to call 

high-fives all around. They deliver $5.4 trillion in assets invested 

for the future. We know that they also provide 5 million Americans 

sufficiency in terms of their income so that they’re not subject to 

poverty. 

It also supports 5.3 million American jobs as retirees spend those 

monthly checks in their communities, and they do it at a cost that’s 

nearly 50 percent less than what would happen if you tried to provide the same benefits in a defined contribution plan. 

In Wyoming, when a retiree receives a payment such as the $320 

million disbursed by the public system in Wyoming, they use it to 

purchase local goods and services. For this hearing, NIRS conducted a very preliminary analysis using our Pension Economics 

Model of the $320 billion in benefits paid from both private and 

public pensions in 2009. Assuming that each dollar of retirement 

income supported $2.36 in economic activity, we know that pensions had an economic impact of more than $750 billion and supported those 5.3 million jobs here in the United States. 

Pension payments are particularly vital to small communities. 

For example, Iowa PERS checks go to retirees who number 10 percent of the active payroll in Madison County. Also, for example, $2 

million in pension checks go from the Colorado PERA to its employees in rural Costilla County, and that comprises 35 percent of the 

earned income in that county. And just this morning, CALPERS released a study of its economic impact of the $12 billion in benefit 
13 

payments throughout California, and in Sierra County those payments increased the gross regional product by 73⁄4 percent. 

At the end of the first quarter of 2011, assets in public plans— 

and private plans—stood at about $5 trillion, recouping most of the 

losses that occurred in 2009 and 2006. The numbers point to the 

role that pensions also play in capital development, acting as an 

intermediary in challenging times, giving our market steps and liquidity. 

We also know from our pension factor research that Americans 

see their parents being kept out of poverty. In fact, 5 million older 

Americans are kept from being considered poor or near poor because of the pension, and therefore less reliant on their families 

and on government assistance. The pension incomes received by 

older American households keep hundreds and thousands of retirees from experiencing food, shelter, or health care hardships. Older 

Americans with pensions, in fact 1.35 million of them, are not on 

our rolls for means-tested public assistance. This saves government 

$7.3 billion. 

We also know that pensions have built-in savings. They’re more 

efficient than defined contribution plans. And NIRS has determined that with regard to the savings that individuals get by using 

a pension for protecting against running out of money, if you 

looked and tried to take your 401(k) plan over your life expectancy, 

you’d have a 50/50 shot of running out of money. Pensions can save 

people over $100,000 more that they should be saving for retirement to assure that they don’t run out of money in retirement. 

They also end up delivering benefits or investment returns much 

more significantly than the private sector does individually with individuals making those investment decisions. If you assume at 

least 100 basis points added return in a defined benefit plan, the 

pensions end up coming up with a 26 percent cost advantage when 

that’s compounded over someone’s working career and retirement 

years. 

In short, we know Americans are anxious about their retirement, 

yet our Nation faces a good deal of economic challenges. Pensions 

are one place where the economy delivers for American households, 

for employers, for our communities and our financial markets. They 

should remain a centerpiece of our retirement income policy, and 

I thank you very much, Mr. Chairman, Senator Enzi, for examining 

this issue. 

[The prepared statement of Ms. Oakley follows:] 

PREPARED STATEMENT OF DIANE OAKLEY

SUMMARY

Americans are highly anxious about retirement. Some 84 percent of Americans 

are concerned about their retirement prospects, while an overwhelming majority believes the Nation’s retirement infrastructure is crumbling and that stock market 

volatility makes it impossible to predict retirement savings. Simultaneously, the Nation faces severe fiscal challenges with the economy struggling to recovery, budgets 

under pressure, and millions of Americans are looking for jobs. 

Americans also believe that the disappearance of pensions has made it harder to 

achieve the ‘‘American Dream.’’ In the1980s, some 38 percent of all private sector 

employees were covered by pensions, and only 15 percent have pensions in 2009. 

Yet, pensions are the most cost-efficient means for delivering a modest, stable income for older Americans so that they can be financially secure. In fact, 81 percent 
14 

of Americans believe all workers should have access to a pension so they can be 

independent in retirement. 

Pensions Strengthen National and Local Economies 

The benefits provided by pensions reaches beyond the retirees, as they buy goods 

and services. For this hearing, NIRS conducted a very preliminary analysis using 

its Pensionomics methodology on the $320 billion in pension benefits paid from 

State and local pensions and private sector pensions. The numbers, while still 

rough, and the finding from 2006 data that each dollar of income supported $2.36 

in economic activity, suggest that pensions: 

• Had a total economic impact of more than $756 billion. 

• Supported more than 5.3 million American jobs. 

• Supported more than $122 billion in annual Federal, State, local tax revenue. 

PENSIONS ENSURE RETIREMENT SELF SUFFICIENCY, PREVENT ELDER POVERTY

Pension income plays a critical role in reducing the risk of poverty and hardship 

for older Americans. The Pension Factor finds that pension income received by nearly half of older American households in 2006 was associated with: 

• 1.72 million fewer poor households and 2.97 million fewer near-poor households. 

• 560,000 fewer households experiencing a food hardship. 

• 380,000 fewer households experiencing a shelter hardship. 

• 320,000 fewer households experiencing a health care hardship. 

The rate of poverty for older households without pension income was six times 

greater than for households with pension. The billions of dollars in savings for public assistance due to pensions are significant given the fiscal pressures on government safety net programs across the country. 

Pensions Are the Most Economically Efficient Retirement Plan 

Due to their group nature, pensions possess ‘‘built-in’’ savings, which make them 

highly efficient retirement income vehicles, capable of delivering retirement benefits 

at a low cost to the employer and employee. NIRS research finds that a pension can 

deliver the same level of retirement income as an individual 401(k) type savings account at half the cost. 

Thank you Chairman Harkin, Ranking Member Enzi, and Senators on the 

Health, Education, and Labor Committee for the opportunity to testify today. I am 

Diane Oakley executive director of the National Institute on Retirement Security, 

or NIRS. NIRS is a not-for-profit research and education organization committed to 

fostering a deep understanding of the value of retirement security to employees, employers and the economy. Our work is available on our Web site www.nirsonline.org. 

Today, I would like to share our research regarding defined benefit (DB) pensions. 

I will focus on pension trends, how pensions fuel the American economy, how pensions ensure Americans can be self-reliant in retirement, and the economic efficiencies of pensions. 

Before I get into the details, let me say a few words on the current state of retirement security in America. 

For working American families, a key facet of the American Dream is to live in 

dignity and maintain financial independence in later years. Simply put, Americans 

do not want to be a financial burden for their families. Unfortunately, NIRS recent 

polling research finds that some 75 percent of Americans believe the disappearance 

of pensions has made it harder to achieve the American Dream. (Boivie, Kenneally, 

& Perlman, 2011) 

When examining private sector pension coverage trends over the past three decades, we find that fewer and fewer employees are participating in pensions. In the 

1980s, some 39 percent of private sector employees were covered by pensions, and 

this number has plummeted to 15 percent of private sector employees in 2009. 

(EBRI, 2011) 

NIRS research finds that traditional pensions are essential to ensuring self-sufficiency for middle class Americans. More specifically, pensions enable nearly 5 million older American households to stay above the poor or near poor threshold levels, 

and thereby avoid reliance on assistance from family or the government to meet 

their basic daily living expenses. 

Given the disappearance of pensions, it’s not surprising that our polling research 

also found that 84 percent of Americans are anxious about their retirement prospects. An overwhelming majority also believe the Nation’s retirement infrastructure 
15 

is crumbling and that stock market volatility makes it impossible to predict retirement savings. (Boivie, Kenneally, & Perlman, 2011) 

This high level of anxiety about retirement security is echoed by others. An Associated Press/LifeGoesStrong.com poll found that 89 percent of baby boomers are not 

convinced that they will be able to live in comfort in their later years. (AP/ 

LifeGoesStrong, 2011) Also, the 2011 Employee Benefits Research Institute Retirement Confidence Survey found confidence in retirement at a low point, with only 

13 percent of respondents feeling very confident about retirement. (EBRI—RCS, 

2011) 

The retirement savings shortfall for Americans is startling. The Center for Retirement Research at Boston College, calculated that the estimated national retirement 

income deficit facing American households is some $5.2 to $7.9 trillion. (Retirement 

USA, 2010) This retirement under funding for private sector workers could have significant negative impacts for individuals, the national economy, and struggling government budgets. 

Therefore, we applaud the committee’s careful examination of the role of pensions 

for middle class Americans and the broader economy. 

PENSIONS STRENGTHEN NATIONAL AND LOCAL ECONOMIES

The benefits provided by pension plans also have an impact that reaches well beyond the retirees who receive pension checks. Public and private pensions play a 

vital role in the national economy as well as in local economies across the country. 

The steady, monthly benefit payments offered by pension plans provides peace of 

mind and security for retirees. At the same time, the national and local economies 

benefit from the regular expenditures retirees. 

As Figure 1 illustrates, a retiree in Iowa, Wyoming or Colorado, who receives a 

benefit payment from their pension fund, spends the money on goods and services 

in her community, thus supporting the local economy and industries. For example, 

a retiree may purchase food at the local diner or grocery store, medical services at 
16 

their pharmacy or hospital, an automobile at the local dealership, clothing at the 

local mall, or tickets at the movie theatre. 

Pension payments are particularly vital to small communities and economies 

across the country where there is a lack of diverse local industries or where other 

steady sources of income may not be readily found. For example, the Colorado Public Employees Retirement Association made pension benefit payments of $2.1 million in 2009 to its retirees in rural Costilla County and those payments comprise 

35 percent of the earned income in that Colorado county. 

In 2006, NIRS conducted the first national economic impact analysis of pension 

expenditures based on public pensions. In Pensionomics (2009), NIRS calculated 

that each dollar of the over $151.7 billion in DB pension benefit expenditures made 

from State and local pension benefits in 2006 supported $2.36 in economic activity 

which: 

• Had a total economic impact of more than $358 billion. (Almeida & Boivie, 

2009) 

• Supported more than 2.5 million American jobs that paid more than $92 billion 

in total compensation to American workers. (Almeida & Boivie, 2009) 

• Supported more than $57 billion in annual Federal, State, local tax revenue. 

(Almeida & Boivie, 2009) 

• Nationally, had the largest economic impact in manufacturing, health care and 

social assistance, finance and insurance, retail trade and accommodations and food 

service sectors. (Almeida & Boivie, 2009) 

Traditional pensions also have large multiplier effects, especially from the viewpoint of each taxpayer dollar contributed to pensions as part of public employees’ 

compensation. Each dollar of the $64.5 billion public employers contributed to State 

and local pensions supported $11.45 in total economic activity. 

NIRS will update the Pensionomics report in early 2012 and we will be pleased 

to share a copy of the final report with the committee. For today’s hearing, we took 

a preliminary look at the latest data on 2009 expenditures made from State and 

local governmental pensions and single-employer private sector pension plans combined. These rough data suggest that public and private sector DB pensions: 

• Had a total economic impact of $756 billion. 

• Supported more than 5.3 million American jobs. 

• Supported more than $121.5 billion in annual Federal, State, local tax revenue. 

Additionally, one lesson from the recent recession and the sharp decline in the 

stock market values is that reliable sources of pension income may be especially important in stabilizing local economies. Comparing pensions to individual retirement 

accounts, we note that guaranteed pension income means retirees need not worry 

about reducing spending with every dip in the stock market. Thus, pensions are all 

the more important in times of financial crisis and economic instability. Pension expenditures play an important role in providing a stable, reliable source of income 

for the local economies in which their retirement checks are spent—and therefore 

help the national economy recover as well. 

It is also important to highlight the magnitude of pension assets. According to the 

Flow of Funds Accounts of the United States released by the Federal Reserve System on June 9, 2011, assets in Private Sector Retirement Funds and State and 

Local Government Employee Retirement Funds have almost reached their 2007 

year-end values, recouping losses that occurred as a result of the stock market collapse of 2008–9. At the end of the first quarter 2011, the value of financial assets 

in private sector defined benefit stood at $2.32 trillion and the value of financial assets held by public pension plans was $3.03 trillion. (BOG, 2011) 

In the 2 most recent years for which we have complete data (2008 and 2009), total 

contributions to pensions exceeded $350 billion. Amounts contributed break down by 

sector as follows: sponsors of pensions among the Fortune 1000 companies contributed $96.4 billion (Warshawsky, 2011), public sector employers contributed $168.9 

billion and public employees contributed $76.2 billion to their pension plans. 

(NASRA) 

These numbers call attention to one aspect of pensions and the economy that 

often is overlooked, pensions are critical to our Nation’s capital development. Because pension plans are long-term investors, they can play a critical intermediation 

role in the economy at the most challenging times giving our financial markets 

depth and liquidity. While other lenders may close their doors to many kinds of financing due to higher risks during periods of tightening credit, pension plans have 

continued to lend and invest in areas like venture capital that grow new companies. 

Their longer view gives financial markets patient capital that can wait for investment returns to be fully realized over long periods. Thus, pension plans are com-
17 

pensated with higher returns while still maintaining properly diversified investments in their portfolios. 

PENSIONS ENSURE RETIREMENT SELF SUFFICIENCY, PREVENT ELDER POVERTY

In addition to the economic benefits of traditional pension plans, they also are of 

great value to Americans. They provide peace of mind and self-sufficiency with a 

secure, predictable retirement income that cannot be outlived. 

Having pension income can play a critical role in reducing the risk of poverty and 

hardship for older Americans. In 2006, the mean annual pension income for elderly 

persons from their own employers was $15,784 and the mean pension income rose 

to $18,195 when pension income from a spouse was also counted. (Almeida & Porell, 

2009) 

NIRS research, The Pension Factor (2009), finds that pension income received by 

nearly half of older American households in 2006 was associated with: 

• 1.72 million fewer poor households and 2.97 million fewer near-poor households; • 560,000 fewer households experiencing a food hardship; • 380,000 fewer households experiencing a shelter hardship; • 320,000 fewer households experiencing a health care hardship. (Almeida & 

Porell, 2009) 

Overall, the rate of poverty for older households without pension income was six 

times greater than the rate among households that had income from a pension. 

(Almeida & Porell, 2009) 

Moreover, NIRS found that pensions reduce—and in some cases eliminate—the 

greater risk of poverty and public assistance dependence that women and minority 

populations otherwise would face. (Almeida & Pore11, 2009) 

For almost 71 percent of the pension recipients in 2006, the source either in whole 

(63.7 percent) or in part (7 percent) of their pension income was a pension sponsored 

by a private employer they worked for. A little more than 36 percent of pension recipients had all or some pension income come from a public pension they earned 

while employed by a State or local government. (Almeida & Porell, 2009) Retirement 

income from individual 401(k)-type DC accounts play a lesser role in meeting the 

retirement security needs of elderly Americans, who were more likely to be covered 

by a pension during their careers. Based on DC plan income from their former employers, only 5.1 percent of all persons age 60 and older had such income and the 

percentage with DC income increased to 7.2 percent when spouses’ DC plan income 

was counted. 

When older Americans with pensions are able to be self-sufficient in retirement, 

the financial burdens on governments ease. In 2006, 1.35 million fewer households 

received means-tested public assistance as a result of having pension income. This 

translated into a $7.3 billion savings in public assistance expenditures, which is 

about 8.5 percent of aggregate public assistance dollars received by all American 

households for the same benefit programs in that year. (Almeida & Porell, 2009) 

These impacts are significant, particularly given the pressures on safety net programs during the current fiscal crises experienced at all levels of government 

throughout the country. The American public sees the value that pensions give to 

their parents and grandparents today, and that could explain why some 81 percent 

of Americans believe that all workers should have access to a pension plan so they 

can be independent and self-reliant in retirement. (Boivie, Kenneally, & Perlman, 

2011) 

PENSIONS ARE THE MOST ECONOMICALLY EFFICIENT RETIREMENT PLAN

Pensions provide retirees and workers with a secure, predictable retirement income that cannot be outlived. One element of pensions that is not widely understood 

is their inherent economic efficiencies. Due to their group nature, pension plans possess ‘‘built-in’’ savings, which make them highly efficient retirement income vehicles, capable of delivering retirement benefits at a low cost to the employer and employee. NIRS research finds that a pension can deliver the same level of retirement 

income as an individual 401(k) type savings account at half the cost. (See Figure 

2) 

These savings derive from three principal sources. 

First, pensions better manage longevity risk, or the chance of running out of 

money in retirement. By pooling the longevity risks of large numbers of individuals, 

pensions avoid the ‘‘over saving’’ dilemma. Half of the retirees who plan on drawing 

down their savings in their 401(k) account over their life expectancy will run out 

of money. To protect against outliving their money, these individual workers should 

save more so they have a bigger nest egg when they start retirement. In fact, to 

assure an adequate retirement income over the ‘‘maximum life expectancy’’ one 
18 

would need about $100,000 more in a 401(k) account than what would be required 

in a pension. (Almeida & Fornia, 2008) Consequently, pension plans are able to do 

more with less. 

Second, because pensions, unlike the individuals in them, do not age, they are 

able to take advantage of the enhanced investment returns that come from a balanced portfolio throughout an individual’s lifetime. Financial advisors recommend 

that individuals gradually switch away from high risk/high return assets in their 

401(k) as they approach retirement as a way of avoiding the downside risk of losses 

in stock values, for example. Consistently, maintaining a well-diversified portfolio 

gives a DB pension a 5 percent cost advantage. (Almeida & Fornia, 2008) 

Third, professionally managed pensions achieve greater investment returns as 

compared with individual accounts. Research from the global benchmarking firm 

CEM, Inc. concluded that between 1988 and 2005 pensions showed annual returns 

180 basis points higher than DC plans. (Flynn & Lum, 2007) Watson Wyatt found 

that, between 1995 and 2006, large pensions outperformed DC accounts by 121 basis 

points. (Watson Wyatt 2008) Also, Morningstar compared returns from retail mutual 

funds with returns from traditional public pensions and found public plans outperformed by 3.22 percent. (Morningstar, 2007) A retirement system that achieves 

higher investment returns can deliver any given level of benefit at a lower cost. 

Over time assuming a 100 basis point advantage for DB pensions each year compounds to a 26 percent cost advantage for the traditional pension. (Almeida & 

Fornia, 2008) 

One can think of pensions as a buying club similar to Costco or BJ’s. These buying clubs add value by operating on a large scale and using professionals who know 

markets to find high quality products at the lowest price for customers. Similar to 

buy clubs, pensions operate on a scale much larger than the average size individual 

401(k) account plan, and also utilize professionals to manage pension assets. As a 

result, pensions can deliver a secure retirement income at a lower cost thanks to 

their economic efficiencies, professional asset management, lower costs, and better 

investment returns. 

These findings are contained in NIRS’ report, A Better Bang for the Buck; The 

Economic Efficiencies of Defined Benefit Pension Plans. Again, this analysis finds 

pensions can offer the same retirement benefit at close to half the cost of an indi-
19 

vidual account. Specifically, the cost to deliver the same level of retirement income 

to a group of employees is 46 percent lower in a pension than it is in an individual 

DC plan. Hence, it makes sense that pensions should remain a centerpiece of retirement income policy and practice in light of current fiscal and economic constraints 

facing plan sponsors. (Almeida & Fornia, 2008) As a nation, we need to deliver retirement benefits in the most economically efficient manner possible. 

CONCLUSION

Pensions are the most cost-efficient means for ensuring Americans can be self-sufficient in retirement. Moreover, spending of pension benefits provides important economic stimulus and jobs nationally and across virtually every city and State from 

coast to coast. Americans are highly concerned about their retirement prospects, 

while the Nation continues to face severe economic challenges. As such, policymakers are wise to focus on protecting pensions that remain in place, and finding 

ways to expand pension coverage for middle class Americans. I thank you for holding this hearing today to examine these issues. 

REFERENCES

Almeida, B. and W. Fornia. 2008. A Better Bang for the Buck: The Economic Efficiencies of Defined Benefit Pension Plans. Washington, DC: National Institute on 

Retirement Security. 

Almeida, B. and F. Porell. 2009. The Pension Factor: Assessing the Role of Defined 

Benefit Plans in Reducing Elder Hardships. Washington, DC: National Institute 

on Retirement Security. 

Almeida, B. and I. Boivie. 2009. Pensionomics: Measuring the Economic Impact of 

State and Local Pension Plans. Washington, DC: National Institute on Retirement 

Security. 

Associated Press and LifeGoesStrong.com. 2011. ‘‘AP-LifeGoesStrong.com Poll Reveals: 44% of All Baby Boomers are Not Confident That They will Retire Comfortably.’’ April 5. 

Board of Governors, Federal Reserve System. 2011. Release Z.1 Flow of Funds Accounts of the United States. Washington, DC: BOG. 

Boivie, I., K. Kenneally, and B. Perlman. 2011. Pensions and Retirement Security 

2011: A Roadmap for Policy Makers. Washington, DC: National Institute on Retirement Security. 

Copeland, C., M. Greenwald & Associates, R. Heiman, & J. VanDerhei. 2011. ‘‘The 

2011 Retirement Confidence Survey: Confidence Drops to Record Low, Reflecting 

‘‘the New Normal.’’ Issue Brief. Washington, DC: Employee Benefit Research Institute. 

Employee Benefit Research Institute. 2011. ‘‘FAQs About Benefits—Retirement 

Issues.’’ Washington, DC. 

Flynn, C., and H. Lum. 2007. ‘‘DC Plans Underperformed DB Funds.’’ Toronto, ON: 

CEM Benchmarking, Inc. 

Morningstar, Inc. and National Conference on Public Employee Retirement Systems. 

2007. ‘‘The Relative Performance Record and Asset Allocation of Public Defined 

Benefit Plans.’’ 

Retirement USA. 2010. ‘‘The Retirement Income Deficit’’ http:// 

www.retirementusa.org/retirement-income-deficit-0. 

Warshawsky, M. 2011. ‘‘Corporate Defined Benefit Pension Plans and the 2008– 

2009 Financial Crisis: Impact and Sponsor and Government Relations.’’ Philadelphia, PA: Wharton School of the University of Pennsylvania. 

Watson Wyatt. 2008. ‘‘Defined benefit vs. 401(k) plans: Investment returns for 

2003–2006.’’ Watson Wyatt Insider 18(5). 

The CHAIRMAN. Thank you very much, Ms. Oakley. 

Mr. Stephen, welcome. Please proceed. 

STATEMENT OF CHRISTOPHER T. STEPHEN, ESQ., EMPLOYEE 

BENEFITS LEGISLATIVE COUNSEL AND SENIOR ASSOCIATE DIRECTOR, GOVERNMENT RELATIONS DEPARTMENT, 

NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION, 

ARLINGTON, VA 

Mr. STEPHEN. Chairman Harkin, Mr. Enzi, members of the committee, my name is Chris Stephen. I’m Employee Benefits legislative counsel at the National Rural Electric Cooperative Association, 
20 

the national service organization for over 900 rural electric utilities 

that provide electricity to 42 million people in 47 States, is very 

well represented here on the panel today. 

Most NRECA members, as you know, are consumer-owned, notfor-profit electric cooperatives dedicated to the delivery of safe, reliable and, most importantly, affordable electricity, and also contributing to the economic development of our consumer owners. 

This committee has long recognized the special, unique nature of 

multiple employer plans sponsored by rural cooperatives. Mr. Enzi 

mentioned it in his opening. This is not to be confused, of course, 

with multiemployer plans that are administered subject to a collective bargaining agreement with unions. 

Electric co-ops are defined by their employees; and, like police, 

fire, and other emergency personnel, electric co-op employees often 

find themselves in harm’s way in carrying out their duties sometimes, and sometimes often, during and immediately after a natural disaster. Take, for example, in January 2011 during an ice 

storm in Greenfield, IA, when Farmers Electric co-op responded to 

211 downed lines in the middle of the storm to make sure the 

lights were on as soon as possible. Or more recently, just last 

month in Saratoga, WY, when the flooding North Platte River was 

at 10 percent above flood stage and linemen from Carbon Power 

and Light Cooperative donned wet suits, got into rafts, and went 

into the middle of the river, the raging river I was told, to get to 

an island in the middle of the river to make sure that the downed 

lines were up in 41⁄2 hours instead of 41⁄2 days, working with the 

National Guard and fire and rescue teams. 

I could go on for hours and hours on this type of work that goes 

on at rural electric co-ops, but today I want to focus on trying to 

keep our rural consumers and our rural Americans in our rural 

areas. Over the last several years, keeping our best and brightest 

at home has become ever more difficult, which has just been exacerbated by the economic downturn. The strongest recruitment and 

retention tool that electric cooperatives have to keeping our best 

and brightest at home is our employee benefit program, and today 

I’m going to focus on our defined benefit plan. 

NRECA is proud that the vast majority of our members offer 

their employees, 63,000 employees total, both the comprehensive 

defined benefit plan as well the NRECA-sponsored 401(k) plan. 

Both are multiple employer plans under 413(c) of the Internal Revenue Code that are operated to maximize retirement savings for 

employees and retirees and provide each and every co-op with a 

convenient and affordable mechanism to pool resources and utilize 

economies of scale that would otherwise be unavailable to small 

businesses like electric cooperatives. 

As you know, our 900-member cooperatives have as few as 4 employees and a median of 48 employees on the payroll. And unlike 

other sectors, fortunately, electric co-ops see a less than 5 percent 

annual turnover. This allows us to invest in our current employees 

for the long-term, and, in fact, two-thirds of co-op employees that 

leave the co-op retire, spending their entire working career in the 

cooperative family. 

Our DB plan rewards long service and allows our members to invest in employees without facing the substantial replacement cost 
21 

to go out and find a new one. As a result of the market collapse, 

unfortunately, contributions to our plan last year rose by 35 percent, by $225 million. This dramatically increased our short-term 

liabilities and forced some co-ops to make the sometimes impossible 

choice of either raising electricity rates, eliminating or reducing retirement benefits, or laying off quality employees to make up the 

difference. Co-ops now, on average, contribute 23 percent of payroll 

to the plan, making it an even larger part of total comp. 

A critical goal for cooperatives is to eliminate volatility and unpredictability in their annual budgets and ultimately electricity 

rates. The same principles applies to every single business that operates a defined benefit plan, including electric cooperatives. The 

Pension Protection Act codified the core fundamental principle that 

a promise made is a promise kept. We applaud that effort, supported the legislation, and thank you for recognizing that even a 

bill that has been a success in many, many ways, the economic calamity of the last several years has shown that even very good legislation does need to be refined to recognize new challenges. We 

thank you for passing short-term pension legislation last year. 

Our plan is part of our members’ core business strategy to recruit and retain long service employees and reward them with a financially secure retirement for that effort. The committee today 

has the opportunity to help our employees by supporting our plan 

in four specific ways. 

No. 1, restoring a critical, logical element to when DB plans were 

most popular; that is, to allow companies to contribute more during 

good times and less during bad times when capital is at a premium. 

No. 2, reject proposals to allow the PBGC to set its own premiums, let alone increase premiums by some $16 billion, which 

amounts to an unfair tax increase on current plan sponsors. 

No. 3, prevent the IRS from eliminating or reducing benefits 

earned by employees who attain their plan’s normal retirement 

age. 

And No. 4, not impose additional taxes on retirement plans to 

address the national deficit. We believe that taxing electric linemen 

in their retirement savings in addition to current tax treatment is 

not the way to address the debt or the deficit. 

We ask you to help us keep our promises by enacting new and 

innovative policies to encourage current plan sponsors to remain in 

the game, particularly multiple employer plans like ours, so they 

remain viable for future generations. I thank you for the invitation. 

[The prepared statement of Mr. Stephen follows:] 

PREPARED STATEMENT OF CHRISTOPHER T. STEPHEN, ESQ. 

SUMMARY

Christopher T. Stephen is Employee Benefits Legislative Counsel at the National 

Rural Electric Cooperative Association (NRECA). NRECA is the national service organization for more than 900 rural electric utilities that provide electricity to approximately 42 million consumers in 47 States and sell approximately 12 percent 

of all electric energy sold in the United States. 

Electric cooperatives are defined by their dedicated employees, who are committed 

to providing safe, reliable and affordable electricity to their consumer-owners. And, 

like police, fire and other emergency personnel, co-op employees frequently confront 

life-threatening situations and selflessly put themselves at great personal risk. 
22 

The vast majority of our members participate in the NRECA Retirement Security 

Plan (the ‘‘Plan’’), a ‘‘multiple-employer’’ plan under IRC Section 413 (c) that plays 

a vital role in ensuring that our 63,000+ participants live with dignity in the communities they once served. It also provides a critical tool for our members to recruit 

and retain employees who can often earn higher wages in more urban areas, but 

value the long-term security provided by the Plan. 

Keeping rural America’s best and brightest ‘‘at home’’ has become an increasingly 

difficult task over the past several years. The strongest recruitment and retention 

tool for electric cooperatives continues to be their employee-benefits programs—particularly our defined-benefit plan. Unlike most other sectors, co-ops see less than a 

5 percent annual employee turnover, with more than 2⁄3 of employees spending their 

entire careers within the cooperative family. Our Plan invests in these employees 

without facing the recruiting, training, and development costs for new hires. 

This guaranteed security, however, has become much more difficult to sustain in 

recent years with economic uncertainty and volatility for all DB Plan sponsors. Cost 

uncertainty is anathema to any business, especially companies that run ‘‘at cost’’ 

like electric cooperatives. Some NRECA members ask, ‘‘If everyone else is cutting 

their defined benefit plans; why aren’t we? ’’ Congress should continually examine 

new and innovative policies to encourage current sponsors to remain ‘‘in the game’’ 

and reject policies that leave companies no choice but to abandon the system. We 

ask you to consider the following to help cooperative employees and retirees: 

(1) Accelerated funding requirements during down financial markets dramatically increases volatility and costs. Congress should restore a critical, logical element from when DB plans were most popular: permit companies to contribute more during good times, and less during bad times. The current system often 

works the opposite way. 

(2) Allowing PBGC to set its own premiums, let alone increasing them by 

$16 billion without one congressional hearing, amounts to an unfair tax increase on plan sponsors that must be soundly rejected. 

(3) Prevent IRS from eliminating or reducing benefits earned by employees who attain their Plan’s normal retirement age (NRA). 

(4) Do not tax retirement plans to address the national deficit. Taxing electric linemen on their retirement savings is not the way to address the deficit. 

Chairman Harkin, Ranking Member Enzi, and all committee members, I am 

Christopher T. Stephen, Employee Benefits Legislative Counsel at the National 

Rural Electric Cooperative Association (NRECA). NRECA is the national service organization for more than 900 rural electric utilities that provide electricity to approximately 42 million consumers in 47 States, and sell approximately 12 percent 

of all electric energy sold in the United States. Most NRECA members are consumer-owned, not-for-profit electric cooperatives and share an obligation to serve 

their members by providing safe, reliable and affordable electric service. I am honored to testify today regarding the voluntary employee benefit programs sponsored 

by our member co-ops for their employees, and how our defined-benefit plan remains 

a critical recruitment and retention tool for electric cooperatives. 

The NRECA Retirement Security Plan (the ‘‘Plan’’) has long enjoyed strong support from this committee. Back in September 2005, this committee unanimously approved an amendment to what eventually became the Pension Protection Act (PP 

A) of 2006 (Pub. L. No. 109–280). Led by Senator Roberts, and cosponsored by you, 

Mr. Chairman, along with Senators Bingaman, Hatch, Alexander, Isakson and Frist 

to recognize the special nature of multiple-employer plans sponsored by rural cooperatives. Thank you all for this strong support, as well as you, Senator Enzi, who 

also strongly supported this effort as chairman of this committee during that time. 

Our Plan plays a vital role in ensuring that our employees have a secure retirement that enables them to live with dignity in the communities they served. It also 

provides a critical tool for our members to recruit and retain employees who can 

often earn higher wages in more urban areas, but value the long-term security provided by the Plan. Today, I will discuss who we serve, what we do, and why maintaining our Plan is part of our member’s core business strategy to recruit, retain 

and reward long-service employees with a secure financial retirement. But first, I 

want to emphasize upfront that this committee has the opportunity to help our employees by supporting our Plan. Specifically, as discussed further below, we ask you 

to consider the following: 

(1) Accelerated funding requirements during down financial markets dramatically increase volatility and costs. We believe in the important reforms enacted by PPA. But, we have all seen the need to further supplement these important 
23 

1Statement by USDA Secretary Thomas Vilsack before the Subcommittee on Agriculture, 

Rural Development, Food and Drug Administration, and Related Agencies, U.S. Senate, March 

2, 2010. 2 Id. 

reforms in light of the lessons learned from the economic downturn and from the 

very sad participation decline in the defined-benefit system. We are grateful for your 

leadership to enact a short-term adjustment last year. Going forward, we need to 

restore a critical, logical element from when defined-benefit plans were most popular: permit companies to contribute more during good times, and less during bad 

times. The current system often works the opposite way, unfortunately. We cannot 

have a vibrant defined-benefit system as long as the funding rules require exorbitant contributions at exactly the wrong time. 

(2) The Administration’s proposal to increase premiums paid to the Pen- sion Benefit Guaranty Corporation (PBGC) by $16 billion amounts to an 

unfair tax increase on defined-benefit plan sponsors. This must be soundly rejected. No congressional committee has examined the true nature of the PBGC’s deficit or the value of the coverage provided by the PBGC. And PBGC’s own annual 

report notes that the PBGC will not have any trouble meeting its obligations for 

the foreseeable future. In that context, it is wrong for the government to even consider taxing plan sponsors. 

(3) The IRS has threatened to prohibit us from keeping our promises to 

our employees. The Plan has long promised employees who attain normal retirement age (NRA) the right to receive their retirement benefits. Our employees need 

your protection. 

(4) We urge you not to tax retirement plans to address the national deficit. Taxing electric linemen on their retirement savings is not the way to address 

the deficit. 

Who We Serve 

Last year, Agriculture Secretary Thomas Vilsack confirmed the economic downturn greatly impacted rural America, with high poverty which is reflected in higher 

mortality rates for children, higher unemployment, and declining populations.1

Since the beginning of the economic slowdown, rural residents have experienced a 

greater decline in real income compared to other parts of the Nation due to lower 

rural educational attainment, less competition for workers among rural employers, 

and fewer highly skilled jobs in the rural occupational mix.2 Rural electric cooperatives have far less revenue than the other electricity sectors, but support a greater 

share of the distribution infrastructure. The challenge of providing affordable electricity is critical when you consider that the average household income in most of 

our service territories is 14 percent below the national average. I enclose State demographic data for all committee members with rural electric cooperative consumers, as compiled by NRECA, as Exhibit 1. 

Electric Cooperative Employees 

Electric cooperatives are defined by their dedicated employees, who are committed 

to providing safe, reliable and affordable electricity to their consumer-owners. Like 

police, fire and other emergency service personnel, electric co-op employees frequently confront life-threatening situations and selflessly put themselves at great 

personal risk. Amidst the day to day dangers associated with the delivery of safe, 

reliable and affordable electricity—often during or in the immediate aftermath of 

hurricanes, floods, tornados and other natural disasters—many co-op employees continuously go above and beyond the call of duty: 

• During the January ice storm in Greenfield, IA, Farmers Electric Cooperative 

had 18 of their linemen, led by Nick Kintigh, Doak Grantham, Paul Weber, Pat 

Held, Dennis Frank and Pat Armstrong, plus 44 linemen and two retired linemen 

from other co-ops in Iowa, Missouri, and Kansas reported for emergency duty. Even 

before the storm ended, crews were out to get as many of the 211 poles downed during the storm back up and working to keep the lights on. 

• On the evening of June 6, the North Platte River uprooted a tree that took out 

transmission lines on an island in the middle of the river operated by Carbon Power 

& Light Cooperative, based in Saratoga, WY. With the river 10 percent above flood 

stage, water ran over the broken live lines with the poles still attached. Carbon’s 

Operations Manager, Dave Cutbirth, who lives about 50 miles from Saratoga, 

turned around and went back to join Tom Westring, Nick Carey, Jeff McCarther, 

Bryn Hinz, John Saier, Kelly Lang and Bill Dahlke who, with the assistance of the 

local fire and rescue team, were boarding rafts in wetsuits in the raging river to 

get to the downed lines. Even more linemen were on either side of the river posi-
24 

3This permits electric cooperatives to pool experience and expenses while being controlled by 

a single Plan Document with limited optional plan features for each employer that is not administered subject to a collective bargaining agreement—which differentiates us from ‘‘union multiemployer plans.’’ The Plan annually files one Form 5500 with the U.S. Department of Labor. 

Each participating employer must execute an adoption agreement that binds them to the plan 

terms. For this reason we operate as a type of single-employer plan for some legal and administrative requirements, but each participating employer must meet other requirements, such as 

IRS nondiscrimination requirements, individually. Contributions to the Plan are pooled in a single trust and (unlike Master Prototype Plans) are available to pay benefits to employees of any 

of the participating organizations. Also, for funding purposes, the Plan is treated as one plan, 

rather than as a collection of single-employer plans, pursuant to Code section 413(c)(4)(B). This 

funding regime is very important to us, as it allows us to deal with funding issues with one 

overall approach, instead of some 900 different approaches. 

tioning the raft and moving equipment into place. At the same time, WY National 

Guardsmen positioned themselves down river to catch any ‘‘floaters’’. This was the 

first time anything like this had happened, so the crew was working on pure instinct. This quick thinking and bravery resolved the outage in 41⁄2 hours, that would 

otherwise have left Saratoga and Encampment, WY in the dark for days if they had 

waited for the water to recede. 

I could go on and on for hours with stories like these from every State over the 

years, not to mention the employees who lost their homes during Hurricane 

Katrina, or more recently from tornadoes in Alabama and Oklahoma, who stayed 

on the job for days before even attempting to rebuild their lives. 

Electric Cooperatives Role in Our Communities 

Since our humble beginnings in the mid-1930s, electric cooperatives’ long-term 

business plan has been to provide safe, affordable and reliable electricity for our 

consumer-owners. A critical component of this commitment is to eliminate volatility 

and unpredictability in their annual budgets, and ultimately electricity rates. On 

average, 60 to 80 percent of a distribution electric cooperative’s annual budget will 

be the cost of wholesale power, distantly followed by salaries and benefits. To prevent sharp spikes in electric bills, our power-producing Generation & Transmission 

(G&T) co-ops work day-in and day-out to avoid unpredictable and highly volatile 

wholesale electricity prices for our distribution systems that would make electricity 

unaffordable for their consumer-owners. 

These same principles—to eliminate volatility and unpredictability—are also critically important to all companies like electric cooperatives that sponsor defined-benefit pension plans. 

Co-op Commitment to Employees—Retirement Savings Plans 

Economic security in retirement is a leading concern for all Americans, including 

electric cooperative employees. NRECA members are committed to preserving and 

enhancing the voluntary employer-sponsored retirement system and the tax policies 

that support it. NRECA is proud that the vast majority of its members offer comprehensive retirement benefits to their committed employees through a traditional 

defined-benefit plan (the NRECA Retirement Security Plan) and a defined-contribution plan (the NRECA 401(k) Plan). These ‘‘multiple-employer’’ retirement benefit 

plans (under § 413(c) of the Internal Revenue Code) are operated to maximize retirement savings for employees, retirees and their families and provide each co-op employee the financial means to enjoy a comfortable and secure retirement.3

The NRECA Retirement Security Plan 

The NRECA Retirement Security Plan (the ‘‘Plan’’) provides comprehensive, guaranteed retirement benefits to over 63,000 employees and retirees throughout the 

United States. Our 900+ members have as few as four employees, with a median 

payroll of 48 employees. Our ‘‘multiple-employer’’ defined-benefit pension plan provides cooperatives with a convenient and affordable mechanism to pool resources, 

maximize group purchasing power and leverage economies of scale that would otherwise be unavailable to small businesses like cooperatives. In fact, that is why 

NRECA created the Plan in 1948—our members could not afford all of the administrative expenses to set up and operate a plan on their own, and financial institutions were not interested in employers of our size. 

When defined-benefit plans were first created, Federal pension policies acknowledged that all business activities were cyclical. That is, Congress recognized that 

every sector of the economy had good times and bad times, which made defined-benefit plans enormously popular as a recruitment and retention tool to reward longservice employees through the 1980s. Until Congress amended the ‘‘full funding 

limit’’ rules (effective in 1988), the tax code allowed employers to contribute more 
25 

to their retirement plans in good times, and less in bad times, recognizing the need 

for more capital in bad times. For the next 12 years, the Plan was so overfunded 

under these rules that electric cooperatives were prevented from making any additional contributions at all (1988–1993), or at best only permitted partial funding 

(1994–99). Since then, our members have funded the Plan as responsibly as possible, but policies like these and others that require more funding by companies during down financial markets make funding these plans extremely difficult. It is critical to remember that defined-benefit plans are invested for the long-term with liabilities extending out for decades, so Federal policies should be carefully crafted 

to balance the need to properly fund plans today, while ensuring that companies can 

weather cyclical financial storms to remain in business for the long term. 

PPA codified the core, fundamental principle that a promise made is a promise 

kept. That is, it sought to strengthen the private retirement plan system with substantially increased funding requirements and improved disclosure to participants 

so that long service employees were more able to count on a secure, financial retirement. And, while the PPA has already been a success in many respects, the economic calamity that followed its passage in 2008 and 2009 with extraordinary investment losses for all employer-sponsored retirement savings vehicles demonstrated that even very good legislation may need to be refined to recognize new, 

unforeseen economic challenges. 

Economic Downturn Impact on the Plan and Employees 

While PPA recognized that by design, NRECA’s ‘‘multiple-employer’’ definedbenefit plan posed no risk of default to the PBGC and delayed implementation of 

many provisions until 2017, electric co-ops were not immune from the unprecedented market losses of 2008 and early 2009. In real dollars, the Plan’s assets were 

valued at $3.5 billion on December 31, 2008, a 30 percent ($1.5 billion dollars) drop 

from the previous year. On December 31, 2009, it had gained back some but not 

all of the previous year’s losses. As a result, average Plan contributions in 2010 

were 35 percent higher than in 2009, dramatically increasing short-term liabilities 

that forced some co-ops to make the difficult choice of increasing electricity rates, 

reducing or eliminating retirement benefits all together, or even laying off quality 

employees to pay for these increased liabilities. As a result, co-ops now, on average, 

contribute 23 percent of payroll to the Plan, making it an even larger part of total 

compensation. 

In both good times and in bad times, electric co-ops have kept their promises to 

their employees and retirees, which has not always been easy. Congress specifically 

recognized the challenges faced by plan sponsors during the economic downturn. As 

a result, it passed legislation (Pub. L. 111–192) that directly permitted plan sponsors to implement a ‘‘2 plus 7’’ or 15-year extended amortization schedule for funding shortfalls. This was supported by nearly every employer and labor union that 

sponsors a plan (including NRECA) because it gave all parties more time to make 

up for the losses of 2008 and early 2009. NRECA applauds your efforts to enact this 

legislation last year. 

We believe providing an employee with a secure retirement is critical to reward 

their commitment to providing our consumer-owners with safe, reliable and affordable electricity. 

DB Plans Work for Electric Cooperatives, But Financial Challenges are Growing 

As you know, keeping rural America’s best and brightest ‘‘at home’’ has become 

an increasingly difficult task, with so many young people going to more urban areas 

for other employment and educational opportunities. The strongest recruitment and 

retention tool for electric cooperatives continues to be their employee-benefits programs—particularly their defined-benefit pension plans. As a consumer-owned business, each electric cooperative is focused on serving its community though its workforce. While many publicly traded, international companies see 20 to 30 percent or 

more annual employee turnover, electric cooperatives see less than a 5 percent annual employee turnover, with more than 2⁄3 of cooperative employees spending their 

entire working careers within the cooperative family. Our members understand the 

very real recruiting, training, and development costs for new hires are 1.0 to 2.0 

times annual pay. As such, our defined-benefit plan rewards long service employees, 

and allows our members to invest in these key employees without having to face 

these substantial replacement costs. 

Each co-op plan has a uniform benefit formula that treats all employees the same 

regardless of pay—from the CEO to the apprentice lineman. Over time, employees 

are able to accumulate substantial benefits for retirement security. This guaranteed 

security, however, has become much more difficult to sustain in recent years be-
26 

cause of volatility in the financial markets, which leads to economic uncertainty and 

volatility for all businesses that sponsor defined benefit plans. 

We are looking toward the future, working with our members to maintain our 

Plan going forward. Cost uncertainty is anathema to any business, let alone one 

that sponsors an increasingly complex and expensive defined-benefit plan. This is 

especially true for companies that run ‘‘at cost’’ like electric cooperatives. Policies 

that increase volatility in contribution rates and require more funding by companies 

during down financial markets has created a trend over the last decade for employers to freeze or completely eliminate defined-benefit plans. As such, electric cooperatives sometimes ask us: ‘‘If everyone else is cutting their defined benefit plans; why 

aren’t we?’’ Thankfully for rural America that has not happened, largely due to our 

business model and the unique multiple-employer plan design that reduces complexity, and maximizes group purchasing power that would otherwise be unavailable while allowing cooperatives to tailor benefits to meet their needs. Many in the 

defined-benefit plan industry are aware that the multiple-employer plan model may 

be one of the best ways to encourage employers nationwide to reestablish traditional 

retirement plans. Congress should continually examine new and innovative policies 

to encourage current plan sponsors to remain ‘‘in the game’’ and should reject policies that leave companies no choice but to abandon the system. 

Current Policies and Proposals Raise Concerns, Opportunities 

PBGC Premiums—In his 2012 Budget Request to Congress, the President proposed giving PBGC the authority to set its own premiums, to utilize a company’s 

‘‘credit rating’’ in determining such premiums, and estimates premium increases of 

$16 billion over 10 years to alleviate the PBGC’s alleged deficit. NRECA strongly 

believes that Congress should not, under any circumstances, cede its taxing authority to the Administration or allow PBGC to set its own premiums. Further, the idea 

of using ‘‘credit rating’’ or some other creditworthiness proxy has been specifically 

rejected by Congress—the latest time was during consideration of PPA. This role for 

a government agency would be inappropriate, especially for private companies and 

non-for-profit entities like electric cooperatives—or even NRECA as a trade association—that are not credit rated. PBGC has also stated that their $16 billion increase 

would be focused on ‘‘at-risk’’ companies only, and the PBGC has further stated that 

20 percent of the 100 largest defined benefit plans are maintained by companies 

that are below investment grade. For companies already facing financial difficulties, 

massive premium increases would force those employers to discontinue providing retirement benefits altogether. We do not believe there is any way for PBGC to assess 

all or even most of this premium increase on just 20 percent of defined benefit plan 

sponsors, which is why even ‘‘healthy’’ companies are opposing this proposal. And 

finally, there are very serious questions about the size of the PBGC’s deficit; and, 

by PBGC’s own statements, there is no demonstrated basis for the drastic measures 

being considered. The PBGC states in its 2010 annual report that ‘‘[s]ince our obligations are paid out over decades, we have more than sufficient funds to pay benefits for the foreseeable future.’’ Since there is no immediate crisis, Congress should 

not rush to relinquish its authority to establish appropriate premium requirements, 

or to raise them unnecessarily. Raising PBGC premiums, without any hearings or 

analysis of the value of the coverage received by the plan sponsors amounts to a 

tax on employers that have voluntarily decided to maintain defined benefit plans. 

IRS Regulation Prevents Co-ops from Keeping their Promises to Employees—Electric cooperatives understand the realities of the tight market for skilled 

labor in rural America, and value long service employees. To prevent co-ops from 

losing their most valuable employees to retirement from these physically demanding 

jobs, the Plan permits employees to ‘‘quasi-retire’’—that is, receive ‘‘in service’’ distributions at the Plan’s NRA—including 30 years of benefit service. Without this 

feature, many needed employees would be forced to retire in order to obtain the 

Plan’s most valuable benefit. This feature is a win-win for cooperatives and employees, and has been a part of the Plan for 25 years. While targeting a new ‘‘Cash Balance Plan’’ technique, the IRS published an immediately effective final regulation 

on May 21, 2007 (72 Fed. Reg. 28604, et. seq. (2007)) that could unfairly prevent 

employees with 30 years of benefit service who wish to continue working from receiving their benefits. Legislation has been introduced in the two preceding Congresses—the ‘‘Incentives for Older Workers Act of 2010’’ (S. 4012) in the 111th, and 

the ‘‘Aging Workforce Flexibility Act of 2007’’ (S. 2933) in the 110th—to prevent this 

from happening. We urge Congress to include this legislation in any pension bill before the end of this year, as some 500 employees at 188 co-ops who have been making life-changing financial decisions could be prevented from receiving their earned 

benefits in 2011 alone; over 2,100 employees at 291 co-ops could be impacted over 

the next 5 years because of this rule intended to address a completely different issue. 
27 

Eliminating/Limiting Retirement Savings Tax Policies—Congress and the 

Administration are focused on reducing budget deficits and the national debt, and 

are considering changes to the deferred tax treatment of defined-benefit plans, defined-contribution plans and other retirement savings vehicles that provide the economic and social safety net for a secure retirement to generate revenue for the 

Treasury. Eliminating or diminishing the current tax treatment of employersponsored retirement plans like the NRECA Retirement Security Plan or 401 (k) 

Plan will jeopardize the retirement security of tens of millions of American workers, 

impact the role of retirement assets in the capital markets, and create challenges 

in maintaining the quality of life for future generations of retirees. While we work 

to enhance the current retirement system and reduce the deficit, policymakers must 

not eliminate one of the central foundations—the tax treatment of retirement savings—upon which today’ s successful system is built. As you consider comprehensive 

tax reform and deficit reduction, we urge you to preserve these provisions that both 

encourage employers to offer and workers to contribute to retirement plans, and prevent these critical plans from becoming ‘‘Piggy Banks’’ for the Federal Government. 

CONCLUSION

NRECA strongly believes that any reforms to the retirement savings system 

should continue to encourage workers to provide for their own economic security, 

while encouraging employers to continue sponsoring benefit plans. Going forward, 

we need to restore a critical, very logical element from the period when defined benefit plans were most popular: funding rules that allow companies to contribute more 

during good economic times, and less during bad times. The current system often 

works the opposite way. We hope to continue our work with the committee to address the challenges of administering and participating in a defined-benefit pension 

plan, particularly ‘‘multiple-employer’’ plans like NRECA, so they remain a viable 

vehicle in the future for companies trying to do the right thing—providing meaningful retirement benefits to their employees. I look forward to answering your questions. 
28 

EXHIBITS

Alaska 

Electric Cooperative Consumers 

Legislative Profile 

Demographics 

GOoOg ~ State C2:DRXI·U§ 

Income c.,.gp· §!!m ~ li!!!t ~ $ Diff: ~ 

Average Household $77,573 $76.856 $n212 $717 09% $6.361 89% 

Pe,caplta $20,466 $28.166 $27.620 $300 1,1% 5846 31% 

Race ~ §!!m ~ Residential Market Share 

While 

Black 

Aslsn 

Other 

Tofal 

Hispanic 

Education 

No HIgh School 

College Oeg"'" 

Consumen;. per MUe 

Revenue per Mile 

701% 

30% 

42% 

227% 

100% 

46% 

~ 

95% 

266% 

Distribution Investment per Customer 

ResldenUal 

Commercial 

Induslrial 

Avg Monthly Ras BIU 

36% 

662% 

121% 

729% ~ 

199,905 

49% 44% 

253% 107% 

100% 100% 

5.4% 152% Housing 

OWn 

l!Im !.Ii;. Rent 

Tolal 

99% 170% 

262% 263% MobHeHome 

IUtlllty Comparisonsl 

l<!!:.!m;. 

21.4 

$51,944 

$3.616 

400 

$70,454 

$2,459 

£!l:!lI!i 

BlII! ~ 

157 ¢ 38% 

143 ¢ 33% 

127 ¢ 29% 

$105 

Data SOUn;e., 2008 EASI Analytlcs, RUS, PlaUs, LOS, EIA 

NRECA Sll1Ileglc Analysis 

91312009 

~ 

251,866 

C.,..,p· 

715% 

285% 

100% 

M% 

844 

$199,569 

$4,114 

~ 

794% 

l!Im !!§;. 

657% 687% 

343% 313% 

100% 100% 

72% 77% 

State Average' 

384 

$90,154 

$3,800 

St'l! Ava AU utUltl",.. 

BlII! 

152 ¢ 

122 ¢ 

126 ¢ 

$101 

~ 

33% 

45% 

22% 
29 

Arizona 

Electric Cooperative Consumers 

Legislative Profile 

Demographics 

~O:QI! x!- §tall ,s:!!g Xi Y§ 

Income !<!l:.!m.; §l!!.I!! J.I.§J. lJillt .%..QIft lJillt ~ 

Average Household $52.396 $67,656 $71,212 ($15,260) -22.6% ($18,816) -26.4% 

PerCep11a $19,328 $25.690 $27,620 ($6,362) -248% ($B,292) -30.0% 

Race CD-DR: .§1l!1! US: Residential Market Share 

While 660% 

Black 17% 

Asian 11% 

Other 312% 

Tolal 100% 

Hispanic 207% 

Education Cg..gp: 

No High School 185% 

College Oegr •• 178% 

Consumers per Mil. 

Revenue peT Mile 

Oistributlon Investment per Customer 

Residential 

Commercfal 

Industrial 

Avg Monthly Res. BIR 

726% 729% CO::!!QHHs 

32% 121% 183.004 

24% 44% 

218% 107% 

100% 100% 

29.1% 152% Housing 

OWn 

~ J.I.§J. Rent 

Total 

163% 170% 

25.4% 26.3% MoblleHome 

lutillty Comparisonsl 

10.4 

$14,566 

$2,605 

299 

$59.377 

$3.045 

l<l!::!!.I!; 

B!!.!! ~ 

114 ¢ 52% 

to 0 ¢ 35% 

74 ¢ 12% 

$91 

Oata Sources: 2008 EASI Analyllcs. RUS. PlaUs. LOS. EIA 

NRECA Straleglc Analysis 

9/312009 

~ 

2,441,699 

Co..gp: 

754% 

246% 

100% 

321% 

33.9 

$66,734 

$2,533 

~ 

1.5% 

.§1l!1! J.I.§J. 

113% 687% 

287% 313% 

100% 100% 

126% 77% 

State Average· 

304 

$59,862 

$2.832 

State Avg. All Utillnes' 

B!!.!! 

97 ¢ 

83 ¢ 

6.0 ¢ 

$110 

45% 

39% 

16% 
30 

Colorado 

Electric Cooperative Consumers 

Legislative Profile 

Demographics 

~g:ml~ mall '2:RJ!D Y§ 

Income Co-op: §!@!I! ~ i.Qlft .%J!JIt i.Qlft %J!llt 

Average Household $82,842 $77,479 $71.212 $5,363 69% $11,530 163% 

PerCepi1a $31,589 $30,612 $27.620 $977 32% $3,969 144% 

Race .!<.!I::!!I!i §!@!I! ~ Residential Market Share 

White 66.9% 

Black 10% 

Asl.n 1,4% 

Olher 10.6% 

Tolal 100% 

Hispanic 146% 

Education Co-op: 

No High School 96% 

College Degree 34,6% 

Consumelll per Mile 

Revenue per Mile 

OlslribuUon Inveslment per C ... lomer 

ResidenUal 

Comma",lal 

Induslriat 

Avg Monthly Res Bill 

796% 729% ~2·oeHHs 

40% 121% 504,766 

29% 44% 

136% 107% 

100% 100% 

19.9% 152% Housing 

OWn 

§!@!I! YJi; Renl 

Tolal 

11 0% 170% 

34 8% 263% Mobile Home 

lutllity Comparisonsl 

7.6 

$11,399 

$3,114 

670 

$93,740 

$1,937 

~ 

Bl!I! ~ 

102 ¢ 42% 

91 ¢ 26% 

69 ¢ 32% 

$88 

Data Sources: 2008 EASt Anetytlcs, RUS, Plaits, lOS, EtA 

NRECA Straleglc Anelysls 

91312009 

~ 

1,936,436 

.!<.!I::!!I!i 

78.4% 

21.6% 

100% 

11.7% 

69.7 

$61,906 

$2,418 

~ 

261% 

§!@!I! YJi; 

701% 667% 

299% 313% 

100% 100% 

6.1% 77% 

State Average: 

542 

$73.211 

$2,286 

Slaftt Avo All Utilities· 

Bl!I! 

93 ¢ 

76 ¢ 

60 ¢ 

566 

35% 

40% 

25% 
31 

Georgia 

Electric Cooperative Consumers 

Legislative Profile 

Demographics 

"9::211 v§ §!Ill Co.oO!! YS 

Income ~ §.I!m ~ Ullft .%.mft i.Wft ~ 

Average Household $71,472 $72,423 $71,212 ($951) -13% $260 0-4% 

PerCaplia $26,363 $27,451 $27,620 ($1,088) -40% ($1.267) -4.6% 

Race Co-op: State ~ Residential Market Share 

WhIte 

Black 

Asian 

Other 

Tolal 

Hispanic 

Education 

No HIgh School 

College Degree 

Consume ... per Mile 

Revenue per Mite 

74.8% 

18.7% 

2.11"/0 

4-4% 

100% 

58% 

Co-op: 

189% 

236% 

DIstribution Investment per Customer 

Resldenllal 

Commercial 

Industrial 

Avg Monlhly R .... Bill 

644% 72.9% I<0-op Htls 

279% 121% 1,703,000 

2.7% 4.4% 

51% 107% 

100% 100% 

68% 152% Housing 

OWn 

~ 

Rent 

.§l!!! Tolal 

183% 170% 

265% 263% Mobile Home 

IUtility Comparlsonsl 

105 

$15,484 

$2,441 

349 

$74,540 

$2,727 

~ 

Bl!I§ ~ 

9.2 ¢ 66% 

89 ¢ 21% 

56 ¢ 13% 

$116 

Data SOurces: 2008 eASI Analytlcs, RUS, PlaUo, lOS. elA 

NRECA Slraleglc Analysis 

91312009 

State HHs 

3,653,200 

~ 

790% 

21.0% 

100% 

164% 

46.3 

5103,615 

$1,526 

~ 

466% 

.§.I!I!! ~ 

70-4% 667% 

29.6% 31.3% 

100% 100% 

116% 77% 

State AveraGe: 

295 

$61,495 

$2,539 

Siale Ava All Ulilltles' 

BD!I 

9.1 ¢ 

81 ¢ 

55 ¢ 

$106 

41% 

34% 

25% 
32 

Illinois 

Electric Cooperative Consumers 

Legislative Profile 

Demographics 

CIN!R :!lIt fltgb! CO::.9RD,U§ 

Income .li.l!:I1Ri §tm .\!l!i li!lf!; %Dlff: li!lf!; ~ 

Average Household $58,539 $77.878 $71,212 ($19.339) ·248% ($12,673) ·178% 

Per Capita $24.483 $29,715 $27,620 ($5,232) ·176% ($3,137) ·114% 

Race CO-DP: State .\!l!i Residential Market Share 

WhHe 951% 

Black 2,4% 

Asian 07% 

other 18% 

Tolal 100% 

HIspanic 2,1% 

Education Co-DP: 

No High School 154% 

College Degree 18.1% 

Consumers per Mile 

Revenue per Mile 

OlstrlbuUon Investment per Customer 

Resldenilal 

Commerclal 

Induslrlsl 

Avg Monthly Res, BlII 

72.1% 72.9% 

142% 121% 

~ 

260.119 

42% 44% 

95% 107% 

100% 100% 

14.5% 152% Housing 

OWn 

Renl 

§!!!! .\!l!i Tolal 

159% 170% 

282% 263% Mobile Home 

lutillty Comparisons I 

48 

$7.877 

$3,533 

410 

$64,863 

$2,680 

Co-op: 

Rate -40fS.185 

105 ¢ 62% 

85 ¢ 19% 

62 ¢ 19% 

$118 

Dais sources; 2008 EASt Analytlcs, RUS. PiaU •. LOS. EIA 

NRECA Strategic Analysis 

91312009 

Stats HHs 

4.915,785 

Co-op: 

79.7% 

20.3% 

100% 

11,8% 

546 

$93.273 

$3,085 

~ 

53% 

§!!!! .\!l!i 

700% 687% 

300% 313% 

100% 100% 

32% 77% 

Slats Average: 

403 

$64.173 

$2,737 

Stat. AVa. AI! Utllltl •• : 

Bi!I! ~ 

10.1 ¢ 33% 

86 ¢ 36% 

66 ¢ 31% 

$80 
33 

Iowa 

Electric Cooperative Consumers 

Income ~ 

Average Household $58,674 

Per Capita $24.115 

Race CO-aD: 

While 965% 

Black 06% 

Asian 07% 

Other 2.2% 

Talat l!l.QY.o 

HI.ps"le 28% 

Education ~ 

No High School 124% 

College Degree 183% 

Consumers per Mile 

Revenue per Mite 

Distribution Investment per Customer 

Residential 

Commercial 

Industrial 

Avg Monthty Res. Bill 

Legislative Profile 

Demographics 

~2::9:e Dt §Ii!l! CO:2RVS.U§ 

~ J.!lii U!lft %Dlff: liHft .%.!llit 

$52,796 $71,212 ($4,122) -6S% ($12,538) -176% 

$25.045 $27.520 ($1.931) -74% ($3.505) -12.7% 

~ J.!lii Residential Market Share 

928% 729% ~o-!leHHs 

22% 12.1% 198.595 

16% 44% 

34% 107% 

100% 100% 

39% 152% Housing 

OWn 

~ J.!lii Rent 

Total 

118% 170% 

23.4% 253% MoblleHome 

lutllity Comparlsonsl 

3.4 

$6,058 

$3,680 

258 

$43,693 

$2.533 

.I<9::!!.m 

B.I!!! ~ 

10 1 ¢ 54% 

76 ¢ 20% 

54 ¢ 27% 

$128 

State HH!! Co-oe% 

1,241.996 160% 

CO-De: ~ US: 

791% 746% 687% 

20,9% 25.4% 313% 

100% 100% 100% 

65% 54% 77% 

State Average: 

47.1 

$59,265 

$2,290 

Slate Ayg. AI! Ulllltl.s: 

B.I!!! ~ 

94 ¢ 31% 

72 ¢ 25% 

47 ¢ 43% 

$64 

25.5 

$42,057 

$2,646 

Data Sources: 2008 EASI AnalyUcs. RUS. Platt., lOS, EIA 

NRECA Strategic Analysis 

91312009 
34 

Kansas 

Electric Cooperative Consumers 

Legislative Profile 

Demographics 

!C2::Jl1! VB. Stlte ,a"oRYS US 

Income ~ §!!!!It .1m.; lJ!!ft ~ $Olff: YaJIIft 

Average Household $55,404 $67,271 $71.212 ($11,867) -17.6% ($15,608) -22.2% 

Per Capita $22.318 $27,158 $27,620 ($4,840) -178% ($5,302) ~192% 

Race ~ §!!!!It .1m.; Residential Market Share 

While 697% 

Black 12% 

Asian 07% 

Other 8.4% 

Io!!!1 100% 

Hispanic 101% 

Education ~ 

No HIgh School 14.6% 

College Oegr •• 194% 

Consumers p.r Mil. 

Revenue per Mile 

Distribution Investment per CUstomer 

ReskfenUal 

Commerclal 

industrial 

Avg Monthly Res Bin 

843% 729% ~g-og tttls 

57% 121% 192,582 

23% 44% 

78% 107% 

10~ I!!l!% 

85% 152% Housing 

Own 

Rent §!!!!It .Y.§;. 

Total 

116% 170% 

287% 263% MobJleHome 

lutillty Comparisons I 

30 

$5,128 

$3,727 

18.2 

$28,898 

$2.163 

Co-OP: 

Rate ~ 

105 ¢ 36% 

91 ¢ 39% 

69 ¢ 25% 

$92 

Data sourc •• : 2008 EASI Anelytlcs, RUS, Platts, LOS. EIA 

NRECA StrategIc Analysis 

913121JO!J 

~ 

1,123,595 

co-op: 

776% 

22.4% 

100% 

10,7% 

341 

$61,165 

$2,670 

Co-op % 

171% 

§!!!!It .Y.§;. 

719% 667% 

281% 313% 

100% 100% 

62% 77% 

State Average: 

194 

532.058 

$2,419 

Slet. AVa All UIIIIII .. • 

B!1!! ~ 

8.2 ¢ 34% 

68 ¢ 38% 

5.1 ¢ 27% 

$75 
35 

Kentucky 

Electric Cooperative Consumers 

Legislative Profile 

Demographics 

S!S:!:2Q ~: .§I!!!! C9<OD~IY§ 

Income ~ ~ Y§;. $ DJff: ~ ~ ~ 

Average Household $51,368 $58,129 $71.212 (56,761) -116% ($19,844) -279% 

Po. Capita $20,559 $23,775 $27,620 ($3,216) -135% ($7,061) -256% 

Race ~ ~ us: Residential Market Share 

White 940% 

Btack 35% 

Asian 05% 

Other 20% 

Total 100% 

Hispanic 2,()% 

Education C!2-0P: 

No High School 272% 

College Oegre. 135% 

Consumers per Mile 

Revenue per Mile 

Distribution Investment per Customer 

Residential 

commercial 

Industrial 

Avg Monthly Res Bill 

893% 72.9% !<!2-011 HHs 

74% 121% 712,581 

10% 44% 

24% 10,7% 

100% 100% 

24% 15,2% Housing 

Own 

liIi!!! Y§;. Rent 

Total 

227% 110% 

190% 263% Mobile Home 

IUtility Comparisonsl 

66 

514,806 

$2,423 

368 

$56,285 

$1.937 

Co-op: 

B!I! ~ 

83 ¢ 4()% 

82 ¢ 12% 

43 ¢ 48% 

5104 

0.t8 Sources: 2008 EASI Analytlcs, RUS, PlaUs. lOS. EIA 

NRECA Straleglc Analysis 

9/312009 

~ 

1,741,434 

CO·!2I1: 

787% 

213% 

100% 

206% 

472 

$Bl,189 

$1,702 

C!2-01l% 

409% 

liIi!!! Y§;. 

733% 68.7% 

26,7% 313% 

100% 100% 

13,8% 77% 

State Average: 

28,1 

$44.267 

$2.083 

State Avg. AI! UI!!!!!!!!; 

B!I! % of 581e5 

7,3 ¢ 30% 

6,8 ¢ 22% 

45 ¢ 48% 

569 
36 

Maryland 

Electric Cooperative Consumers 

Legislative Profile 

Demographics 

Co""'g VI §tate ~g-oI!VS.U§ 

Income &!!::.!m; ~ J.Ili;. 1J2ltt ~ 1J2ltt ~ 

Average Household $80,587 $85.404 $71.212 ($4,811) -5.6% $9,375 132% 

Po,caplta $29,485 $32,904 $27.620 ($3,419) -104% $1,865 68% 

Race &!!::.!m; ~ J.Ili;. Residential Market Share 

While 734% 

Black 214% 

Asian 18% 

Olher 34% 

Tolal 100% 

Hispanic 28% 

Education &!!::.!m; 

No High School 137% 

College Degree 227% 

Consumora per Mile 

Revenue per Mile 

OfslribuUon rnvestment per Customer 

ResldenUal 

Commerclal 

Industrial 

Avg Monthly Res. Bill 

620% 

281% 121% 

729% ~ 

177,761 

49% 44% 

50% 107% 

100% 100% 

55% 152% Housing 

OWn 

~ J.Ili;. Rent 

Total 

138% 170% 

336% 263% Mobile Home 

lutility Comparisonsl 

12.4 

$20,026 

$2,544 

43.9 

$81,161 

$2,996 

.I<!!:!!I!: 

!ii!.!lt ~ 

129 ¢ 64% 

It 5 ¢ 34% 

87 ¢ 2% 

$171 

Oala Sources: 2008 EASI Analytic •. RUS. Plaits, lOS, EIA 

NRECA Strategic Analysis 

9/312009 

~ 

2,171.505 

Co-op: 

80.3% 

197% 

100% 

5.6% 

576 

$86,669 

$1,924 

~ 

82% 

~ J.Ili;. 

690% 687% 

302% 31-3% 

100% 100% 

1.9% 77% 

State Average: 

420 

$n,274 

$2,964 

stale AVa All UIIIIU,,' 

119 ¢ 

116 ¢ 

94 ¢ 

$129 

%ofS.le. 

43% 

47% 

9% 
37 

Minnesota 

Electric Cooperative Consumers 

Legislative Profile 

Demographics 

C2-QQ w. St!!!t. ,g·RIll§~y§ 

Income £Q:lm;. .!i!m Y§.; SOiff: !e..Wft !.Wt.t ~ 

Average Household $70,740 $75.123 $71,212 ($4,383) -58% ($472) -07% 

Per Capita $27,050 $29,853 $27,620 (S2,B03) -94% ($570) -21% 

Race Co-op: Slate us: Residential Market Share 

While 934% 

Black 09% 

Asian 15% 

other 43% 

T!!tal 100% 

Hispanic 24% 

Education co-op: 

No High School 109% 

CoUege Degree 232% 

Consumers per Mile 

Revenue per MHe 

Olstributfon investment per customer 

ResldenUat 

Commercial 

Industrial 

Avg Monthly Res Bill 

88,1% 72.9% ,"o;gPl:ll:lli 

35% 12,1% 687,237 

34% 4,4% 

51% 10,7% 

100% 100% 

39% 152% Housing 

Own 

lni!1!! Y§.; Rent 

Total 

102% 170% 

292% 263% Mobile Home 

lutllity ComparisOns/ 

59 

$7.489 

$2,699 

402 

$67,879 

$1,899 

Co-op; 

Rate :la.l!f.liJ!lu 

88 ¢ 63% 

71 ¢ 22% 

55 ¢ 15% 

$94 

Data Source.: 2008 EASI AnalyUcs, RUS, PIat1s, LOS, EIA 

NRECA StrategiC Analysis 

91312009 

State HHs 

2,073,551 

,"o-op: 

85,0% 

15,0% 

100% 

76% 

473 

$77,762 

$1,928 

Co-op % 

331% 

§!m Y§.; 

765% 687% 

235% 313% 

100% 100% 

4,2% 77% 

State Average: 

34,6 

$57.853 

$2.057 

Slate AVa. An Ulllitles: 

B!!t ~ 

9,2 ¢ 33% 

75 ¢ 33% 

57 ¢ 34% 

$76 
38 

Income Co-op: 

Average Household $43,949 

PerCspl1a S16,180 

New Mexico 

Electric Cooperative Consumers 

Legislative Profile 

~ 

$56,224 

$21,328 

Demographics 

l.!§1 

$71.212 

$27,620 

CO:9IJ De State 

($12,275) -21.8% 

($5.148) -24 t% 

Co=!!!! VS. US 

($27.263) -363% 

($11,440) -414% 

Race Co-op; Slate l.!§1 Residential Market Share 

While 520% 

Black 08% 

Asian 05% 

Olher 467% 

618% 

20% 

14% 

349% 

729% 

121% 

44% 

107% 

Co-op HHs 

179,811 

_Tolal _____ l00% ___ I00% ____ 100% _______ 

Hispanic 477% 495% 152% Housing 

Own 

Education Jt.I:!::.!!p;. ~ us: Renl 

Total 

No High School 223% 185% 170% 

College Degree 190% 253% 263% Mobile Home 

I Utility comparisonsl 

Co-°Pi !Q.Y;, 

Consumers per Mne 4.8 485 

Revenue per MUe $6,895 $69.214 

Dlslrlbulion Inveolmenl per Cuslomer $2.686 $1,789 

Co-op: 

R!l!! ~ 

ResldenUal 11.3 ¢ 25% 

Commercial 95 ¢ 25% 

Induslrial 6.1 ¢ 49% 

Avg Monlhly Res. Bm $65 

Dala Sources: 2008 EASI Anal)lllcs, RUS. PlaUs. LOS. ErA 

NRECA Sll'aIeglc Analysis 

91312009 

state HHs 

752,094 

£!!:!m; 

796% 

204% 

100% 

315% 

Munlcl!!!I: 

274 

$53.751 

$1.813 

239% 

.!l!m! US: 

729% 687% 

271% 313% 

100% 100% 

194% 77% 

Sli!lgAv!!tI!g!ll 

363 

$53.476 

$2,039 

Slate Am All Ylllilio. 

R!l!! ~ 

91 ¢ 29% 

7.7¢ 40% 

56 ¢ 31% 

$58 
39 

North Carolina 

Electric Cooperative Consumers 

Legislative Profile 

Demographics 

~O-ol! vs. Stile s;.!!:.9D~ u§ 

Income ~ iIllI!! !Hi;. 1!!.Ift %Jillf: ~ ~ 

Average Household $57,475 $65,726 $71,212 ($8,251) -126% ($13,737) -193% 

Per Capita $23.240 $26.624 $27.620 ($3.364) -127% ($4.380) -159% 

Race co-oo' State !Hi;. Residential Market Share 

Whll. 74.8% 7o.s% 729% ~ iIiWL!:i!:!!! ~ 

Black 180% 217% 121% 900.339 3.702.712 243% 

Asian 09% 19% 44% 

other 63% 59% 107% 

_Tplal 10.0%_ .... . .... 100% .. .... .1.00% .~ .. "-~.--"-." ---_.".-. 

Hispanic 55% 61% 15.2% Housing ~ §.!i!! !Hi;. 

Own 77.6% 723% 687% 

Rent 22.4% 277% 31.3% 

Education ~ §.!i!! Y§; 

Totol 100% tOO% 100% 

No High School 218% 185% 170% 

Conoge Oegree 178% 25.0% 263% MobIle Home 248% 164% 77% 

lutillty Comparisonsl 

Slate Average: 

Consumers per MHo 

Revenue per Mile 

OistribuUon Investment per Customer 

95 

$13.547 

$2.719 

265 

$54.524 

$2,767 

418 

$90.925 

$2,066 

253 

$54,000 

$2.676 

£!I:9Jll 

Bill! !t..!!W!u 

ResidentIal 109 ¢ 

Commen:lal 9.1 ¢ 

Industrial 58 ¢ 

Avg Monthly Res. Bill $125 

Oata Sources: 2008 EASI Anolytlcs, RUS, Platts, LOS. ElA 

NRECA Strategic Analysis 

91312009 

74% 

19% 

7% 

Stat! Ava All UUfltfu! 

Bill! !t..!!W!u 

9.4 ¢ 43% 

7.4 ¢ 35% 

5.5 ¢ 22% 

$107 
40 

Income ~ 

Average Househotd 557,585 

Per Caplla S23.242 

Oregon 

Electric Cooperative Consumers 

Legislative Profile 

Demographics 

Co=op vs. Slate 

.sIm ~ l..U!.!t .%..121ft 

$65.690 571 .212 ($6,105) -12.3% 

$26.232 S27,62O ($2,990) -11.4% 

Co-DD VB us 

l..U!.!t ~ 

(SI3,627) -191% 

(54,378) -159% 

Baee Co-op: §l;!!! US: Be&i~hmtia! Ma[ket §hare 

While 68.S''(' 83.3% 729% Co-op I:lHs 

Black 04% 1.7% 12.1% 177.776 

Asian 13% 4 .0% 44% 

Olher 98% 11.0% IOn'. 

•• lol.L. ......•.. .... I.D.O.% . .. ............... 1.00.% .. ............. .100.% .... • • " _ _ ~ ••• " .. . ... _ •• _A ___ 

Hispanic 83% 101% 152% Housing 

OWn 

Renl 

Education £l!.::2Di §l;!!! ~ 

lot.1 No High School 143% 12.8% 170% 

College Degree 21 .4% 26.5% 26 .3% Mobil. Home 

I Utility Comparlsonsl 

Consumers per Mile 

Revenue per Mile 

Distribution Investment per Customer 

68 

511,222 

$3,661 

~ 

329 

$53.923 

52.440 

BIll lUUIl!l 

Re.ldentlel 76 ¢ 

Commercial 66 ¢ 

Induslrl.1 5.0 ¢ 

Avg Monlhly Res. Bill $90 

O.1e Source.: 2008 EASI Analytic., RU5, PiaU., LOS. EIA 

NRECA Sirslegic Anelysl. 

91312009 

51% 

22% 

27% 

~ ~ 

1.506,661 118% 

... .- -.-- ~." -. .- .• - .. .. . .. * .. __ .. --. _ .• _ •• _ ••••.• _ .• 

Co-op: 

73.2% 

26.8% 

100% 

196% 

Municipal: 

30.2 

$51,045 

$2,220 

§l;!!! .Y§; 

665% 687% 

335% 31 .3% 

100% 100% 

108% 77% 

Slate Average: 

297 

$49.079 

$2,523 

Sial. Avo Atl U!I!IlI,,: 

BIll .l1!!f.bIn 

8.2 ¢ 40% 

7.2 ¢ 33% 

5 .1 ¢ 27% 

583 
41 

Pennsylvania 

Electric Cooperative Consumers 

Legislative Profile 

Demographics 

C9=9P Vi State CO-Ol!n. U§ 

Income ~ §!m us: 1..QJft ~ 1..QJft ~ 

Average Household $53.164 $67,241 $71,212 ($14,077) ·20.9% ($16,046) ·25.3% 

PerCapila $21,422 $27,464 $27,620 ($6,062) ·22.1% ($6,198) ·22.4% 

Race co-op' §!m uS: Residential Market Share 

While 97.4% 648% 729% CIl'OP!:!!:!! liti!l!.l:!.!:I ~ 

Bleck 1()o,(, 96% 121% 197,349 5,068,719 39% 

Asian 0.4% 22% 44% 

Other 13% 3,4% 107% 

.. JpII!L 100% . . Joll'l. ........ J.O.Q% -.-'- .-.-.-,---~----'" "-----~-."~~ 

Hispanic 15% 4.3% 152% Housing Co-IlP: §!m us: 

OWn 611% 73.8% 687% 

~ 

Rent 169% 262% 31.3% 

Education State 1l§.; 

Tolal 100% 100% 100% No High School 177% 15.8% 170% 

College Degree 143% 24.4% 263% Mobile Home 152% 50% 77% 

IUtility Comparisonsl 

Municipal: State Average: 

Consumera per Mile 

Revenue per Mile 

Distribution Investment per CUslomer 

74 

$8,999 

$2.814 

345 

$64,750 

$2,224 

436 

$62,083 

$2,192 

341 

$63,686 

$2,235 

l<!!:!!R; 

B!II li.s!Lbl!! 

Residential 109 ¢ 

Commercial 98 ¢ 

Industrial 76 ¢ 

Avg Monthly Res. Bill $69 

Data Sources; 2008 EASI Analytics, RUS, Plaits, LOS, EIA 

NRECA Strategic Analysis 

91312009 

74% 

18% 

8% 

Stat, AYa All Utilities' 

Bill! li.s!Lbl!! 

10.9 ¢ 36% 

9.2 ¢ 31% 

69 ¢ 32% 

$96 
42 

Income ~ 

Average Household $57.823 

PerCeplta $22.791 

Race Co-op: 

White 908% 

Black 6.1% 

Asian 06% 

Other 25% 

Hispanic 27% 

Education ~ 

No High School 251% 

College Oegree t56% 

Consume", per Mile 

Revenue per Mile 

Tennessee 

Electric Cooperative Consumers 

Legislative Profile 

Demographics 

Cp::Op \t! St'tt 

Slale us: !..!WJ;. ~ 

$62.531 $71.212 ($4.708) -75% 

$25.334 $27.620 ($2.543) -100% 

Co.opw us 

!..!WJ;. ~ 

($13.369) -168% 

($4.829) ·175% 

.§.!!I.@ !l§i Residential Market Share 

800% 729% !<o-op HHi ~ Co-op % 

157% 121% 823.782 2.50B.789 328% 

13% 44% 

30% 107% 

, __ j911.·lL_ .. __ .~1JLD.'l'L .. _._ ",_ .. ____ " __ ._ ..... _._ .. ___ . __ ....... _. _. __ .. 

31% 152% Housing Co-op: .§.!!I.@ !l§i 

OWn 799% 727% 687% 

Rent 20,1% 273% 313% 

.§.!!I.@ !l§i 

Total 100% 100% 100% 

206% 17,0% 

216% 26,3% Mobile Home t8,0% 112% 77% 

IUtility Comparisons I 

C,,"op: JruI.; Slate Average: 

115 308 

$17.556 $57,423 

Distribution Investment per Customer $2.033 $1.774 

Municipal: 

32.5 

$65,406 

$1.963 

278 

$54,597 

$1,974 

l<2:!U!.; 

B!1!! ~ 

Resldenllsl 8.0 ¢ 

CommercIal 87 ¢ 

Industrial 59 ¢ 

Avg Monthty Res Bill $114 

Oata Sources: 2008 EASt Analytlcs, RUS. Platts. LOS. EIA 

NRECA Strategic Analysis 

91312009 

80% 

24% 

16% 

SIal. Avg. All Ulllllles' 

Bl!l! 

76¢ 

81 ¢ 

52 ¢ 

S105 

~ 

40% 

28% 

31% 
43 

Income &.!!.:wI.:. 

Average Household $52.695 

Per Caplla $17.849 

Utah 

Electric Cooperative Consumers 

Legislative Profile 

Demographics 

§.1m l.!Ii;. 

$71.449 $71,212 

$22.755 $27.620 

C0:9P yB Sial. 

($18.754) .262% 

($4.906) ·216% 

Co~opvs us 

($18.517) ·26.0% 

($9,771) ·35.4% 

Race co..op· Slate US: Resjdential Market Share 

White 860% 

Black 01% 

Asian 06% 

Other 133% 

.. _ . .1olal _____ • ___ -100%._ •...... _ .. 

Hispanic 49% 

Education ~ 

No High School 140% 

College Degree 195% 

Consume", per Mile 

Revenue per Mile 

Distribution Investment per Customer 

ResldenUal 

Commercial 

Industrial 

Avg Monthly Res. Bill 

87.1% 729% 

08% 121% 

2.7% 44% 

9.3% 107% 

• 100.% .. __ •••• __ 100% .... 

109% 152% 

§!!!t!! .Y.§i 

103% 170% 

275% 263% 

Co-op HHs 

34.216 

Housing 

Own 

Rent 

Tolal 

Mobil. Home 

lUtility Comparlsonsl 

55 

$11.052 

53.210 

281 

$43,323 

$2.603 

~ 

f!!I! ~ 

65 ¢ 40% 

66 ¢ 43% 

59 ¢ 18% 

$83 

Oala Sources: 2008 EASI AnalytiC'S, RUS. Platts. LOS. EIA 

NRECA straleglc Analysis 

91312009 

851.676 

Co-op: 

61.6% 

18.4% 

100% 

166% 

713 

$102,639 

$1.354 

§!!!t!! 

742% 

258% 

100% 

49% 

~ 

40% 

l.!Ii;. 

687% 

31.3% 

100% 

77% 

Stat, Average· 

343 

$51.631 

$2.422 

Slate Avo AI! UllIlIles' 

f!!I! 

6.2 ¢ 

65 ¢ 

4.5 ¢ 

$65 

~ 

31% 

37% 

32% 
44 

Income Co-op: 

Average Household $63.304 

Per Capita $25.327 

Vermont 

Electric Cooperative Consumers 

Legislative Profile 

Demographics 

Co.ap ya. State 

.!!!D!! ~ SOlff: ~ 

$65.192 $71,212 ($1.888) -29% 

$27,097 $27,620 ($1.770) -65% 

Co..opvs.us 

!.W.ft ~ 

($7.908) -111% 

($2.293) -8.3% 

Race !<9.:!!I!i .!!!D!! us: Residential Market Share 

White 965% 

Black 0,3°/0' 

Asian 05% 

other 27% 

1.01;11 109.% . 

Hispanic 16% 

Education !<9.:!!I!i 

No High School 12.1% 

College Oograe 306% 

Consumers per Mile 

Revenue per Mile 

OlslribuUon Investment por Customer 

ResidenUal 

Commercial 

Industrial 

Avg Monthly Re •. Bill 

960% 729% C!!:21! t:!t:!!i 05% 121% 47.749 10% 44% 

24% 10.7% 

10.9% " ..... lQO.,!,~ 

16% 152% Housing 

Own 

Y.§; Rent §iI!1!l 

Total 

117% 170% 

315% 263% MobVeHome 

IUtility comparisonsl 

93 

$10.900 

$3.015 

22.9 

$44,606 

$1.769 

Co-oP; 

B!l!! ~ 

16,4 ¢ 55% 

13.1 ¢ 24% 

94 ¢ 20% 

$90 

Oota Sources: 2008 EASI Anelytlcs. RUS. Platts, lOS, EIA 

NRECA Strategic Analysis 

91312009 

~ 

258.583 

!<9.:!!I!i 

815% 

185% 

100% 

11.7% 

255 

$39.174 

$1,768 

~ 

18.5% 

~ Y.§; 

733% 667% 

26.7% 313% 

100% 100% 

88% 77% 

State Average; 

228 

$42.300 

$1.822 

State AVa. All Utllllles: 

B!l!! ~ 

141 ¢ 37% 

123 ¢ 35% 

69 ¢ 28% 

$64 
45 

Washington 

Electric Cooperative Consumers 

Legislative Profile 

Demographics 

~2:!ZIID §Yl! ~2:!!gn us 

Income ~ ~ .1m; l..Ql.II; .%..121ft l..Ql.II; .%..Q!tt 

Average Household 565.121 572,608 $71,212 ($7,487) -10.3% ($6,091) -86% 

Per CapllB $25.207 $28,706 527,620 (53,499) -12.2% ($2,413) -8.7% 

Race Co-op: State us: Residential Market Share 

WhHe 807% 

Blac!< 3.0% 

Asian 36% 

OIher 127% 

.. Tola'---. ....... 100% . 

Hispanic 10.1% 

Education Co-op' 

No High School 126% 

College oogree 23.4% 

Consumers per Mile 

Revenue per MUs 

DistributIon Investment per Customer 

Residential 

CornmerdaJ 

Induslllal 

Avg Monlhly Res Bill 

78.4% 729% CO-OR HHs 

3.3% 121'l'. 143,665 6.9'l'. 4.4% 

113% 107% 

_ .. 100% ... 100% . 

9.4% 152% Housing 

OWn 

IDm lI.§;. Renl 

Tolal 

111% 17.0% 

291% 26.3% Mobile Home 

I Utility Comparisonsl 

78 

510,719 

$3,564 

39.7 

$54.579 

52.557 

Co-op: 

~at. .%..l!!..§Alu 

6.7 ¢ 56% 

5.5 ¢ 31% 

4 .7 ¢ 13% 

$90 

oalB Sourc •• ; 2008 EASI Analy1lcs, RUS, PlaUs, LOS, EIA 

NRECA Slraleglc Analysis 

91312009 

li!!1!.Hl1! 

2,574,701 

Co-op: 

734% 

268% 

100% 

16.3% 

448 

$72,091 

$2,969 

l<!!:!!I!..Y! 

5.6% 

§!!!! us: 

669% 687% 

33.1% 31 3% 

100% 100% 

90% 77% 

StaW Avaraa,' 

408 

$61,970 

$2.843 

St,t. Ava All Utlllll,,· 

B.Ill 

73 ¢ 

66 ¢ 

4.6 ¢ 

$76 

~ 

41% 

35% 

24% 
46 

The CHAIRMAN. Thank you very much, Mr. Stephen. 

Mr. Bertheaud. Bertheaud (Berthode) or Bertheaud (Berthoud)? 

Mr. BERTHEAUD. Thank you. Bertheaud (Berthoud). Thank you. 

The CHAIRMAN. Bertheaud. Thank you, Mr. Bertheaud. Please 

proceed. 
47 

STATEMENT OF EDMOND P. BERTHEAUD, JR., CHIEF ACTUARY 

AND DIRECTOR OF CORPORATE INSURANCE, THE DUPONT 

COMPANY, WILMINGTON, DE 

Mr. BERTHEAUD. My name is Edmond Bertheaud. I’m the chief 

actuary and director of Corporate Insurance for the DuPont Company. I serve on the American Benefits Council board of directors, 

on whose behalf I testify today. 

I thank Chairman Harkin, Ranking Member Enzi, and the members of the committee for the opportunity to be here today to discuss the role of the employer-sponsored defined benefit pension 

plan. 

The American Benefits Council is a public policy organization 

representing principally Fortune 500 companies and other organizations that assist employers of all sizes in providing benefits to 

employees. Collectively, the Council’s members either sponsor directly or provide services to retirement and health plans that cover 

more than 100 million Americans. 

DuPont is a science-based products and services company founded in 1802. DuPont put science to work by creating sustainable solutions essential to a better, safer, healthier life for people everywhere. Operating in more than 90 countries, DuPont offers a wide 

range of innovative products and services for markets, including 

agriculture and food, building and construction, communications 

and transportation. 

DuPont has operated a defined benefit pension plan for over 100 

years. Beginning in 2007, DuPont chose to change its emphasis 

from defined benefit to defined contribution. The defined contribution plan now provides a 3 percent company contribution plus a full 

match of the employee contribution up to 6 percent of pay. New 

employees no longer participate in the defined benefit plan, but to 

help existing employees with the transition, accruals in that plan 

continue for those employees at one-third of their previous rate. 

Defined benefit plans are an effective means of providing long 

service employees with a secure retirement. Such plans protect employees from investment risk and offer employees guaranteed income for life. In that regard, DuPont’s defined benefit plan has 

never offered a lump-sum option and was designed to provide employees with a steady stream of retirement income. 

As a matter of policy, we and many other Council members are 

supportive of the defined benefit system. However, the legal and 

competitive environments have caused many companies to move 

away from that system. We hope that a discussion of the reasons 

for this will be helpful to the committee. 

In brief, here are our primary concerns, together with the concerns of other Council members. 

First, publicly traded plan sponsors have financial reporting considerations. Under U.S. generally accepted accounting principles, 

defined benefit pension plan assets and liabilities are determined 

annually in a snapshot view. Such snapshots affect the sponsor’s 

balance sheet immediately so that when a sudden shortfall arises 

as a result of a severe economic downturn such as we experienced 

in 2008 and 2009, or due to low spot interest rates, investors can 

become concerned. 
48 

Shortfalls also cause volatility in the sponsor’s corporate income, 

and the rating agencies consider them in the same category as 

debt. 

By contrast, the cost of defined contribution plans is stable as 

employee compensation, results in no long-term company liabilities, 

and require very little explanation to investors. 

Second, defined benefit plan funding rules used to be structured 

to permit companies to contribute less during challenging economic 

times and more during favorable economic times. This made defined benefit plans very attractive to companies. Unfortunately, 

over the last 25 years, the pendulum has swung in the exact opposite direction. Now the rules are less flexible. Extremely large and 

potentially unfavorable contributions are required when times are 

toughest. Defined benefit funding has also become less predictable, 

which is inconsistent with business planning. 

Third, it seems many employees do not value the promise of a 

lifetime income as much as they value retirement accounts. Without supportive accounting and funding rules, and with employee 

sentiment favoring defined contribution plans, employers are not in 

a position to educate employees about the value of a defined benefit 

pension plan. 

Fourth, the significant increases in PBGC premiums that are 

being discussed, and the PBGC deficit itself upon which the increases are being justified, should be carefully examined by Congress so as to avoid burdensome and inappropriate increases. There 

are serious questions about the size and calculation of the PBGC’s 

deficit that should be understood by Congress. 

Fifth, the regulation of employee benefit plans has grown considerably, and the employee benefits field has become an area of the 

law that is well known for its complexity and burdensome regulatory regime. To be sure, plan sponsors appreciate the importance 

of rules that are appropriately protective of plan sponsors’ and participants’ interests. But those interest are not well served when requirements are unnecessarily broad, when there are conflicting 

rules from agencies, overlapping reporting, and communication requirements where the rules are very overly burdensome. 

We look forward to working with the committee to find ways to 

improve the regulatory environment. 

In closing, the employer-sponsored retirement system is important to the long-term retirement security of Americans. Its strength 

is dependent on a concerted effort amongst all stakeholders—government, employers, and employees. Attaining retirement security 

is dependent on developing consensus on policy, a strong and flexible legal and regulatory environment, and improved understanding 

among employees of the importance of retirement security and the 

value of benefits being offered. 

We look forward to working with the committee as they delve 

into these issues. Thank you, and I’m happy to answer any questions. 

[The prepared statement of Mr. Bertheaud follows:] 

PREPARED STATEMENT OF EDMOND P. BERTHEAUD, JR. 

My name is Edmond P. Bertheaud, Jr., and I am chief actuary and director of 

Corporate Insurance for the DuPont Company. I also serve on the Policy Board of 

Directors for the American Benefits Council (the ‘‘Council’’) for whom I am testifying 
49 

today. On behalf of DuPont and the Council, I want to thank the committee for 

holding this hearing on such a critical topic and for inviting us to testify. 

The Council is a public policy organization representing principally Fortune 500 

companies and other organizations that assist employers of all sizes in providing 

benefits to employees. Collectively, the Council’s members either sponsor directly or 

provide services to retirement and health plans that cover more than 100 million 

Americans. 

DuPont is a science-based products and services company. Founded in 1802, DuPont puts science to work by creating sustainable solutions essential to a better, 

safer, healthier life for people everywhere. Operating in more than 90 countries, DuPont offers a wide range of innovative products and services for markets including 

agriculture and food; building and construction; communications; and transportation. 

DuPont has operated a defined benefit pension plan for over 100 years. The plan 

pays monthly benefits based on years of service and average pay. The intent of the 

plan is to provide a retirement income stream. There has never been an option to 

receive pension benefits in a lump sum, except as required to preserve benefit forms 

after acquisitions. 

Starting in the early 1970s, DuPont has operated a defined contribution plan in 

addition to the defined benefit plan. This plan provided the opportunity for employees to save by payroll deduction and was meant to supplement retirement income 

from the pension plan. For most of this plan’s existence, the company matched half 

of the employee’s contribution up to 6 percent of the employee’s base pay. 

Beginning in 2007, DuPont chose to change its emphasis from defined benefit to 

defined contribution. The defined contribution plan now provides a 3 percent company contribution plus a full match of the employee contributions up to 6 percent 

of pay. New employees no longer participate in the defined benefit plan, but to help 

existing employees with the transition, accruals in that plan continue at one-third 

of their previous rate. 

VIEWS ON DEFINED BENEFIT PLANS

Defined benefit plans are an effective means of providing long-service employees 

with a secure retirement. Such plans protect employees from investment risk and 

offer employees guaranteed income for life. As a matter of policy, we and many 

other Council members are supportive of the defined benefit system. However, the 

legal and competitive environments have caused many companies to move away 

from the defined benefit system. We hope that a discussion of those reasons would 

be helpful to the committee. 

In brief, here are our concerns together with concerns of other Council members: 

(1) Defined benefit plan funding rules used to be structured to permit companies 

to contribute less during challenging economic times and more during favorable economic times. This made defined benefit plans very attractive to companies. Unfortunately, over the last 25 years, the pendulum has swung in the exact opposite direction. Now, the rules are less flexible. Extremely large and potentially unaffordable 

contributions can be required when times are toughest. 

(2) Defined benefit funding used to be predictable. Now it is significantly unpredictable, which is inconsistent with business planning. 

(3) Employees do not value the promise of lifetime income as much as they value 

retirement ‘‘accounts’’. Because of the other factors listed here, employers have less 

incentive to educate employees about the advantages of defined benefit plans. 

(4) Publicly traded plans sponsors have financial reporting considerations. Under 

U.S. generally accepted accounting principles, defined benefit pension plan assets 

and liabilities are determined annually in a snapshot view. Such snapshots affect 

the sponsor’s balance sheet immediately, so that when sudden shortfalls arise as a 

result of a severe economic downturn such as we experienced in 2008 and 2009, or 

due to low spot interest rates, investors can become concerned. Shortfalls can also 

cause volatility in the sponsor’s corporate income and the rating agencies consider 

them in the same category as debt. By contrast, the cost for defined contribution 

plans is as stable as employee compensation, result in no long-term company liabilities and require very little explanation to investors. 

(5) The PBGC has maintained a practice of intervening in the normal business 

transactions of defined benefit plan sponsors. This is true even when there is not 

increased risk to the PBGC. 

(6) The Administration has proposed imposing a $16 billion tax on defined benefit 

plan sponsors through premium increases for an alleged PBGC deficit that plan 

sponsors generally did not create. PBGC premiums should be set only after exten-
50 

sive consideration by Congress of the real risks posed to the PBGC by defined benefit pension plans. 

(7) In recent years, the regulation of employee benefit plans has grown considerably, and the employee benefits field has become an area of the law that is wellknown for its complexity and burdensome regulatory regime. To be sure, plan sponsors appreciate the importance of rules that are appropriately protective of sound 

objectives. But those interests are not well-served when requirements are unnecessarily broad and overly burdensome. Rather, the government should establish a coordinated legal and regulatory regime under which individual savers and employer 

plan sponsors can operate effectively. 

DISCUSSION

Funding. Employers can provide substantial help to employees when it comes to 

retirement savings and income with respect to all types of retirement plans. Employers are in an excellent position to know the retirement needs of their employee 

populations and can tailor their retirement programs to these needs. The government is in a unique position to help employers in this regard through supportive 

public policy. Many employers have maintained defined benefit pension plans over 

the years because public policy supported employer actions that served employees’ 

needs. 

There has, however, been a steady trend away from defined benefit plans for some 

time now. One reason for this trend is a dramatic change in public policy regarding 

funding. Pursuant to that change, the largest, least manageable funding obligations 

arise during the hardest economic times. 

We recognize the great strengths of the Pension Protection Act of 2006 (‘‘PPA’’). 

It was critical to establish the fundamental principle that a promise made is a 

promise kept. But it is also critical to learn from the economic downturn and refine 

the PPA in ways that respond to the lessons from the downturn. To help defined 

benefit plans, it is critical that plan sponsors have the flexibility to contribute less 

in the tough economic times. 

In this respect, when many defined benefit plans were put in place, their sponsors 

considered them to be long-term commitments. Plan sponsors expected to fund the 

plans as needed, but had flexibility to do so in a measured way when cash was 

available. Over time, the focus of changes in funding rules has been to view the 

sponsor’s responsibility less as a long-term commitment and more as a short-term 

requirement, with much of the flexibility removed. Restoration of this flexibility is 

critical. 

ERISA section 4062(e). The PBGC recently proposed regulations regarding various corporate transactions, including the shutdown of operations. These proposed 

regulations would reverse longstanding PBGC written policy and would impose potentially enormous liabilities with respect to routine transactions that involve no 

layoffs or shutdowns and pose no threat to the PBGC. Companies will find it extremely difficult to continue sponsoring defined benefit pension plans if their routine 

business transactions trigger large liabilities unrelated to any risk to the PBGC. In 

our view, this regulatory project is a critical test of defined benefit plan public policy. Given the depth of our concerns, we were very encouraged when last fall PBGC 

Director Joshua Gotbaum recognized the importance of these proposed regulations 

and extended the comment period to receive further input. We thank the Chairman 

and Ranking Member of this committee for their leadership with respect to that extension. We further hope that this hearing will lead to an open dialogue among Congress, plan sponsors, and the PBGC so that the PBGC rules will encourage rather 

than discourage plan maintenance. 

PBGC premiums. Recently there has been increased attention paid to the possibility of increasing premiums paid to the Pension Benefit Guaranty Corporation including the possibility of it being included in deficit reduction measures. The Pension Benefit Guaranty Corporation is charged with protecting the pension benefits 

of workers and retirees in the event a company sponsoring a defined benefit pension 

plan goes bankrupt. The PBGC is partially financed through premiums paid by the 

sponsors of defined benefit pension plans. We urge Congress to take the time to 

fully analyze the implications of proposals to increase the premiums. 

Proponents of increasing PBGC premiums have often cited the PBGC’s deficit and 

the need to ensure that companies sponsoring pension plans be responsible for that 

deficit. While many have tossed about the figure of $23 billion as PBGC’s deficit, 

there are many serious questions about this number which should be critically examined by Congress. For example, the $23 billion number is based on a study of 

the cost of buying annuities to satisfy pension liabilities, despite the fact that the 

PBGC does not purchase annuities. This can have a very material effect on the size 
51 

of the deficit. The PBGC actually resembles an ongoing pension plan in that it pays 

out benefits over many years. 

Moreover, PBGC’s report states that almost 30 percent of its self-reported deficit 

is solely attributable to the drop in interest rates over 12 months. Interest rates 

have been low as part of a national strategy to address recent economic challenges. 

It would be inappropriate to raise premiums without examining the role interest 

rates play in the PBGC’s deficit. 

While we understand the pressures that Congress is facing to address budget deficits, significant increases in PBGC premiums must be carefully examined—and not 

adopted based on pressure to find revenue raisers. 

Regulatory Burdens. Regulations should not conflict, go beyond the statute in 

interpretation, be overly broad or hastily implemented because that causes frustration, extra costs and confusion. President Obama acknowledged the critical importance of avoiding regulatory conflicts and burdens in his January 18, 2011, executive order on Improving Regulation and Regulatory Review. 

One area of current concern is the use of swaps by pension plans. Pension plans 

use swaps to manage interest rate risks and other risks, and to reduce volatility 

with respect to funding obligations. If swaps were to become materially less available to plans, plan costs and funding volatility would rise sharply. This would undermine participants’ retirement security and would force employers to reserve, in 

the aggregate, billions of additional dollars to address increased funding volatility. 

These reserves would have to be diverted from investments that create and retain 

jobs and that spur economic growth and recovery. 

In enacting the Dodd-Frank Wall Street Reform and Consumer Protection Act, 

Congress adopted ‘‘business conduct’’ standards to help plans and other swap 

counterparties by ensuring that swap dealers and major swap participants (MSPs) 

deal fairly with plans and other counterparties. A conflict has grown out of the business conduct standards and the DOL proposed fiduciary definition so that compliance with the business conduct standards would create a prohibited transaction 

under ERISA. The interaction of the business conduct standards under the DoddFrank Act and the DOL’s proposed fiduciary definition regulations should be publicly and formally resolved in a way that provides legal certainty that using swaps 

will not cause a violation of ERISA by the time the CFTC finalizes the business conduct standards. 

Furthermore, under the proposed business conduct standards, if a swap dealer or 

MSP ‘‘functions as an advisor to a plan with respect to’’ a swap, the swap dealer 

or MSP must act ‘‘in the best interests’’ of the plan with respect to the swap. Under 

the proposed rules, many standard communications used by a swap dealer or an 

MSP in the selling process would cause the swap dealer or MSP to be treated as 

an advisor. This means that swap dealers or MSPs acting solely as counterparties 

would be required to also act in the best interests of the plan. A swap dealer or 

MSP as a party to a swap transaction cannot have a conflicting duty to act against 

its own interests and in the best interests of its counterparty with respect to the 

swap. If such a conflict were to be imposed on swap dealers and MSPs, all swaps 

with plans would cease. 

If a swap dealer or MSP clearly communicates to a plan in writing that it is functioning solely as the plan’s counterparty or potential counterparty, no communication by the swap dealer or MSP should be treated as a ‘‘recommendation’’. 

Employers are committed to helping their employees save for retirement. However, the current defined benefit plan structure does not facilitate the creation or 

maintenance of pension plans. If Congress desires more defined benefit plans, significant changes may need to be made. The Council and its members look forward 

to working with this committee and Congress to find solutions. 

I appreciate this opportunity to discuss pension issues with the committee. Thank 

you for your time. I would be happy to answer any questions. 

SUPPLEMENTAL STATEMENT OF EDMOND BERTHEAUD

As mentioned in the full written testimony, in addition to a defined benefit pension plan that continues to accrue benefits for many of our employees, the DuPont 

Company defined contribution plan provides a 3 percent company contribution plus 

a full match of the employee contributions up to 6 percent of pay for a potential 

total contribution of 9 percent of compensation. 

On behalf of the American Benefits Council and the DuPont Company, I would 

like to clarify two points that were raised at the July 12, 2011 hearing referenced 

above. 
52 

EMPLOYEE PREFERENCES

First, the question was raised as to whether there is any support for the proposition that employees prefer account-based plans over traditional pension plans. The 

answer is, yes. For example, a 2006 personal finance poll found that 79 percent of 

those surveyed preferred a defined contribution plan to a defined benefit plan. Wall 

Street Journal Online/Harris Interactive, ‘‘Vast Majority Say the Government 

Should Take Action to Ensure Americans Have Enough to Live on in Retirement,’’ 

September 2006. In a 2002 survey, 73 percent preferred a plan with company 

matching contributions over a pension plan Transamerica Center for Retirement 

Studies, ‘‘Transamerica Small Business Retirement Survey.’’ November 2002. 

We are not suggesting that the literature on this issue is uniform. We are suggesting that there is a solid foundation for concluding that employees favor defined 

contribution plans over pension plans. Further support is found in the overwhelming shift to defined contributions over the last 25 years. It is not realistic to 

conclude that this shift did not reflect the demands of the workforce. Retirement 

plans of any kind are expensive; employers naturally desire to spend this money 

wisely so they are constantly seeking the best plan to recruit and retain employees. 

In choosing the right plan for their workforce, employers are sensitive to the fact 

employees have become more mobile. The median job tenure—the number of years 

with a worker’s current employer—is now 4.4 for individuals 16 years and older. Bureau of Labor Statistics, ‘‘Employer Tenure Summary,’’ September 2010. The percentage of employed wage and salary workers age 25 with over 10 years or more 

of tenure with their current employer is only 33.1. Bureau of Labor Statistics, Employer Tenure Summary, September 2010. As employees have become more mobile, 

many employers have tried to respond to workforce requests for retirement plans 

that grow more evenly across careers by establishing or strengthening 401(k) plans 

that include defined contributions by the employer. 

401(k) plans have been met with enormous popularity with employees. This is evidenced by the strong opposition employees have to changes to the defined contribution plan system and its tax benefits. Fully 88 percent of all U.S. households disagreed when asked whether the tax advantages of defined contribution accounts 

should be eliminated, while 82 percent opposed any reduction in account contribution limits. Nearly 90 percent of all U.S. households disagreed with the idea that 

individuals should not be permitted to make investment decisions in their defined 

contribution plan accounts. Ninety-six percent of all account-owning households 

agreed that it is important to have choice in, and control of, the investment options 

in their defined contribution plans. Investment Company Institute, Commitment to 

Retirement Security: Investor Attitude and Actions, January 27, 2011. 

With the popularity of 401(k) plans, it is no wonder that many companies maintain very robust plans that include the use of automatic enrollment and automatic 

escalation as well as matching contributions. In the case of some of the more robust 

plans, additional contributions not contingent upon contributions made by employees are also made. The DuPont Company is one of these plans as was noted in the 

primary testimony. 

DUPONT EDUCATIONAL INITIATIVES

I would also like to clarify a second point. DuPont has worked very hard to educate its employees about retirement planning, and how to achieve a secure retirement. In this regard, we are extremely proud of our record. 

We do not provide information to employees about retirement plan designs that 

DuPont does not sponsor, nor are we aware of any company that does so or would 

consider doing so. As discussed below, we are dedicated to helping our employees 

use the very generous programs that we provide to attain retirement security. 

We offer several retirement planning tools to our employees through our relationships with our Defined Contribution recordkeeper—Bank of America Merrill Lynch 

(BAML) and our Defined Benefit recordkeeper—Aon Hewitt. There is no additional 

cost to the employees to use these services. 

Advice Access. Advice Access is a service which helps employees determine how 

much they need to save for retirement. Employees can use the tool through the 

BAML on-line Web site or by phone by talking with a BAML Participant Service 

Representative. The tool automatically factors in the employee’s DuPont 401(k) and 

pension plan benefits. Employees can provide additional asset information (prior 

employer pension and savings plans benefits, other asset holdings, spouse asset 

holdings, etc.) as well as indicate various cash flow needs (college, weddings, second 

home, etc.) to be factored into the model at various retirement ages selected by the 

participant. The tool will then model expected needed savings both inside and outside—if necessary—of the 401(k) plan so that the participant can generate expected 
53 

cash flow needed at the retirement date. In addition, as part of the model, the tool 

makes recommendations for investment allocations across the various funds offered 

within the 401(k) plan. 

Pre-Retirement Financial Planning. In addition to the above, we have piloted 

a program to a select group of individuals who may be within 5–7 years of retirement. Participants in the program are encouraged to complete a ‘‘Retirement Readiness’’ profile through their on-line account at BAML. The profile questionnaire asks 

questions which help the participant think about the things needed in preparation 

for retirement—estate planning, beneficiary elections, elder care, getting pension estimates, etc. In addition, on-site seminars have been offered at various DuPont locations. These seminars are run by the Financial Advisors (FA) in the BAML Retirement Education Services group along with DuPont Human Resources. Seminars 

provide an overview of the DuPont benefit plans and Social Security, and help employees think about how to plan regarding their DuPont benefits as it relates to retirement. Employees also have the option to sign up for a free one-time consultation 

with a BAML FA who will provide specific recommendations based on information 

the employee provides to the consultant. 

The intent is to eventually offer this program to all employees—tailored to the 

needs of the various life cycles—young new hire, early family, mid-career new hire, 

mid-career family, and retirement eligible. 

DuPont Connection. In addition to the two programs above, pension plan participants can ask for detailed projected defined benefit pension estimates through 

our pension recordkeeper—Aon Hewitt. The Hewitt Web site also allows for some 

do-it-yourself on-line retirement modeling for the DuPont pension and 401(k) plans 

at various retirement ages, pay assumptions, and savings rates and rates of return. 

New Hires. Upon hire we provide a ‘‘Plan Highlights’’ brochure and ‘‘Investment 

Choices Guide’’ booklet which describe the 401(k) plan provisions as well as an overview of the funds offered. The ‘‘Plan Highlights’’ brochure describes: (1) the plan features (contributions, vesting, withdrawals, distributions, etc.), (2) how to enroll—including a description of our auto-enroll/auto-escalation feature if no action is taken 

by the employee, (3) how employees can access and monitor their accounts, and (4) 

the benefits of early participation in the plan through modeling. 

The ‘‘Investment Choices Guide’’ describes the basic asset classes used by investors (including returns of these general asset classes over the past 10 years), discusses the risks and rewards of investing and the importance of diversification, and 

provides an overview of each of the funds offered in the plan along with the estimated fees and expenses of each fund. Detailed information for each of the funds 

can be found in our quarterly ‘‘Fund Fact Sheets’’ which are available on the BAML 

Web site. 

The Advice Access tool is described in both of these packages. 

The CHAIRMAN. Thank you very much, Mr. Bertheaud. 

And now we’ll wind up with Mr. Marchick. 

STATEMENT OF DAVID M. MARCHICK, MANAGING DIRECTOR, 

CARLYLE GROUP, WASHINGTON, DC 

Mr. MARCHICK. Thank you, sir. Mr. Chairman, members of the 

committee, Senator Enzi, thank you very much for the opportunity 

to testify before you today on this important subject. 

I’d like to focus on four points. First, as you said, Mr. Chairman, 

pension funds provide essential liquidity that helps grease the U.S. 

economy. They’re absolutely essential. 

Second, as was stated earlier, defined benefit plans tend to outperform defined contribution plans, and therefore help to increase 

savings and consumer spending in the United States. 

Third, pension funds are a critical driver of growth and equally 

importantly are one of the only sources of long-term patient capital 

in the United States. 

And finally, pension funds provide the bulk of funding for venture capital, growth capital, private equity, and real estate funds, 

and those investments in turn create millions of jobs, more efficient 

companies, and drive innovation in the United States. 
54 

The bottom line is that private and public pension funds create 

jobs and drive economic growth in the United States at a time 

when we desperately need growth and higher levels of employment. 

Defined benefit plans create wealth for the middle class, as was 

stated earlier. They out-perform other forms of savings. Two studies show that defined benefit plans out-perform defined contribution plans by about 1 percent a year. Now, that may sound trivial, 

but over a 35-year period where an individual contributes $3,000 

a year, that person would have $200,000 more at the end of his or 

her period of employment. So the compounding is very significant. 

And let me give you two examples of long-term patient investments that have and will continue to create jobs in the United 

States which would not have been possible without a robust defined benefit system. Our firm invests in small, medium, and large 

companies in the United States. We’ve invested in about 80 companies in the United States; 75 percent of them are small or mediumsized companies. 

One example is an investment we made in 1999 in a company 

called Kuhlman Electric in Kentucky. Kuhlman made large transformers for the electric utility industry. And right after we made 

our investment, unfortunately, the entire market crashed, the California energy crisis, Enron, electric utilities cut capital spending, 

and we wrote down the investment to zero. Because this was longterm patient capital, pension funds had committed about 45 percent of the money to this particular fund and we had a 10-year investment horizon, we were able to weather the storm, put more 

capital up, and were able to ride out the cycle. 

And at the end of our investment period, which is 10 years, jobs 

were up by 25 percent, sales were up, and we were able to survive 

the downturn, turn the company around, and the end result was 

very positive. 

I’ll give you another example, which is in Connecticut we have 

developed a partnership with the State of Connecticut to refurbish 

and revitalize the service centers where you stop for gas, food, and 

restrooms on the road on Highway 95. Now, these service plazas 

were built in the 1940s and 1950s, and had not been upgraded for 

25 years. And obviously, as you all know, the State of Connecticut 

and other States are pressed for cash. So we basically structured 

a 35-year deal where we would put up the money, partner with the 

State of Connecticut. We would invest $178 million over 5 years 

and revitalize, refurbish, rebuild the service plazas, and then enter 

into a revenue-sharing agreement with the State which will 

produce a significant amount of revenue for both the State and for 

the pension funds that invested with us in this investment. This 

project alone will create 375 jobs. 

We’ve partnered with the SEIU in the State to create good jobs, 

and the State will share about $500 million in revenue from the 

investment, and we have examples of this in virtually every State. 

In Iowa, for example, we have investments in six companies that 

have about 1,300 employees, and in Minnesota we have investments in 10 companies that have about 1,300 employees; North 

Carolina—Senator Hagan was here—15 companies with 3,700 employees. 
55 

1World Bank Policy Research Working Paper No. 2421. 

2Federal Reserve, Flow of Funds, June 2011. 

State by State, and basically about 40 percent of the money that 

goes into venture capital, growth capital, real estate investing 

funds come from pension funds, and they would not be able to invest in long-term patient projects that can ride out the quarterly 

ups and downs over 5, 7, 10 years without the long-term investment horizon of pension funds. 

And so we’ve heard from you, Mr. Chairman, about the benefits 

that they pay to individuals, and we’ve heard about the huge contributions that the payouts mean for the middle class. But the role 

of pension funds as a driver of liquidity in the U.S. economy is absolutely central to the growth and vibrancy of our economy. Thank 

you very much, Mr. Chairman. 

[The prepared statement of Mr. Marchick follows:] 

PREPARED STATEMENT OF DAVID MARCHICK, MANAGING DIRECTOR, THE CARLYLE GROUP

Mr. Chairman, Senator Enzi and members of the committee, thank you very much 

for the opportunity to testify on the very important subject of the role that pension 

funds play in the U.S. economy. I also want to thank the Chairman and Ranking 

Member for approaching this important subject in a bipartisan manner. 

The Carlyle Group is a global alternative asset management firm with approxi- mately $150 billion in assets under management. We care deeply about the subject 

of this hearing because our mandate as a firm is to generate attractive returns for 

our investors, the largest groups of which are public and private pension funds. 

I would like to focus on four points today: 

1. First, authoritative research demonstrates that pension funds provide essential 

liquidity that helps make U.S. financial markets function effectively and efficiently. 

2. Second, defined benefit plans tend to out-perform defined contribution plans, 

particularly where individual, non-professional investors make investment decisions. 

3. Third, pension funds are critical drivers of growth and economic activity in the 

United States because they are one of the only significant sources of long-term, patient capital. As such, they are able to invest in longer-term, less liquid asset classes, and those asset classes tend to create jobs and generate efficiencies in the U.S. 

economy. 

4. Finally, pension funds provide the bulk of funding for venture and growth capital, real estate and private equity investments, and those investments in turn create millions of jobs, and more efficient companies, driving innovation in the U.S. 

economy. 

The bottom line is that private and public pension funds create jobs and drive economic growth in the United States at a time when we desperately need more growth 

and lower unemployment. 

1. PENSION FUNDS ARE AN IMPORTANT DRIVER OF LIQUIDITY IN THE U.S. ECONOMY

The size and scale of pension funds have helped to drive the development of the 

U.S. financial system. Defined benefit pension systems depend on asset accumulation to pay benefits, which increases demand for new investments and accelerates 

securities market development. World Bank researchers have established a causal 

relationship between pension funds’ asset accumulation and stock market development in many countries.1 In other words, the larger and more developed a country’s 

pension funds, the larger and more developed a country’s stock market. Stock market growth obviously creates growth in income and national wealth. 

Pension funds also help stimulate the development of non-bank finance channels, 

including the issuance of corporate bonds and commercial paper that reduce businesses’ external financing costs relative to bank loans. 

At the end of the first quarter of 2011, U.S. private pensions held $6.27 trillion 

in total assets, while State and local government employee pension funds held more 

than $3.03 trillion in assets.2 Of this $9 trillion of total assets, $4 trillion was invested directly in corporate equities, with an additional $2.4 trillion invested in mutual funds that invest in corporate securities. In total, private and public pension 

funds accounted for about one-third of the total market capitalization of domestic 
56 

corporations, which the Fed estimates at $18.2 trillion. Pension funds play a key 

role providing liquidity for initial public offerings, private placements of equity and 

debt securities, and large block securities trades. Without a large and strong pension fund sector in the United States, the cost of capital to businesses would increase, slowing growth. 

Defined benefit pension funds also provide large benefits to investors. By pooling 

savings and risks across beneficiaries, pension plans create economies of scale, 

which results in lower average costs for investors. These economies of scale also enable defined benefit funds to invest in large investment opportunities, including 

large-scale natural resource development and other types of project finance that 

would otherwise be unable to attract competitive financing. 

2. DEFINED BENEFIT (DB) PLANS OUT-PERFORM DEFINED CONTRIBUTION (DC) PLANS

DB plans’ economies of scale and wide range of investment opportunities translate 

directly to higher returns than other forms of savings, including DC plans and individual retirement accounts (IRAs). By out-performing other forms of savings, DB 

plans reduce the amount of resources that need to be set aside today to fund a given 

level of future retirement income. In other words, for the same level of savings 

today, DB plans can generate sufficient future investment balances to provide higher levels of retirement income. The economy benefits because higher returns create 

more consumer demand, which in turn creates more rapid economic growth. 

Two authoritative studies published in the last 5 years show that DB plans 

achieved higher returns than both DC plans and IRAs. A 2006 paper published by 

the Center for Retirement Research at Boston College found that DB plans out-performed DC plans by 1 percent per year between 1988 and 2004. This finding was 

confirmed by research from Watson Wyatt, a leading retirement consulting firm. 

Watson Wyatt also observed a 1.09 percent per year return differential between 

1995 and 2006. The Watson Wyatt study analyzed corporate DB plans and 401(k)s 

in both bull and bear markets and found that larger DB plans out performed 

401(k)s in part because larger plans ‘‘generally have access to a wider variety of investment options and economies of scale and, in the case of DB plans, more investment expertise.’’ That study concluded the following: 

‘‘Trustees for DB plans have a fiduciary responsibility for investment performance. They or the professionals they hire also usually have considerable financial education, experience, discipline and access to sophisticated investment 

tools—advantages not typically shared by individual participants in 401(k) 

plans. These advantages help DB plan investors maximize their returns and 

maintain well-diversified portfolios, so they can generally ride out market fluctuations more smoothly than 401(k) plan participants.’’ 

Although one may question the benefit of a 1 percent differential, the results over 

time are significant. As shown in the hypothetical example below, an individual who 

made the median annual employee contribution of $3,000 for 35 years would realize 

a difference in the end-of-period balance of nearly $200,000 with just a 1 percent 

increase in annual returns. 

Extrapolated Return Differentials 

Defined 

benefit 

Defined 

contribution 

Return .......................................................................................................................................... 10.30 percent 9.21 percent 

Years ........................................................................................................................................... 35 35 

Annual Contribution .................................................................................................................... $3,000 $3,000 

Ending Balance ........................................................................................................................... $871,256.12 $678,715.35 

As a firm that invests in companies throughout the United States, we understand 

the challenges that companies face from a competitive position with respect to defined benefit plans. U.S. companies are facing huge competitive pressures, and the 

costs and uncertainties associated with escalating retirement and medical obligations have led to a trend by corporations away from DB toward DC plans. But this 

trend does not undermine the fact that from a macro-economic perspective, as mentioned above, DB plans make enormous contributions to the U.S. economy and tend 

to out-perform other forms of saving. 
57 

3Preqin, 2011 Global Private Equity Report. 

3. PENSION FUNDS ARE CRITICAL DRIVERS OF GROWTH AND ECONOMIC ACTIVITY IN THE

UNITED STATES

Pension funds represent long-term, patient capital—one of the only significant 

sources of stable capital in the United States. This approach to long-term investing 

is necessarily driven by their structure: DB plans have liabilities that extend 20, 

30 or even 40 years, and therefore need to invest in assets that will match their 

long-term obligations. While pursuing long-term investment strategies is directly in 

pension funds’ self interest, their patient approach pays huge dividends for the economy. Pension funds allow firms to issue equity and longer-dated securities, which 

increases capital market development and lowers the cost of capital for American 

businesses. 

The length of time until a liability comes due helps to determine the expected return and liquidity characteristics of the investment used to fund that obligation. For 

example, a household with surplus cash today will choose different investment options for that savings depending on how it is expected to be used. If the money will 

be devoted to next month’s cable bill, the household would likely choose to put the 

money in a savings account and accept a lower expected return in exchange for less 

volatility. Conversely, if that money were intended for a college tuition payment in 

8 years, the more appropriate investment would be one that accepts greater shortterm volatility in exchange for higher expected returns. By nature of the longer time 

horizon, pension funds can accept less liquidity and more short-term volatility in exchange for higher expected returns. 

It is widely understood that technological change drives long-term economic 

growth, productivity and improvement in living standards. Institutions that hold 

longer-dated assets are critical to financing technological change because the cash 

flow from new technologies is paid out in the distant future, well beyond the investment horizons of banks and other investors. For example, consider that the first 

microprocessor was introduced in 1971 with very uncertain commercial prospects. 

By 2010, computer technology had fundamentally transformed the economy and society and annual semiconductor sales had reached nearly $300 billion. Institutions 

unable to absorb short-term uncertainty and volatility cannot fund investments in 

transformative technologies that increase employment and living standards. 

Consider the following: A large commercial construction project that takes 10 

years to develop is not likely to be funded by an institution that might need to sell 

its stake 18 months after groundbreaking. Similarly, the investor base of a company 

seeking to commercialize a new technology is not likely to be concentrated among 

investors subject to overnight withdrawals that might need to sell their interest in 

the venture during the early development stages. 

4. PENSION FUNDS PROVIDE THE BULK OF FUNDING FOR VENTURE AND GROWTH CAPITAL, REAL ESTATE FUNDS AND PRIVATE EQUITY, WHICH IN TURN CREATE MILLIONS

OF JOBS IN THE UNITED STATES

Pension funds are also the largest source of funding for venture, private equity 

and real estate funds—all of which tend to have long-term investment horizons. 

More specifically, public and private pensions account for 42 percent of all investments in venture capital, real estate, infrastructure, and later stage corporate finance.3 Based on a prorated allocation to current invested capital totals, pension 

funds provide financing for more than $100 billion in venture capital investments 

and more than $400 billion in growth capital and later stage corporate private equity investments. In addition, according to the Real Estate Roundtable, pension 

funds currently provide approximately $160 billion of needed equity capital to the 

commercial real estate industry in the United States at a time when the sector has 

been under great pressure. 

These investments contribute to a larger economy and more jobs. According to research from the World Economic Forum, productivity growth at private equitybacked companies is 2 percentage points greater than at comparable businesses, 

translating directly to higher wages. Private equity investment supports more than 

6 million jobs in the United States, according to 2009 data compiled by the Private 

Equity Growth Capital Council. An estimated 9 million jobs are generated or supported by real estate—jobs in construction, planning, architecture, environmental 

consultation and remediation, engineering, building maintenance and security, management, leasing, brokerage, investment and mortgage lending, accounting and legal 

services, interior design, landscaping, cleaning services and more. In 2010, according 

to the National Venture Capital Association, more than 1 in every 10 private sector 
58 

4The actual amount that fund investors contribute to a particular transaction frequently varies from the level of commitment those fund investors have made to a particular fund. This differential stems from a number of factors, including the investments made by a management 

team or co-investors. 

workers in the United States was employed by a company that had received venture 

capital funding at one point. 

A smaller DB defined benefit pension base would directly compromise the capital 

markets’ ability to fund these types of investments. The investment opportunities 

and potential employment gains would still be there, but the lack of patient capital 

with a sufficiently long investment horizon would make financing these projects 

much more difficult. 

The Carlyle Group invests in small, medium and large companies, real estate, infrastructure projects and financial services firms. Whether an investment is in a 

small, growing company, a large infrastructure project or a real estate asset, our 

strategy is the same: we seek to build long-term value in a company or asset 

through investments, improvements in management, and efficiency enhancements. 

Today, we have investments in approximately 80 companies based in the United 

States, 77 percent of which are small or medium-size businesses (fewer than 2,500 

employees), as well as about 125 real estate projects, which include commercial, residential, and health care or data centers. Combined, these companies employ more 

than 216,000 people in the United States in all 50 States. 

We invest in a variety of asset classes, most of which target long-term investments of 4 to 7 years. Some of our funds have investment horizons as long as 10 

or 12 years, one of the longest investment horizons a pension fund can invest in 

outside of 30-year bonds. 

My partners at Carlyle make the decisions when to invest, how much to invest, 

and how to manage the investment, but it is our investors’ money, matched by a 

commitment of 3–5 percent of our own money, that makes an investment possible. 

In other words, without the long-term, patient capital provided by private and public pension funds, private equity investment would not be possible. 

Allow me to give you a couple of examples of how long-term, patient capital from 

pension funds has helped to create jobs and economic activity in the United States. 

One of Carlyle’s earliest buyout funds, Carlyle Partners II, L.P., acquired 

Kuhlman Electric Corporation in October 1999. Public and private pension funds accounted for 45 percent of the capital committed to that fund. Kuhlman, which is 

based in Kentucky, was founded in 1894 and provides power transformers and related products to utility companies. 

Carlyle managed our investment in Kuhlman through tough economic conditions 

resulting from California’s energy deregulation initiative, the collapse of Enron, 

major reductions in customer capital spending, falling wholesale prices, and the sector’s challenging credit crisis. As a result of these conditions, Carlyle valued the investment at zero. 

However, Carlyle remained committed to Kuhlman. In fact, several investors and 

Carlyle employees personally invested additional capital to strengthen the company. 

Carlyle, together with management, helped turn the company around. Nearly 10 

years later, in August 2008, Kuhlman was sold by Carlyle to ABB, the global power 

and automation technology group, earning our investors an attractive return. For 

the fiscal years 2005, 2006 and 2007, Kuhlman’s revenue increased by approximately 26 percent, 26 percent and 45 percent, respectively. In 2007, Kuhlman experienced record results in all three of its operating divisions. In addition, Kuhlman’s 

overall employment levels increased approximately 25 percent during Carlyle’s ownership. At the time of the sale to ABB, the company had approximately 800 employees. During the downturn, Kuhlman maintained a positive relationship with its 

unionized workforce, and organized labor was an important part of the turnaround. 

Another Carlyle fund that is focused on infrastructure investments has developed 

an innovative partnership with the State of Connecticut to redevelop, operate, and 

maintain Connecticut’s 23 highway service areas across the State. Public and private pension funds contributed 42 percent of the $1.1 billion infrastructure fund 

that we manage.4 In this case, Carlyle’s infrastructure fund formed a 35-year publicprivate partnership with the State of Connecticut to finance the redevelopment and 

operations of highway service areas at a time when the State budget was under 

great stress. Carlyle and our partners plan to invest approximately $178 million in 

improvements and upgrades to the service areas over the next 5 years, investments 

that we estimate will create approximately 375 permanent and construction-related 

jobs—a 50 percent increase above the 750 jobs that support the service areas today. 
59 

In total, the State is expected to receive nearly $500 million in economic benefit 

from the redevelopment effort. 

Neither of these investments would have been possible without the commitment 

of long-term capital to Carlyle’s funds by private and public pension funds in the 

United States. In both of these cases, private and public pension funds contributed 

capital for 10 years, and we are working hard to provide attractive returns to those 

investors who have entrusted their assets with us. 

Thank you once again for the opportunity to testify. 

The CHAIRMAN. Thank you, Mr. Marchick. 

Thank you all very much. Very stimulating testimony. And, of 

course, last night I got to read your written testimony, and I think 

I’d like to start 5-minute rounds here. 

First let me start with Mr. Bertheaud. I just remember reading 

it, and I think you mentioned it also, and someone else mentioned 

that we had a number of plans that had gone down. Oh, yes, Senator Enzi said that in the 1980s we had 112,000—I think that was 

right—defined benefit plans, and in 2008 we only had 27,000. 

I keep asking, Why? What happened? Not just for you, but I’ll 

start with you, Ms. Oakley. Why? Why did this happen? If it’s a 

good driver in our economy, it’s patient capital, everything I looked 

at said it’s good investments, it’s low cost. I forget who had the 

chart in here about the cost ratio between defined benefit and defined contribution, about half. So if you get the same benefit at half 

the cost, why did all these plans go by the wayside? 

Ms. OAKLEY. Mr. Chairman—— 

The CHAIRMAN. I really want you to think about this because I 

think we have to come to grips with this. 

Ms. OAKLEY. Senator Harkin, one of the things that’s interesting 

in terms of the work that NIRS has done, we’re very familiar with 

private and public sector plans. If you look at what’s happened in 

the public sector, where defined benefit plans continue to cover 80- 

plus percent of the employees, a lot of it is their workforce values 

that plan. 

It’s also because the States have—they’re not as regulated as the 

private sector because there’s no PBGC, no government guarantee. 

And so the States really are responsible for making sure that they 

deliver those benefits to their employees, and they gradually, perhaps more gradually than what is currently allowed in the tax law 

for making contributions to pensions, they get to full funding. They 

get there a little slower, but they’ve gotten there and, again, 

they’ve gone through the same losses in the market. 

What we’ve seen when we compare public and private that’s the 

most startling is the percentage increase in contributions from a 

year-to-year basis. And the private sector contributions, the volatility of those contributions is things that we’ve also heard is very 

concerning, the unpredictability of the contributions, where everything else is predictable in the defined contribution—the defined 

benefit plan, and the defined contribution plan has a predictable 

contribution. That’s something that’s critically important, too, from 

what we understand, for private sector employers. 

The CHAIRMAN. It still would seem to me that the business community wants more predictability, less volatility. So if there’s more 

predictability and stability in defined benefit plans, why have we 

gone from—what did I say?—120,000 down to 27,000, 112,000 

down to 27,000, and I think it was mentioned by someone that de-
60 

fined benefit pension plans may be just going out the window. It 

may be the end of it. 

Mr. Stephen, any thoughts on this? I’m trying to come to grips 

with why this is happening. 

Mr. STEPHEN. I think from the employee side, Mr. Chairman, 

you’re right, that it is a predictable, guaranteed retirement benefit 

that the employee or then eventually the retiree can’t outlive. It’s 

guaranteed income for life if they take the annuity stream. 

However, from the employer’s side, since the full funding limit 

rules came into effect in 1988, those really—it changed the dynamic that began in the 1940s after World War II when DB plans 

were at their most popular clip, because of the way that the funding rules worked at the time. Obviously, I wasn’t there, but my history tells me that the way the funding rules worked is business 

cycle and pension funding cycle were on the same page. 

Now we find ourselves 60 years later in a counter-cyclical market. So we have pension funding rules in a different cycle than 

business times, which makes you fund more in down markets when 

capital is at a premium, and doesn’t let you fund as much in good 

times. 

The CHAIRMAN. I’ve read that in more than one testimony that 

we’ve had here. When did that happen? When were those rules 

changed? In other words, it makes sense to me. It’s just common 

sense. 

Mr. STEPHEN. Sure. 

The CHAIRMAN. I’m not an actuary or anything. If you in good 

times can pre-pay and put in more, then in bad times you put in 

less. Why was that changed? You or Mr. Bertheaud or Mr. 

Marchick. 

Mr. STEPHEN. Why?, I can’t answer. I can tell you when. 

The CHAIRMAN. When? When? 

[Laughter.] 

Mr. STEPHEN. When? It was when the full funding limit rules became effective in 1988. 

The CHAIRMAN. 1988. 

Mr. STEPHEN. Yes, sir. 

The CHAIRMAN. I’ve got to find out what that was all about. I 

was here at that time, but I was just a freshman Senator then. I 

just don’t remember that. 

Mr. STEPHEN. If it’s any consolation, I was in high school. 

[Laughter.] 

The CHAIRMAN. Rub it in, rub it in. 

[Laughter.] 

Mr. Bertheaud, again, OK, is this one of the keys, then, that 

change that was made? 

Mr. BERTHEAUD. Absolutely. That was one of the keys. 

The CHAIRMAN. Wow. 

Mr. BERTHEAUD. The concept of being able to fund more in good 

times and not to fund as much in bad times is a key for employers. 

Another thing, though, was the adoption of the current pension 

accounting rules and their development over the last several years, 

several decades. And where the companies, as there are fluctuations in the markets and fluctuations in interest rates which affect 

the amount of pension liabilities, these things now appear directly 
61 

on the balance sheets of corporations, and corporations end up having to explain why do you have, why are you ending up with so 

much liabilities on your balance sheet, that kind of thing. 

So it ends up being a financial concern to the management of corporations. 

The CHAIRMAN. But it wasn’t before 1988? I’m trying—I don’t understand—— 

Mr. BERTHEAUD. It was earlier in the 1980s, actually. The accounting rules came in about the early to mid-1980s, and they have 

developed over time. And especially just in this past decade, when 

the accounting rules became even more stringent and required 

these liabilities to go immediately onto the balance sheet. 

The CHAIRMAN. Mr. Marchick, I’ve gone over my time, but do you 

have a point of view on this? 

Mr. MARCHICK. Nothing to add. They explained it quite well. 

The CHAIRMAN. Senator Franken. 

STATEMENT OF SENATOR FRANKEN

Senator FRANKEN. Thank you, Mr. Chairman, for calling this 

very important hearing, and thank you all for your testimony. 

I’ll followup on exactly what the Chairman was talking about 

later. I had just one bit of confusion in reading Mr. Bertheaud’s 

testimony from yesterday. I’m sorry I came in late. I was at another meeting. 

But you basically say that employees prefer defined contribution 

to defined benefit plans. That has not been my experience when I 

talk to people who work for a living and who would be the people 

who would choose between those. And Ms. Oakley said that, in her 

testimony, 75 percent of Americans think that the decline of pensions have made it harder to achieve the American dream. And 

also I’ve heard from experts in previous hearings that Americans 

have difficulty conceptualizing what a 401(k) account balance 

means in terms of monthly retirement income. 

Can anyone respond to this, Mr. Bertheaud? Anybody else? You 

asserted this as a fact, and I’m wondering is it just your opinion? 

Is it based on something other than your opinion? 

Mr. BERTHEAUD. It’s been the experience of members of our association that many employees, especially younger employees, when 

you’re going out to hire employees, that they expect to—they value 

more the account-based type, because they can watch it grow. They 

can watch their contributions go in, they can watch them grow. 

They can watch their company’s contributions go in and grow, and 

they have value for it. 

Traditional defined benefit plans, and there may be other designs 

that are available, but traditional defined benefit plans often are 

stated in terms of benefits at age 65, and it’s hard for a younger 

employee in the early parts of their career to appreciate that as 

much as an account that they can watch grow. 

Senator FRANKEN. Is it because people don’t see their life at one 

company the way people used to? Is that part of it? 

Mr. BERTHEAUD. That’s quite a bit of it. And the traditional design, which is the plan that DuPont had sponsored for many years, 

if your career is broken at any point, even in two different employers, or maybe three different employers, often you leave a lot of 
62 

value behind in that kind of an arrangement. So that the portability of the defined contribution type plan has become something 

that people value. 

Senator FRANKEN. Right. Ms. Oakley, did you have something to 

say about this? 

Ms. OAKLEY. Yes, Senator. Senator, I think when we recently did 

some opinion surveys, and what we also found was that 8 out of 

10 Americans think that everybody ought to have access to a traditional pension. We had to explain to some people what a traditional 

pension was because they didn’t know about them. But when they 

heard what it was and what it delivered, I think especially in light 

of the last decade of investment returns, individuals really do value 

that type of lifelong income security that they can’t outlive and a 

benefit that gives them a promise of a certain replacement of their 

income. 

It is a difficult thing for some people when they’re younger to understand that, but clearly I think as we’ve seen particularly in the 

public sector, where employees have a long career as a teacher, a 

police officer, a firefighter, they value those benefits. 

Senator FRANKEN. Those are all sort of public sector jobs. 

Ms. OAKLEY. Right. 

Senator FRANKEN. And Mr. Bertheaud is the actuary at DuPont. 

So I think there’s a difference. I mean, we kind of pinpointed some 

of this, which is that most people who work in the private sector, 

and even people who work in the public sector, don’t expect necessarily to do that job for their whole life. A policeman or a firefighter probably does, a teacher might, but not necessarily someone 

who works at DuPont, someone who works at DuPont may see 

themselves changing jobs. 

You’re an actuary, right? So you deal with numbers, and you 

trust numbers. You have a lot of faith in numbers. You’re an actuary. Did you have any numbers? Are there numbers? Did you do 

any, or is this anecdotal? 

Mr. BERTHEAUD. I don’t have numbers for you. 

Senator FRANKEN. OK, because you made an assertion that was, 

I guess, based on your opinion, but you didn’t state it as based on 

your opinion, and I find that troubling because as a Senator taking 

testimony, I’d really like to be able to understand what’s fact 

versus opinion, especially coming from someone as distinguished as 

yourself. 

I guess I’m out of time. OK, we’ll do another round. 

The CHAIRMAN. I want to pick up on Senator Franken. I can understand why a younger worker, if looking at a defined contribution 

plan and a standard defined benefit plan, would think to himself 

or herself, I like that defined contribution plan. I can understand 

that because I might leave DuPont. I might go someplace, and I 

take it with me. I can still remember in the 1980s, I was here. I 

was in the House at the time. I came over here in the mid-1980s. 

But I remember, that was the big deal about defined contribution 

plans. You could move it with you. And because the workforce had 

changed, people don’t work at one company. They change four, five, 

six, seven times. Now you had portability, and at any point in time 

you could go in and see how much you had. 
63 

That appeals to people. It appeals to me, and especially—well, 

maybe not at my age, but it appeals to younger people, I would 

think. So I can understand that a younger person presented with 

just this or that might say, ‘‘hmmm, I like that defined contribution.’’ I don’t have numbers, but I could just sense that that would 

be true, that they would like a defined contribution plan better. 

I think the problem is, as somebody mentioned, education. How 

are they being educated about their lifespan and how long they can 

live and the difference between a defined contribution, defined benefit? Also, and this is what intrigues me, and I’ve been wrestling 

with since we started this set of hearings, isn’t there some kind of 

a hybrid out there, something that you brilliant people could come 

up with that has the aspects of defined benefit but which you can 

take with you and move as you go from company to company? 

Mr. Stephen, you have your plans in your rural electric cooperatives. You said employees tend to stay there, but what if they went 

from one rural electric to another, to another? Would they still 

have that same plan? 

Mr. STEPHEN. In our plan, Mr. Harkin, in fact—I was going to 

jump in. In our plan, in the NRECA Retirement Security Plan, if 

you stay within the cooperative family and you go from one co-op 

to the other, and both co-ops have a retirement plan, you continue 

to accrue. So you still have that portability inside of our multiple 

employer plan. 

Now, if you start working at a co-op and then you go work for 

DuPont, obviously that benefit is not portable from the co-op to DuPont. However, they would roll it over to an IRA and then take it 

eventually. But inside the cooperative multiple employer plan, if 

you go from a co-op in Iowa to a co-op in Wyoming, it’s a portable 

benefit. It’s a unique thing to our multiple employer plan. 

The CHAIRMAN. Let’s take that a step further. 

Mr. STEPHEN. Sure. 

The CHAIRMAN. This is what I’m wrestling with. So you’ve got 

small businesses. 

Mr. STEPHEN. Yes. 

The CHAIRMAN. Which employ most of the people in America. 

Mr. STEPHEN. Yes. 

The CHAIRMAN. Sorry, DuPont, but it’s mostly small businesses 

out there. By the way, my brother worked all his life for DuPont, 

so I have very strong feelings about what a great company it is. 

But small businesses, if they could join some kind of a cooperative—did you guys say that?—or something—— 

Mr. STEPHEN. We’d like for you to say that. Yes, sir. 

[Laughter.] 

The CHAIRMAN. Well, I don’t know what it would be, but some 

kind of a network, because we all know insurance. Insurance, the 

broader the base, the cheaper it is for everybody, and the more stable it is. 

Mr. STEPHEN. Correct. 

The CHAIRMAN. And so if you had a system whereby small businesses could join in on defined benefit plans, so that if I worked 

for the ABC Company that had 10 employees, and then I went to 

work for the XYZ Company that had 30 employees and moved 

around like that, that each of them would have a stake in the de-
64 

fined benefit plan and I would somehow take it with me. Is that 

impossible? 

Mr. STEPHEN. I would just answer and say nothing is impossible, 

but it’s going to be inherently difficult because of the myriad of existing regulations on—— 

The CHAIRMAN. Well, if nothing else has come out of these hearings it’s that we’ve got to look at these regulations. What you all 

have brought up here I’ve heard before, and something has got to 

be done about this. So we’re going to zero in on that. 

I keep thinking that defined benefit plans aren’t really dead. 

Sure, there’s been this big cutback, but now what we’re seeing are 

the fruits of that. People now are retiring without enough money 

to last them, one out of four without any assets at all in terms of 

retirement. The retirement stool was built on three legs, right? 

There’s Social Security, a pension, and savings. So now we’re down 

to two, down to Social Security and savings, savings being the defined contribution plan. So we’ve pulled one leg of that stool out 

from underneath it, and I want to know is there any way of reversing it. 

Ms. OAKLEY. Senator Harkin, there is a model too in small communities. For example, we just at NIRS did a study on six case 

studies of well-funded plans that survived the financial market 

meltdown. One of those plans was a plan in the State of Illinois, 

and many people might say that they’d be surprised that Illinois 

has a well-funded public pension, but this municipal plan which 

enables small communities in Illinois, small cities, towns to come 

into a larger plan that then provides benefits for all of their employees in a defined benefit structure is one of the best funded 

plans in the country. 

And so there are models out there that do work and provide that. 

The CHAIRMAN. I just asked him to get me all the data he could 

on that. 

I’m sorry. Senator Franken. 

Senator FRANKEN. Well, again, Ms. Oakley, that again is for public employees, and I think we have to make the distinction. I mean, 

I have a defined benefit plan from being a member of a union 

where we had multiple employees, where I wrote for NBC, I wrote 

for Paramount, I wrote for on and on. But they paid into the Writer’s Guild for me, and I have a defined benefit plan there. So that’s 

a common defined benefit plan, right? 

Mr. STEPHEN. Just to clarify, yes, it is, Senator, in answer to 

your question, but there is a huge difference. And I know it’s a 

term of art between multiemployer plan, which you’re talking 

about. 

Senator FRANKEN. Yes. 

Mr. STEPHEN. Which is subject to a collective bargaining agreement. 

Senator FRANKEN. Right. 

Mr. STEPHEN. And a multiple employer plan like ours, which is 

not. We’re under the single employer rules for all of our funding 

and reporting obligations. 

Senator FRANKEN. OK. 
65 

Mr. STEPHEN. But we do have multiple employers with a common employment bond in our plan. For example, we’re all electric 

cooperatives. 

Senator FRANKEN. Right. And I love electric cooperatives. 

Mr. STEPHEN. And we appreciate that. 

Senator FRANKEN. We have a great electric cooperative in Minnesota, and I’m for increasing RUS loans, and I’m big on rural electric co-ops. Great. 

Mr. STEPHEN. And we thank you. 

Senator FRANKEN. Absolutely. You’re welcome. 

[Laughter.] 

OK. Now, on the regulation that we were talking about, Mr. 

Bertheaud, you talked to a number of these things, and Mr. Stephen, you talked to this, too, about the requirements at a down period to put in a lot of money when that isn’t a good time to do it, 

and at a high point that your contributions are actually capped. Is 

that right, Mr. Bertheaud? 

Mr. BERTHEAUD. Yes. I think those caps, when it came about in 

1988 and caused quite a bit less funding I think at that time, those 

caps have been relaxed somewhat by PPA in some of the more recent legislation, and that has allowed employers to contribute more 

when times are good. But it’s still—the problem is that the requirements when times are bad can be so harsh—— 

Senator FRANKEN. Right. 

Mr. BERTHEAUD [continuing]. That it causes a lot of trouble for 

employers. 

Senator FRANKEN. Did Congress do anything in the wake of this 

last downturn, the meltdown especially, to alleviate that at all? 

Mr. BERTHEAUD. Yes. 

Senator FRANKEN. And what were those measures? 

Mr. BERTHEAUD. Yes. There was some relief given, and the idea 

in the PPA which passed in 2006, that any shortfalls needed to be 

funded over 7 years, amortized over 7 years. What the funding relief allowed was to amortize that just for a couple of years, not forever but just for a couple of years of shortfalls, to amortize it over 

15 years or interest only for 2 years and then over 7 years after 

that. 

Senator FRANKEN. A longer period. 

Mr. BERTHEAUD. Right. 

Senator FRANKEN. Let me ask you this, because the Chairman 

spoke to this and about education, and I think you kind of talked 

to it, about your employees wanting to have the defined contribution rather than defined benefit. 

Do you make an effort? Do you make an effort to educate your 

employees about what a defined benefit is and what the advantages are? I mean, we’ve had testimony on what the advantages 

are to the company and society in terms of patient capital. And I 

think everyone should understand that that’s patient, like I have 

a lot of patience, as opposed to a doctor having a lot of patients, 

but patient, like long-term capital, and it’s a good thing, right? As 

opposed to someone who is in a defined contribution plan and is 

jumping their investments all over the place. 

So do you educate your employees? 
66 

Mr. BERTHEAUD. And I would say, the employers in our organization, the defined benefit rules and the contribution rules and the 

accounting rules that have kind of put a burden on us from that 

standpoint have really not put us in a position to educate our employees that defined benefit is the way to go because it presents 

such a burden for us as a corporation. 

Senator FRANKEN. So you feel it’s not in your interest to educate 

them, or it’s not in their interest, or both? 

Mr. BERTHEAUD. That’s—— 

Senator FRANKEN. I’m running out of time. 

[Laughter.] 

Mr. BERTHEAUD. I’m sorry, I’m sorry. 

Senator FRANKEN. No, I’m sorry. I was kidding. You take your 

time on that one. 

[Laughter.] 

Mr. BERTHEAUD. I guess, I’m not sure that employers who are 

burdened by the regulation, etc, accounting rules, really find that 

it would make sense for them to be convincing people a defined 

benefit is the way to go when it presents such a burden to the corporation. 

Senator FRANKEN. OK. Thanks for your honest answer. And I 

know, Mr. Chairman, if it’s OK, Ms. Oakley seemed to want to respond as well. 

The CHAIRMAN. Please. 

Ms. OAKLEY. I did want to say, Senator Franken, one of the 

things that NIRS asked employees when we did this nationwide 

survey of people, both in defined benefit, defined contribution public/private, we said should the government make it easier for employers to offer defined benefit plans, and 50 percent of the people 

we surveyed who responded strongly agreed with that statement. 

Eight out of ten people agreed with it. So I think, again, there is 

a perceived value. Perhaps it’s because they see the pension their 

parents have, the pension their grandparents have, and how it’s 

enabled them to sort of get through the financial crunch, and they 

wonder about themselves not having a pension and wanting to 

have that flexibility. 

Senator FRANKEN. Thank you. 

Mr. STEPHEN. Mr. Chairman, may I have one moment to—— 

The CHAIRMAN. Sure, sure. 

Mr. STEPHEN. To Senator Franken, to your point on education, 

we actually have a total—and lawyers shouldn’t use numbers, but 

we have 349 full-time employees between our Arlington headquarters and our Lincoln services operation that have something to 

do with administering our three benefit plans, our DB, our 401(k), 

and our group benefits trust. Of that number, we have 39 full-time 

people in our investments department, a subset of which, I believe 

it’s a number of 10, that are personal investment retirement counselors, that are all about investment education on a one-on-one 

basis, on a group basis, and on a co-op basis. So we do retirement 

plans, asset allocation, long-term savings strategies and how to 

save to augment those three benefits together. And if you’re a participant in one of the plans, you have a right to that for free. 

In addition, we have just under 20 what we call relationship 

managers. They are field reps inside of different regions of the 
67 

State. For example, Karen Alexander is our representative in Minnesota. She has Minnesota and Wisconsin, doing employee meetings, retirement planning 10 years out, 5 years out, one-on-one, as 

well as group settings, to try and prepare people, even in their 20s, 

on the value of retirement savings. 

Senator FRANKEN. So that seems like a stark difference between 

you and DuPont. And thank you, Mr. Bertheaud, for your really 

honest response to that, which is that DuPont kind of feels it’s not 

in its interests because of what you feel is the regulatory impediments to do this. So I thank you all for your testimony. 

Mr. BERTHEAUD. And, Senator Franken, understand that I’m also 

speaking not just for DuPont but for the American Benefits Council. 

Senator FRANKEN. Oh, yes. I’m sorry. 

Mr. BERTHEAUD. I’m involved in that. 

Senator FRANKEN. Thank you. 

The CHAIRMAN. Well, again, Mr. Bertheaud, going over your written testimony, you said DuPont has operated a defined benefit pension plan for over 100 years, and there’s never been an option to 

receive pension benefits in a lump sum. Then starting in the early 

1970s, DuPont started a defined contribution plan in addition to 

the defined benefit plan. So you have both now at DuPont. 

Mr. BERTHEAUD. We do have both now. 

The CHAIRMAN. And then, let’s see, you match up to 6 percent 

on the defined contribution, up to that. 

Mr. BERTHEAUD. Yes, plus a 3 percent contribution that does not 

require the employees to contribute. 

The CHAIRMAN. Oh, you put in. So if I work for DuPont and I 

want to have a defined contribution plan, if I didn’t put in anything, you’d still put in 3 percent. 

Mr. BERTHEAUD. Yes, sir. Yes. 

The CHAIRMAN. And then how much would you put into the defined contribution plan? Then 3 percent? 

Mr. BERTHEAUD. Well, that is the defined contribution. We put 

3 percent in—— 

The CHAIRMAN. I mean defined benefit. 

Mr. BERTHEAUD. OK. The defined benefit plan right now is continuing only for existing employees. 

The CHAIRMAN. New employees don’t get into it. 

Mr. BERTHEAUD. New employees do not get into the defined contribution plan. 

The CHAIRMAN. So you said that started in the 1970s. They offered it in addition to the defined benefit. When did you stop offering a defined benefit plan? 

Mr. BERTHEAUD. In 2007. 

The CHAIRMAN. Wow, just recently. 

Mr. BERTHEAUD. To new employees. 

The CHAIRMAN. Oh, I see. You said beginning in 2007, DuPont 

chose to change its emphasis from defined benefit to defined contribution. They didn’t change emphasis, they changed the whole 

thing. 

Mr. BERTHEAUD. For new employees, yes. Current employees 

continue to accrue a portion of their benefits. 
68 

The CHAIRMAN. So again, why in 2007 would DuPont end something they’ve done seemingly quite well for 100 years? Why would 

they end that in 2007? 

Mr. BERTHEAUD. It gets back to the burdens that we’ve talked 

about, the way the accounting rules end up putting the volatility 

of markets and the volatility of discount rates right on our balance 

sheet of corporations, and that combined with the funding rules 

that have become difficult for corporations to manage the fluctuations and having to contribute in down times, and these various 

reasons have caused employers to look more toward the defined 

contribution environment. 

The CHAIRMAN. Could you help us out a little bit more than that 

and maybe in writing or something? 

Mr. BERTHEAUD. We’d be happy to—the ABC staff would be 

happy to follow up with your staff, absolutely. 

The CHAIRMAN. A little bit more detail on that. 

Mr. BERTHEAUD. Absolutely. 

The CHAIRMAN. I’m still trying to get to why—OK, I understand 

the rules on pre-paying more and not paying. I get that. 

Mr. BERTHEAUD. Right. 

The CHAIRMAN. I get maybe some of the other reporting requirements. I don’t understand completely some of the IRS problems 

there, but we ought to look at that, too. 

Is it in your opinion, Mr. Bertheaud, now not as DuPont but now 

wearing your other hat, the American Benefits Council, is it worth 

us to really look at how we can save and maybe re-grow a defined 

benefit plan in America for the reasons that Mr. Marchick talked 

about in terms of patient capital, long-term investment, stability? 

Is it worth it? And assuming that we can look at some of the rules 

changes, IRS changes, regulatory changes, to make them better 

and to figure out some way of making them portable, is it worth 

it? 

Mr. BERTHEAUD. I think it is worth it. 

The CHAIRMAN. Well, we’d like to do that. That’s what we’re trying to get our hands on. Like I told you at the beginning, I said 

I don’t have the answers. 

Mr. BERTHEAUD. Right. 

The CHAIRMAN. But it seems to me everything that we’ve heard, 

not only from here but in previous sessions we’ve had, is that there 

is something good for the long-term interests of our country in 

terms of the long-term interests of the middle class of America, in 

terms of retirement, that other leg of that stool, that really is very 

compelling for a defined benefit program. So then I keep thinking, 

well, if that’s the case, why are we losing them all? So that’s what 

I want to try to figure out. As the Chairman of this committee, and 

I hope I speak for other members of the committee on both sides, 

that we try to figure that out and see if there’s a path forward, if 

you believe they’re really worth saving. 

Do you believe they’re worth saving, Mr. Marchick, I mean defined benefit plans? 

Mr. MARCHICK. I think the idea that you’ve articulated is one 

that is well worth exploring. I understand the pressures from the 

business side as a company that invests in business, and we hear 

from management about these pressures all the time. But if you 
69 

can take the individual flexibility of a defined contribution plan 

where people can take it with them, it’s portable, they can make 

choices, combined with the benefits of a defined benefit plan where 

you have large pools of savings, professional management, and a 

very long-term investment horizon, that’s a very attractive option. 

I don’t know how you structure that from new legislation requirements, but if you could do that, that would be very, very attractive, and I think that would be a wonderful thing to do on a 

bipartisan basis because it takes the ideas that many on the Republican side advocate in terms of individual choice and individual 

flexibility, individual mobility, with the ideas of many on the 

Democratic side in terms of pooled savings, and it would be a very, 

very creative bipartisan approach to pursue that strategy for the 

benefit of the country. 

The CHAIRMAN. Mr. Stephen. 

Mr. STEPHEN. Mr. Chairman, I wouldn’t say it’s important that 

we do what we can, I’d say it’s critical that we do what we can. 

And I think that with your leadership in this committee, with your 

dedication to this, we can come up with something that makes 

sense for business and ultimately for employees, which is the whole 

point. 

I would say that when you’re looking at DB funding, we were 

trying to figure out what happened. Well, if you look at it from a 

company standpoint, you’re looking at a long-term unfunded liability with unpredictable contribution rates year by year that are dependent on returns in the equity market, the financial market, and 

interest rates on the DB side. 

When you look at the DC side, at 401(k)s, I can look at my payroll for this year, know that I’m going to make a 1 percent negative 

election or a 1 percent base contribution or a 4 percent match, and 

I know exactly what my number is going to be every year within 

a percentage point or two. I can budget for it. It’s sure, it’s predictable, and it’s easy to follow. 

DB funding is completely different. It’s an unfunded long-term liability that the company now—if a company is now starting, if 

you’re starting a small business, to your point, if we’re in Iowa 

starting a small business, once I get past all of the FICA taxes and 

unemployment and everything that I’m doing to get my start-up 

company done, why am I going to have this new unfunded liability 

that I’m going to have no idea what my costs are going to be in 

3 years, let alone I’m trying to survive to the next quarter? 

So it’s a difference in the world marketplace where, to Senator 

Franken’s point, when you look at anecdotal data, of course, but 

real data shows—the Department of Labor—that an average American will change jobs seven to eight times in their working career. 

Without that portability on the DB side, someone who works for a 

company for a year-and-a-half doesn’t accumulate much, and the 

compliance costs and the start-up costs for that company to get 

that account set up for that person for a year-and-a-half there is 

upside-down, under water—use the analogy you want. 

So when you’re looking at it that way, there’s a difference between long-term employees with very low turnover where a long 

kind of legacy plan, if you will—I know that’s a bad word sometimes when you’re talking about pension plans—makes sense. For 
70 

us, it makes sense. For a very different market, for example, I 

know of a company that has several gas station convenience stores, 

I believe their annual turnover is 166 percent a year. They pay 

folks with no-fee debit cards. Those aren’t the kind of people that 

should be having a DB plan. It makes no sense. They come and 

work for 2 weeks and then they don’t show up again. 

So it’s different depending on your market, depending on your 

business, and depending on your long-term goal. 

The CHAIRMAN. That’s very good, very good. 

Yes, Ms. Oakley. 

Ms. OAKLEY. Senator Harkin, I think one of the other interesting 

things to look at and maybe learn a little bit from what happens 

in the public sector. A lot of people aren’t aware that public sector 

employees make a significant contribution toward their defined 

benefit plans, just as sometimes happens in the multiemployer 

side. They do that, and it does help. It helps reduce the cost for 

the employer directly. It gives some predictability to the funding. 

It also gives the employees a stake in the game. That forced savings helps them get that ownership and start to value that defined 

benefit plan. So that even today as we’re seeing a lot of reforms 

around the State, increased employee contributions, quite often 

that’s done in an environment legislatively where there’s discussion 

back and forth, or it’s done on collective bargaining situations 

where employees agree willingly to contribute more because they 

value those defined benefit plans. 

So I think there are ways. And, in fact, I believe that one small 

piece of the Pension Protection Act that really hasn’t gotten off 

fully was something called the DBK, which was a way of combining 

a defined benefit plan with 401(k) plans. And maybe there’s some 

hope to go back and look at the DBK where you get that tax benefit 

for the employees and still have a defined benefit plan that’s there 

to provide a benefit for the employees in the private sector. 

The CHAIRMAN. Very good. 

Senator Franken. 

Senator FRANKEN. Well, I’m going to go look back at the DBK. 

Who, Mr. Bertheaud, makes up the American Benefits Council? 

Mr. BERTHEAUD. It’s principally Fortune 500 companies and 

other organizations that assist employers in providing benefits to 

employees. 

Senator FRANKEN. OK, because it seems to me here that we’re 

talking about a whole bunch of different things that are happening 

all at once, different factors, one of which—and you talked about 

all the different uncertainty that faces a company, and Mr. Stephen 

talked to that a little bit. And talking about start-ups, DuPont, obviously, is not a start-up. Probably many of the Fortune 500 companies aren’t start-ups, almost by definition. 

So what it seems to me is that what we’re talking about here is 

a shift of the uncertainty from the corporation, from the business 

to the employee. And because this has happened over the last 20, 

30 years, we’re seeing—this is part of the middle class squeeze, if 

you will, or just another part of it, which is a shift of the burden 

from corporate America to people who are working and to the middle class. And that’s why I was wondering whether you did education about the benefits of this. 
71 

I want to ask Mr. Marchick a question just so that he can speak 

to the benefits, because you spoke to investments. How does a shift 

from defined benefit plans to defined contribution plans affect entrepreneurs and their access to capital, and could that shift have 

larger effects on the economy as a whole? 

Mr. MARCHICK. That’s a great question. One of the key distinctions between investments in a typical DC plan versus a DB plan 

is that the DB plan can invest in long-term illiquid assets, a very 

long-term corporate investment, a long-term real estate investment, a long-term infrastructure investment, 10, 20, 30 years. 

A defined contribution plan has to be liquid. And so therefore 

with liquidity, it’s typically going to larger, publicly traded companies that are large enough to be on a stock market. So that money 

is not going into small and medium-sized companies typically because they’re not large enough to have liquidity. 

And so one of the benefits of a defined benefit plan is they support venture capital investments. They support real estate investments. They support growth investments, which are investments in 

companies that may or may not make it, but the ones that make 

it grow so much faster than the ones that don’t make it that there’s 

a risk/reward ratio that overall benefits the United States and benefits our economy and makes it the most dynamic economy in the 

world. 

And so creating pools of capital that can fund those long-term 

riskier investments is essential for the vibrancy of our economy. 

Senator FRANKEN. So the vitality, the dynamic nature of our 

economy is helped by defined benefits. 

Mr. MARCHICK. By large pools of savings that can invest in the 

whole range of assets, some liquid, some illiquid, some short-term, 

some long-term, that can create the most balanced portfolio to not 

only create attractive investments but also create better returns for 

those beneficiaries. 

Senator FRANKEN. And is it in the interest of large corporations 

perhaps not to have that dynamism in the short term? 

Mr. MARCHICK. I think for large corporations—and again, we invest in small, medium and large. We see the pressures from the 

corporate side. Many large corporations, the uncertainty and the 

costs, the liability costs associated with long-term health care, longterm retirement obligations are very, very significant, particularly 

in the up and down of a market. And so there are pros and cons 

for large corporations. 

Obviously, large corporations want a dynamic U.S. economy. 

They want people to have as much money as they can that drives 

consumer demand. But the costs on their balance sheet, as Mr. 

Bertheaud said, are very, very high. And so in a highly competitive 

economic environment, there are very, very strong competitive 

pressures on large U.S. companies that have driven many of those 

companies to move toward defined contribution plans. 

Senator FRANKEN. What about all this money that we hear that is being sat on, this $2 trillion? I just want to ask you, Mr. 

Marchick, why is that not being invested? 

Mr. MARCHICK. I think a lot of it is not being invested because 

of lack of confidence about the future, that companies, investment 

firms make investments if they believe that the long-term return 
72 

on that investment will be attractive. And in a very uncertain economic environment, it’s very hard to make those investment decisions if you don’t have confidence about the future in terms of your 

ability to sell a product, sell a new service, provide new opportunities for the consumers, either individual consumers or business 

consumers of a particular product, because many investments take 

3, 5, 7, 10 years to pay off, and if you’re uncertain about the future 

of the economy, you sit on cash. 

Senator FRANKEN. OK. Well, my time is up. But it seems to me 

that we’re in a bit of a vicious cycle here. I don’t think that’s a new 

observation. 

So thank you, Mr. Chairman. 

The CHAIRMAN. Senator Franken, in just talking about risk, I 

couldn’t help but think—my staff always carries it for me—about 

shifting risk, The Great Risk Shift by Jacob Hacker. It talks exactly about this, about shifting risk, and I think that’s all right. In 

some circumstances that’s OK. 

But in terms of something that’s so important to our country as 

retirement because we’re living longer, we wish people would save 

more money, but they don’t. And in tough times, it’s hard for a 

family making $45,000 a year and they’ve got two or three kids, 

it’s hard to save any money on that kind of an income. 

So it seems to me that if we make a decision that defined benefit 

plans are worth saving, worth re-growing, not just sort of stabilizing but actually growing it, and that it’s good for the long-term 

interests of our Nation to do that, then maybe we ought to re-think 

perhaps the structure of defined benefits. Ms. Oakley talked about 

that. 

For example, for defined benefit plans, the employer puts in all 

the money. The employee doesn’t put in anything. So an employee 

says, not bad, they put it all in, I don’t have to worry about it. Of 

course, now it’s not portable. If I leave the company, I don’t get it. 

So that makes a defined contribution look better to me. 

On a defined contribution, the employee puts in the money, and 

the employer may or may not contribute to it, may or may not. 

But what if you had a defined benefit plan where employees had 

to contribute? Just like they do with a defined contribution plan 

now. We talked about someone who went to work for a couple of 

weeks and then moved on. Well, they got a paycheck. But if some 

of that had to be sliced off to go to a DB plan which would be there 

no matter where they went, it would seem to me that if you could 

work something out like that, that that would be in the long-term 

best interests for our country. 

Why can’t employees contribute to a defined benefit plan? Is 

there something, maybe a law against it? 

Mr. BERTHEAUD. No. Certainly, it’s not necessarily typical, but 

certainly it’s permissible. 

The CHAIRMAN. It is. 

Mr. BERTHEAUD. Employees can contribute to a defined benefit 

plan. 

Mr. MARCHICK. On an after-tax basis. 

Mr. BERTHEAUD. On an after-tax basis. 

The CHAIRMAN. On what? Oh, after-tax basis. 
73 

Mr. BERTHEAUD. Right, after-tax basis. But this kind of creative 

thinking is the kind of thing I think that we need to try to at least 

take a step toward reviving the defined benefit system. 

The CHAIRMAN. Well, I need more information. 

Ms. OAKLEY. Yes, Senator. One of the things I think, just sitting 

here on the panel listening, public and private plans are definitely 

different, but there’s a lot to be learned from public plans understanding what the private sector does, and private sector plans understanding how the public sector plans work. And I think you’ve 

done so much today in this hearing to bring light to that. 

In the private sector, they said employees can contribute, but it’s 

with after-tax dollars, and 401(k) plans highlight if you can do it 

with before-tax dollars, maybe that makes it easier for many people 

to do it. 

The CHAIRMAN. So 401(k) plans is before-tax dollars. 

Ms. OAKLEY. Exactly. 

The CHAIRMAN. Defined benefit, as the public employees put in, 

that’s after-tax dollars. 

Ms. OAKLEY. Well, actually, there’s a provision—this gets into 

where the tax code goes through these numbers and letters all the 

time. There’s another provision in the tax code that allows something called an employer pick-up for public employees so that that 

money is treated as before-tax dollars. So public employees can contribute to their employer’s pension with before-tax dollars, and that 

does make an incentive. It makes it more palatable for those contributions. 

The CHAIRMAN. That’s Federal tax dollars. 

Ms. OAKLEY. Federal. 

The CHAIRMAN. Is that true all over the country? If so, then 

that’s true for everyone, right? 

Ms. OAKLEY. It’s available to everyone. 

The CHAIRMAN. So it’s really not after-tax dollars. It’s before-tax 

dollars. 

Ms. OAKLEY. In the public sector, by and large, it’s probably before-tax dollars. 

The CHAIRMAN. But in the private sector, it would be after-tax 

dollars. 

Ms. OAKLEY. Right. 

Mr. BERTHEAUD. That’s correct. 

The CHAIRMAN. Well, now, that’s interesting. We’ll have to think 

about that one. 

Ms. OAKLEY. And that’s what the DBK proposal was going to try 

to address. It would let you put the before-tax dollars—— 

The CHAIRMAN. I’ll ask Michael about that. He said they still 

haven’t got rules out on that. What did you say? 

Ms. OAKLEY. Haven’t issued rules. 

The CHAIRMAN. They’re still working on it. Well, that’s who we 

ought to—let’s get them up here sometime, find out where they are 

on that. 

Mr. STEPHEN. Can we submit questions for the record on that? 

The CHAIRMAN. Absolutely. Yes, I could use some questions, absolutely. In fact, I invite that. If you’ve got questions that we need 

to be asking them, I’d invite that to come to this committee. Please 

submit them to this committee, absolutely. As I said, I don’t have 
74 

any set idea on what to do. I just have this sense from your testimony and others that the defined benefit plans really do have a 

value, a great value to our country, and it’s a shame to see them 

going down and almost being done away with. 

Now, if the consensus was that everybody said, ‘‘no, they’re not 

worth a darn or valueless, they don’t do the good things you talked 

about,’’ well, OK, fine, let them go. 

But that’s not what I’ve heard here. I haven’t heard this today, 

and I haven’t heard it in the other two or three hearings that we’ve 

had on this. But it seems like they’re dwindling and going away because no one is paying attention to it or no one is doing anything 

about it. And that’s what I want this committee to focus on. 

So I don’t know if I have any more questions. You’ve all been 

very forthright in your testimony, and I thank you for that. I would 

just ask you if you have some questions you’d like us to submit to 

get more of what IRS is up to; second, Mr. Bertheaud, you were 

going to give me some information, too. What was it I asked for? 

Now I can’t remember. I asked you to give me something here for 

the committee. I’m sorry; what was that? 

Mr. BERTHEAUD. It was information about the regulation that 

changed the system back in the 1980s. 

The CHAIRMAN. Thank you. Yes, I need that kind of background 

stuff, and any advice and suggestions that each of you have on how 

we change the regulatory structure. You all outlined them in your 

testimonies, that there’s a problem there. I’m sorry to say, I don’t 

see any solutions in here, OK? So I need you to, if you’ve got some 

ideas on how we change it, I really invite you to submit that to the 

committee. 

Mr. BERTHEAUD. We will. Mr. Chairman, the American Benefits 

Council would be happy to work with the committee on this. 

The CHAIRMAN. That would be wonderful. I’d appreciate it. 

Mr. STEPHEN. The NRECA will continue to work with you. 

The CHAIRMAN. I would appreciate that. 

Ms. OAKLEY. We’ll be happy to do that as well, sir. 

The CHAIRMAN. Thank you. 

Mr. Marchick. 

Mr. MARCHICK. I’m in. 

The CHAIRMAN. You’re in? OK, good. Thank you. 

[Laughter.] 

Anything else for the record that anybody would like to bring up? 

Something we might have missed, we overlooked? 

[No response.] 

No. Well, listen, you’ve been a great panel. You obviously all 

really know the system well, and we thank you so much for this. 

And help us try to work through this to see where we can move 

ahead in the future, OK? 

Thank you all very much. 

Mr. BERTHEAUD. Thank you, Mr. Chairman. 

Ms. OAKLEY. Thank you, Mr. Chairman. 

The CHAIRMAN. The committee stands adjourned. 

[Additional material follows.] 
75 

ADDITIONAL MATERIAL 

PREPARED STATEMENT OF HAROLD A. SCHAITBERGER, GENERAL PRESIDENT, 

INTERNATIONAL ASSOCIATION OF FIRE FIGHTERS

Chairman Harkin, Ranking Member Enzi, and distinguished members of the 

HELP Committee, I thank you for holding today’s critically important hearing on 

‘‘The Power of Pensions: Building a Strong Middle Class and Strong Economy.’’ As 

the General President of the International Association of Fire Fighters (IAFF), I 

have the honor of representing nearly 300,000 men and women who risk their lives 

daily to provide fire, rescue and emergency medical services protection to over 85 

percent of our Nation’s population. It is on behalf of these dedicated Americans that 

I wish to offer my thoughts on retirement security. 

In addition to speaking on behalf of IAFF members in all 50 States, I also speak 

as someone who has spent the better part of his professional life focusing on retirement security issues for first responders and other public employees. After serving 

as a Lieutenant in the Fairfax County Fire Department, I served as a public member of the County’s pension board. Upon my arrival in Washington, DC, I served 

as Counsel to both the National Conference on Public Employee Retirement Systems 

and the National Association of Government Deferred Compensation Administrators. And as President of the IAFF, I have greatly expanded our organization’s emphasis on retirement issues, creating a new Pension Department. In total, I have 

spent the better part of four decades championing retirement security for working 

Americans. 

It is from this background that I have come to fully appreciate the essential role 

that defined benefit pensions play both in our economy and in the everyday lives 

of retired Americans. I don’t believe it is hyperbole to say that defined benefit pension plans were one of the reasons why our parents’ generation retired with dignity. 

Unfortunately, the increasing absence of DB plans in compensation packages is a 

critical threat to the retirement security of both our generation, Mr. Chairman, and 

our children and grandchildren’s generations. 

For emergency responders in particular, defined benefit pension plans are simply 

irreplaceable. Any movement away from them—and you only have to pick up the 

newspaper to see that our pension plans are under attack in State capitals and city 

halls across America—would decimate the retirement security of fire fighters and 

their families. 

As a matter of public policy, State and local governments have adopted earlier retirement ages for public safety officers than other occupations. Many jurisdictions 

have mandatory retirement ages which require fire fighters and law enforcement officers to leave their job at a certain age. Working together with management and 

legislators, IAFF Locals have helped structure defined benefit pension plans that reflect these public safety realities. Defined contribution plans, which are dependent 

solely on the amount of money contributed rather than a benefit formula, undermine the policy goal of having a younger, more physically fit, public safety workforce. We do not believe it is wise public policy to force a fire fighter to remain on 

the job after they are no longer capable of performing their duties solely because 

a market downturn robbed their DC plan of the funds they needed to retire. 

Our DB plans also address the high rates of disability in public safety occupations 

by providing a secure retirement even for those who suffer a career-ending injury 

early in their careers. And our plans provide for the survivors of fire fighters who 

make the ultimate sacrifice in the line of duty. 401(k)-style defined contribution 

plans offer no such security for those who place their lives on the line each day to 

protect their neighbors, and who all too often pay a huge price for their service. 

The advantages of DB plans, however, are not limited to fire fighters and other 

public safety officers. In an apples-to-apples comparison, DB plans simply beat DC 

plans in several ways. Perhaps the most important way is in actual plan performance. In a Watson Towers study that compared DB and DC investment returns between 1995 and 2007, the study found that DB plans outperformed DC plans by 1 

percentage point per year. And 1 percentage point does not amount to pocket 

change. With a $5,000 annual contribution spanning 40 years, a difference between 

an 8 percent return and a 7 percent return is over $330,000. 

DB plans are also cheaper to run. Administration and investment costs for DC 

plans can cost as much as four times what a DB plan would cost. And who bears 

the full brunt of these additional costs? The employee. Again, these additional costs 

equal real money. According to the Illinois Municipal Retirement Fund, the administrative and investment costs associated with switching to a DC plan could cost 

them up to $250 million more than what they currently pay with their DB plan. 
76 

* The views expressed in this statement are solely those of Jack VanDerhei and should not 

be attributed to the Employee Benefit Research Institute (EBRI), the EBRI Education and Research Fund, any of its programs, officers, trustees, sponsors, or other staff. The Employee Benefit Research Institute is a nonprofit, nonpartisan, education and research organization established in Washington, DC, in 1978. EBRI does not take policy positions, nor does it lobby, advocate specific policy recommendations, or receive Federal funding. 

DC plans also punish people who are unable to put as much into their retirement 

accounts as they would like. Many people are unable to contribute to DC plans because a family member has high medical bills or other circumstances beyond their 

control. DB plans provide a secure retirement to workers regardless of other expenses the worker has to meet. 

But even those who conscientiously make maximum annual payments to their defined contribution plans do far better under a defined benefit scheme. A fire fighter 

who works for 30 years, starting at age 25 earning $30,000, would have to contribute more than $1,000 every month to even come close to providing the retirement income offered by a typical DB plan. It is simply not reasonable to assume 

that a family making $30,000 can devote 40 percent of their income toward retirement. 

And then there is the predictability and security of knowing that in retirement, 

you will get a check every month to cover your expenses, or cover your spouse’s expenses should you pass away. As the saying goes, that kind of peace of mind is truly 

priceless. That’s why retirement annuities that take your 401(k) nest egg and convert them to a steady income stream are on the rise. People are scared that they 

will outlive their savings, so they are willing to pay extra fees in order to convert 

them to fixed annuities that act as de facto pension plans. 

Wouldn’t it have been better to have just had a DB plan in the first place, so 

these hard working Americans could have taken advantage of the higher investment 

returns and lower administrative costs of a DB plan over their lifetime, and cut out 

the middle-men at the brokerage firms collecting their commissions and fees? 

Those of us in occupations that are still covered by defined benefit plans are often 

asked why we should continue to enjoy the benefits of these plans when so many 

others have lost them in the recent migration to defined contribution plans. But this 

question suggests that there should be a race to the bottom in retirement planning. 

Rather than promoting a race to the bottom, the IAFF believes that our Nation 

should be exploring ways to ensure that all hardworking Americans can retire with 

dignity. Instead of pension envy, we should be fostering pension pride. 

That’s why I commend you, Chairman Harkin, for trying to find ways to increase 

defined benefit pension plans in the private sector as well as being a true champion 

of DB plans in the public workforce. I look forward to working with you and the 

members of this distinguished committee to find ways to foster pension pride for all 

Americans. 

PREPARED STATEMENT OF JACK VANDERHEI, PH.D., RESEARCH DIRECTOR, EMPLOYEE BENEFIT RESEARCH INSTITUTE (EBRI)* 

INTRODUCTION

According to EBRI estimates,1 the percentage of private-sector workers participating in an employment-based defined benefit plan decreased from 38 percent in 

1979 to 15 percent in 2008. Although much of this decrease took place by 1997,2

there have been a number of recent developments 3 that have made defined benefit 

sponsors in the private sector re-examine the costs and benefits of providing retirement benefits through the form of a qualified defined benefit plan.4 However, these 

plans still cover millions of U.S. workers and have long been valued as an integral 

component of retirement income adequacy for their households. In this testimony, 

we make use of an EBRI simulation project that has been ongoing for more than 

10 years to evaluate the importance of defined benefit plans for households assuming they retire at age 65. 

In 2010, EBRI updated its Retirement Security Projection Model 5 (RSPM) and determined that the overall retirement income adequacy for households currently ages 

36–62 had substantially improved since 2003 (VanDerhei and Copeland, 2010). Almost one-half of Baby Boomers and Gen Xers were determined to be at risk of not 

having sufficient retirement income to cover even basic expenses and uninsured 

health care costs. The results, not surprisingly, were even worse for low-income 

households, as 70 percent of households in the lowest one-third when ranked by preretirement income were classified as ‘‘at risk.’’ Moreover, 41 percent of those in the 

lowest pre-retirement income quartile are predicted to run short of money within 

10 years of retirement. 
77 

Although the 2010 version of RSPM assumed all households retired at age 65, the 

model was updated in 2011 to allow retirement income adequacy simulations for deferred retirement ages through age 84 (VanDerhei and Copeland, 2011). The percentage of households with adequate retirement income at a 50, 70 or 80 percent 

probability level obviously increased as the deferral period beyond age 65 increased 

but the results cast suspicions on the conventional wisdom that merely working a 

few more years beyond age 65 would be adequate for all retirees (especially for those 

in the lowest-income quartile). 

EBRI received several requests to focus on what the average present values of retirement income deficits would be for various cohorts of future retirees, and what 

the aggregate value of those deficits are likely to be in current dollars. The 2010 

Retirement Savings Shortfalls (RSS) were determined as a present value of retirement deficits at age 65 for the same three age cohorts in VanDerhei (September 

2010): 

• Early Boomers (born between 1948–54, now ages 56–62). 

• Late Boomers (born between 1955–64, now ages 46–55). 

• Generation Xers (born between 1965–74, now ages 36–45). 

The aggregate RSS for these age cohorts expressed in 2010 dollars is $4.55 trillion, for an overall average of $47,732 per individual 6 still assumed to be alive at 

age 65.7 Figure 1 in VanDerhei (October 2010a) shows that the average RSS varies 

by age cohort as well as gender and marital status. The RSS per individual is always lowest for households (varying from $29,467 for Early Boomers to $32,098 for 

Gen Xers), somewhat higher for single males (19–34 percent depending on age cohort), and more than twice as large for single females (110–135 percent depending 

on age cohort). Even though the present values are defined in constant dollars, the 

RSS for any gender/marital status combination increases for younger cohorts. This 

is largely due to the impact of assuming health care-related costs will increase faster than the general inflation rate. 

In testimony before this committee last year (VanDerhei, October 2010b), we used 

this model to demonstrate the importance of Social Security retirement benefits. We 

estimated that if those benefits were to be eliminated, the aggregate deficit would 

jump to $8.5 trillion and the average would increase to approximately $89,000. 

THE IMPORTANCE OF DEFINED BENEFIT PLANS FOR RETIREMENT INCOME ADEQUACY

Previous EBRI studies were able to document the degree to which eligibility for 

participation in defined contribution plans matters with respect to ‘‘at-risk’’ status. 

For example, the at-risk probability for Gen Xers varies from 60 percent for those 

with no future years of eligibility in a defined contribution plan to 20 percent for 

those with 20 or more years. However, RSPM had never been used in the past to 

quantify the importance of accruals in defined benefit plans.8 For purposes of this 

testimony, we assumed that all households retire when the oldest wage earner 

reaches age 65.9 We bifurcated each household in terms of whether it had a defined 

benefit accrual at age 65 10 to assess the impact of these benefits on retirement income adequacy.11 We then ran the results for all Baby Boom and Gen Xer households and found that overall the presence of a defined benefit accrual at age 65 reduces the at-risk percentage by 11.6 percentage points. 

Figure 1 shows the impact of a defined benefit accrual at age 65 on at-risk probabilities by age cohort. The greatest impact is on the early boomers as the percentage of households without any defined benefit accruals considered to be at risk of 

insufficient retirement income is 67 percent compared with only 41 percent for their 

counterparts with some defined benefit accruals. As expected, the defined benefit 

advantage (as measured by the gap between the two at-risk percentages) narrows 

for younger cohorts. For late boomers the at-risk percentage is 59 percent for those 

with no defined benefit accruals versus 38 percent for those with some defined benefit accrual. The gap narrows even more for the Gen Xers: 55 percent for those with 

no defined benefit accruals versus 38 percent for those with some defined benefit 

accrual. 

Figure 2 provides similar information to Figure 1 although this time the impact 

is displayed as a function of pre-retirement income level.12 The greatest defined benefit advantage (as measured by the gap between the two at-risk percentages) is for 

the lowest-income quartile: the percentage of households without any defined benefit 

accruals considered to be at risk of insufficient retirement income is 86 percent compared with only 68 percent for their counterparts with some defined benefit accruals. The absolute value of the differences decrease as the relative pre-retirement income quartiles increase (10.3 percentage points for the second income quartile, 9.0 

percentage points for the third-income quartile and 8.7 percentage points for the 
78 

highest income quartile); however, the relative value (when compared with the atrisk levels for those without defined benefit accruals) remain quite high.13

Figure 3 shows the impact of a defined benefit accrual at age 65 on at-risk probabilities by age cohort and pre-retirement income level. In each case the greatest 

defined benefit advantage (as measured by the gap between the two at-risk percentages) is for the lowest-income quartile. The absolute difference for the lowest income 

quartile is 20.0 percentage points for Early Boomers and 20.7 percentage points for 

the Late Boomers. It decreases somewhat for Gen Xers but still decreases the atrisk rating for the lowest-income quartile in that cohort by 15.8 percentage points. 
79 

Figure 1 

Impact of Age and Presence of Defined Benefit Accrual at Retirement Age 

on At·Risk" Probabilities 

Percentage of population "at risk" for Inadequate retirement Income, 

by age cohort, and future years eligible for participation 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

Early Boomers Late Boomers Gao XersN 

Source: EBRIIERF Retire:ment Security Projection Model® version 110714e . 

• An individual or family is considered to be Mat risk~ in this version of the model If their aggregate resources in retirement are not 

sufficient to meet aggregate minimum retirement expenditures defined as a combination of deterministic expenses from the 

Consumer Expenditure Survey (as a function of income) and some health insurance and out~of..poeket health-related expenses, 

plus stochastic expenses from nursing home and home health care expenses (at least until the point they are picked uP by 

Medicaid). The resources in retirement will consist of Social Security (either status quo or one of the spetined reform alternatives), 

account balances from defined contribution plans, IRAs and/or cash balance plans, annuities from defined benefit plans (unless the 

lump-.sum Qlstribution scenario is chosen), and (in some cases) net houslng equity (either in the form of an annuity or as slumpsum distribution). This version of the model is constructed to simulate "basic" retirement income adequacy; however. alternative 

versions of the model allow similar analysis for replacement rates, standard-of·livlng, and other ad hoc thresholds, 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

Figure 2 

Impact of Income and Presence of Defined Benefit 

Accrual at Retirement Age on At·Risk* Probabilities 

Perc.ntage of population "at risk" for inadequate retirement Income, 

by age .... p.cific remaining career income quartiles (baseline assumptions) 

• None 

• Some DB accruals 

Lowest Highest 

Source: EBRI/ERF Retirement Security Projection Model TIo! version 100504e . 

... An individual or family is considered to be ~at risk~ in this version of the model if their aggregate resources in retirement are not 

sufficient to meet aggregate minimum retirement expenditures defined as a combination of deterministic expenses from the Consumer 

Expenditure Survey (as a function of income) and some health insurance and out-of~pocket health·related expenses, plus stochastic 

expenses from nursing home and home health care expenses (at least until the point they are picked up by Medicaid). The resources in 

retirement will consist of Sodal Securtty (either status quo or one of the specified reform alternatives), account balances from defined 

contribution plans, IRAs and/or cash balance plans, annuities from defmoo benefit plans (unless the lump-sum distribution scenario is 

chosen), and (in some eases) net housing equity (either in the fonn of an annuity or as a lump--sum distribution). This version of the 

model is constructed to simulate "baslcD retirement income adequacy; however, aHernative versions of the model allow similar analysis 

for replacement rates, standard-of·living, and other ad hoc thresholds. 
80 

Even though the overall finding that the presence of a defined benefit accrual at 

age 65 reduces the at-risk percentage by 11.6 percentage points is quite impressive, 

this impact is undoubtedly muted to some extent by the interaction of defined contribution plan accumulations. Although the greater heterogeneity produced by defined contribution plans precludes a simple bifurcation of whether or not a plan balance exists at age 65, we are able to distinguish the overall impact of eligibility in 

a defined contribution plan by tracking the number of future years of simulated eligibility and displaying the impact of the presence of a defined benefit accrual in one 

of four categories: 

• Zero future years of eligible participation. 

• 1–9 future years of eligible participation. 

• 10–19 future years of eligible participation. 

• 20 or more future years of eligible participation. 

Figure 4 provides the results for this analysis. As expected, the overall impact of 

a defined benefit accrual at age 65 is much larger for those households with no future years of eligible participation in a defined contribution plan (23.6 percentage 

points) and decreases as the future years of defined contribution eligibility increases 

(11.3 percentage points for 1–9 years, 8.5 percentage points for 10–19 years and 6.4 

percentage points for those with 20 or more years). 

SUMMARY

The analysis performed for this testimony shows the tremendous importance of 

defined benefit plans in achieving retirement income adequacy for Baby Boomers 

and Gen Xers. Overall, the presence of a defined benefit accrual at age 65 reduces 

the ‘‘at-risk’’ percentage by 11.6 percentage points. The defined benefit plan advantage (as measured by the gap between the two at-risk percentages) is particularly 

valuable for the lowest-income quartile but also has a strong impact on the middle 

class (the reduction in the at-risk percentage for the second and third income quartiles combined is 9.7 percentage points which corresponds to a 19.5 percent relative 

reduction). 

It should be noted that this analysis does NOT attempt to do a comparison between the relative effectiveness of defined benefit vs. defined contribution plans in 

providing retirement income adequacy; however, it does show that when the value 

of a defined benefit plan is analyzed for those without any future eligibility in a defined contribution plan, the impact on the at-risk ratings increases to 23.6 percentage points. In other words, for those households without future years of defined contribution eligibility, the presence of a defined benefit accrual at age 65 is sufficient 

to save nearly 1 out of 4 of these households in the Baby Boomer and Gen Xer cohorts from becoming ‘‘at risk’’ of running short of money in retirement for basic expenses and uninsured medical expenses. 
81 

i 

1

100% 

i 9D% 

80% 

70% 

60% 

40% 

30% 

20% 

'0% 

0% 

8'" 

70% 

."" 

50% 

40% 

I 30% 

,2C'" 

'0% 

Figure 3 

Impact of Age and Income and Presence of Defined Benefit Accrual at 

Retirement Age on At-Risk* Probabilities 

Percentage of population "at risk" for inadequate retirement income, 

by age and age-specific remaining career income quartiles (baseline assumptions) 

.Nene 

• Some 08 Accruals 

Source: EBRI/ERf Retirement SeCtJrityProjettioll Model"versioo 110714e 

• An Individual or family Is eonslderl!1:l to be ~at risk" in this version of the model If their aggregate resources in retirement are not sufficient 10 meet ;Jggfegate 

nllnlmum retirement e~pendrtures defoned a~ a combination of determinlsti( e~pense5 ITom the Consumer Expenditure Survey (as a function of Incomej ,tnd some 

health 1n5Uran~e and out-of-p()~klt health-relattd expenus, plus stochastic expenses from mJrsing home ~nd home health care expenses (at lust uflullhe POint thev 

Ire picked up bV MedIClld). The resources In retirement will consist of SOCial Security (either stilUS quo or one of the specified reform altematives), .. ,count b~l~nces 

from defined wntrlbutlon plilns, I~Asand/or cilsh balance plans. annuities from defined benefit plans (unless the lump-ium d'iitributioo icenarlo is choieo), ilnd ~in 

§Ome cases) net hOUSIng equity (either in the form of an annuity or as a lump-sum distrobutlon). nus version ofthe model is constructed 10 simulate -basic" retirement 

income ildequac~, however, altern ative versions of the model allow Similar analysis for replacement rates, standard..of-living, and other ad hoc thresholds 

Figure 4 

Impact of Presence of Defined Benefit Accrual at Retirement Age and 

Future Years of Eligibility for Participation 

in a Defined Contribution Plan on At-Risk* Probabilitie5 

Percentage of population "at risk" for inadequate retirement income, by Future Years of Eligible 

Participation In a Defined Contribution Plan (baseline assumptions) 

'·9 10-19 20orMore 

Future Yeus ef Eligible Participation in iI Defined Contribution plan 

SOUree: EBRI/ERF Retirement SecuritVf'roJeetlon Model"verslon 11071 4e . 

.None 

• Some DB Accruals 

• An IndiVidual orfam,ly 1$ a.msideretl to be «al rlsk~ in tf"l,S version of the model If their aggregate resources 111 retlre'nenl are not suffICient to meet aggreil:ale 

minimum retirement expenditures defined asa combination of deterministic expenses from the Consumer bcpendltlJre Survey (1$ a function of income)and some 

health insurance ilnd out-of-por::k.et health-relited e.pense$, plus 5toch~s!lceJCpensesfrom nur5inll home and home health COIre eJCpenslS (at leiS! until the pOlllllhey 

are picked up by Medicaid). The resources In retirement will wnslst of SOCial Se.:uritV (either status quo or one of the $peclfled reform alternatives), aa:ount balances 

from def,,'ed contribution plans.IRAs and/or cash balance plans. annuitie~ from defined benefil plins (unless the lump-sum djstributlon scenirlo 1$ thonn), i1nd (In 

same ~ise5) net hOlJsing equity (either in the form of an annuity or ~s a IlImp-sum distrlb ... tlon). ThiS version af the model is oonstrucled to simulate "b'15k" retlrem~nl 

Income adequacy; however, Iltem:atl~ veflions of the model allow Similar analysis for repla(ement rales, stilndilrd-ot-livlnlil, and other ad hOC thresholds. 
82 

APPENDIX

BRIEF CHRONOLOGY OF RSPM

The original version of Retirement Security Projection Model® (RSPM) was used 

to analyze the future economic well-being of the retired population at the State 

level. The Employee Benefit Research Institute and the Milbank Memorial Fund, 

working with the governor of Oregon, set out to see if this situation could be addressed for Oregon. The analysis 14 focused primarily on simulated retirement 

wealth with a comparison to ad hoc thresholds for retirement expenditures, but the 

results made it clear that major decisions lie ahead if the State’s population is to 

have adequate resources in retirement. 

Subsequent to the release of the Oregon study, it was decided that the approach 

could be carried to other States as well. Kansas and Massachusetts were chosen as 

the next States for analysis. Results of the Kansas study were presented to the 

State’s Long-Term Care Services Task Force on July 11, 2002,15 and the results of 

the Massachusetts study were presented on December 1, 2002.16 With the assistance of the Kansas Insurance Department, EBRI was able to create Retirement 

Readiness Ratings based on a full stochastic accumulation model that took into account the household’s longevity risk, post-retirement investment risk, and exposure 

to potentially catastrophic nursing home and home health care risks. This was followed by the expansion of RSPM, as well as the Retirement Readiness Ratings produced by it, to a national model and the presentation of the first micro-simulation 

retirement income adequacy model built in part from administrative 401(k) data at 

the EBRI December 2003 policy forum.17 The basic model was then modified for 

Senate Aging testimony in 2004 to quantify the beneficial impact of a mandatory 

contribution of 5 percent of compensation.18

The first major modification of the model occurred for the EBRI May 2004 policy 

forum. In an analysis to determine the impact of annuitizing defined contribution 

and IRA balances at retirement age, VanDerhei and Copeland (2004) were able to 

demonstrate that for a household seeking a 75 percent probability of retirement income adequacy, the additional savings that would otherwise need to be set aside 

each year until retirement to achieve this objective would decrease by a median 

amount of 30 percent. Additional refinements were introduced in 2005 to evaluate 

the impact of purchasing long-term care insurance on retirement income adequacy.19

The model was next used in March 2006 to evaluate the impact of defined benefit 

freezes on participants by simulating the minimum employer contribution rate that 

would be needed to financially indemnify the employees for the reduction in their 

expected retirement income under various rate-of-return assumptions.20 Later that 

year, an updated version of the model was developed to enhance the EBRI interactive Ballpark E$timater® worksheet by providing Monte Carlo simulations of the 

necessary replacement rates needed for specific probabilities of retirement income 

adequacy under alternative risk management treatments.21

RSPM was significantly enhanced for the May 2008 EBRI policy forum by allowing automatic enrollment of 401(k) participants with the potential for automatic escalation of contributions to be included.22 Additional modifications were added in 

2009 for a Pension Research Council presentation that involved a winners/losers 

analysis of defined benefit freezes and the enhanced defined contribution employer 

contributions provided as a quid pro quo.23

A new subroutine was added to the model to allow simulations of various styles 

of target-date funds for a comparison with participant-directed investments in 

2009.24 In April 2010, the model was completely re-parameterized with 401(k) plan 

design parameters for sponsors that have adopted automatic enrollment provisions.25 A completely updated version of the national model was produced for the 

May 2010 EBRI policy forum and used in the July 2010 Issue Brief.26

The new model was used to analyze how eligibility for participation in a defined 

contribution plan impacts retirement income adequacy in September 2010.27 It was 

also used to compute Retirement Savings Shortfalls for Boomers and Gen Xers in 

October 2010.28

In October 2010 testimony before the Senate Health, Education, Labor, and Pensions Committee, on ‘‘The Wobbly Stool: Retirement (In)security in America,’’ the 

model was used to analyze the relative importance of employer-provided retirement 

benefits and Social Security.29

In February 2011, the model was used to analyze the impact of the 2008/9 crisis 

in the financial and real estate markets on retirement income adequacy.30

Finally, an April 2011 article introduced a new method of analyzing the results 

from the RSPM.31 Instead of simply computing an overall percentage of the simu-
83 

lated life paths in a particular cohort that will not have sufficient retirement income 

to pay for the simulated expenses, the new method computes what percentage of the 

households will meet that requirement more than a specified percentage of times 

in the simulation. 

RETIREMENT INCOME AND WEALTH ASSUMPTIONS

RSPM is based in part on a 13-year time series of administrative data from several million 401(k) participants and tens of thousands of 401(k) plans,32 as well as 

a time series of several hundred plan descriptions used to provide a sample of the 

various defined benefit and defined contribution plan provisions applicable to plan 

participants. In addition, several public surveys based on participants’ self-reported 

answers (the Survey of Consumer Finances [SCF], the Current Population Survey 

[CPS], and the Survey of Income and Program Participation [SIPP]) were used to 

model participation, wages, and initial account balance information. 

This information is combined to model participation and initial account balance 

information for all defined contribution participants, as well as contribution behavior for non-401(k) defined contribution plans. Asset allocation information is based 

on previously published results of the EBRI/ICI Participant-Directed Retirement 

Plan Data Collection Project, and employee contribution behavior to 401(k) plans is 

provided by an expansion of a method developed in VanDerhei and Copeland (2008) 

and further refined in VanDerhei (2010). 

A combination of Form 5500 data and self-reported results was also used to estimate defined benefit participation models; however, it appears information in the 

latter is rather unreliable with respect to estimating current and/or future accrued 

benefits. Therefore, a database of defined benefit plan provisions for salary-related 

plans was constructed to estimate benefit accruals. 

Combinations of self-reported results were used to initialize IRA accounts. Future 

IRA contributions were modeled from SIPP data, while future rollover activity was 

assumed to flow from future separation from employment in those cases in which 

the employee was participating in a defined contribution plan sponsored by the previous employer. Industry data are used to estimate the relative likelihood that the 

balances are rolled over to an IRA, left with the previous employer, transferred to 

a new employer, or used for other purposes. 

DEFINED BENEFIT PLANS

A stochastic job duration algorithm was estimated and applied to each individual 

in RSPM to predict the number of jobs held and age at each job change. Each time 

the individual starts a new job, RSPM simulates whether or not it will result in coverage in a defined benefit plan, a defined contribution plan, both, or neither. If coverage in a defined benefit plan is predicted, time series information from the Bureau 

of Labor Statistics (BLS) is used to predict what type of plan it will be.33

While the BLS information provides significant detail on the generosity parameters for defined benefit plans, preliminary analysis indicated that several of these 

provisions were likely to be highly correlated (especially for integrated plans). 

Therefore, a time series of several hundred defined benefit plans per year was coded 

to allow for assignment to the individuals in RSPM.34

Although the Tax Reform Act of 1986 at least partially modified the constraints 

on integrated pension plans by adding Sec. 401(l) to the Internal Revenue Code, it 

would appear that a significant percentage of defined benefit sponsors have retained 

Primary Insurance Amount (PIA)-offset plans. In order to estimate the offset provided under the plan formulas, RSPM computes the employee’s Average Indexed 

Monthly Earnings, Primary Insurance Amount, and covered compensation values for 

the birth cohort. 

DEFINED CONTRIBUTION PLANS

Previous studies on the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project have analyzed the average account balances for 401(k) participants 

by age and tenure. Recently published results (VanDerhei, Holden and Alonso, 

2009) show that the year-end 2008 average balance ranged from $3,237 for participants in their 20s with less than 3 years of tenure with their current employer to 

$172,555 for participants in their 60s who have been with the current employer for 

at least 30 years (thereby effectively eliminating any capability for IRA rollovers). 

Unfortunately, the EBRI/ICI database does not currently provide detailed information on other types of defined contribution plans, nor does it allow analysis of 

defined contribution balances that may have been left with previous employers. 

RSPM uses self-reported responses for whether an individual has a defined con-
84 

tribution balance to estimate a participation model and the reported value is modeled as a function of age and tenure. 

The procedure for modeling participation and contribution behavior and asset allocation for defined contribution plans that have not adopted automatic enrollment is 

described in VanDerhei and Copeland (2008). The procedure for modeling contribution behavior (with and without automatic escalation of contributions) for 401(k) 

plans is described in VanDerhei (2010). Asset allocation for automatic enrollment 

plans is assumed to follow average age-appropriate target-date funds as described 

in VanDerhei (2009). Investment returns are based on those used in Park (2009). 

SOCIAL SECURITY BENEFITS

Social Security’s current-law benefits are assumed to be paid and received by 

those qualifying for the benefits under the baseline scenario. This funding could either be from an increase in the payroll tax or from a general revenue transfer. The 

benefits are projected for each cohort assuming the intermediate assumptions within 

the 2009 OASDI Trustee’s Report. A second alternative is used where all recipients’ 

benefits are cut 24 percent on the date that the OASDI Trust Fund is depleted 

(2037). 

EXPENDITURE ASSUMPTIONS

The expenditures used in the model for the elderly consist of two components— 

deterministic and stochastic expenses. The deterministic expenses include those expenses that the elderly incur in their basic daily life, while the stochastic expenses 

in this model are exclusively health-event related—such as an admission to a nursing home or the commencement of an episode of home health care—that occur only 

for a portion of retirement (if ever), not on an annual or certain basis. 

DETERMINISTIC EXPENSES

The deterministic expenses are broken down into seven categories—food, apparel 

and services (dry cleaning, haircuts), transportation, entertainment, reading and 

education, housing, and basic health expenditures. Each of these expenses is estimated for the elderly (65 or older) by family size (single or couple) and family income (less than $20,000, $20,000–$39,999, and $40,000 or more in 2008 dollars) of 

the family/individual. 

The estimates are derived from the 2008 Consumer Expenditure Survey (CES) 

conducted by the Bureau of Labor Statistics of the U.S. Department of Labor. The 

survey targets the total noninstitutionalized population (urban and rural) of the 

United States and is the basic source of data for revising the items and weights in 

the market basket of consumer purchases to be priced for the Consumer Price 

Index. Therefore, an expense value is calculated using actual experience of the elderly for each family size and income level by averaging the observed expenses for 

the elderly within each category meeting the above criteria. The basic health expenditure category has additional data needs besides just the CES. 

HEALTH

The basic health expenditures are estimated using a somewhat different technique and are comprised of two parts. The first part uses the CES as above to estimate the elderly’s annual health expenditures that are paid out-of-pocket or are not 

fully reimbursed (or not covered) by Medicare and/or private Medigap health insurance. 

The second part contains insurance premium estimates, including Medicare Part 

B and Part D premiums. All of the elderly are assumed to participate in Part B and 

Part D, and the premium is determined annually by the Medicare program and is 

the same nationally with an increasing contribution from the individual/family on 

the basis of their income. For the Medigap insurance premium, it is assumed all 

of the elderly purchase a Medigap policy. A national estimate is derived from a 2005 

survey done by Thestreet.com that received average quotes for Plan F in 47 States 

and the District. The estimates are calculated based on a 65-year-old female. The 

2005 premium level is the average of the 47 State average quotes. The 2010 premium level was estimated by applying the annual growth rates in the Part B premiums from 2006 through 2010 to the average 2005 premium. 

This approach is taken for two reasons. First, sufficient quality data do not exist 

for the matching of retiree medical care (as well as the generosity of and cost of 

the coverage) and Medigap policy use to various characteristics of the elderly. Second, the health status of the elderly at the age of 65 is not known, let alone over 

the entire course of their remaining life. Thus, by assuming everyone one has a 
85 

standard level of coverage eliminates trying to differentiate among all possible coverage types as well as determining whether the sick or healthy have the coverage. 

Therefore, averaging of the expenses over the entire population should have offsetting effects in the aggregate. 

The total deterministic expenses for the elderly individual or family are then the 

sum of the values in all the expense categories for family size and family income 

level of the individual or family. These expenses make up the basic annual (recurring) expenses for the individual or family. However, if the individual or family meet 

the income and asset tests for Medicaid, Medicaid is assumed to cover the basic 

health care expenses (both parts), not the individual or family. Furthermore, Part 

D and Part B premium relief for the low-income elderly (not qualifying for Medicaid) 

is also incorporated. 

STOCHASTIC EXPENSES

The second component of health expenditures is the result of simulated health 

events that would require longterm care in a nursing home or home-based setting 

for the elderly. Neither of these simulated types of care would be reimbursed by 

Medicare because they would be for custodial (not rehabilitative) care. The incidence 

of the nursing home and home health care and the resulting expenditures on the 

care are estimated from the 1999 and 2004 National Nursing Home Survey (NNHS) 

and the 2000 and 2007 National Home and Hospice Care Survey (NHHCS). NNHS 

is a nationwide sample survey of nursing homes, their current residents and discharges that was conducted by the National Center for Health Statistics from July 

through December 1999 and 2004. The NHHCS is a nationwide sample survey of 

home health and hospice care agencies, their current and discharge patients, that 

was conducted by the National Center for Health Statistics from August 2000 

through December 2000 and from August 2007 through February 2008. 

For determining whether an individual has these expenses, the following process 

is undertaken. An individual reaching the Social Security normal retirement age 

has a probability of being in one of four possible assumed ‘‘health’’ statuses: Not receiving either home health or nursing home care; Home health care patient; Nursing home care patient; and Death, based upon the estimates of the use of each type 

of care from the surveys above and mortality. The individual is randomly assigned 

to each of these four categories with the likelihood of falling into one of the four 

categories based upon the estimated probabilities of each event. If the individual 

does not need long-term care, no stochastic expenses are incurred. Each year, the 

individual will again face these probabilities (the probabilities of being in the different statuses will change as the individual becomes older after reaching age 75 

then again at age 85) of being in each of the four statuses. This continues until 

death or the need for longterm care. 

For those who have a resulting status of home health care or nursing home care, 

their duration of care is simulated based upon the distribution of the durations of 

care found in the NNHS and NHHCS. After the duration of care for a nursing home 

stay or episode of home health care, the individual will have a probability of being 

discharged to one of the other three statuses based upon the discharge estimates 

from NNHS and NHHCS, respectively. The stochastic expenses incurred are then 

determined by the length of the stay/number of days of care times the per diem 

charge estimated for the nursing home care and home health care, respectively. 

For any person without the need for long-term care, this process repeats annually. 

The process repeats for individuals receiving home health care or nursing home care 

at the end of their duration of stay/care and subsequently if not receiving the specialized care again at their next birthday. Those who are simulated to die, of course, 

are not further simulated. 

As with the basic health care expenses, the qualification of Medicaid by income 

and asset levels is considered to see how much of the stochastic expenses must be 

covered by the individual to determine the individual’s final expenditures for the 

care. Only those expenditures attributable to the individual—not the Medicaid program—are considered as expenses to the individual and as a result in any of the 

‘‘deficit’’ calculations. 

TOTAL EXPENDITURES

The elderly individuals’ or families’ expenses are then the sum of their assumed 

deterministic expenses based upon their retirement income plus any simulated 

stochastic expenses that they may have incurred. In each subsequent year of life, 

the total expenditures are again calculated in this manner. The base year’s expenditure value estimates excluding the health care expenses, are adjusted annually 

using the assumed general inflation rate of 2.8 percent from the 2009 OASDI Trust-
86 

ees Report, while the health care expenses are adjusted annually using the 4.0 percent medical consumer price index that corresponds to the average annual level 

from 2004–9.35

REFERENCES

Combes, Andrea. ‘‘U.S. Retirement Income Deficit: $6.6 Trillion.’’ SmartMoney (September 16, 2010). 

Copeland, Craig, and Jack VanDerhei. ‘‘The Declining Role of Private Defined Benefit Pension Plans: Who Is Affected, and How.’’ In Robert L. Clark and Olivia 

Mitchell, eds., Reorienting Retirement Risk Management (Oxford University Press 

for the Pension Research Council, 2010): 122–136. 

Park, Youngkyun. ‘‘Public Pension Plan Asset Allocations.’’ EBRI Notes, no. 4 (Employee Benefit Research Institute, April 2009). 

Olsen, Kelly and Jack VanDerhei. ‘‘Defined Contribution Plan Dominance Grows 

Across Sectors and Employer Sizes, While Mega Defined Benefit Plans Remain 

Strong: Where We Are and Where We Are Going.’’ In Retirement Prospects in a 

Defined Contribution World. Washington, DC: Employee Benefit Research Institute, 1997): pp. 55–92. 

VanDerhei, Jack. Testimony for the U.S. Senate Special Committee on Aging Hearing on Retirement Planning: ‘‘Do We Have a Crisis in America? Results From the 

EBRI–ERF Retirement Security Projection Model,’’ Jan. 27, 2004 (T–141). 

ll. ‘‘Projections of Future Retirement Income Security: Impact of Long-Term 

Care Insurance.’’ American Society on Aging/National Council on Aging 

joint conference, March 2005. 

ll. ‘‘Defined Benefit Plan Freezes: Who’s Affected, How Much, and Replacing 

Lost Accruals.’’ EBRI Issue Brief, no. 291 (Employee Benefit Research Institute, March 2006). 

ll. ‘‘Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates.’’ EBRI Issue Brief, no. 297 (Employee Benefit Research Institute, September 2006). 

ll. ‘‘Retirement Income Adequacy After PPA and FAS 158: Part One—Plan 

Sponsors’ Reactions.’’ EBRI Issue Brief, no. 337 (Employee Benefit Research 

Institute, July 2007). 

ll. ‘‘How Would Target-Date Funds Likely Impact Future 401(k) Contributions.’’ Testimony before the joint DOL/SEC Hearing, Target Date Fund 

Public Hearing, June 2009. 

ll. ‘‘The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement 

Accumulations: A Simulation Study Based on Plan Design Modifications of 

Large Plan Sponsors.’’ EBRI Issue Brief, no. 341 (Employee Benefit Research 

Institute, April 2010). 

ll. ‘‘Retirement Income Adequacy for Today’s Workers: How Certain, How Much 

Will It Cost, and How Does Eligibility for Participation in a Defined Contribution Plan Help?’’ EBRI Notes, no. 9 (Employee Benefit Research Institute, September 2010): 13–20. 

ll. ‘‘Retirement Savings Shortfalls for Today’s Workers.’’ EBRI Notes, no. 10 

(Employee Benefit Research Institute, October 2010a): 2–9. 

ll. Testimony before the Senate Health, Education, Labor, and Pensions Committee, on ‘‘The Wobbly Stool: Retirement (In)security in America’’ (T–166). 

Oct. 7, 2010b. 

ll. ‘‘A Post-Crisis Assessment of Retirement Income Adequacy for Baby 

Boomers and Gen Xers.’’ EBRI Issue Brief, no. 354 (Employee Benefit Research Institute, February 2011). 

ll. ‘‘Retirement Income Adequacy: Alternative Thresholds and the Importance 

of Future Eligibility in Defined Contribution Retirement Plans.’’ EBRI 

Notes, no. 4 (Employee Benefit Research Institute, April 2011): 10–19. 

VanDerhei, Jack, and Craig Copeland. Oregon Future Retirement Income Assessment Project. A project of the EBRI Education and Research Fund and the 

Milbank Memorial Fund, 2001. 

ll. Kansas Future Retirement Income Assessment Project. A project of the 

EBRI Education and Research Fund and the Milbank Memorial Fund, July 

16, 2002. 

ll. Massachusetts Future Retirement Income Assessment Project. A project of 

the EBRI Education and Research Fund and the Milbank Memorial Fund, 

December 1, 2002. 
87 

ll. ‘‘Can America Afford Tomorrow’s Retirees: Results From the EBRI–ERF Retirement Security Projection Model.’’ EBRI Issue Brief, no. 263 (Employee 

Benefit Research Institute, November 2003). ll. ‘‘ERISA At 30: The Decline of Private-Sector Defined Benefit Promises and 

Annuity Payments: What Will It Mean?’’ EBRI Issue Brief, no. 269 (Employee Benefit Research Institute, May 2004). ll. ‘‘The Impact of PPA on Retirement Income for 401(k) Participants.’’ EBRI 

Issue Brief, no. 318 (Employee Benefit Research Institute, June 2008). ll. ‘‘The EBRI Retirement Readiness Rating:TM Retirement Income Preparation 

and Future Prospects.’’ EBRI Issue Brief, no. 344 (Employee Benefit Research Institute, July 2010). ll. ‘‘The Impact of Deferring Retirement Age on Retirement Income Adequacy.’’ 

EBRI Issue Brief, no. 358 (Employee Benefit Research Institute, June 2011). 

VanDerhei, Jack, Sarah Holden, and Luis Alonso. ‘‘401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2008.’’ EBRI Issue Brief, no. 335 (Employee 

Benefit Research Institute, October 2009). 

ENDNOTES

1. www.ebri.org/publications/benfaq/index.cfm?fa=retfaq14, last accessed July 26, 

2011. 

2. For a historical review of causes of this decline see Olsen and VanDerhei 

(1997). 

3. See VanDerhei (2007) for a summary of the responses of defined benefit sponsors to the implementation of the new funding requirements under the Pension Protection Act of 2006 as well as the potential pension expense volatility under new 

FASB requirements. 

4. This does not necessarily imply that many existing defined benefit sponsors 

have or will terminate their existing defined benefit plans. Instead the process of 

freezing these plans for current and/or new workers has increased substantially in 

recent years. For more information on the impact of plan freezes on workers see 

VanDerhei (March 2006). For an analysis of whether ‘‘frozen’’ workers have been financially indemnified via enhanced employer contribution to defined contribution 

plans, see Copeland and VanDerhei (2010). 

5. A brief description of RSPM is included in the appendix. 

6. Household deficits for married couples are divided equally between the two 

spouses. 

7. Boston College’s Center for Retirement Research has recently estimated a figure of $6.6 trillion in retirement income deficits or ‘‘about $90,000 per household if 

you count all 72 million households ages 32 to 64’’ (Coombes, 2010). The proper interpretation of this number is somewhat problematic in that it appears that they 

are assuming virtually none of the 72.6 million households in that age range in the 

2007 Survey of Consumer Finances die prior to age 65. 

8. This was primarily due to the increased likelihood of future eligibility in a defined contribution plan relative to a defined benefit plan. 

9. This assumption will be relaxed in a later study. 

10. The term ‘‘accrual at age 65’’ does not denote that an employee age 65 accrued 

a benefit in that year. Instead, it is meant to indicate that they had a previously 

accrued benefit that has not been cashed out prior to age 65. 

11. It is important to note that this is not the same as assessing the importance 

of all defined benefit plan accruals. Whenever an employee is assumed to leave a 

job in RSPM, the present value of the vested defined benefit accrual from the current job is compared with the year-specific involuntary cash-out threshold and converted to a terminated vested status if greater. Any present values less than the 

threshold are assumed to be cashed out. 

12. Specifically, each household is placed into one of four quartiles based on agespecific remaining career income. 

13. The value of the absolute difference divided by the at-risk percentage without 

defined benefit accruals is 21 percent for the lowest-income quartile, 18 percent for 

the second-income quartile, 21 percent for the third-income quartile and 33 percent 

for the highest-income quartile. 

14. VanDerhei and Copeland (2001). 

15. VanDerhei and Copeland (July 2002). 

16. VanDerhei and Copeland (December 2002). 

17. VanDerhei and Copeland (2003). 

18. VanDerhei (January 2004). 

19. VanDerhei (2005). 

20. VanDerhei (March 2006). 
88 

1 EBRI, May 2011 Issue Brief, ‘‘Retirement Income Adequacy with Immediate and Longevity 

Annuities.’’ EBRI, 2011 Retirement Confidence Survey Fact Sheet. 

21. VanDerhei (September 2006). 

22. VanDerhei and Copeland (2008). 

23. Copeland and VanDerhei (2010). 

24. VanDerhei (2009). 

25. VanDerhei (April 2010). 

26. VanDerhei and Copeland (2010). 

27. VanDerhei (September 2010). 

28. VanDerhei (October 2010a). 

29. VanDerhei (October 2010b). 

30. VanDerhei (February 2011). 

31. VanDerhei (April 2011). 

32. The EBRI/ICI Participant-Directed Retirement Plan Data Collection Project is 

the largest, most representative repository of information about individual 401(k) 

plan participant accounts. As of December 31, 2009, the database included statistical information about: 

• 20.7 million 401(k) plan participants, in 

• 51,852 employer-sponsored 401(k) plans, holding 

• $1.21 trillion in assets. 

The EBRI/ICI project is unique because it includes data provided by a wide variety of plan recordkeepers and, therefore, portrays the activity of participants in 

401(k) plans of varying sizes—from very large corporations to small businesses— 

with a variety of investment options. 

33. The model is currently programmed to allow the employee to participate in 

a nonintegrated career average plan; an integrated career average plan; a 5-year 

final average plan without integration; a 3-year final average plan without integration; a 5-year final average plan with covered compensation as the integration level; 

a 3-year final average plan with covered compensation as the integration level; a 

5-year final average plan with a PIA offset; a 3-year final average plan with a PIA 

offset; a cash balance plan, or a flat benefit plan. 

34. BLS information was utilized to code the distribution of generosity parameters 

for flat benefit plans. 

35. While the medical consumer price index only accounts for the increases in 

prices of the health care services, it does not account for the changes in the number 

and/or intensity of services obtained. Thus, with increased longevity, the rate of 

health care expenditure growth will be significantly higher than the 4.0 percent 

medical inflation rate, as has been the case in recent years. 

PREPARED STATEMENT OF THE AMERICAN COUNCIL OF LIFE INSURERS (ACLI) 

The American Council of Life Insurers (ACLI) commends this committee for holding hearings on the growing retirement security crisis. We applaud Chairman Harkin (D–IA) and Ranking Member Enzi (R–WY) for holding this particular hearing 

because of its focus on the benefits of retirees receiving lifetime income. ACLI believes that individuals should convert some of their savings to lifetime income at 

retirement to cover anticipated expenses in retirement. A number of studies demonstrate that retirees receiving lifetime income felt the most secure in their retirement.1

The American Council of Life Insurers is a national trade organization with over 

300 members that represent more than 90 percent of the assets and premiums of 

the U.S. life insurance and annuity industry. ACLI member companies offer insurance contracts and investment products and services to qualified retirement plans, 

including defined benefit pension, 401(k), 403(b) and 457 arrangements and to individuals through individual retirement arrangements (IRAs) or on a non-qualified 

basis. ACLI member companies’ also are employer sponsors of retirement plans for 

their employees. As service and product providers, as well as employers, we believe 

that saving for retirement and managing assets throughout retirement are critical 

economic issues facing individuals and our Nation. 

Lifetime income products are a vital piece of the retirement income security puzzle. The General Accounting Office (GAO) released a report on June 7, 2011, titled 

‘‘Retirement Income: Ensuring Income throughout Retirement Requires Difficult 

Choices,’’ noting that 

‘‘Experts we interviewed tended to recommend that retirees draw down their 

savings strategically and systemically and that they convert a portion of their 

savings into an income annuity to cover necessary expenses or opt for the annu-
89 

ity provided by an employer-sponsored DB pension, rather than take a lump 

sum.’’ 

Many current retirees are fortunate in that they are receiving lifetime monthly 

income from both Social Security and an employer-provided defined benefit (DB) 

pension. That situation is rapidly changing. Today, more workers have retirement 

savings in defined contribution plans, which generally do not offer the option to 

elect a stream of guaranteed lifetime income. This change leads to questions of how 

individuals will manage their savings to last throughout their lifetime. Attached as 

an addendum to this statement, ACLI has outlined a number of legislative and regulatory initiatives that can help employers assist their employees in obtaining guaranteed lifetime income in the same way they have assisted employees in obtaining 

life insurance, disability insurance, and other financial protection products. A number of these initiatives were included in the recently issued GAO report. 

In addition to employers offering lifetime income options to their workers, workers 

need to understand the value of their retirement savings as a source of guaranteed 

lifetime income. The ‘‘Lifetime Income Disclosure Act,’’ which is co-sponsored by 

Senators Bingaman, Isakson and Kohl, will help workers think of their defined contribution plan savings as not only a lump sum balance, but also as a source of guaranteed lifetime income. The legislation would provide every worker with a lifetime 

income illustration directly on their 401(k) statements. The Federal Thrift Savings 

Plan has successfully incorporated this feature on Federal workers’ statements this 

year. With this additional information, workers will receive a ball park estimate, 

which, when coupled with their Social Security statement, visually displays how 

much monthly income they could potentially receive in retirement based on their 

current savings. Workers can better decide whether to increase their savings, adjust 

their 401(k) investments or reconsider their retirement date, if necessary, to assure 

the quality of life they expect in retirement. 

Last, about one-half of workers are not covered by an employer-provided retirement savings plan, so they need to be disciplined to save for their own retirement. 

For these individuals, nonqualified (‘‘individual’’) annuities continue to play an important role in their retirement planning. Individuals can contribute to their individual annuities during their working years and convert some of their savings at 

retirement into lifetime income. Last year, legislation was passed which included a 

provision to more easily allow individuals to partially convert their annuity savings 

into a lifetime income stream. However, more can be done. ACLI supports the implementation of a national strategy for financial literacy and education that helps 

Americans recognize the importance of retirement savings, managing these savings 

to last a lifetime and how insurance products help families manage risk and protect 

savings. 

Over the long-term, the Nation will benefit because people who address their longterm financial security needs today are less likely to need public assistance tomorrow. Government policies that encourage prudent behavior, such as long-term savings, should not only be maintained, they should be enhanced. Therefore, ACLI continues to urge lawmakers to maintain the availability of annuities and other financial protection products for all Americans and their families by rejecting proposals 

that would make these products more expensive. 

In conclusion, lifetime income products play a vital role in any retirement income 

security plan. Middle class families feel the most secure in their retirements when 

they are receiving lifetime income. ACLI has outlined a number of initiatives that 

would help facilitate the securement of lifetime income. ACLI looks forward to working with the committee in taking these important steps today to help address tomorrow’s retirement income security crisis. 

ADDENDUM

New laws and regulations can help employers assist their employees in obtaining 

guaranteed lifetime income in the same way they have assisted employees in obtaining life insurance, disability insurance, and other financial protection products. New 

laws and regulations can also create an incentive to use guaranteed lifetime income 

as part of an employee’s overall retirement income plan. 

Recommendations to Encourage Employers to Offer Annuities 

1. Provide Employers with Guidance on Lifetime Income and Education. The 

ACLI urges the DOL to revise and extend Interpretive Bulletin 96–1 beyond guidance on investment education to include guidance on the provision of education regarding lifetime income and other distribution options, both ‘‘in-plan’’ and outside 

the plan, to assist participants and beneficiaries in making informed decisions regarding their distribution choices. 
90 

2. Help Employers Select an Annuity Provider. The DOL took an important step 

by changing the so-called ‘‘safest annuity standard’’ in Interpretive Bulletin 95–1 by 

adopting a safe harbor for the selection of annuity providers for individual account 

plans. While this regulation provided some helpful guideposts, it contains a requirement that the fiduciary ‘‘conclude that the annuity provider is financially able to 

make all future payments.’’ This standard is difficult to meet, in part because it is 

hard to know how to draw this conclusion. While it is part of a ‘‘safe harbor,’’ this 

prong makes it difficult to use the safe harbor and thus is an impediment to the 

offer of annuities in defined contribution plans. ACLI believes that changes can be 

made to these rules which will make it easier for employers to meet their duties 

while at the same time ensuring a prudent selection. We plan to work with the Department of Labor to simplify this requirement so that an employer can more easily 

and objectively evaluate the financial stability of the annuity provider. 

3. Annuity Administration. Employers take on a number of duties in administering a retirement plan, and the administration of an annuity option would increase those duties. The qualified joint and survivor annuity (‘‘QJSA’’) rules provide 

important spousal protections. The notice and consent requirements provide spouses 

with an opportunity to consider the survivor benefits available under a joint and 

survivor annuity. However, these rules add an additional layer of administrative 

complexity as well as technical compliance issues that most plan sponsors choose 

to avoid by excluding annuities from their plans. 

There are a number of ways that the rules can be modified to make it easier for 

employers to administer this important requirement while protecting survivors, including: 

• model plan amendments for employers to add guaranteed lifetime income options; 

• simplify QJSA notice requirements; and 

• the use of electronic signatures, widely accepted in financial transactions today. 

ACLI proposes allowing those employers who choose to do so to transfer the duties 

and liabilities of administering qualified joint and survivor annuity rules to an annuity administrator. Also, employers need guidance that confirms that a participant’s purchase of incremental deferred payout annuities should not be subject to 

the QJSA rules until the participant has elected to take the annuity payout. 

4. Partial Annuitization Option. Some employers view annuitization as an ‘‘all-ornothing’’ distribution offering. In our RFI submission, we asked the Departments to 

provide guidance making clear that plans may provide retirees with the option to 

use a portion of the account value to purchase guaranteed lifetime income, including 

model amendments to simplify the adoption of such provision. 

Recommendations to Encourage Workers to Elect Annuities 

1. Illustration. To reframe retirement savings as a source of lifetime income, ACLI 

supports legislative proposals to include an illustration of participant accumulations 

as monthly guaranteed lifetime income on defined contribution plan benefit statements. ACLI thanks Senators Kohl, Bingaman and Isakson for their bipartisan 

sponsorship of S. 2832, the Lifetime Income Disclosure Act, in the 111th Congress. 

This bill would help workers understand how their retirement savings might translate into guaranteed lifetime income. 

2. Information. The ACLI has asked the Treasury Department to modify the 

402(f) rollover notice requirements and the safe harbor notice to include information 

on guaranteed lifetime income, including the importance of income protections and 

the availability of lifetime income plan distribution options, if any, as well as lifetime income options available outside the plan. 

ATTACHMENTS

February 2009 

ENCOURAGE ANNUITY OPTIONS FOR DEFINED CONTRIBUTION PLANS

Problem: Currently, about one-half of employees’ retirement savings is in defined 

contribution plans. Most defined contribution plans do not contain guaranteed lifetime income (annuity) distribution options notwithstanding that annuitization of account balances on retirement is the best way of assuring that retirement funds will 

not be exhausted during the participant’s life. Early exhaustion of account balances 

may also adversely affect surviving spouses. 

A major reason that defined contribution plans do not provide guaranteed lifetime 

income options is that, if they do so, the plan must then comply with burdensome 
91 

statutory requirements relating to joint and survivor annuities. The J & S rules impose costly and burdensome administrative requirements involving notifications to 

spouses, waivers by spouses, and prescribe the form and amount of spousal benefits. 

A major reason for the shift to defined contribution plans is a desire by employers 

to avoid the administrative cost and complexity associated with defined benefit 

plans, including compliance with joint and survivor annuity requirements. 

A potential solution to this problem would be for the plan sponsor to outsource 

the administration of the joint and survivor annuity rules to the annuity provider. 

However, in the event of a failure of the annuity provider to properly administer 

the rules, the plan and plan sponsor would still be liable for a claim for benefits 

under Section 502 of ERISA. 

Solution: Where the plan sponsor and the annuity provider have agreed that the 

annuity provider will be responsible for administration of the joint and survivor annuity rules, provide that enforcement actions for failure to comply with the joint and 

survivor annuity rules may only be maintained against the annuity provider, provided that the plan sponsor or administrator has prudently selected and retained 

selection of the annuity provider. Make this provision applicable only to administration of the joint and survivor annuity rules under defined contribution plans. The 

electronic delivery rules should be modified to allow greater use of electronic means 

for administration of the J & S rules. 

Rationale: The ability to shift responsibility for the administration of the joint 

and survivor annuity rules would make guaranteed lifetime income (annuity) options more attractive to plan sponsors and could result in significantly wider availability of such annuity payment options under defined contribution plans. While this 

approach would retain the cost and complexity of the annuity rules, it would preserve spousal protections and would permit the plan and plan sponsor to shift responsibility to an experienced third party annuity provider. This provider would be 

an insurance company with experience in annuity administration and a secure financial ability to pay annuities. These factors makes shifting responsibility to annuity issuers more beneficial to and protective of plan participants, beneficiaries (including surviving spouses) and the plan sponsor than leaving responsibility with the 

plan and plan sponsor. 

Electronic administration is more cost efficient and has become more widely used. 

DOL has indicated that they are modifying their regulation on electronic delivery, 

although it is not known whether the modification will cover the QJSA rules. 

SECTIONl 

(a) AMENDMENTS TO THE EMPLOYEE RETIREMENT INCOME SECURlTY 

ACT OF 1974.— 

(I) IN GENERAL—Section 402(c) of the Employee Retirement Income Security Act of 

1974 (29 U.S.C. 1102(c)) is amended— 

(A) in paragraph (2) by striking ‘‘or’’ at the end; 

(B) in paragraph (3) by striking the period at the end and inserting ‘‘; or’’; 

and 

(C) by adding at the end the following new paragraph: 

‘‘(4) that a named fiduciary, or a fiduciary designated by a named fiduciary pursuant to a plan procedure described in section 405(e), may appoint 

an annuity administrator or administrators with responsibility for administration of an individual account plan in accordance with the requirements 

of Section 205 and payment of any annuity required thereunder.’’ 

(2) Section 405 (29 U.S.C. 1105) is amended by adding at the end the following new 

subsection: 

‘‘(e) Annuity Administrator 

If an annuity administrator or administrators have been appointed under section 402(c)(4), then neither the named fiduciary nor any appointing fiduciary 

shall be liable for any act or omission of the annuity administrator except to 

the extent that—— 

(1) the fiduciary violated section 404(a)(l)— 

(i) with respect to such allocation or designation, or 

(ii) in continuing the allocation or designation; or 

(2) the fiduciary would otherwise be liable in accordance with subsection 

(a).’’ 

(3) Section 205(b) (29 U.S.C. 1055) is amended by adding at the end the following 

new sentence: 

‘‘Clause (ii) of subparagraph (C) shall not apply if an annuity administrator 

or administrators have been appointed under section 402(c)(4).’’ 

(b) AMENDMENTS TO THE INTERNAL REVENUE CODE OF 1986— 
92 

* Department of Treasury, Internal Revenue Service (26 CFR Part 1 [REG–132554–08]) 

(1) IN GENERAL—Section 401(a)(11) of the Internal Revenue Code of 1986 (relating 

to requirements of joint and survivor annuities and preretirement survivor annuities) is amended by adding at the end the following new sentence: 

‘‘Clause (iii) (II) shall not apply if an annuity administrator or administrators 

have been appointed under section 402(c)(4) of the Employee Retirement Income Security Act of 1974.’’ 

(c) ELECTRONIC DELIVERY 

(I) IN GENERAL—The Secretary of the Department of Labor shall modify the regulations under section 104 or section 205 of the Employee Retirement Income Security Act of 1974 to provide a broad ability to administer the requirements of section 205 of the Employee Retirement Income Security Act of 1974 by electronic 

means. 

‘‘ACLI Retirement Choices Study,’’ by Mathew Greenwald & Associates, Inc, April 

2010. (see http://www.acli.com/Issues/Documents/f3ce56cc76ca4060a5cb9fae03ce5 

f96ReportlACLIRetirementChoicesStudy.pdf) 

[Editor’s Note: Due to the high cost of printing, previously published materials are 

not reprinted.] 

THE AMERICAN SOCIETY OF PENSION PROFESSIONALS & ACTUARIES (ASPPA)* 

COMMENTS ON PROPOSED ADDITIONAL RULES REGARDING HYBRID

RETIREMENT PLANS

The American Society of Pension Professionals & Actuaries (ASPPA) appreciates 

this opportunity to comment on the proposed additional rules regarding hybrid retirement plans as issued by the IRS and Treasury on October 19, 2010 (REG– 

132554–08). 

ASPPA is a national organization of more than 7,500 retirement plan professionals who provide consulting and administrative services for qualified retirement 

plans covering millions of American workers. ASPPA members are retirement professionals of all disciplines, including consultants, investment professionals, administrators, actuaries, accountants and attorneys. Our large and broad-based membership gives ASPPA unique insight into current practical applications of ERISA and 

qualified retirement plans, with a particular focus on the issues faced by small- to 

medium-sized employers. ASPPA’s membership is diverse but united by a common 

dedication to the employer-sponsored retirement plan system. All credentialed actuarial members of ASPPA are members of the ASPPA College of Pension Actuaries 

(ASPPA COPA), which has primary responsibility for the content of comment letters 

that involve actuarial issues. 

References are to the Internal Revenue Code of 1986 and Treasury regulations 

unless otherwise specified. 

SUMMARY OF RECOMMENDATIONS

The following is a summary of ASPPA COPA’s recommendations which are described in greater detail in the Discussion of Issue section. 

I. Final regulations should provide § 411(d)(6) relief for changing the method of 

calculating immediate annuity options. 

II. Final regulations should provide a safe harbor definition of ‘‘reasonable assumptions’’. 

III. Final regulations should provide additional guidance about statutory hybrid 

plans and § 411(a)(9). 

IV. Final regulations should include a ‘‘set and forget’’ conversion rule. 

V. Final regulations should make it clear that general testing rules are not available to show compliance with § 411 if the market rate of return and preservation 

of capital rules are not satisfied. 

VI. Final regulations should clarify that a plan using segment rates can reference 

either current or prior stability period rates to determine the current stability period interest credit. 

VII. Final regulations should clarify that partial interest credits are permitted on 

amounts distributed between interest crediting dates. 

VIII. Final regulations should allow for the use of an interest crediting rate based 

on an index. 
93 

IX. Final regulations should provide that when certain events occur a plan would 

be permitted to substitute a comparable RIC or index based on the stated investment objectives of the original RIC, without concern for protected benefit rights 

under § 411(d)(6). 

X. Final regulations should clarify that, for plans that use a crediting rate equal 

to the trust’s actual rate of return, changes in actual investments do not present 

issues under the § 411(d)(6) anti-cutback rules. 

XI. Final regulations should clarify that the annuity conversion rates for a terminated plan applicable at normal retirement also apply at a participants early retirement date. 

XII. Final regulations should provide additional § 411(d)(6) relief and guidance for 

changes to interest crediting rates. 

XIII. Final regulations should provide additional guidance on how the accrual 

rules apply to a floor offset arrangement that includes a cash balance plan. 

XIV. Final regulations should provide guidance on the application of nondiscrimination, coverage, participation, accrual and maximum benefit rules when a 

plan uses a variable rate. 

XV. If participant choice is permitted, regulations should provide new safeguards 

to participants in exchange for workable rules for plan sponsors. 

DISCUSSION OF ISSUES

I. Early retirement benefit conversion options. Based on prior IRS requirements that the accrued benefit be stated solely as the monthly annuity payable at 

normal retirement age, and the § 411(a) requirement that all optional forms be at 

least actuarially equivalent to the normal retirement benefit (on the basis of reasonable actuarial assumptions), many plans contain provisions requiring that the benefit payable in an optional form be at least actuarially equivalent to the accrued 

benefit payable at normal retirement. Section 1.411(a)(13)–1(b)(3) of the proposed 

regulations removes this ‘‘annuity whipsaw’’, but without § 411(d)(6) relief, these 

plans are unable to take advantage of it. 

ASPPA COPA recommends that § 411(d)(6) relief be provided for plan amendments that change the amount payable under an optional form of payment from the 

actuarial equivalent of the projected annuity payable at normal retirement date to 

the actuarial equivalent of the current hypothetical account balance. 

II. Reasonable assumptions. In the proposed regulations, § 1.411(a)(13)–1(b)(3) 

frequently uses the expression ‘‘reasonable assumptions.’’ However, this expression 

is not defined. Given the broad range of plan designs and employee groups, it is difficult to contemplate a regulation adequately defining this term. For the benefit of 

plan sponsors, particularly small plan sponsors, it would be extremely helpful to 

have certain assumptions identified as ‘‘deemed reasonable’’. 

ASPPA COPA recommends that certain assumptions should be deemed reasonable, but the term should not be defined. For example, interest rates that satisfy 

the definition of market-rate of return should be deemed reasonable interest rates. 

Additionally, ASPPA COPA recommends that the § 417(e) mortality, and no preretirement mortality, be deemed reasonable mortality. 

III. Decreases in benefits. Section 411(a)(9) provides that the normal retirement 

benefit cannot be less than the early retirement benefit. Section 411(b)(1)(G) provides that a participant’s benefit may not be decreased on account of increasing age 

or service. In a hybrid plan that provides market rate interest credits, it is easy to 

construct examples where the participant’s monthly annuity benefit payable at age 

63 is greater than the monthly annuity benefit payable at normal retirement age. 

Practitioners are confused about how to apply these rules and plan sponsors and 

participants would be best served by having clear guidance. 

ASPPA COPA recommends that final regulations clarify: 

• That decreases in benefits due to interest crediting rates decreasing or being 

negative are not a decrease in benefit due to increasing age or service. 

• That decreases in benefits due to variable assumptions (such as § 417(e) assumptions) used to convert lump sum balances to annuities changing as described 

in the plan are not a decrease in benefit due to increasing age or service. 

• That for purposes of § 411(a)(9) an early retirement benefit is any immediate 

annuity payable prior to normal retirement age whether or not a plan labels it an 

early retirement benefit. Guidance should explain when early retirement benefits 

need to be determined (for example, annually based on plan or birth date, at the 

end of each interest crediting period, etc.). 

• How lump sums should be calculated in the case of an account-based plan 

where due to decreases in the hypothetical account balance the early retirement 

benefit exceeds the otherwise calculated normal retirement benefit. Should the plan 
94 

pay the account balance or as described in proposed regulation § 1.411(a)(13)– 

1(b)(4)(ii) the sum of the account balance and the § 417(e) lump sum based upon the 

difference in the early retirement benefit and the otherwise calculated normal retirement benefit? 

IV. ‘‘Set and forget’’ conversion rule. The alternative method for establishing 

an opening account balance in the proposed regulation requires ongoing testing and 

adjustments that are not workable administratively. 

ASPPA COPA recommends that the Service reconsider this alternative. As suggested in our original comments submitted March 27, 2008, final regulations should 

allow plans without early retirement subsidies that establish opening hypothetical 

account balances no less than the single sum value of the accrued benefit using 

§ 417(e) mortality and interest to avoid future comparisons. This methodology would 

generally be cost effective for the small employer-sponsored plans with little or no 

possibility of discrimination in favor of HCEs. 

V. Noncompliant interest crediting rates. Section 411(b)(5)(B)(i) and (ii) state 

that an applicable defined benefit plan ‘‘shall be treated as failing’’ to comply with 

the requirements of § 411 (b)(1)(H) unless the market rate of return and preservation of capital requirements are met. The fact that these are requirements, not safe 

harbors, is not clearly stated in the proposed regulations, however, and the lack of 

a clear statement has led to some confusion. 

ASPPA COPA recommends that final regulations make it clear that interest 

credits that do not conform with the market rate of return or the preservation of 

capital rules under § 411(b)(5)(B)(i) may not use the general testing rule for age discrimination in § 411(b)(l)(H) to show compliance with § 411. 

VI. Lookback period. Some plans have been drafted to base interest credits applied to hypothetical accounts using a lookback month during the current plan year 

while others have been drafted to use a rate determinable at the beginning of the 

plan year based on a lookback month during the prior plan year. For example, the 

2010 interest credit under some plans is based on the November 2010 30-year rate 

while others define the rate for 2010 using the November 2009 rate. Both options 

apparently were acceptable under Notice 96–8. 

Under § 1.411(b)(5)–1(d)(1)(iv)(B) a plan would seem to be limited to using an interest crediting rate based on one of the lookback months from the prior year: ‘‘. . . 

a plan that is using one of the interest crediting rates described in paragraph (d)(3) 

or (d)(4) of this section can determine interest credits for a stability period based 

on the interest crediting rate for a specified lookback month with respect to that 

stability period. For purposes of the preceding sentence, the stability period and 

lookback month must satisfy the rules for selecting the stability period and lookback 

month under § 1.417(e)–1(d)(4), although the interest crediting rate can be any one 

of the rates in paragraph (d)(3) or (d)(4) of this section and the stability period and 

lookback month need not be the same as those used under the plan for purposes 

of section 417(e)(3).’’ 

We believe it should not be an imperative that the interest crediting rate under 

a cash balance rate be tightly tied to the period for which a credit is provided. It 

is necessary that the rate be definitely determinable and that the rate not be in excess of a market rate of return. But the use of a rate tied to the beginning of the 

period is no more ‘‘accurate’’ than a rate tied to the end of the period. 

ASPPA COPA recommends that the final rule be clarified to accommodate both 

choices as long as the plan document describes the interest rate credit in a definitely determinable manner. 

VII. Crediting interest on distributions during the year. Final regulation 

§ 1.411(b)(5)–1(d)(1)(iv)(C) provides that ‘‘Interest credits under a plan must be provided on an annual or more frequent periodic basis and interest credit must be credited as of the end of the period.’’ Proposed regulation § 1.411(b)(5)–1(d)(1)(iv)(D) provides that ‘‘A plan is not treated as failing to meet the requirements of this paragraph (d) merely because the plan does not provide for interest credits on amounts 

distributed prior to the end of the interest crediting period.’’ The proposed regulation does not provide guidance that would be helpful for those plan sponsors who 

choose to credit interest on balances paid before the end of the period. 

ASPPA COPA recommends that the final regulations clarify that it is permissible to prorate interest credit for the year of the participant’s distribution for situations where payment is made prior to the next interest crediting date. Guidance 

should provide that if the actual crediting rate is not known, the rate used to project 

the hypothetical account balance to normal retirement age, a lesser rate, or a fixed 

rate could be used for this purpose. Guidance should also make it clear that the date 

through which interest is credited can be a date as of which the distribution is intended to be paid, and need not be the date the distribution actually is paid from 

the trust. 
95 

VIII. Use of an index. The proposed regulations do not endorse the use of an 

interest crediting rate that is based on an index, and generally requires that a Registered Investment Company (RIC) would have to be used for equity-based options. 

The apparent explanation for this requirement is that the use of the index itself will 

provide a return greater than a market rate of return because it does not reflect 

the underlying expenses inherent in actually investing funds. Also, a RIC that is 

based on an index will not exactly replicate the results of the index because when 

the makeup of an index changes, there is a lag before the RIC can adjust its holdings to match the index. The Service notes that a RIC can cease to exist or change 

its investment strategy and has asked for comments on how additional guidance 

should deal with these possibilities. 

We agree that changes in RICs used as the basis to determine interest crediting 

rates can be problematic because the RIC may cease to exist or may be modified 

over time. We believe that this is much less likely to be a concern with broadly used 

indexes. To adjust for the concern that the index itself does not reflect a true market 

rate of return because of transaction costs and timing differences, a set reduction 

could be required. To reflect the reduced cost of investing in an index fund as contrasted with managed funds, the adjustment should be relatively small. 

ASPPA COPA recommends that final guidance allow for the use of an interest 

crediting rate based on a widely acknowledged index. If indeed there is concern that 

such a rate would be greater than a market rate of return, final guidance could require a reduction in the rate by a minimum number of basis points (e.g., 20 bp). 

IX. Required changes in RICs. The Service has asked for comments on how 

§ 411(d)(6) would apply if a selected RIC ceases to exist or if the RIC substantially 

changes its investment strategy. 

When an interest crediting rate is based on a RIC, or several RICs, the plan sponsor and plan participants anticipate that each RIC will continue to be in existence 

and that the investment strategy in existence as of the date the RIC was selected 

will continue. However, this is not always the case and the discontinuance of a RIC 

or a change in the investment strategy of the RIC will upset those expectations. 

Under these circumstances the plan sponsor should be allowed to replace such RIC 

with another RIC that provides the same (or similar) investment strategy and underlying expenses as the original RIC. Such a change should not be viewed as an 

amendment to the plan that is subject to anti-cutback requirements. If the RIC no 

longer exists, the actual investment income is zero. If there is a change in investment strategy, the replacement RIC that brings the choice back to the originally selected strategy has the effect of protecting the original expectations. Neither circumstance represents a settlor-type decision to change the underlying promise of the 

benefit defined by the plan—which would be the type of change the anti-cutback 

rule addresses. Plan document language could specify the conditions under which 

the substitution would be made so as to restrict the plan sponsor’s discretion about 

the time of the change or the selection of the new RIC. 

ASPPA COPA recommends that plan sponsors should be allowed to replace an 

existing RIC with a similar RIC without considering the change to an amendment 

that is subject to § 411(d)(6) restrictions. Final regulations could specify the type of 

documentation needed to implement the change in the RIC, suggest plan language 

that would be suitable to avoid employer discretion about the substitution, and provide guidance on what constitutes a similar RIC. 

X. Actual investment return and accrued benefits. Assuming the diversification requirements are satisfied, the proposed regulations allow a plan to provide an 

interest crediting rate based on the actual rate of return on the aggregate assets 

of the plan. Fiduciaries need to be assured that a change in investment policy, or 

individual investments being selected, would not constitute a violation of anti-cutback rules under § 411(d)(6) or an impermissible forfeiture under § 411(a). 

ASPPA COPA recommends that the final rule should clarify that a plan using 

actual investment results for the interest crediting rate is not constrained by anticutback or impermissible forfeiture rules, with respect to accrued, normal, or early 

retirement benefits, stemming from changes in investment decisions made by the 

plan fiduciary. 

XI. Annuity conversion rates for terminated plans. Proposed regulation 

§ 1.411(b)(5)–1(e)(2)(i)(B) provides guidance regarding the interest rate and mortality table used to calculate any benefit under the plan payable in the form of an 

annuity commencing at or after normal retirement age. Guidance is not provided on 

the conversion rates at earlier ages. Guidance is also not provided on how the 5- 

year average is to be determined if the plan is terminated mid-year. 

ASPPA COPA recommends that the final regulations clarify that the annuity 

conversion rates required by this section also apply prior to normal retirement date. 

Guidance should also be provided on acceptable methods for determining the 5-year 
96 

average interest credit for mid-year terminations such as dropping the rate applicable to the year of termination or annualizing the rate for the short period up to the 

plan termination date. 

XII. Anti-cutback relief. In the final regulations, § 1.411(b)(5)–1(e)(3)(ii) provides 

prospective § 411(d)(6) protection for plans with an interest crediting rate that exceeds a market rate of return to modify the rate to the extent necessary to satisfy 

the market rate of return rules. However, plan administrators need additional relief 

and guidance for several situations such as the following: 

• In an effort to comply with the Pension Protection Act (PPA), a plan administrator whose plan document specified an interest crediting rate in excess of a market rate of return operationally applied a lower interest crediting rate than specified 

in the plan document. The lower interest crediting rate was chosen by the plan administrator to be consistent with the plan administrator’s interpretation of the requirements of PPA. Plan participants were provided an ERISA § 204(h) notice that 

explained the change in the interest crediting rate. A retroactive plan amendment 

is needed to conform the document to operations as contemplated by § 1107 of PPA. • A plan document has an interest crediting rate in excess of market rate of return and plan operations reflected the documented rate. The final regulations provide that § 411(d)(6) relief is available allowing the plan sponsor to prospectively 

change the interest crediting rate, but additional guidance is needed to address 

whether the interest crediting rate can be amended retroactively with § 411(d)(6) 

protection to conform to the final regulations. • A plan is using an interest crediting rate that satisfies the requirements of 

§ 1.411(b)(5)–1(d)(3) or §1.411(b)(5)–1(d)(4). However, the plan’s method of applying 

this rule is not consistent with the requirements of § 1.411(b)(5)–1(d)(1)(iv)(B) which 

are effective for plan years after 2010. For example, instead of using a look-back 

month, the plan chooses the rate based upon the rate in effect on a single day. 

ASPPA COPA recommends that § 1.411(b)(5)–1(e)(3) be amended to: 

• Provide that a plan may be amended to conform its operational interest crediting rate for the first plan year beginning after the passage of PPA through the 

last day of the plan year ending after the final regulations are issued without a requirement to also provide the rate stated in the plan document, if greater, if the 

following conditions are met: 

• The plan operationally used the interest crediting rate. • The plan had a good faith belief that the plan as written did not conform to 

the requirements of PPA. • The plan had a good faith belief that the lower interest crediting rate satisfied the statutory requirements of the PPA. 

• Provide guidance on retroactive amendments to interest crediting rates to conform to the requirements of PPA. • Provide § 411(d)(6) relief for plans with an acceptable interest crediting rate 

under § 1.411(b)(5)–1(d)(3) or § 1.411(b)(5)–1(d)(4) to amend the method of applying 

their interest credit rate to conform with § 1.411(b)(5)–1(d)(1)(iv)(B). In amending to 

conform with § 1.411(b)(5)–1(d)(1)(iv)(B) plan sponsors should be able to choose any 

acceptable options under § 417(e) for look back month, averaging, and stability period without regard to their current methodology and should be permitted to modify 

those methods without a requirement to provide the greater of two rates for the period prior to actual amendment of the plan. 

XIII. Floor offset arrangements. Floor offset arrangements are specifically permitted in assessing age discrimination under § 411(b)(5)(C) to the extent otherwise 

permitted under § 401(a). Existing guidance on floor offset arrangements (principally 

Rev. Rul. 76–259) explains how an offset arrangement would apply where traditional plan benefits are offset by benefits provided from a true defined contribution 

account. Example 3 in the new final hybrid regulation at § 1.411(a)(13)–1 illustrates 

the 3-year vesting rule in a situation where a traditional plan benefit is offset by 

the cash balance account in a separate plan, thus confirming that floor-offset arrangements can be constructed with defined benefit as well as defined contribution 

offsets. 

Guidance is needed on how the accrual rules are applied to the plans where a 

cash balance account is used in a floor offset arrangement. As in the case of a defined contribution offset, the net benefit from the richer plan should not be required 

to independently show that it satisfies an accrual rule. As in the case of a defined 

contribution offset, the floor offset should be limited to the amount provided from 

the vested portion of the hypothetical account. 

Guidance is also needed for floor offset arrangements that consist of a cash balance plan offset by allocations under a defined contribution plan. Arguably, rules 

for such plans are already in place in Rev. Rul. 76–259. However, some interpret 
97 

current requirements to permit a plan design that offsets allocations against cash 

balance credits on an annual basis. We have concerns about the impact of such a 

design on the accrual rule that must be satisfied by the cash balance plan. 

ASPPA COPA recommends that final regulations clarify that floor offset arrangements comprised of two defined benefit plans are tested under the accrual 

rules in aggregate and that the offset is limited to the vested portion of the offset 

benefit. This treatment would be comparable to the rule for defined contribution 

plans in Rev. Rul. 76–259. 

In addition, ASPPA COPA recommends that regulations clarify that cash balance principal credits cannot be offset by defined contributions on an annual basis. 

XIV. Testing methodology with variable rates. The cash balance safe harbor 

testing method in § 1.401(a)(4)–8(c)(3)(v)(B) provides that, if a cash balance plan 

uses a variable interest crediting rate, the rate specified in the plan that is used 

to project the account balance must be either the interest crediting rate for the current period, or an average of the rate for one or more prior periods not to exceed 

5 years. Based on this regulation, which has not been updated for PPA, practitioners believe it is reasonable to use a rate that meets this safe harbor to project 

benefits for purposes of § 401(a)(4), § 401(a)(26), § 411, § 415 and § 416. Although the 

use of current, or recent, investment results to predict future returns has been the 

safe harbor, it does not reflect the fact that long-term returns are unlikely to be the 

same as recent returns—especially in times of irrational exuberance or bear markets. (In fact, the preamble to the proposed regulations notes that a 5-year average 

of equity rates is not a good predictor of future equity rates of return. Presumably 

a current year rate would also not be predictive.) The proposed regulations acknowledge the difficulty inherent in projecting negative returns for purposes of § 411, and 

permit an assumption of zero return when return is negative. The proposed regulation does not extend this approach to other code sections. 

Placing a cap and floor on interest crediting rates used for projection would result 

in more realistic projections of hypothetical account balances than the current methodology based on a current rate or recent average. A concern about permitting a 

floor in excess of zero is that existing hypothetical balances may reflect unusually 

high returns, a negative return may just be part of returns reverting to the long 

term norm, and using a minimum crediting rate when returns are negative will 

overstate projected balances. However, if there were also a cap on the crediting rate, 

the cap would have prevented the (probably more significant) overstatement of likely projected balances that resulted from projecting the prior hypothetical account at 

an irrationally high long term rate. 

ASPPA COPA recommends that final regulations provide guidance on the application of nondiscrimination, coverage, participation, accrual and maximum benefit 

rules when a plan uses a variable interest crediting rate. Specifically guidance 

should: 

• Permit cash balance plans to project hypothetical balances for testing purposes, 

including § 401(a)(4), § 401(a)(26), § 411, and § 415, using the crediting rate for the 

most recent period or an average of prior periods, subject to minimum and maximum interest crediting rates. The floor could be, for example, the average rate of 

return on 1-year Treasury constant maturities and the cap the average of the S&P 

500 over a 40-year period (a typical working lifetime). 

• Provide safe harbor principle credit amounts that will be deemed to satisfy the 

meaningful benefit requirement of § 401(a)(26). Because determination of an appropriate credit should consider the methodology adopted for projecting benefits, 

ASPPA COPA requests that there be an opportunity to comment further on this 

issue when further guidance is provided on applying variable interest crediting rates 

for testing purposes. 

• Clarify that the present value of accrued benefits for purposes of determining 

top heavy status is the hypothetical account balance as of the determination date. 

XV. Participant choice. The preamble to the proposed regulations asks for comments on whether or not a statutory hybrid plan should be allowed to offer participants a menu of hypothetical investment options, including a life-cycle investment 

option under which participants are automatically moved into a less aggressive investment mix as they near retirement. ASPPA COPA has serious concerns about 

permitting participant choice of interest crediting rates. The defined benefit system 

has historically offered participants and spouses additional protections over the defined contribution system. However, the introduction of an alternative to 401(k) 

plans that provides a defined contribution allocation rather than elective deferral 

(pay credit), minimum guarantee, and automatic, though waivable, qualified joint 

and survivor benefits may be an option that many plan sponsors and plan participants value. If participant choice is offered in the defined benefit system, the addi-
98 

tional protections need to be preserved, and a number of other issues will need to 

be addressed to assure these plans are workable administratively and not fraught 

with hidden liabilities for employers and fiduciaries. 

A. Choice of benefit structures. The choice of interest crediting rates in a cash 

balance plan represents a participant being offered a choice between two different 

benefit structures. If participants are offered a menu of potential interest crediting 

rates, participants need to be provided with adequate information about how their 

choices will impact their potential monthly annuity benefit including how their 

choices will impact the assumptions used to convert their account balance to an annuity. 

If participant choice of interest crediting rates is permitted, ASPPA COPA recommends that participants and their spouses should be provided information about 

the impact of their choices on their monthly annuity in advance of participants making interest credit choices. 

B. Disclosure. Participant accounts in defined contribution plans either have the 

protection of the prudent expert rule or are subject to the rules of ERISA § 404(c). 

Thus, unless the participants are given the disclosures and information required 

under ERISA § 404(c) (and other protections, including the right to change investment elections at least quarterly), the trustees remain responsible for the investment performance of the participants’ accounts. Similar protections for participants 

would not exist in a participant-directed cash balance plan under current law. PPA’s 

addition of the preservation of capital rule for cash balance plans does not adequately make up for the loss of protection. 

Thus, while the selection of an investment menu offered to participants is clearly 

a fiduciary duty in a defined contribution plan, in a defined benefit plan it would 

be settlor function; simply a plan design choice. Absent requirements in the regulations to provide basic disclosure about the hypothetical investment menu and other 

ERISA § 404(c)-type protections, the defined benefit plan that is supposed to provide 

greater security to the participant would have none of the protections extended to 

participants in the (supposedly less secure) defined contribution plans. 

If participant choice of interest crediting rates is permitted, ASPPA COPA recommends that disclosure requirements similar to those for ERISA § 404(c) be required of cash balance plans offering choice. However, unlike ERISA § 404(c), cash 

balance plans should not be required to permit election changes more frequently 

than annually. Also, a cash balance plan should be able to limit options to a range 

of life-cycle funds, or funds representing conservative and moderate investment 

mixes so as to limit volatility for individual participants. 

C. Moral hazard. With participant directed cash balance plans there are additional moral hazards for trustees and plan sponsors. The duty of a defined benefit 

plan trustee to invest so as to manage volatility would seem to be at odds with the 

ability of participants to elect an aggressive interest crediting option. If participants 

make aggressive elections, either assets would have to be invested aggressively, 

leading to volatile returns, or the plan sponsor could expect additional volatility in 

contributions. It can be argued that it is always prudent to invest the assets in a 

defined benefit plan in such a way that the assets exactly track the increases and 

decreases in plan liabilities. This would effectively lead to permitting defined benefit 

plan assets to be invested to track participant elections (thus shifting all investment 

risks from the plan sponsor to the plan participant), but without a structure similar 

to ERISA 404(c) to protect the electing participants and the fiduciaries. In the alternative, if the plan’s investments are invested according to a traditional defined benefit investment strategy which does not correlate to participants’ aggressive elections, there is a possibility that a well-funded plan could become underfunded very 

quickly in a period when aggressive investments perform well. This could lead to 

additional exposure for the PBGC and put participants at risk for shortfalls in anticipated benefits. 

Because the interest crediting rate is part of the accrued benefit, and all related 

future interest credits are accrued at the time a participant accrues a pay credit, 

some would argue that a change in the crediting rate would appropriately be treated 

as a plan amendment for § 411(d)(6) purposes. A similar result arises from the notion that participants in a qualified retirement plan are not permitted to waive all 

or any part of their accrued benefit. An election of a different interest crediting rate 

would effectively be a waiver of any part of the benefit that would have been payable had the change not been made. In either view, the effect would be that the 

benefit resulting from the changed participant choice cannot be less than would 

have been provided applying the previously chosen interest crediting rate. If plans 

had to operate under this paradigm, participants would be encouraged to select one 

rate and subsequently change to another rate with different characteristics to 

achieve the greater of the two results. This moral hazard could be limited by placing 
99 

restrictions on the ability to change investments. However, limiting the ability to 

change when an initial election is no longer (or never was) appropriate would eliminate a right available under a self-directed defined contribution plan (with quarterly 

or more frequent changes permitted), placing participants in a defined benefit plan 

at a relative disadvantage. 

If participant choice of interest crediting rates is permitted, ASPPA COPA recommends that: • Plans permitting participant choice be required to provide the 3 percent aggregate minimum allowed for equity based interest credit rates for all hypothetical accounts under the plan. • A change of election relating to an existing hypothetical account not be treated 

as a plan amendment or impermissible waiver of accrued benefit under § 411. 

While PPA set capital preservation as the appropriate minimum in cash balance 

plans, if participant choice of interest crediting rates is permitted, a higher minimum is necessary to combine protection of accrued benefits with workable rules 

and to mitigate moral hazard. Since plan sponsors are not required to employ the 

prudent expert rule in determining the proper menu of funds for participant direction in cash balance plans, this minimum will also help to insure that sponsors 

choose funds of appropriate quality and risk characteristics. This combination of a 

higher cumulative minimum and § 411 relief would provide participants with greater protection than a defined contribution plan, while permitting flexibility in cash 

balance plan design. 

D. Other guidance required. If choice of investment crediting rates is permitted, guidance would need to address the following concerns: 

• § 401(a)(4). Current regulations would already require that interest crediting 

rate options be available on a nondiscriminatory basis. Guidance should provide 

that changes in elections can only be prospective, and § 401(a)(4) testing is based 

on the interest crediting rate in effect on the testing date. 

• § 401(a)(26). Guidance should provide that benefit projections are based on the 

interest crediting rate in effect on the determination date. 

• § 411(a). Guidance should provide that no forfeiture occurs as a result of a 

change in an interest crediting rate election. 

• § 411(b). As with other plan amendments, the application of the accrual rules 

would be based on the prospective interest crediting rate. 

• § 411(b)(5). The § 411(b)(5) safe harbor regulations would have to be modified to 

provide that the similarly situated test is applied assuming a history of identical 

elections of investment choice for older and younger workers. 

• Alternative option. Assuming the 3 percent cumulative minimum is required, 

and choices are available on a nondiscriminatory basis, plans should be permitted 

to use the cumulative 3 percent account to apply the general nondiscrimination test 

of § 401(a)(4), and to demonstrate compliance with § 401(a)(26) and § 411. 

If the interest crediting rate in effect on the current testing date is a variable 

rate, the recommendations on testing methodology with variable rates in section IX 

above, including any averaging of returns for prior periods, would be applied based 

on the interest crediting rate in effect on that date. 

XVI. Ministerial Issues. 

A. Given that governmental plans are not subject to § 411, references to the special PPA delayed effective date rule should not be included in final § 411 regulatory 

effective date descriptions. 

B. Regulation § 1.411(b)(5)–1(d)(5)(ii) relating to the use of the actual rate of return on plan assets should be added to the list of sections in Prop. § 1.411(b)(5)– 

1(f)(2)(i)(B) (dealing with the 2012 effective date). 

These comments were prepared by a task force of ASPPA’s Defined Benefit Subcommittee of the Government Affairs Committee and the ASPPA College of Pension 

Actuaries. The task force was chaired by Kevin Donovan, MSPA, and the comments 

were primarily authored by Marjorie Martin, MSPA, Judy Miller, MSPA, Mark 

Dunbar, MSPA, Karen Smith, MSPA and Thomas Finnegan, MSPA. Please contact 

us if you have any comments or questions on the matters discussed above. 

Thank you for your consideration of these comments. 

Sincerely, 

Brian H. Graff, Esq., APM, Executive Director/CEO; Craig P. Hoffman, Esq., 

APM, General Counsel/Director of Regulatory Affairs; Ilene Ferenczy, Esq., APM, 

Co-chair, Government Affairs Committee; Karen Smith, MSPA, Co-chair, Defined 

Benefit Subcommittee; Judy A. Miller, MSPA, Chief of Actuarial Issues; Mark Dunbar, MSPA, Co-chair, Government Affairs Committee; James Paul, Esq., APM, Cochair, Government Affairs Committee. 
100 

1Private Pension Plan Bulletin Historical Tables: U.S. Department of Labor, Employee Benefits Security Administration, June 2010, http://www.dol.gov/ebsa/pdf/1975-2007historical 

tables.pdf (accessed August 11, 2010). 2 Beckman, Allan. ‘‘Access, Participation, and Take-up Rates in Defined Contribution Retirement Plans Among Workers in Private Industry, 2006’’. Bureau of Labor Statistics. December 

27, 2006. http://www.bls.gov/opub/cwc/cm20061213ar01p1.htm (accessed August 11, 2010). 3 ‘‘Percent of Workers in Private Industry With Access to Retirement and Health Care Benefits 

by Selected Characteristics: 2008’’, Bureau of Labor Statistics, http://www.census.gov/compendia/statab/2010/tables/10s0639.pdf (Accessed August 11, 2010). 4 2011 Investment Company Fact Book: A Review of Trends and Activity in the Investment 

Company Industry, pp. 100–102. WWW.ICIFACTBOOK.ORG. 5 2011 Investment Company Fact Book: A Review of Trends and Activity in the Investment 

Company Industry, WWW.ICIFACTBOOK.ORG, p. 108. 6 [EBRI CITE]. 

PREPARED STATEMENT OF THE U.S. CHAMBER OF COMMERCE

The U.S. Chamber of Commerce would like to thank Chairman Harkin, Ranking 

Member Enzi, and members of the committee for the opportunity to provide a statement for the record of the hearing entitled ‘‘The Power of Pensions: Building a 

Strong Middle Class and Strong Economy’’ which was held on July 12, 2011. 

Even with the many challenges facing plan sponsors, the voluntary employerprovided retirement system has been overwhelmingly successful in providing retirement income. Private employers spent over $200 billion on retirement income benefits in 2008 and paid out over $449 billion in retirement benefits. According to the 

Bureau of Labor Statistics, in March 2009, 67 percent of all private sector workers 

had access to a retirement plan at work, and 51 percent participated. For full time 

workers, the numbers are 76 percent and 61 percent, respectively. 

The Chamber and its membership promote all parts of the employer-provided retirement plan system. While we agree that efforts should be made to encourage the 

defined benefit plan system, we believe that it is equally important to recognize the 

success of the defined contribution system and to continue to encourage employers 

to participate and expand that system as well. In our statement, we highlight the 

successes of the defined contribution system and also point out challenges in the defined benefit system that have led to the declining numbers of defined benefit plans. 

THE SUCCESS OF THE DEFINED CONTRIBUTION PLAN SYSTEM

While there has been a shift away from defined benefit plans, the number of defined contribution plans has increased exponentially. Since 1975, the number of defined contribution plans has almost quadrupled from 207,748 to 658,805 in 2007.1

In 1992–93, 32 percent of workers in private industry participated in a defined benefit plan, while 35 percent participated in a defined contribution plan.2 According 

to the 2008 National Compensation Survey, the participation for private industry 

workers in defined benefit plans has decreased to 21 percent, while participation in 

defined contribution plans has increased to 56 percent.3

In addition, the amount of assets held in these plans has significantly increased. 

The total assets of all employer-sponsored retirement plans, IRAs, and annuities 

equaled $17.5 trillion at year-end 2010. The largest components of retirement assets 

were IRAs and employer-sponsored defined contribution plans, holding $4.7 trillion 

and $4.5 trillion, respectively, at year-end 2010. Comparably, private-sector defined 

benefit pension funds held $2.2 trillion at year-end 2010.4 Consequently, the investment capital from defined contribution plan savings has a significant impact on our 

economy. 

Although there has been critique of the adequacy of account balances in defined 

contribution plans, we believe that this criticism paints an unfair picture. Since personal account plans did not become popular until the 1980s, there has not yet been 

a generation that has relied completely upon personal account plans for retirement. 

Moreover, studies show that account balances tend to be higher the longer 401(k) 

plan participants had been working for their current employers and the older the 

participants. Workers in their sixties with at least 30 years of tenure at their current employers had an average 401(k) account balance of $198,993.5

Through the passage of the Pension Protection Act of 2006, Congress encouraged 

even greater participation in defined contribution plans by implementing automatic 

enrollment and automatic escalation rules. EBRI has stated that automatic enrollment can nearly double participation in some defined contribution plans.6 Moreover, 

a study by Vanguard found that automatic enrollment appears to raise plan participation rates most dramatically among certain demographic groups, particularly 

young and low-income workers, for whom plan participation rates are traditionally 

very low. For example, employees earning less than $30,000 and hired under auto-
101 

7 [VANGUARD CITE]. 

8 In 2007, 54 of the 100 largest employers offered a traditional pension plan to new workers, 

down from 58 in 2006, according to Watson Wyatt Worldwide. That 7 percent decline compares 

with a 14 percent drop as recently as 2005. Levitz, Jennifer. ‘‘When 401 (k) Investing Goes Bad’’. 

The Wall Street Journal Online 4 Aug. 2008. http://online.wsj.com/article/SB121744530 

152197819.html (accessed August 21, 2009) Also see Private Pension Plan Bulletin Historical 

Tables: U.S. Department of Labor, Employee Benefits Security Administration, June 2010, 

http://www.dol.gov/ebsa/pdf/1975-2007historicaltables.pdf (accessed August 11, 2010). 9 Job Creation and Worker Assistance Act of 2002 (P.L. 107–147 increasing the range of permissible interest rates for determining pension liabilities, lump sum distributions, and PBGC 

premiums for under-funded pension plans to 120 percent of the current 30-year Treasury bond 

interest rate; Pension Funding Equity Act of 2004 replacing the interest rate assumption for 

2 years; Pension Protection Act of 2006 fundamentally changing the funding rules for both single-employer and multiemployer defined benefit plans; The Worker, Retiree, and Employer Recovery Act of 2008 (‘‘WRERA’’) providing limited funding relief; The Preservation of Access to 

Care for Medicare Beneficiaries and Pension Relief Act of 2010, providing defined benefit plan 

funding relief for both single-employer and multiemployer plans. 10 In 1999, the Service’s Director of Employee Plans issued a Field Directive that effectively 

halted the determination letter applications of hybrid plans from being processed. In 2002, the 

Treasury Department, with input from the Equal Employment Opportunity Commission and the 

Department of Labor, issued proposed regulations addressing the issue of age discrimination in 

hybrid plans but withdrew the proposed regulations in 2004 in order to clear a path for Congress to act. The uncertainty surrounding hybrid plans has been even more considerable in the 

litigation arena with contradictory decisions among various circuit courts. 11 At the beginning of 2008, the average funded level of plans was 100 percent. Data from 

a study published by the Center for Retirement Research at Boston College indicates the following as of October 9, 2008: 

• In the 12-month period ending October 9, 2008, equities held by private defined benefit plans lost almost a trillion dollars ($.9 trillion). 

• For funding purposes, the aggregate funded status of defined benefit plans unpredictably 

fell from 100 percent at the end of 2007 to 75 percent at the end of 2008. (See footnote 5 of 

the study). 

• Aggregate contributions that employers will be required to make to such plans for 2009 

could almost triple, from just over $50 billion to almost $150 billion. 

matic enrollment have a participation rate of 77 percent versus a participation rate 

of 25 percent for employees at the same income level hired under voluntary enrollment. Similarly, 81 percent of employees younger than 25 are plan participants 

under automatic enrollment, versus 30 percent under voluntary enrollment.7 Consequently, automatic enrollment has been most successful with the groups that are 

most at risk for not being adequately prepared for retirement. 

CHALLENGES FACING THE DEFINED BENEFIT SYSTEM

The number of defined benefit plans has been declining.8 This decline is due to 

the number of challenges facing plan sponsors—of which the greatest are the need 

for predictability of the rules and flexibility to adapt to changing situations. Since 

2002, Congress has passed five laws that address defined benefit funding.9 For over 

a decade, the legality of hybrid plans was unresolved and those plan sponsors were 

unable to get determination letters.10 In the recent financial crisis, plan sponsors 

faced unexpected financial burdens due to inflexible funding rules. All of these scenarios have had a negative impact on the employer-provided retirement system. 

Therefore, we urge Congress to keep in mind the need for predictability and flexibility to ensure that employers can continue to maintain plans that contribute to 

their workers’ retirement security. 

Funding Issues 

The current economic environment has created challenges for employers that 

want to maintain retirement plans. In addition to complying with the normal set 

of rules and regulations, plan sponsors must make tough decisions about their retirement plans and other competing needs. Therefore, the more certainty that plan 

sponsors have about the rules, the better they will be able to make these important 

decisions. 

On August 17, 2006, the Pension Protection Act of 2006 (‘‘PPA’’) was signed into 

law. The act fundamentally changed the funding rules for defined benefit plans. A 

major impetus behind the PPA was to increase the funding level of pension plans. 

Consequently, most plan sponsors entered 2008 fully ready to comply with the new 

funding rules. The severe market downturn at the end of 2008 drastically changed 

the situation.11 Because of the accelerated funding scenarios spelled out in the PPA, 

and notwithstanding the efforts of Congress to provide some temporary funding re-
102 

lief, many plan sponsors were faced with the reality of having to contribute two and 

three times the amount of the expected contribution. 

A matter of recent concern is the consideration of increases to PBGC premiums. 

Increasing PBGC premiums without the opportunity for discussion of details, careful consideration of the potential impact, or buy-in from all interested parties would 

present another challenge to the private sector defined benefit pension system. 

Raising the PBGC premiums, without making contextual reforms to the agency 

or the defined benefit system, amounts to a tax on employers that have voluntarily 

decided to maintain defined benefit plans. An increase in PBGC premiums, when 

added to the multi-billion dollar impact of accelerated funding enacted in 2006 could 

divert critical resources from additional business investment and subsequent job 

creation. 

Regulatory Issues 

In general, greater regulation often leads to greater administrative complexities 

and burdens. Such regulatory burdens can often discourage plan sponsors from establishing and maintaining retirement plans. The following are just a few examples 

of where the regulatory burden is overwhelming, particularly with respect to defined 

contribution plans. 

Notice and Disclosure: Plan sponsors are faced with two increasingly conflicting 

goals—providing information required under ERISA and providing clear and 

streamlined information. In addition to required notices, plan sponsors want to provide information that is pertinent to the individual plan and provides greater transparency. However, this is difficult with the amount of required disclosures that currently exist. Although there is a reason, even a good reason, for every notice or disclosure requirement, excessive notice requirements are counterproductive in that 

they overwhelm participants with information, which many of them ignore because 

they find it difficult to distinguish the routine, e.g., summary annual reports, from 

the important. Excessive notice requirements also drive up plan administrative 

costs without providing any material benefit. It is critical that Congress coordinate 

with the agencies and the plan sponsor community to determine the best way to 

streamline the notice and disclosure requirements. 

PBGC Rule on Cessation of Operations: In August 2010, the PBGC published a 

proposed rule under ERISA section 4062(e) which provides for reporting the liabilities for certain substantial cessations of operations from employers that maintain 

single employer plans. If an employer ceases operations at a facility in any location 

that causes job losses affecting more than 20 percent of participants in the employer’s qualified retirement plan, the PBGC can require an employer to put a certain 

amount in escrow or secure a bond to ensure against financial failure of the plan. 

These amounts can be quite substantial. 

We believe that the PBGC proposed rule goes beyond the intent of the statute and 

would create greater financial instability for plan sponsors. Furthermore, we are 

concerned that the proposed rules do not take into account the entirety of all circumstances but, rather, focus on particular incidents in isolation. As such, the proposed rule would have the effect of creating greater financial instability for plan 

sponsors. 

The PBGC recently announced that it is reconsidering the proposed rule. However, we continue to hear from members that the proposed rule continues to be enforced. This type of uncertainty is an unnecessary burden on plan sponsors and discourages continued participation in the defined benefit plan system. 

Alternative Premium Funding Target Election: The PBGC’s regulations allow a 

plan to calculate its variable-rate premium (VRP) for plan years beginning after 

2007, using a method that is simpler and less burdensome than the ‘‘standard’’ 

method currently prescribed by statute. Use of this alternative premium funding 

target (APFT) was particularly advantageous in 2009 because related pension funding relief provided by the Internal Revenue Service served for many plans to eliminate or significantly reduce VRP liability under the APFT method. However, in both 

2008 and 2009 PBGC determined that hundreds of plan administrators failed to correctly and timely elect the APFT in their comprehensive premium filing to the 

PBGC, with the failures due primarily to clerical errors in filling out the form or 

administrative delays in meeting the deadline. In June 2010, the PBGC responded 

to the concerns of plan sponsors by issuing Technical Update 10–2 which provides 

relief to certain plan sponsors who incorrectly filed. We appreciate the PBGC’s attention to this matter and its flexibility in responding to this situation. However, 

we are concerned that the relief provided does not capture all clerical errors or administrative errors that may have occurred and, therefore, some plan sponsors remain unfairly subject to what are substantial and entirely inappropriate penalties. 

As such, we believe that the rules established under the current regulation and the 
103 

Technical Update should be considered a safe harbor. The regulation should be revised to state that if the safe harbor is not met, the PBGC will still allow use of 

the APFT if the filer can demonstrate, through appropriate documentation to the 

satisfaction of the PBGC, that a decision to use the APFT had been made on or before the VRP filing deadline. Proof of such a decision could be established, for example, by correspondence between the filer and the plan’s enrolled actuary making it 

clear that, on or before the VRP filing deadline, the filer had opted for the APFT. 

It is important that this regulatory change be made on a retroactive basis, so as 

to provide needed relief to filers for all post-PPA plan years. 

Cash Balance Plan Regulations: On October 18, 2010, the Internal Revenue Service issued long-awaited regulations affecting cash balance benefit plans under the 

Pension Protection Act of 2006. In addition to the delay in receiving this regulatory 

guidance, plan sponsors were disappointed that the regulations deviated from clear 

congressional intent. The Chamber is engaged in on-going conversations with the 

Treasury Department and is asking Treasury and the IRS to set forth a clear and 

rational approach to PPA compliance for Pension Equity Plans. Moreover, because 

of the complexity of hybrid plans and their regulation, we are requesting additional 

guidance to ensure that plan sponsors have sufficient clarity and flexibility to adopt 

and maintain hybrid pension plans with legal certainty. 

Top-Heavy Rules: The top-heavy rules under ERISA are an example of extremely 

complex and burdensome regulations that do not offer a corresponding benefit. We 

recommend that this statute be eliminated altogether. 

ACCOUNTING ISSUES

In 2006, the Financial Accounting Standards Board (‘‘FASB’’) undertook a project 

to reconsider the method by which pensions and other benefits are reported in financial statements. They completed Phase I of the project but left Phase II, which 

would have removed smoothing periods from the measure of liabilities, until a later 

date. After significant negative feedback from the plan sponsor community, FASB 

indefinitely postponed the implementation of Phase II. 

In 2010, FASB issued two proposals concerning accounting requirements for businesses that participate in multiemployer plans. Each proposal would have required 

the participating employer to include estimated withdrawal liabilities on their statement regardless of the likelihood of withdrawal. As you are aware, the information 

included on financial statements is used to determine the credit-worthiness of a 

company. Therefore, disclosing an estimated withdrawal liability could be misleading and negatively impact an employer’s ability to get appropriate financing either from banks or bonding agencies. In addition, even if an individual employer is 

not directly impacted, that employer may be indirectly impacted if other employers 

who participate in the plan suffer financial trouble due to the disclosure of this information. FASB recently revised this proposal at the urging of the business community. 

The threat of accounting changes from FASB is a constant worry of plan sponsors. 

These changes can have significant ramifications for their businesses—impacting 

credit determinations and loan agreements—without having any impact on the actual funding of the plans. This persistent threat discourages participation in the employer-provided retirement system. 

CONCLUSION

The best way to encourage plan sponsors to maintain retirement plans is to create 

a predictable and flexible benefit system. Moreover, we believe that all types of benefit plans should be equally encouraged, as there is not one type of plan that is suitable for every employer. We look forward to working with this committee and Congress to enact legislation that will encourage further participation in all parts of the 

employer provided retirement system. 

Thank you for your consideration of this statement. 
104 

REPORT OF TOWER WATSON’S (INSIDER, JULY 2011) NEWSLETTER

Insider 1 JUly 201:.1. TOWERS WATSON fA:../ 

Prevalence of Retirement Plan lypes 

in the Fortune 100 in 2011 

Account-Based Benefit Plans Dominate 

By Brendan McFarland 

Towers Watson has been tracking 

retirement plans offered to newly hired 

salaried employees of Fortune 100 

companies for many years. In 2011, 

the number of these large companies 

offering new salaried employees only a 

defined contribution (DC) plan, such as 

a 401 (k) plan, grew significantly. Today, 

less than a third of these companies offer 

any defined benefit (DB) pension to 

newly hired salaried employees, and 

only 13 sponsor a traditional DB plan 

open to newly hired workers. 

Large employers have been rethinking their 

retirement offerIngs for some time now. OVer the 

last 10 years, many of them have shifted from 

tradltiona! DB plans to DC and account-based DB 

plans. Several factors have driven the shift, including 

a desire to reduce overall retirement costs (perhaps 

due to higher compensation and benefit costs 

elsewhere, especially health care), greater mobility 

in the workforce, the popularity of account-based 

designs with employees, government and accounttng 

regulations, market trends and board pressures, and 

a belief that such a shift reduces financial risk. 

The shift to DC plans as the primary retirement 

vehicle transfers the responsibility and risk for 

capital accumulation for retirement from employers 

to employees, who are left to manage their own 

contribution leve!s, withdrawals (and loans), 

investments and retirement distributions. For the 

employer, the move creates other risks, such as that 

counter..cyclica! workforce trends wit! necessitate 

increased severance pay, raise benefit costs and 

result in less mobillty within an organization. 

100 plan 

Since 1998, there has been a steady - yet 

dramatic - overall shift in retirement offerings to 

newly hired employees. At the end of 1998, 90 of 

the Fortune 100 companies offered some sort of DB 

benefit, either a traditional or hybrid (account-based, 

usually cash balance) plan. Today, only 30 companies 

offer 08 plans to their new hires (see Figure 1). 

Consequently, offering DC plans as the sale 

retirement plan became increasingly common over 

this period, jumping from only 10 Fortune 100 

companies at year-end 1998 to 70 companies in 

this year's Fortune 100. 

The decline of traditional DB plans is striking. 

A traditional DB plan provides a defined benefit 

amount at retirement, usually In the form of an 

annUity, based on a formula that normally relates 

to pay and years of service. The value of benefit 

accruals Is typically back-loaded, meaning benefit 

values increase faster as participants near 

retirement. As such, traditional DB plans are better 

suited to long-tenured employees than to those with 

shorter tenures. After all, one reason for estabHshing 

these plans was to encourage valuable workers to 

stay with the employer (another was to enable 

employees to retire with sufficient Income to maintain 

a reasonable standard of liVing In retirement). Over 

time, however, employers have changed their focus 

from providing retirement income to workers who 

stay until retirement to providing a more uniform 

level of retirement-directed capital accumulation for 

aU employees. So, many companies have instead 

opted for more portable, account-based retirement 

programs such as hybrid DB and DC plans. 

Figure 1. Fortune 100 retirement plan pre\lalence for new hires (1985-2011) 

1985 ;1998 2002 2004 2005 2006 2007 2008 2009 

Tota! 08 pension plans 90 .0 83 13 .2 51 53 41 43 

Traditional DB plan 8. 61 48 38 32 28 21 2. ,. Hybrid pension plan 1 2. 3S .5 •• 2' 2. 2' 24 

DC plan only 10 10 11 21 38 43 41 53 51 

Note: SponSOfsmp Is showl"! as type of plan offered to salaried new hires at the end of the year and Is based Oil the following year's Fortull~ 100 list 

for e~ample, the 2010 data are based OIl the 2011lis\ and lOclude plans offered al year~nd 2010. The "Today" column reflects changes imPlemented betWeen 

~:r~ ~,;!;~:~ay 31. 2011 

201{) Today 

.1 •• 11 1.3 

2. 11 

63 10 
105 

Insider I July 2011 

Figure 2. Retirement prevalence trend for new hires for 20ll Fortune 100 companies (199B-20l.1.) 

:1.998 :1.999 :WOO 200:1. 2002 2003 2004 2005 2006 2007 2008 2009 2010 Today 

Total DB pension plans 72 72 72 71 7. •• •• 64 57 50 45 4. 37 3. 

Traditional DB plan 64 5. SG 53 47 40 37 3. 33 2. 22 2. 17 13 

Hybrid pension plan 8 13 14 18 23 29 29 28 24 2:1. 23 2. 2. 17 

DC plan only 26 28 26 2S 30 31 34 38 43 SO 55 GO 63 70 

Not~: Sponsorship is sI\own as type of plan (lffered to salaned new hires at the end ofthil year. The "Today- ~olumn reftects data through May 31, 2011, Trend data are shown for the 2011,ortune 100 

~~m:~~:.:~ == changes 10 relifem~mt plans fOl' these companies SII\Cl;! 1998 

Figure 3. Plan types offered today by Fortune 100 companies 

(for newly hired employees) 

Figure 4. Most recent change In newly hired employee retirement 

program since 1998 

111"'100 

Soun;e:TowersWl'!lson. 

• Final average pay plan + DC plan 

1% Career average pay plan + DC plan 

Cash balance plan + DC plan 

• Pension equity plan + DC plan 

• Other hybrid plan + DC plan 

• DC plan only 

In hybrid plans, the employer defines. that is. 

specifies, the retirement benefit - similar to a 

traditional DB plan - but the final benefit is defined 

as a lump-sum account balance rather than as an 

annuity. The benefit value of hybrid plans typically 

accrues more evenly over a worker's career (though 

designs can vary benefit accrual by age, service or a 

combination of the two). If hybrid pian participants 

leave their employer, they usually can take their 

lump-sum account balance with them, transferring it 

to an individual retirement account, much like DC 

plan participants, or they can convert the account 

balance into an annuity. (Note that many traditional 

DB plans also now provide for lump-sum 

distributions at retirement,) 

In 1985, 89 Fortune 100 companies offered a 

traditional DB plan to their newly hired workers, 

while 11 offered only an account-based plan. Over 

the past 25 years, the pattern has flipped almost 

completely, Today, 87 of today·s Fortune 100 

companies offer only account-based retirement 

plans to newly hired workers, while 13 offer 

traditional DB plans. 

retirement plans 

Some of the changes In the reported retirement 

offerings arise from annual turnover in the Fortune 

100 !lst, reflecting mergers, spin-offs, new or rapidly 

growing businesses, and bankruptcies. Historically, 

seven to eight companies drop off the list in any 

given year. Six companies are new to the 2011 list, 

• Hybrid conversion since 1998 

1; Closed pension since 1998 

• Froze pension Since 1998 

• Always DC since 1998 

• No change to DB 

{Traditional {n=13) or hybrid (n=3)} 

and, over time, we have found that new list members 

are less likely to have ever offered a DB plan. For 

example, at year-end 1.998. 28 companies in today's 

Fortune 100 provided only a DC plan to new hires 

(see Figure 2), while 10 companies in the 1999 

Fortune 100 sponsored only a DC plan (Figure 1). 

Nevertheless, while list turnover has had some 

effect on the trend, there is no escaping the 

conclusion that companies have moved away from 

traditional DB plans. Indeed, to control for annual 

turnover in the Fortune 100, we analyzed the 

evolution of retirement offerings from this year's 

Fortune 100 list of companies since 1998 

(Figure 2). 

The movement away from traditional plans to 

account-balanced retirement plans and its timing is 

still apparent. Today, 70 of the 2011 Fortune 100 

offer only a DC plan to new hires, compared with 28 

of thOse same companies back in year-end 1998. 

Between year-end 2010 and May 2011, seven more 

companies stopped offering DB plans to new hires 

and adopted a DC-oniy retirement benefit approach. 

Of the 30 companies currently offering a DB plan to 

new hires, half sponsor cash balance plans (as 

shown in Figure 3). Traditional final-average-pay 

plans make up the seconcf.largest DB offering, with 

career-average-pay plans and other hybrid plan types 

making up the remainder. 

Forty-two of the 70 companies that currently offer 

only a DC plan to new hires froze or dosed their 

traditional pension plan after 1998 (see Figure 4). 
106 

When a sponsor freezes a DB plan. benefits tied to 

service. those tied to payor all benefits stop 

accruing for some (based on age. years of service or 

both) or all plan participants. When a sponsor closes 

a pension plan. benefits for current participants 

typically continue to accrue. but the plan does not 

admit employees hired after a certain date. Twentytwo companies in this year's Fortune 100 list have 

frozen a pension plan since 1998. while 20 have 

closed plans to newly hired employees. 

Fourteen sponsors took a different route. converting 

their traditional DB plans to hybrid plans. Figure 5 

depicts the t iming of these hybrid conversions 

since 1998. 

Over the last several months, none of the Fortune 

100 companies transitioned from a traditional DB 

to a hybrid plan. Before 2004. hybrid conversions 

were occurring at a steady pace. Between 2004 and 

2006, there were no conversions. most likely due to 

legal and regulatory uncertainty created by the 2003 

Cooper v. IBM ruling, which found that cash balance 

plans were inherently age discriminatory. But later 

rulings and the Pension Protection Act of 2006 

(PPA) cleared away some of the legal fog that had 

surrounded these plans and appeared to trigger 

new conversions. Of Fortune 100 companies that 

converted to hybrid plans (that are still active for 

new hires today). half the conversions took place 

before the PPA was signed into law and half after. 

Transitioning workers from a DB plan 

to a DC plan: Grandfathering. partial 

grandfathering and no grandfathering 

There are various approaches for managing the 

transition of pension-eligible employees to a 

DC·plan-only environment, and most companies take 

one of three broad approaches. The first Is full 

grandfathering. where all those participating in the 

DB plan as of a certain date continue accruing 

benefits. either at the same or a reduced level. The 

second approach is parUal grandtathering. In which 

only participants who meet certain age and/ or 

service requirements continue accruing benefits in 

the DB plan. All other participants are switched over 

to whatever retirement plan is offered to new hires. 

The third approach is not to grandfather anyone -

all current participants stop accruing benefits and 

are enrolled in the DC plan offered to new hires. 

Of the 41 companies we analyzed. 46% implemented full 

grandfathering. 12% opted for partial grandfatherJng. 1 

and the remaining 42% did not grandfather anyone. 2 

Insider' I' July 201.:1 

Figure 5. Hybrid conversions tor active plans for newly hired employees 

(1998-2011) 

3.5 

3.0 

2.5 

2.0 

1.5 

1.0 

0.5 

0.0 ~!-______ L.l ____ L--"-----''-----''--'' ___ L..I ____ L-'''-

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

• Hybrid conversion (active plans today for new hires) 

Figure 6. Transition approaches of Fortune 100 sponsors moving from DB to DC 

• full grandfathering. No change In DC benefit for all 

• Full grandfathering. Decreased DB benefit for 

grandfathered employees. No change In DC benefit for all 

~ Full grandfatherlng. Decreased DB for grandfathered 

employees. Increased DC benefit for new hires 

• Full grandfathering. Increased DC benefit for new hires 

• No grandfatherlng. Increased DC benefit for all 

• Partial grandfathering. Increased DC benefit for all 

• Partial grandfathering. Increased DC benefit for new hires 

N_41 

Soon:e:TowefSWltsoo 

As shown In FIgure 6, within the three broad transition 

approaches, employers varied the details. The most 

frequent approach (42%) was not grandfathering 

anyone and Increasing benefits in the DC plan for all 

workers. The next most common tack (34%) was 

offering fuU grandfathering with unreduced benefits 

tor current participants and Increasing DC benefits 

for newly hired workers relative to what their 

pension-ellgible counterparts received. Nine percent 

of companies fully grandfathered their workers but 

reduced future DB accruals (2% used full 

grandfatherlng, decreased the DB plan benefit and 

did not change the DC benefit for anyone, and 7% 

used full grandfathering, decreased the DB plan 

benefit and Increased DC benefits for new hires). 

month, . nO!l~ oflhe 

F,lr!WI" J(lljeulllI'JI1I('" 

trJmiuom·J(I))UlJ 

Cl.hLtion:J1DlJ 10 J 

hybrid pLm" 

'Of ,h. /;, .. com""n;., <I •• ,.....-d p.nW gnndf .. h.ring. ("'" b"..,J Ii pbili'y on poin .. (combi .... tion of.,.. .nd .. ..,;ee). The ,~do ... ,iord from 4S roin'" (....., compMli<!.) tu 62 

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· If •• on'p.I>)''mpl.n .. n'.dontgr.ndfat:h ... ing.l'!'lWCh.ndl>t<,,hlllg ... it.tb....-muit.c."..,"'iul.>lt"'l'!'lWCh. Fortll.17.on'I""' •• tlI .. oIf.~n"K .. nd{ .. henn,"("'" 

p..-viowly orr.ttd t\1l1 1l"ndf.rh.,ing.nd clow.:Ilhei. plln '" new him. Th.-,. cmnp,ni .. bu. f~ <hri, pi.." and ",horqu.ndy off.ttd no armdf.tlIerin&. 

lower .. wol.son.com/ ... 50afcn /iru,ld o. 3 
107 

Insjder I July 2011 

"The dominant approach amollg thc'c 

grclndElthcring companies was to add a 

nOli-elective l:ontribution to thc 1)(: plan." 

Figure 7. Actions taken for new-hlre DC plan in companies that fully or partially 

grandfathered pension-eligible workers 

• Added nOtl-€lectlve contribution 

Increased matching contribution 

Increased matching contribution + added non-elective 

• Increased non-eiective contribution 

• Decreased match + added non-elective 

• No change 

Note<Re$UltsareshOWflwheretrans!tlor>datawereava~ablef0<230fthe24rompar>iesthilt fully or partillily 

~'~~:~=~::kers 

Figure 8. DC employer contributions from companies that fully or partially 

grandfathered pension-eliglble workers {new hires versus grandfathered 

employees} 

Total matching Total non-elective Total DC 

contribution contribution contribution 

Grandfathered 3.90% 1.:1.8%- 5.09% employees 

New hires 4.25% 3.55% 1._ Note: Results are shown where full contrlbutlon data wereavadable for 22 of the 24comp/lnillS thetfu lIyorpartialty 

grarl>:tfatheredtheirworkefs.lfdlSCfeIlOl'lllryoor>trlbutlooswereshowrlloreoges.themaxlmlll1!VIIlue was used 

~~ft~T:~wa~esmake thecontObutlor>s necessary to receive the ma~lmum me!(:h,ngcontributiOfl 

Figure 9. Actions taken in DC plan by non-grandfathering companies 

N ... 17 

SO\l'ce:T~swatson 

• Added non-elective for aU employees 

; Added notl-€Iective. Former pension-eligible 

employees receive higher non-electlve 

Increased non-electlve for all employees 

• Increased match for all employees 

• Increased match + added non·e:!ective for 

all employees. Pensiotl-€Hglble employees 

receive higher total contribution 

• Increased match + added non-elective for 

all employees 

Wi: Increased match for all employees + 

increased non-elective for formerly 

pension~ligible employees 

Almost all companies that offered some level of 

grandfathering (58%) Increased DC benefits for new 

employees to mitigate the loss of the pension benefit. 

As shown in Figure 7, the dominant approach (57%) 

among these grandfathering companies was to add 

a non-electlve contribution to the DC plan - meaning 

the employer contributes whether or not the employee 

does (similar to cash balance plan pay credits). 

All the changes depicted in Figure 7 are for newly 

hired workers or existing workers who did not meet 

age and service requirements for grandfathering. 

The second most popular approach (22%) was 

increasing the matching contribution for workers who 

were no longer pensiorreHgible. 

Because non-penslon.eligible workers receive higher 

DC benefits than their grandfathered counterparts, 

we next quantify DC contributions as a percentage of 

pay for these two groups among the grandfathering 

companies. Figure 8 shows total DC employer 

contributions for a newly hired 35-year-old employee 

earning $50.000/year versus a grandfathered 

3S·year-old employee earning $SO,OOO/year with 

five years of service. 

Total employer contributions to DC plans for new 

hires. on average, are roughly 2.7% of compensation 

higher than contributions for their pension-eUglble 

counterparts. Most of this Increase reffects a higher 

non-e!ective contribution for new hires. The higher 

DC benefit for new hires, however, typically does not 

fully mitigate the pension loss.3 

We next analyze what happened to DC plans when the 

sponsor did not grandfather any DB plan participants 

and moved everyone to a DC-only program. As shown in 

Figure 9, 76% of companies that did not grandfather 

any plan participants increased their matching 

contribution to the DC plan, and 53% added or 

increased a non-elective contribution. It is interesting 

to observe that, in 18% of non.grandfathering 

companies;4 workers whose DB pensions were 

frozen received bigger DC contributions than those 

who had never had a pension. 

a traditional 

DB 

Some companies chose to convert their traditional 

DB plan to a hybrid plan. Of the 14 companies that 

converted to hybrid plans since 1998, five kept 

existing workers in the traditional plan and enrolled 

newly hired employees In the hybrld plan,S and four 

allowed employees to choose between the traditional 
108 

RESPONSE TO QUESTIONS OF SENATOR ENZI BY DIANE OAKLEY

Question 1. We all agree that well-run defined benefit plans offer very good benefits for employees and are an attractive retention tool for employers. However, many 

businesses may struggle with the burdensome regulations or convoluted laws associated with setting up and maintaining a defined benefit plan. In your opinion, which 

is easier for large companies to set up a defined contribution or a defined benefit 

plan? Does a defined contribution plan offer more of a ‘‘turn-key’’ operation for many 

businesses? What about for small- and medium-sized business to set up? Why is 

this? 

Answer 1. DB pension plans offer employers a cost-efficient, useful workforce 

management tool for employee recruitment and retention. In today’s economy, most 

companies do not start out as large firms, rather over time they grow in size from 
109 

start-up organizations or they become larger in size as a result of a merger. Also, 

private-sector industry shifts have occurred as the number of domestic manufacturing jobs with long-tenured employees has declined, while there has been a 

growth in information technology companies that typically have employees with 

shorter average tenures. As a result fewer companies offer new employees pensions 

today than even just 10 years ago. 

Among the Fortune 1000 companies, we have seen an upward trend in the number of corporations covering employees under defined contribution (DC) plans rather 

than defined benefit (DB) plans due in large part to the growing level of regulations 

that you refer to in the next questions. This has occurred in spite of the reality that 

DB plans due to their embedded economic efficiencies can provide the same level 

of retirement income for nearly half the amount that an individual would need to 

accumulate in a 401(k) account. DB plans require employers to continue to fund the 

promised benefits and that commitment means that in tough economic patches employers do not have the flexibility that we saw many larger employers with 401(k) 

plans exercise when they suspended employer matching contributions in 2009 and 

2010 and which they are now starting to resume. 

While it might be easier to set up a DC plan because the financial services industry has developed the capacity to deliver turn-key programs, the ongoing operating 

cost of a DB plan once established for larger employers is more cost effective. DC 

plans have higher administrative costs of maintaining individual accounts and annual testing, although with bundled service approaches the cost is often borne by 

employees through the fees charged to their accounts. 

DB plans are often tailored to the companies’ human resource needs, and while 

DB plans may require additional actuarial work we have seen very efficient models 

develop in the public sector under which state-wide municipal retirement plans can 

scale up services and deliver cost-effective DB plans to public employees in small 

local communities. 

When the DB(k) plan was created as part of the Pension Protection Act of 2006 

(PPA), I believe that there was some of that intent but the delay in issuing regulations on such plans has stalled possible implementations of DB(k) plans. NIRS has 

offered several policy options that could help employers consider covering workers 

under DB plans which include changing the law to make plan funding less volatile, 

allowing employees to contribute to DB plans on a pre-tax basis and creating a way 

that third parties could sponsor a pension plan. 

Question 2. When ERISA was first enacted in 1974, our retirement system was 

a lot simpler and 401(k) plans didn’t really take off until much later. In today’s environment, does it make sense to have three regulatory entities overseeing the retirement benefit system? In this case, we have the Department of Labor’s Employee 

Benefit Security Administration, the Pension Benefit Guaranty Corporation and the 

Internal Revenue Service. 

Answer 2. See response to question 3. 

Question 3. At the hearing, I introduced into the record a six page list of required 

employee disclosures pursuant to Federal retirement and health laws. In addition, 

those laws and regulations require many additional filings and reports to regulators. 

Recently, the President issued Executive Order 13563 requiring agencies to look at 

the regulatory burden and to come up with plans to reduce redundant, overlapping 

or burdensome regulations. Should the Administration place special attention on reducing regulatory burdens in the retirement area? What suggestions would you 

have for DOL in implementing e-disclosure policies? 

Answer 2 and 3. Let me combine my response to these two questions. I agree that 

the operations of pension plans have become more complex since ERISA was enacted. I started working with pension plans just as ERISA passed and it was 

thought to be a complex law even in its original form and it has changed significantly over time. 

Of course, in 1974 the change in the law that enabled the creation of 401(k) plan 

was still to come. I believe that the history of 401(k) plans illustrate how the unintended consequence of a small change in the pension and tax law can lead to major 

policy shifts, in that 401(k) plans, which were created as supplements to what was 

then the mainstay of retirement—defined benefit plans, have become the only retirement savings plan offered to the majority of workers covered by employer-sponsored 

plans. 

The first area for the Administration to look at in reducing regulatory burden is 

regulations being interpreted by the IRS and other agencies in ways that do not reflect the intent of Congress. 
110 

Let me illustrate this with another unintended consequence example that is coming out of the rulemaking process with regard to established practices on normal 

retirement age, especially for public pensions. In language designed to allow for 

phased retirement, Pension Protection Act of 2006 (PPA) set forth a definition of 

‘‘normal retirement age.’’ At the time, there was no discussion of normal retirement 

age practices in the public sector nor was there any intent to broadly change State 

pension laws at the time. Still, the IRS chose to use a PPA provision dealing with 

in-service distributions under phased retirement as the basis for questioning whether or not a retirement age that is conditioned (directly or indirectly) on the completion of a stated number of years of service is permissible in public sector plans. 

Under the IRS regulations—scheduled to apply to public sector pension plans beginning in 2013—all governmental pension plans would be required to specifically 

define a normal retirement age as an actual age. However, many governmental 

plans define normal retirement age or normal retirement date as the time or times 

when participants qualify for unreduced retirement benefits under the plan, which 

is set forth in State and/or local statutes and may not state a specific age. 

Furthermore, under many governmental pension plans, a participant can reach 

normal retirement age by satisfying one of several age and service combinations. 

Sponsors of such plans would find it very difficult to select a single age to be the 

plan’s normal retirement age. Selecting an age that is higher than the lowest age 

would likely impair the constitutionally protected rights of the participants to any 

benefit conditioned on normal retirement. Selecting an age that is lower than the 

highest age could impact the actuarial cost of the plan. While meetings have occurred between governmental plan representatives and the Treasury Department, 

the issue remains unresolved. 

Question 4. Studies show that many new employees like having a defined contribution plan because they can see their money grow from year to year. Also, many 

new employees do not envision that they will be with the same company for 30 

years. Should Congress expand the opportunities under the defined contribution system to adjust to this new workforce philosophy? 

Answer 4. For many years while 401(k) plans were gaining popularity, employees 

were able to look at their quarterly statements and see the money in their DC plan 

account grow. The last decade has been an eye-opener for many families about the 

investment risk in 401(k) plans. 

During the last decade’s first recession, many participants tried not to look at the 

shrinking 401(k) account balances when their quarterly statement arrived and 

many had recovered from investment losses just as the great recession hit in 2008. 

Over recent years they have seen account balances fall significantly once again and 

equity investments have continued to swing down and up. 

The economic shocks we have lived through since the start of this century have 

shown workers how risky our new retirement system can be. In a recent NIRS 

Opinion Survey, we asked if it was easier to prepare for retirement today than it 

was in comparison to earlier generations. Nearly 6 out of 10 women and nearly half 

of the men told us that it was much harder. Also, more than 8 out of 10 women 

told us that the average worker cannot save enough on their own to guarantee a 

secure retirement and 3 out of 4 men felt the same way. 

Most working Americans have seen their earnings slip in real terms over these 

years and few cannot afford to make added retirement contributions to make up the 

losses. I indicated in an earlier response that employers have a difficult time dealing 

with volatility but they have more wherewithal than most employees do to rebound 

from the beating their accounts took in the recent financial storms. This has created 

a growing appreciation for traditional defined benefit plans. 

In the public sector where a number of States allow new employees to choose between participating in a DB or DC plans, the large majority speak with their money 

and choose the traditional DB plan. Congress has helped retirement savings plans 

take advantage of defaults to encourage participation in retirement plans, so you 

have seen the power that a default can have. In the State of Washington where employees have a choice between a traditional DB plan and hybrid arrangement that 

includes a DC plan and the default is to the hybrid arrangement. This provides an 

interesting example, 6 out of 10 employees actively choose the traditional DB plan 

over the default option with its DC plan. NIRS will be releasing a report on the 

choice selections between DB and DC plans in the coming weeks and we would be 

happy to share all of the details with you. 

Over the last several decade Congress has done a lot of heavy lifting to make pension plans more portable by expanding rollover flexibility among plans. This has 

been extremely helpful to workers when they change jobs. Of course, the other side 

of portability is that lump sum distributions often lead to leakage when employees 
111 

leave one job for another and fail to make a roll over. Even modest lump sums, especially from employment early in a career would compound significantly with interest 

and improve long-term retirement security for many Americans if we could discourage early withdrawals. 

Last, Boston College did a ‘‘chicken or the egg’’ type of analysis of job changing 

and the decline of pensions. In 2006, they found evidence that the move from DB 

plans into DC plans beginning in the 1990s caused employees to turn over at higher 

rates—as opposed to the other way around, as is sometimes assumed. They further 

found that DB pension coverage increases tenure with an employer by 4 years, as 

compared to having no retirement system in place. DB coverage increases tenure 

with an employer by 1.3 years as compared with DC coverage. Having a DB and 

DC plan showed the greatest retention effects, as the two plans together increase 

tenure by a full 3.1 years, as compared with a DC-only plan. 

Question 5. At the hearing, we heard that one of the big issues for companies in 

sponsoring defined benefits is the change in accounting standards and rules requiring fair market value of pension liabilities which are reported on companies’ balance 

sheets. Many companies believe that this has led to increased volatility for companies’ balance sheets. Even if we revise the pension funding rules pursuant to ERISA 

for counter-cyclical events, would the current accounting rules still be an issue? 

Answer 5. I agreed with the witness who spoke to the accounting change that the 

change in the accounting standards requiring fair market value of pension liabilities 

has led to increased volatility on corporate balance sheets. NIRS has found that it 

also contributed to the trend toward freezing DB plans in the private sector. As 

Congress considered the PPA, many private plan sponsors suggested that the funding rules that moved in a similar direction would force sponsors to consider freezing 

pensions and that appears to be the case. In the wake of the financial crisis, Congress provided modest pension funding relief for private pension plans and a further 

consideration of restoring greater time horizons to the funding requirements, which 

would have an important bottom line effect in generating cash flow, could help companies have the resources to hire new employees. 

The FASB accounting rules would still pose challenges in private sector and similar concerns now face public employers, with the release of the recent exposure draft 

on pension accounting by GASB. The balance sheet numbers will impact stock prices 

and credit ratings but the pension funding rules go straight to the cash flow bottom 

line today even though the pension plan liabilities are far in the distant future. 

Question 6. In your research, you found that defined benefit plans get ‘‘more bang 

for the buck’’ than defined contribution plans, however, your research comes from 

public pension plans. What about the volatility and accounting issues associated 

with private sector defined benefit plans? Do the longer period for amortization and 

‘‘smoothing’’ allowed by public pension plans create stability for public pension plans 

or do they create more funding problems for State and local governments’ pension 

obligations? 

Answer 6. NIRS ‘‘Better Bang for the Buck’’ compares the cost of providing a certain level of lifetime income under both a DC plan and a DB plan. It finds that the 

DB plan generally provides a 46 percent cost advantage to provide the same benefit. 

The analysis looks at a generic DB plan that would occur in either the private or 

public sectors. The analysis did not look at funding volatility in and of itself. 

The paper calculates how much money would be needed in a DC plan to provide 

a certain level of income in retirement to last for almost all of a person’s life. It 

then compares that amount with the amount of money that would need to be accumulated in a DB plan with the same benefit level. The pooling of longevity risk, 

maintaining portfolio diversity and higher investment returns from DB plans due 

to professional asset management add up to a 46 percent cost advantage. Investment risk occurs in DB and DC plans but it generally resides with employers in 

DB plans and with employees in DC plans. 

Because the States that sponsor the large public pensions, which cover 85 percent 

of the public workforce, are sovereign governments there is no Federal agency insuring the benefits promised to public employees. 

Without Federal restrictions on the actuarial tools (smoothing and amortization) 

that plan sponsors can use to create a more stable and predictable flow of dollars 

into pension plans, public pension trusts gradually reached aggregate funding levels 

in excess of 100 percent by 2000. The vast majority of individual public pensions 

attained funding levels that GOA has cited as appropriate for public pensions by 

that same time, but some plans fell short when it came to prefunding their liabilities for various reasons, including budgetary pressures. 
112 

The predictable cost of providing a DB plan in the public sector as well as the 

contributions made to DB plans by public employees have allowed these plans to 

continue to provide retirement security to millions of American workers. The first 

chart shows the historical employer and employee contributions made into public 

pensions from 1982 through 2009. The shared forced saving of public employees has 

been a steady component of public pension funding while employer contributions 

were adjusted back when plans in many States reach full funding levels. The second 

chart compares the percentage increase in plan contributions for both public and 

private employers and illustrates how the longer period for amortization and 

‘‘smoothing’’ offer sponsors of public pensions a more predictable cost for their pensions which enabled most plans to reach adequate funding levels over time without 

creating extreme burdens on taxpayers in any 1 year. Over the last several years 

nearly all States have adjusted their pension plans in various ways to put them on 

a path back on a sounder financial basis over time. 

PUBLIC PENSIONS TYPICALLY ARE SHARED FUNDING RESPONSIBILITY

EMPLOYEE AND EMPLOYER PENSION CONTRIBUTIONS, 1982 TO 2009
113 

CHANGE FROM PRIOR YEAR IN CORPORATE AND PUBLIC PENSION CONTRIBUTIONS, 

1989–2009

RESPONSE TO QUESTIONS OF SENATOR ENZI BY CHRISTOPHER T. STEPHEN, ESQ. 

Question 1. We all agree that well-run defined benefit plans offer very good benefits for employees and are an attractive retention tool for employers. However, many 

businesses may struggle with the burdensome regulations or convoluted laws associated with setting up and maintaining a defined benefit plan. In your opinion, which 

is easier for large companies to set up a defined contribution or a defined benefit 

plan? Does a defined contribution plan offer more of a ‘‘turn-key’’ operation for many 

businesses? What about for small- and medium-sized business to set up? Why is 

this? 

Answer 1. DC plans were originally created to be supplemental retirement income 

to traditional DB Plans and Social Security benefits. We all know that over the last 

25 years, DC plans have largely become the primary retirement savings vehicle for 

workers, as many companies have reduced, frozen or terminated their DB plans. As 

I testified during the hearing, there are many reasons for this transition, but the 

‘‘tipping point’’ was when Congress (1) amended the Full Funding Limit rules (effective in 1988), and (2) introduced pro-cyclical funding requirements that dramatically 

increased funding obligations during difficult economic times. Up until that time, 

the tax code allowed employers to contribute more to their retirement plans in good 

times, and less in bad times, recognizing the need for more capital in bad times. 

Policies that increased volatility in contribution rates and required more funding 

by companies during down financial markets has created a trend over the last two 

decades for employers to freeze or completely eliminate DB plans. The current funding rules are pro-cyclical, making operation and maintenance of a DB a one-waywrench that requires substantial increases in funding when companies are least 

able to afford it. We cannot have a vibrant defined-benefit system as long as the 

funding rules require exorbitant contributions at exactly the wrong time. 

No business of any size—whether it is a small electric co-op in Iowa or Wyoming 

or J.P. Morgan which Forbes cites as the largest company in the world—can survive 

or thrive if it does not have predictable, manageable, and budgetable costs on an 

annual basis, let alone a 5- to 10-year horizon. That is exactly what has become of 

the DB system—substantially increased volatility and unpredictability in the fund-
114 

ing rules has made sponsoring a DB plan an unpredictable, unmanageable, and 

unbudgetable cost that companies will be liable for over decades. 

Companies need certainty. In late September 2011, The New York Times and The 

Wall Street Journal both reported that health-insurance premiums paid by employers rose by 9 percent in 2011, with the average annual cost of family coverage topping $15,000 according to a study from Kaiser Family Foundation, and that unemployment insurance premiums are rising for employers as States struggle to repay 

$38 billion in Federal loans for unemployment benefits. And, at the same time, the 

Administration continues to pursue its goal to increase PBGC premiums by $16— 

$17 billion on the very companies struggling to keep their DB Plan in place. This 

unfair tax increase on DB plan sponsors is just another example of government injecting unpredictability and pro-cyclical, anti-growth policies into a system it allegedly wants to preserve and enhance. In that context, it is wrong for the government 

to even consider taxing plan sponsors. 

Question 2. When ERISA was first enacted in 1974, our retirement system was 

a lot simpler and 401(k)s didn’t really take off until much later. In today’s environment, does it make sense to have three regulatory entities overseeing the retirement 

benefit system? In this case, we have the Department of Labor’s Employee Benefit 

Security Administration, the Pension Benefit Guaranty Corporation and the Internal Revenue Service. 

Answer 2. If the three agencies are going to continue to oversee the retirement 

benefit system, much better coordination is needed among them. For example, each 

agency discusses the need to slow the decline of the DB Plan system, but there is 

no concerted effort to do so. Instead, the PBGC spearheads an extremely counterproductive proposal to impose a large tax only on defined benefit plan sponsors. In 

our public policy discussions with the Hill and the Administration, Treasury and 

Labor are not involved, leaving us more convinced than ever of the need for more 

coordination among the agencies. That coordination could potentially head off misguided proposals like the PBGC’s. 

Question 3. At the hearing, I introduced into the record a 6-page list of required 

employee disclosures pursuant to Federal retirement and health laws. In addition, 

those laws and regulations require many additional filings and reports to regulators. 

Recently,the President issued Executive Order 13563 requiring agencies to look at 

the regulatory burden and to come up with plans to reduce redundant, overlapping 

or burdensome regulations. Should the Administration place special attention on reducing regulatory burdens in the retirement area? What suggestions would you 

have for DOL in implementing e-disclosure policies? 

Answer 3. The retirement plan system is slowly being overrun by overlapping, unnecessary, and burdensome requirements. First, the volume and complexity of employee communications have reached such an extreme point that many employees 

simply do not read anything anymore, yet longer and more complicated disclosures 

are constantly being added. Second, the cost of preparing, printing, and mailing 

these notices is growing. Despite the fact that the world, including much of the Federal Government, is moving toward electronic communication, DOL is moving toward more paper, more cost, and less effective communication. Finally, all the new 

rules are spawning a wave of baseless litigation as class actions in search of a settlement have hit the retirement plan system. These issues must be addressed if we 

are to have a vibrant, growing private retirement system. 

Question 4. Studies show that many new employees like having a defined contribution plan because they can see their money grow from year to year. Also, many 

new employees do not envision that they will be with the same company for 30 

years. Should Congress expand the opportunities under the defined contribution system to adjust to this new workforce philosophy? 

Answer 4. Congress should expand opportunities throughout the retirement security arena, to enable workers to save more for a secure retirement, and, encourage 

employers to invest more in their greatest asset—employees. That is, Congress 

should not pick ‘‘winners and losers’’ in the retirement savings arena. Rather, it 

should enact policies that encourage employers to provide and contribute to plans, 

and that incentivize employees to save for their own retirement. 

As I said in my testimony, NRECA is proud that the vast majority of its members 

offer comprehensive retirement benefits to their committed employees through a traditional DB plan (the NRECA Retirement Security Plan) and a DC Plan (the 

NRECA 401(k) Plan). These ‘‘multiple-employer’’ retirement benefit plans (under 

§ 413(c) of the Internal Revenue Code) are operated to maximize retirement savings 

for employees, retirees and their families and provide each co-op employee the financial means to enjoy a comfortable and secure retirement. 
115 

The strongest recruitment and retention tool for electric cooperatives continues to 

be their employee-benefits program—particularly their DB Plans. As a consumerowned business, each electric cooperative is focused on serving its community 

through its workforce. While many publicly traded, international companies see 20 

to 30 percent or more annual employee turnover, electric cooperatives see less than 

a 5 percent annual employee turnover, with more than 2⁄3 of cooperative employees 

spending their entire working careers within the cooperative family. Our members 

understand the very real recruiting, training, and development costs for new hires 

are 1.0 to 2.0 times annual pay. As such, our DB Plan rewards long service employees, and allows our members to invest in these key employees without having to 

face these substantial replacement costs. This ‘‘works’’ for our businesses. 

For other business and industries, however, a traditional DB Plan may not ‘‘work’’ 

for its employees or business model. For employers, DC Plans have predictable, 

manageable, and budgetable costs, which make them an important part of total 

compensation. Also, as your question states, many employees have transitioned 

away from career employment at one company. At the same time, while the DC 

Plan system has achieved many successes, with approximately 670,000 private-sector DC Plans covering 67 million Americans, it still presents challenges to provide 

the necessary level of retirement benefits to many Americans. 

Eliminating or diminishing the current tax treatment of employer-sponsored retirement plans like the NRECA Retirement Security Plan or 401(k) Plan will jeopardize the retirement security of tens of millions of American workers, impact the 

role of retirement assets in the capital markets, and create challenges in maintaining the quality of life for future generations of retirees. While we work to enhance 

the current retirement system and reduce the deficit, policymakers must not eliminate one of the central foundations—the tax treatment of retirement savings—upon 

which today’s successful system is built. As Congress and the Administration consider comprehensive tax reform and deficit reduction, we urge you to preserve these 

provisions that both encourage employers to offer and workers to contribute to retirement plans. 

Question 5. At the hearing, we heard that one of the big issues for companies in 

sponsoring defined benefits is the change in accounting standards and rules requiring fair market value of pension liabilities which are reported on companies’ balance 

sheets. Many companies believe that this has led to increased volatility for companies’ balance sheets. Even if we revise the pension funding rules pursuant to ERISA 

for counter-cyclical events, would the current accounting rules still be an issue? 

Answer 5. Not available. 

Question 6. Your cooperative members operate a ‘‘multiple employer’’ defined benefit plan that allows multiple defined benefits plans to be rolled into a larger plan. 

Multiple employer plans seem to allow small businesses some of the benefits large 

companies have with their big participant pools. What can be done to allow other 

entities to have access to the multiple employer structure? Are there major regulatory burdens or roadblocks to implementing and running a successful multiple employer plan? 

Answer 6. Our ‘‘multiple-employer’’ DB Plan provides cooperatives with a convenient and affordable mechanism to pool resources, maximize group purchasing power 

and leverage economies of scale that would otherwise be unavailable to small businesses like cooperatives. In fact, that is why NRECA created the Plan in 1948—our 

members could not afford all of the administrative expenses to set up and operate 

a plan on their own, and financial institutions were not interested in employers of 

our size. 

There are, however, several statutory and regulatory burdens and roadblocks hindering the formation of association-based multiple-employer plans (MEPs) like ours, 

that are dedicated to doing the right thing for their members and their employees. 

• If Congress pursues a policy to expand MEPs, Federal laws and regulations should recognize the difference between bona fide ‘‘employer association-based MEPs,’’ and ‘‘open MEPs’’ for fiduciary responsibility and liability purposes. For true bona fide association-based multiple employer plans (like 

NRECA), participating employers share a relationship and common business goal 

unrelated to employee benefits and typically have voting authority with respect to 

the association. Employer-association MEPs assume enormous liabilities for other 

employers when sponsoring the MEP; in exchange for assuming the risk, complexity 

and cost, the central MEP sponsor must have control over policies, provider selection, plan management, and investments. If, for example, 1,000 participating employers in an employer-association-based MEP were obligated to assume responsibility for management and monitoring of the MEP, the advantages of the MEP de-
116 

sign (centralization of cost and complexity), would be eviscerated, leading to increased costs and confusion. In that model, individual employers would need to hire 

sub-administrators to provide monitoring administration services, defeating the purpose of the MEP. To the extent Congress looks to expand opportunities for companies to join and/or establish MEPs, Congress should recognize bona fide associationsponsored MEPs’ centralized responsibility and accountability and eliminate burdens at the participating employer level. Further, Congress should be very 

leery of opportunistic for-profit companies who seek to establish ‘‘open 

MEPs,’’ where employers share no ‘‘common-bond’’ relationship or voting 

authority with respect to the sponsoring entity, so there is no separate entity to assume those obligations. With an open MEP, since there is no bona fide 

employer association sponsor, it makes sense to require participating employers to 

maintain these obligations. If any clarifications are made to current law on MEP 

structure or fiduciary responsibility and liability, Congress should carefully assess 

the structure, operation, oversight and participant protections in ‘‘open MEPs.’’ • Expand eligibility to participate in employer association-based MEPs. 

Under ERISA § 3(5), an employer includes an association of employers. Under various DOL advisory opinions specific to health and welfare plans, the DOL advised 

that employers who lack certain characteristics, such as the requisite degree of control, may not be eligible to participate in an employer association-sponsored plan. 

These opinions were primarily issued to address entities attempting to circumvent 

State health insurance requirements. Recent comments by the DOL suggested that 

the interpretation of 3(5) would be the same as to retirement plans. This interpretation generally does not impact existing association-sponsored MEPs or employers already participating in them, particularly ‘‘closed’’ association-sponsored MEPs like 

NRECAs. However, a narrow interpretation of the definition of employer would discourage the expansion of association-sponsored MEPs, or the formation of ‘‘open 

MEPs.’’ Obviously, concerns about eligibility would further diminish the likelihood 

that an employer would establish or participate in a DB MEP. Congress could facilitate ‘‘open MEPs’’ or the expansion of existing association-sponsored 

MEPs, with appropriate safeguards. • Congress should change rules that disqualify and penalize an entire 

MEP for the compliance failure of one participating employer. Code section 

413(c) and in particular Treas. Reg. § 1.413–2(a)(4) provides in essence that to the 

extent a single participating employer fails to comply with tax qualification requirements, all participating employers in the MEP and the MEP itself will be disqualified. Further, under revenue procedures, if a single participating employer fails to 

comply, the tax penalty is based not on the assets attributable to that employer, but 

on the assets of the entire plan. This rule is impractical and counter to a policy that 

encourages MEPs. Instead, Congress should implement a reasonable rule that 

imposes obligations only on the party that fails to comply. For example, the 

employer responsible for the breach could be (a) compelled to take corrective measures pursuant to IRS correction programs; and, (b) statutorily required to fund the 

liabilities affiliated with its own failure. 

• Enhance DB Plan Portability. One primary advantage of an MEP like 

NRECA’s is portability. In a true association-sponsored MEP like ours, employees 

of one co-op may transfer to another participating co-op without losing eligibility, 

service, or vesting credit. This portability should be preserved for existing 

MEPs and possibly made more widely available. 

• Reporting and disclosure requirements for DB MEP Administration 

must be streamlined and simplified. One of the most challenging aspects of 

MEP administration involves the reporting and disclosure requirements of Title I, 

Part I of ERISA. Unlike a single employer plan where the employer knows the employment status, address, compensation, marital and disability status of employees, 

in the MEP design, the participating employer, not the MEP administrator, has the 

data related to employee status. Similarly, unlike a union-based multi-employer 

plan where the benefit design is often the same or similar for collectively bargained 

employees, or a single employer plan where the plan design is largely the same for 

all employees, in the MEP design, each participating employer’s benefit design is 

often different, including eligibility, benefit accrual, normal retirement date, vesting, 

etc. This creates necessary flexibility for employers operating in different markets 

with different compensation rates and is one of the most attractive features of an 

MEP for employers. However, it is also one of the most expensive and challenging 

to administer. For example, MEP administrators (like NRECA) may have thousands 

of different Summary Plan Descriptions (SPDs) and correspondingly complex disclosure requirements. Managing these difficulties requires extensive resources and increased expenses. Congress should examine ways to make electronic compliance as feasible as possible and provide flexible deadlines that recognize the 
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difficulties of data collection and disclosure obstacles applicable to many 

different employers with unique benefit designs. 

RESPONSE TO QUESTIONS OF SENATOR HAGAN BY DIANE OAKLEY

Question 1. Ms. Oakley, in your work at the National Institute on Retirement Security, have you seen a need for financial literacy programs not just in young people, but also in adults who are making important decisions about their retirement? 

Answer 1. Senator Hagan, a wide body of research indicates that indeed, there 

is a need for increased financial literacy for Americans in all areas of personal finance. 

According to Council for Economic Education (CEE), your State, North Carolina, 

is a leader on financial literacy for young people having already put in place standards for economic and personal finance education and requiring school districts to 

implement those standards and offer classes. Thanks to CEE and other programs 

like JumpStart we are reaching children and helping them understand about 

money, the economy and the importance of savings. 

Financial Literacy for adults is also critical, especially today, as financial matters 

have become more complex and more of the risks for reaching important lifetime 

goals, like a secure retirement, are falling squarely on the shoulders of working 

Americans. We have often heard that adults take more time to plan a 2-week vacation than they take to plan their retirement. Research also tells us that Americans 

with a higher level of financial literacy are in a better position to manage their income during their working and retirement years. Economist Annamaria Lusardi 

found that retirement planning is a powerful predictor of wealth accumulation; 

those who plan have more than double the wealth of those who have done no retirement planning. 

However, financial literacy can only do so much when it comes to helping Americans achieve retirement security. Even if an individual understands how to save for 

retirement, the bigger challenge is to convert that knowledge into action. Retirement plans that make it easy for Americans to save are far more valuable than financial literacy programs. For example, providing employees with access to a traditional pension eases the burden on Americans. The plan does the work—collecting 

regular savings, investing with professional asset management, and paying a stable 

monthly income in retirement that lasts until death. With a pension, the average 

employee does NOT have to be a financial planner, an investment advisor and an 

actuary in addition to their regular day job. This is particularly important as millions of Americans near retirement are struggling with how to contend with the ongoing volatility of the financial markets. 

Ultimately, financial literacy is important, but not a silver bullet for what ails the 

Nation’s retirement crisis. Twenty-five years ago more than 80 percent of large and 

mid-sized firms offered workers a defined benefit plan 25 years ago, but today less 

than a third do and that share continues to decline. If we have any hope of putting 

America back on track to reach the ‘‘retirement security’’ component of the American Dream, we need to restore the board pooling of ‘‘retirement risks’’ that is at 

the foundation of traditional pensions. 

RESPONSE TO QUESTIONS OF SENATOR ENZI AND SENATOR HAGAN

BY DAVID MARCHICK

SENATOR ENZI

Question 1. In your research, you found that defined benefit plans get ‘‘more bang 

for the buck’’ than defined contribution plans, however, your research comes from 

public pension plans. What about the volatility and accounting issues associated 

with private sector defined benefit plans? Do the longer period for amortization and 

‘‘smoothing’’ allowed by public pension plans create stability for public pension plans 

or do they create more funding problems for State and local governments’ pension 

obligations? 

Answer 1. Unavailable. 

SENATOR HAGAN

Question 1. Mr. Marchick, in your testimony you highlighted the liquidity that 

pension funds provide to U.S. financial markets. I agree that this is an important 

function, but it would seem to me that retirement assets, broadly speaking, provide 

that function. Regardless of whether assets reside in defined benefit or defined contribution plans, they are typically longer-term and more patient capital. 
118 

Can you help me understand the liquidity impact that we would see if pension 

assets were held elsewhere, for example in defined contribution plans? Would this 

pension fund liquidity disappear? 

I also noted that in your testimony you cited return differentials between pension 

funds and other retirement assets. It is my understanding that pension funds are 

typically permitted to engage in certain activities not permitted by most defined contribution plans, such as investing in private equity funds or hedge funds. 

What impact does the broader investment mandate enjoyed by some pension 

funds have on the return differentials you see between defined benefit and defined 

contribution plans? 

Answer 1. Unavailable. 

AMERICAN BENEFITS COUNCIL, 

WASHINGTON, DC 20005, 

February 3, 2011. 

OFFICE OF REGULATIONS AND INTERPRETATIONS, 

Employee Benefits Security Administration, 

Attn: Definition of Fiduciary Proposed Rule, 

Room N–5655, 

U.S. Department of Labor, 

200 Constitution Avenue, NW, 

Washington, DC 20210. 

Re: RIN 1210–AB32, Definition of Fiduciary Proposed Rule 

DEAR SIR OR MADAM: On behalf of the American Benefits Council (the ‘‘Council’’), 

I am writing today with respect to the proposed regulations addressing the definition of a fiduciary. 

The Council is a public policy organization representing principally Fortune 500 

companies and other organizations that assist employers of all sizes in providing 

benefits to employees. Collectively, the Council’s members either sponsor directly or 

provide services to retirement and health plans that cover more than 100 million 

Americans. 

The Council has requested to testify at the hearing scheduled for March 1, 2011 

and, if necessary, March 2, 2011. We thank the Department of Labor (the ‘‘Department’’) for scheduling the hearing and for extending the comment period. We believe 

that those were important steps in ensuring a full public policy dialogue with respect to this critical proposed regulation. 

We understand the desire of the Department to update and improve the regulatory definition of a fiduciary. We agree that the retirement community would benefit from rules that establish clear lines between fiduciary advice, on the one hand, 

and non-fiduciary education, marketing, and selling on the other hand. However, we 

believe that the proposed regulations create too broad a definition of fiduciary. As 

discussed in more detail below, we are very concerned that an overly broad definition would actually have a very adverse effect on retirement savings by raising 

costs, inhibiting investment education and guidance for plans and participants, and 

significantly shrinking the pool of service providers willing to provide such investment education and guidance. 

We know that the Department does not have any intent to create an overly broad 

definition that would adversely affect retirement savings or trigger burdensome and 

unnecessary costs that will be borne in whole or in part by participants. Accordingly, we look forward to a very constructive dialogue on the critical issues raised 

by the proposed regulations. 

Defined contribution plan participants and individual retirement account or annuity (‘‘IRA’’) owners have generally been given the opportunity and responsibility to 

make their own investment decisions and to design their own path toward retirement security. This is an enormous challenge for individuals who are not investment professionals and may not be familiar with the investment markets. The public policy challenge is how to facilitate participant education and engagement with 

respect to effective investment strategies, while at the same time protecting participants from misleading self-interested advice. Finding a balance between these two 

goals should, in our view, be the core objective of the new definition of a fiduciary. 

Moreover, as discussed further below, it is essential that the Department’s proposed regulations be coordinated with guidance issued by the Securities and Exchange Commission (‘‘SEC’’) and the Financial Industry Regulatory Authority regarding the standard of conduct applicable to brokers and dealers. Without coordination, brokers and dealers would be subject to different and conflicting standards 
119 

with respect to the same advice, reducing their ability to provide clear sound advice 

to participants. 

The proposed regulations would also pose great challenges for defined benefit plan 

sponsors seeking investment information and valuation services. In particular, it is 

critical that the proposed regulations be coordinated with specificity with the Commodity Futures Trading Commission’s ‘‘business conduct’’ regulations regarding 

swaps; without clear coordination, the Department’s regulations could render swaps 

unavailable to plans, with devastating results. 

The importance of coordinating among Federal agencies has recently been strongly emphasized by the President in a January 18, 2011 Executive order: 

Some sectors and industries face a significant number of regulatory requirements, some of which may be redundant, inconsistent or, overlapping. Greater 

coordination across agencies could reduce these requirements, thus reducing 

costs and simplifying and harmonizing rules. In developing regulatory actions 

and identifying appropriate approaches, each agency shall attempt to promote 

such coordination, simplification, and harmonization. 

Finally, as discussed below, we strongly urge the Department to provide broad 

transition relief to avoid significant disruption of the retirement plan world. 

ENSURING THE CONTINUED AVAILABILITY OF INVESTMENT EDUCATION AND GUIDANCE

AND SERVICES TO RETIREMENT PLANS

The Department’s regulations could have very significant effects on the provision 

of services to plan sponsors, and on the provision of investment education and guidance to plans, plan participants, and IRA owners. In this regard, the regulations 

could cause certain established means of providing such services, education, and 

guidance to cease, which could leave plans and participants with less access to investment education and guidance. That is clearly undesirable. 

We have the following recommendations with respect to avoiding this result: 

• Substantive modifications. There are certain modifications to the proposed 

regulations that would be consistent with the Department’s objectives but would 

not unnecessarily disrupt established and successful means of providing investment education and guidance. The remainder of this letter addresses those 

issues. 

• Effective date. The regulations are proposed to be effective within 180 days 

of finalization. That is not enough time. These regulations could cause portions 

of the investment advice industry to be restructured or eliminated. For example, 

in some cases, advisors may need to alter the type of education and guidance 

they provide or possibly eliminate certain services in order to avoid fiduciary 

status. These advisors will need significant training. In other cases, advisors 

will become fiduciaries, and this may require restructuring their compensation 

packages, as well as the fee structures of their employer. Even if existing agreements are grandfathered (as discussed below), new agreements regarding investment services will need to be developed. And potentially far more entities 

and persons will need to be insured as fiduciaries. All of this requires a substantial amount of time, especially at a time when administrative frameworks 

and systems are being strained by adjustments to broad new disclosure regimes. 

A transition period of at least 12 months following finalization of the regulations (and implementation of any necessary prohibited transaction exemptions) 

is critical to avoid periods when investment information is materially less available for plans and IRAs. 

In addition, we urge the Department not to disrupt existing agreements. For 

example, a plan sponsor may have an existing agreement with a consultant to 

provide non-fiduciary investment information regarding the plan’s investment 

options as well as other investment options that could be offered to plan participants. It would be very disruptive to cause that agreement to be terminated 

prior to its expiration by reason of the fact that the new rules would transform 

the arrangement into a fiduciary relationship. It may not be possible to renegotiate a different agreement under the new rules with the same service provider; 

it may even be the case that for a period of time, no service provider is prepared 

to provide services under the new rules. In this context, the forced termination 

of existing arrangements would certainly not be appropriate. 

Other existing arrangements may raise even more difficult problems. For example, swap agreements set out long-term financial and contractual obligations 

that cannot be modified without extensive and expensive renegotiations. The 

proposed regulations have great potential to force such renegotiations by, for example, treating certain valuations under typical agreements as fiduciary advice, 
120 

which would, in turn, trigger prohibited transaction issues and termination provisions in swap agreements. 

We are still gathering information on the extent of the adverse effects on existing arrangements, but what we have uncovered to date convinces us that 

there is a great need not to disrupt existing arrangements that may be very difficult to modify or replace, especially in the short term. • Coordination with other guidance. If certain established means of providing 

investment information cease to be workable, members of the retirement plan 

community will be looking for alternative means of providing such information. 

In this regard, it is critical that all available tools be ready and available when 

investment information delivery systems are being redesigned. This means that 

the finalization of the proposed regulations should be coordinated with other 

rulemaking that could affect investment information delivery systems. For example, the proposed regulations implementing the prohibited transaction exemptions under the Pension Protection Act of 2006 (the ‘‘PPA’’) should be finalized at least 12 months before the effective date of the fiduciary definition regulations, so that during the 12-month period, the plan community can explore 

whether use of the exemptions can provide a workable way to provide investment information. 

It is important that the Department clarify that all currently applicable prohibited transaction exemptions would remain in effect. In that regard, if the Department is planning, in light of the regulation, to revisit any exemptions affecting the investment advice area, it is critical that this be coordinated with the 

finalization of the fiduciary definition regulations, so that all available means 

of providing investment information can be evaluated prior to the effective date 

of the new rules. 

Coordination with the SEC is very important, as discussed further below. If 

the Department’s regulations are finalized and effective at a time when broker/ 

dealers’ obligations under the securities laws are not settled, this will result in 

broker/dealers being unable to redesign their investment information delivery 

systems due to ongoing uncertainty. This could have a devastating effect on the 

availability of investment information from broker/dealers, which traditionally 

have been a very important source of such information, especially for small 

businesses and IRA owners. 

Coordination with the CFTC and the SEC regarding swaps is also critical. If 

the Department’s proposed regulations and the CFTC’s proposed business 

standards were finalized in their current state, plans would effectively be forced 

to cease using swaps, with devastating results, as discussed further below. 

CLARIFICATION OF THE BASIC DEFINITION OF ‘‘FIDUCIARY’’ 

Individualized Specific Advice Should be Required in All Cases 

In general. We are very concerned that the furnishing of investment recommendations may, under the proposed regulations, be treated as a fiduciary act even if the 

recommendations are not specific or individualized. For example, assume that an investment adviser (within the meaning of section 202(a)(11) of Investment Advisers 

Act of 1940) (‘‘Investment Adviser’’) provides a firm newsletter to an IRA owner customer. The firm newsletter provides a discussion of the general market outlook, including a discussion of which industry sectors may be gaining or losing strength in 

the near future. 

Arguably, the newsletter is providing recommendations regarding the ‘‘advisability of investing in, purchasing, holding, or selling securities.’’ If so, the newsletter would appear to be fiduciary advice under the proposed regulation since (1) 

the newsletter is provided to an IRA owner, (2) the newsletter is provided by an 

Investment Adviser, (3) the newsletter does not appear to be covered by any of the 

‘‘limitations’’ in § 2510.3–21(c)(2), and (4) compensation, such as brokerage commissions, would be earned in connection with purchases or sales of securities. Furthermore, under the proposed regulations, affiliates of the Investment Adviser’ employer 

would also appear to be fiduciaries with respect to the matters addressed in the 

newsletter. 

Clearly, the newsletter should not be treated as fiduciary advice. The newsletter 

is simply an effort to educate and engage individuals with respect to market trends. 

Such education should not be inhibited and we do not believe that the Department 

intended this result. (Of course, if a newsletter were sold that provides specific investment advice on particular investments that participants should buy or sell within a specific plan, the newsletter should be treated as fiduciary advice.) 

The proposed regulations should be clarified so that in order to constitute fiduciary advice, recommendations must in all cases (1) be individualized to the needs 
121 

of the plan, plan fiduciary, or participant or beneficiary, and (2) address the purchase, sale, or holding of specific securities, rather than market trends or asset allocations. This should apply in the case of subclauses (A), (B), and (C) of § 2510.3– 

21(c)(1)(ii), in addition to applying for purposes of subclause (D). 

Interaction with Interpretive Bulletin 96–1. Without the clarification described 

above, the meaning of Interpretive Bulletin 96–1 (‘‘IB 96–1’’) would be cast into 

doubt. It is true that the proposed regulations specifically provide that the provision 

of investment education and materials within the meaning of IB 96–1 does not give 

rise to fiduciary status. But IB 96–1 has generally been read to permit education 

about investments that does not involve individualized advice regarding specific securities. The proposed regulations would call that interpretation into question by 

clearly implying that at least some non-individualized non-specific market guidance 

can constitute fiduciary advice. 

If finalized in their current form, the proposed regulations would thus put a significant chill on investment education. Any non-individualized investment education 

that is not precisely addressed in IB 96–1 would be called into question and thus 

may cease to be provided. This would have a very adverse effect on critical educational tools currently in effect, leaving participants with far less information, especially low- and middle-income participants who may not be able to afford to acquire 

investment assistance elsewhere. In addition, this structure will clearly stifle any 

future innovation with respect to investment education, such as the application of 

IB 96–1 to plans (in addition to plan participants) as discussed below. We do not 

believe that the Department intended these results, which can be avoided by clarifying the regulations in the manner recommended above. 

Fiduciary Relationship: ‘‘May Be Considered’’ is Too Low a Threshold to Trigger 

Fiduciary Duties and Liabilities 

As discussed above, recommendations should be fiduciary advice only if individualized and specific. However, that alone is not enough. For example, assume that 

a plan participant has done extensive research and consulted with an advisor, and 

has decided tentatively to invest in a group of mutual funds available under the 

plan. As a last-minute check, the individual asks a friend in the employer’s human 

resources department if the participant’s fund selections make sense for an individual in his situation. The human resources employee says she is not an expert 

but the choices make sense to her and are consistent with what many others are 

doing. Under the regulation, that reaction may be investment advice if the human 

resources employee is compensated in part for dealing with plan-related questions. 

Alternatively, instead of calling the human resources employee, the employee calls 

a friend who is an Investment Adviser of an affiliate of the financial institution offering some of the funds under the plan. The Investment Adviser has nothing to do 

with the plan and his affiliate operates completely independently of the institution 

offering some of the plan’s funds. The Independent Adviser says that he cannot give 

the participant investment advice, but the choices seem generally appropriate for 

someone in the participant’s position. That reaction is clearly investment advice 

under the proposed regulations (and would thus be a prohibited transaction). 

These examples are not real investment advice. These are situations where individuals receive very incidental comfort regarding decisions made independently by 

them. Yet the proposed regulations would turn this into investment advice that triggers personal liability and, in the case of the Investment Adviser, a prohibited 

transaction. This is not the right result. 

A fiduciary relationship should not be treated as existing unless: 

There is a mutual understanding that the recommendations or advice being 

provided in connection with a plan or IRA: 

(1) will play a significant role in the recipient’s decisionmaking, and 

(2) will reflect the considered judgment of the adviser. 

The ‘‘may be considered’’ standard is such a low threshold that almost any casual 

discussion of investments will satisfy it. An ERISA fiduciary relationship is a very 

serious relationship with the highest fiduciary standard under the law, including (1) 

application of the prudent expert standard, (2) a duty to act solely in the interest 

of the participants and beneficiaries, and (3) very significant potential liability. In 

that context, fiduciary status should not be triggered by casual discussions but only 

by serious communications that reflect a mutual understanding that an adviser/ 

advisee relationship exists. 

Thus, we urge the Department to replace the ‘‘may be considered’’ standard with 

the standard described above. Moreover, no recommendations should be treated as 

giving rise to fiduciary status unless such recommendations meet this standard. 
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Thus, this standard should be a part of subclauses (A), (B), and (C) of § 2510.3– 

21(c)(1)(ii), in addition to being part of subclause (D). 

Requiring Individualized Specific Advice and Raising the ‘‘May Be Considered’’ 

Threshold Would Address Other Concerns 

A number of concerns have been identified regarding the proposed regulations’ 

‘‘status’’ rules under which an adviser may, for example, become a fiduciary by reason of being a fiduciary for another purpose, an Investment Adviser, or in some 

cases an affiliate of an entity that meets one of these ‘‘status’’ requirements. (If the 

Investment Adviser ‘‘status’’ rule is retained, it should be clarified that the exclusions under section 202(a)(11) of the Investment Advisers Act of 1940 apply in determining who is an Investment Adviser for purposes of the regulation.) For example, 

if a financial institution serves as a directed trustee, any discussion of the market 

by an affiliate of the financial institution, however benign the discussion, could arguably be treated as fiduciary advice under the proposed regulations solely by reason of the conceptually irrelevant point that the affiliated financial institution 

serves as a directed trustee. This inappropriate result is avoided if the proposed regulations are modified, in accordance with the suggestions set forth above, to provide 

that advice is treated as giving rise to fiduciary status if and only if: 

(1) There is a mutual understanding that the recommendations or advice 

being provided in connection with a plan or IRA: 

(a) will play a significant role in the recipient’s decisionmaking, and 

(b) will reflect the considered judgment of the adviser, and 

(2) The recommendations or advice is individualized to the needs of the plan, 

plan fiduciary, or participant or beneficiary. 

Thus, proposed regulation § 2510.3–21(c)(1)(ii) should be revised so that a person 

cannot be a fiduciary by reason of providing investment advice unless the person’s 

recommendations or advice satisfies the above requirements. 

‘‘Management of Securities or Other Property’’: the Proposed Regulations Would 

Transform Contract Reviews and Other Non-Investment Advice Into Investment 

Advice 

The proposed regulations would include within the definition of ‘‘investment advice’’ the following: ‘‘advice . . . or recommendations as to the management of securities or other property.’’ The preamble states that: 

This would include, for instance, advice and recommendations as to the exercise of rights appurtenant to shares of stock (e.g., voting proxies), and as to selection of persons to manage plan investments. 

The broad language of the proposed regulations raises many questions: 

• A plan decides to change trustees, chooses a new trustee, and begins negotiating a trust agreement with the new trustee. The plan asks for advice with respect 

to the terms of the trust agreement from the plan sponsor’s internal and external 

ERISA and contract attorneys, as well as the plan sponsor’s compliance personnel, 

human resources department, and tax department. The trustee is involved in the 

‘‘management’’ of plan assets, and the terms of the trust agreement affect that management. Does that mean that all of the above personnel advising the plan with respect to the trust agreement are fiduciaries? If it does, the cost of trust agreements 

and many other routine plan actions will increase exponentially with the imposition 

of new duties and large potential liabilities. Also, many of the above persons may 

refuse to work on the project without a full indemnification from the plan sponsor. 

We do not believe that this type of cost increase and disruption was intended. 

What about the persons working on the agreement for the new trustee? If such 

persons make any ‘‘recommendations’’ to the plan in the course of negotiations, they 

would become fiduciaries because the seller exemption, on its face, only appears to 

apply to sales of property and not services. Any such recommendations would thus 

trigger fiduciary status and corresponding prohibited transactions. Theoretically, 

this could chill all meaningful give-and-take during the negotiations, and many institutions may be unwilling to act as trustee. Again, we do not think that this was 

intended. 

• A plan has decided to enter into a swap and must execute a swap agreement. 

The terms of the swap agreement will have a significant effect on the plan’s rights 

with respect to the swap. The plan asks its internal and outside securities counsel 

to work on the swap agreement, and to consult with the plan’s internal and outside 

ERISA counsel. The plan also asks its investment manager for input on the types 

of provisions that are important for plans to include (or exclude) in swap agreements. The plan accountant is also asked to review the agreement. Finally, the com-
123 

pany’s own compliance personnel, contract experts, and finance department also review the agreement. 

The terms of the swap agreement affect the ‘‘management’’ of the swap. So do all 

of the above personnel become fiduciaries under the proposed regulations? If the answer is yes, plans’ cost of investments will skyrocket, as an enormous new set of 

individuals and companies that have little material role in plan investments become 

fiduciaries, with far greater potential liability and a higher standard to meet. In addition, as noted above, many persons would likely refuse to review the agreement 

absent a full indemnification by the plan sponsor. 

• A plan negotiates a loan agreement in connection with an ESOP. Is everyone 

who works on the loan agreement a fiduciary? Could individuals working on the 

loan agreement for the lender become fiduciaries if they make any ‘‘recommendations’’ during negotiations? 

• Are Board recommendations regarding proxy voting on employer securities a fiduciary act? They could be under the proposed regulations. 

To avoid the inappropriate results described above and many other similar results, we strongly urge you to provide a precise and appropriately narrow definition 

of ‘‘management’’ in the regulations. Under the definition, ‘‘management’’ would include: 

• The selection of persons to manage investments; 

• Individualized advice as to the exercise of rights appurtenant to shares of stock; 

and 

• Any exercise of discretion to alter the terms of a plan investment in a way that 

affects the rights of the plan, unless such exercise of discretion has been specifically 

reviewed and agreed to by a plan fiduciary. In the swap context, for example, swap 

terms can be modified without plan review and consent by, for example, swap data 

repositories. If any such changes are made, anyone making those changes is acting 

for the plan and should be treated as a fiduciary. Moreover, such treatment is necessary in order to prevent harm to the plan. 

This would target the actions identified by the Department in the preamble and 

would give the Department the flexibility to identify additional forms of ‘‘management’’. But it would not have the inappropriately broad consequences illustrated 

above. 

Even Without the Management Issue, the Proposed Regulations Would Transform 

Legal Advice and Other Non-Investment Advice Into Investment Advice 

Assume that the definition of ‘‘management’’ is revised in accordance with our 

suggestion. Let us go back to the swap example set forth above. 

• Assume that ERISA counsel advises the plan that entering into a swap with 

the particular dealer would raise prohibited transaction issues and counsels the 

plan not to enter into the swap for that reason. Under the proposed regulations, 

that would clearly constitute investment advice, making the ERISA attorney a fiduciary. 

• Assume that the plan sponsor’s contract experts determine that, separate from 

any investment issue, the swap agreement gives the dealer too much discretion in 

interpreting critical terms and advises the plan not to enter into the swap. That internal contract expert would be rendering investment advice under the proposed 

regulations and thus would also clearly be a fiduciary. 

• Assume that the plan sponsor’s compliance personnel are concerned about 

whether the swap, as structured by the dealer, would comply with the law and advise the plan not to enter into the swap for that reason. Again these internal compliance personnel would be rendering investment advice under the proposed regulations and thus would be fiduciaries. 

These inappropriate results can be avoided by adding an additional exception to 

the regulations. Under this exception, advice would not be treated as investment advice if it relates to the compliance of the investment with applicable law or relates 

to risks separate from the advisability of the underlying investment. 

Clarity: Permitting the Parties’ Agreement to Clarify Fiduciary Status 

Both plan sponsors and service providers have emphasized to the Council the importance of clarity with respect to who is and who is not a fiduciary. We know that 

similarly this is an important issue for the Department. In this regard, we remain 

concerned that, even with our suggested changes, it would be difficult in many circumstances to determine whether a fiduciary relationship exists. 

Accordingly, we recommend that the regulations provide that a service provider, 

adviser, or appraiser is not a fiduciary if the parties agree in writing to that effect. 

(This rule would apply separately from, and in addition to, the seller exemption.) 
124 

We also propose the following safeguards be adopted as part of the rule we are suggesting: 

• The agreement would have to describe the type of advice that the parties agree 

is not fiduciary advice. For example, assume that a plan uses a particular investment manager (‘‘Manager A’’) for Pacific Rim investments. The agreement could provide that any advice not related to Pacific Rim investments is not fiduciary advice. 

• The agreement would also have to describe how the decisions on which the nonfiduciary advice may be given would be made. Under the agreement between Manager A and the plan, for example, Manager A agrees to be available to discuss investment opportunities outside the Pacific Rim, but the agreement specifies that the 

plan relies on different investment managers with respect to such other investments. The plan wants Manager A to be available as a sounding board and as a 

source of questions for the other investment managers, but the plan does not make 

such other investment decisions based on Manager A’s advice. In these circumstances, Manager A would not be a fiduciary with respect to the advice it renders regarding such other investments. 

• Similarly, if a swap counterparty provides information to a pension plan as required by the terms of a financial instrument or if requested by a fiduciary to a pension plan prior to entering into a financial instrument, the fiduciary to a pension 

plan and the counterparty should be able to agree that the plan is relying on other 

advisors and that counterparty is not a fiduciary to the pension plan. 

On a separate but related point, we urge the Department to clarify that an advisor is not treated as having acknowledged fiduciary status under Proposed Regulations § 2510.3–21(c)(1)(ii)(A) unless such acknowledgement is made in writing. Clarity with respect to fiduciary status is critical, and the regulations should not make 

fiduciary status turn on oral, informal discussions. 

Plan-Level Education: Application of IB 96–1 

We believe that there is no legal or conceptual reason why the principles of IB 

96–1 regarding investment education should not be extended to defined benefit and 

defined contribution plans. The provision of investment education to defined benefit 

and defined contribution plan fiduciaries should not give rise to fiduciary status. 

Plan Sponsor and Advisor Employees: Who Should Be a Fiduciary? 

By very significantly lowering the threshold for fiduciary status, the proposed regulations raise serious questions regarding which plan sponsor and advisor employees may be treated as fiduciaries. For example, it is, of course, common for a plan 

sponsor to form a committee of senior executives to oversee plan issues, including 

plan investment issues. It is certainly clear that such committee has fiduciary status. But plan sponsors have expressed concern about the status of other employees 

who perform the research and analysis necessary to present investment issues for 

the committee’s review and resolution. 

Such other employees may provide recommendations for the committee to consider. This is simply how companies work. Middle-level employees frame issues for 

senior employees to resolve; issues are best presented in the context of a recommendation based on the advantages and disadvantages of any decision, so that 

senior employees can quickly appreciate the relevant factors. Many employees may 

participate in the research and the preparation of the recommendations to the committee. If all of these employees were fiduciaries, the effects would be severely negative. 

• The cost of fiduciary insurance would skyrocket, if such insurance would be 

available at all for such employees. 

• It would certainly become more difficult to get employees to work on these 

projects in the face of potentially staggering liabilities and lawsuits. 

• Creative work and recommendations would likely be stifled as middle-level employees propose conservative approaches with less downside (and correspondingly 

less upside). 

The bottom line is that the employees preparing the reports for the plan committee are not the decisionmakers. They are the researchers who prepare recommendations based on objective criteria for the committee members to evaluate 

and resolve. And the proposed regulations could potentially sweep in a huge number 

of employees, since the middle-managers formulate their recommendations based on 

the work of employees who in turn work for them. 

As noted, this issue applies to third-party advisors as well as to plan sponsors. 

Recommendations by advisors may be formulated by a team of employees employed 

by the advisor. It would not make sense to treat the entire team of individuals as 

fiduciaries. 
125 

Accordingly, we ask that you clarify the regulations to address the situation 

where a company or committee within a company serves as a fiduciary with respect 

to investment decisions or recommendations. In that case, the employees who help 

the company or committee make those decisions or recommendations should not be 

fiduciaries. Otherwise, we could have a real problem as potentially hundreds of employees without decisionmaking power become fiduciaries. This is not to suggest 

that employees of a fiduciary company cannot be a fiduciary. For example, an advisor company’s employee may have the advisory relationship with a plan or participant and may become a fiduciary by reason of that relationship. Or an employee 

newsletter might be sold to the company employees making very specific recommendations regarding the investments available under the company’s plan in 

which the employees should invest. But these cases are different. In these cases, 

employees involved are making direct investment recommendations that are not filtered through supervisors or entities that are fiduciaries. 

SELLER/PURCHASER EXEMPTION

Scope of the Exemption 

The deletion of the ‘‘regular basis’’ and ‘‘primary basis’’ requirements from the existing regulation puts enormous pressure on establishing a workable distinction between selling and advice. If a one-time recommendation can give rise to fiduciary 

status, it is essential to distinguish between fiduciary recommendations and the 

selling of investment products or services. In both cases, the participant or plan is 

provided with in-depth recommendations regarding investment decisions. But clearly in the case of selling, there is no fiduciary relationship nor would the commercial 

world be workable if such a fiduciary relationship were imposed. 

Thus, we applaud the Department for including an exemption for persons acting 

as, or on behalf of, purchasers or sellers. However, it is critical that the scope of 

this exemption be clarified. Consider, for example, the following situations: 

• A plan offers 40 mutual funds sponsored by fund families X, Y, and Z, as well 

as target date funds sponsored by fund families X and Y. A representative of X 

meets with a participant to promote her firm’s target date funds. The representative 

makes all appropriate disclosures regarding her self-interest. The recommendations 

made by the representative seem clearly covered by the proposed seller exemption, 

as they should be. 

• Same plan as above. A representative of Z meets with a participant and provides the participant with an illustrative portfolio consisting of Z funds. This representative also makes all the appropriate disclosures and recommends the illustrative portfolio as better than X and Y’s target date funds. This recommendation 

should clearly be covered by the seller exemption. Otherwise, the law would be, 

without justification, favoring target date funds over a group of funds that can perform the same function. 

• Same plan. An Investment Adviser with a commercial relationship with Y 

meets with a participant to promote Y’s target date funds. The Investment Adviser 

states in writing that she receives compensation for selling Y’s funds, and makes 

all other appropriate disclosures. Again, the proposed seller exemption should clearly cover this arrangement. The Investment Adviser discloses the compensation arrangement with Y and makes all other appropriate disclosures necessary to alert 

the participant to the Investment Adviser’s self-interest. There is no reason for such 

an arrangement not to be covered by the seller exemption. 

• Pursuant to an RFP, a plan interviews three investment consultants to review 

the plan’s mutual fund offerings on an ongoing basis. As part of the interview process, the plan asks all three to come prepared with a review of the plan’s current 

offerings, together with recommendations for any changes. This is a very common 

part of the RFP process and it should be clarified that responses to RFPs (and similar marketing initiatives) do not constitute fiduciary advice. 

• IRA account. A representative of Z (a financial institution) meets with a client 

who indicates that he would like to roll over his section 401(k) account plan balance 

to an IRA. After discussing the client’s goals and assets, the representative of Z recommends that the client open an IRA custodial account with specific investments. 

The representative not only recommends products manufactured by Z but also by 

firms Y, X and V with whom Z has selling agreements. The representative makes 

all appropriate disclosures regarding her self-interest. All of these recommendations 

should be covered by the proposed seller exemption. The fact that Z makes other 

firms’ investments available (i.e., an ‘‘open architecture firm’’) versus solely its own 

manufactured products should not affect the analysis. Both open architecture firms 

and those that only sell their own proprietary products should be able to avail themselves of the seller’s exemption with the appropriate disclosures. 
126 

• A pension plan fiduciary is contacted by an investment bank to discuss potential trades with the investment bank as a counterparty, the investment bank provides information in advance of the trade to the pension plan fiduciary. The parties 

agree in writing either at the establishment of the counterparty relationship, or in 

the terms of the trade, that the plan fiduciary (and not the investment bank) is the 

fiduciary to the pension plan with respect to any dealings with such investment 

bank and that any information provided by the investment bank is not provided on 

a ‘‘fiduciary’’ basis to the pension plan. The information provided to the plan fiduciary should not be viewed as a ‘‘recommendation’’ or ‘‘investment advice’’ even if 

specific to the pension plan. Instead, the parties should be able to rely on the investment expertise of the plan’s investment manager, and not the investment bank 

counterparty which clearly has a conflict of interest. Otherwise, dealers will either 

refuse to deal with pension plans and plan fiduciaries or provide only ‘‘generic’’ information to potential pension plan counterparties which will put pension plan fiduciaries at an information disadvantage. • A defined benefit plan asks an asset manager for information regarding liability-driven investing. The manager provides white papers it has drafted on the topic 

and shares some general approaches on how defined benefit plans can implement 

liability-driven investing. The manager offers its services to the plan fiduciaries, 

which could be in the form of managing a separate account to a liability benchmark 

and/or investing in a liability-driven fund offered by the asset manager. It is unclear 

whether the seller exemption would cover this selling of investment services, but it 

clearly should if the manager discloses its potential self-interest in the separate account and fund contexts. 

We ask the Department to clarify the purchaser/seller exception in accordance 

with the above discussion. The seller exemption should apply in any case where the 

entity providing a recommendation has a self-interest in the decision to be made by 

the plan or participants, and that self-interest is clearly and effectively communicated. Conceptually, it does not make sense to distinguish among sellers of an investment product, providers of an investment-related service, and any other entities 

that have a financial interest in the decision made by the plan or participant. The 

fundamental principle is clear: any person with an interest in an investment decision to be made by a plan or participant should be entitled to promote products and 

services as long as such person makes his or her self-interest clear. Any other rule 

would effectively prohibit marketing, promotion, and selling, which is not ERISA’s 

purpose. 

See also the discussion of the seller exemption in the context of distribution advice 

below. 

Disclosure 

Under the proposed regulations, the seller/purchaser exception only applies if the 

recipient of the advice: 

knows or, under the circumstances, reasonably should know, that the person is 

providing the advice or making the recommendation in its capacity as a purchaser or seller of a security or other property . . . whose interests are adverse 

to the interests of the plan or its participants or beneficiaries, and that the person is not undertaking to provide impartial investment advice. [emphasis 

added] 

We have several comments regarding this language. First, the reference to ‘‘adverse’’ interests should be deleted. The relationship between a seller of investment 

products and an investor is by no means ‘‘adverse’’. The seller’s objective is to establish a long-term mutually beneficial relationship. If the investor is not happy with 

the product or the service or feels somehow misled or taken advantage of, that will 

result in a short-term relationship and unhelpful word-of-mouth for the seller. It is 

certainly true that sellers of investment products profit by selling, but that is true 

of all product and service providers, including doctors, lawyers, counselors, etc. In 

short, the term ‘‘adverse’’ is inaccurate and unduly negative, and it does not provide 

the recipient of the disclosure with any meaningful information. 

Second, the reference to ‘‘not undertaking to provide impartial advice’’ is not necessarily correct. Sellers may in many circumstances be impartial because their objective is not short-term profits, but a long-term relationship. 

In lieu of the ‘‘adverse’’ and ‘‘not . . . impartial advice’’ references, the proposed 

regulations should be modified to be more accurate and precise. Regulation 

§ 2510.3–21(c)(2)(i) should be amended by deleting all the words starting with 

‘‘whose interests are’’ replacing them with the following: 

who has a financial interest in the transaction to which the recommendation 

or other information provided relates. 
127 

This is an accurate portrayal of the relationship between a seller and investor, 

much more accurate than the description in the proposed regulations. It would be 

a disservice to both the seller and the investor to describe their relationship inaccurately. 

Finally, we believe that the regulation should make clear that disclosures of the 

seller/purchaser’s relationship to the investor, as described above, should satisfy the 

‘‘knows or reasonably should know’’ standard. So if a seller/purchaser were to make 

the above disclosure in writing, and provide a general description of the financial 

interest, that should satisfy the seller/purchaser exception. 

PLAN MENU OF INVESTMENT OPTIONS

The proposed regulations would confirm that the offering of a service provider 

menu of investment options does not constitute fiduciary advice. It should be clarified that this treatment does not turn on the service provider menu meeting any 

requirements regarding the number or nature of investment options. The critical 

issue, however, is: how does an employer select a plan menu of investment options 

from the broader service provider menu? In that regard, the proposed regulations 

clarify that ‘‘the provision of general financial information and data’’ to assist the 

employer in selecting a plan menu is not fiduciary advice. 

Today, one of our greatest challenges in the retirement security area is broadening the retirement plan coverage among small businesses. It is critical that we 

step back and consider this proposed rule in that context. Small businesses will generally adopt a retirement plan only if the process is simple and inexpensive. If the 

process is burdensome, complicated, or costly, small businesses simply will not 

adopt retirement plans. In this context, imagine the hardware store owner who 

would like to adopt a plan for his 12 employees. Assume that the service provider 

presents its menu of 300 investment options, provides objective data regarding all 

300, and tells the hardware store owner (1) to decide how many to offer and (2) to 

pick the right options for his employees, subject to fiduciary liability if he picks imprudently. Alternatively, the hardware store owner can find some independent consultants, interview them, choose one (subject to fiduciary liability), and pay that 

consultant a substantial amount of money to pick and monitor the plan menu. 

Needless to say, if that is the message that the hardware store owner receives, 

he will not adopt a plan for his employees. So if the rule set forth in the proposed 

regulations is finalized without further clarification, we may well see a marked decline in retirement plan coverage. 

Service providers need a way to provide employers with help in choosing the plan 

menu so that the process is simple and inexpensive. In this regard, we urge you 

to treat all of the following as not triggering fiduciary status: 

• The service provider may provide the plan fiduciary with objective factors that 

others commonly use in selecting plan menus, such as fund ratings, past performance (measured against competitive funds), risk measurements, fees, and manager 

tenure. 

• The service provider may screen funds based on objective criteria that are provided by the plan fiduciary or that are commonly used in the industry. For example, 

if the plan fiduciary establishes criteria based on fund ratings, past performance 

(measured against competitive funds), fees, risk, and manager tenure, the service 

provider may screen the available funds based on such criteria and provide the plan 

fiduciary with fund options that meet the plan fiduciary’s criteria. Within each investment category, there would generally be multiple funds for the plan fiduciary 

to choose from, but in some circumstances, there could be a single fund. 

• The service provider may present non-individualized model plan menus that 

other similar businesses have chosen or that reflect a conservative, moderate, or aggressive investment approach, with an explanation of objective differences between 

the menus. 

• In the context of responding to an RFP, it is very common for service providers 

to provide a non-individualized model plan menu of investment options. This is necessary for pricing purposes and it is made very clear that the model menu is not 

being recommended. This should not give rise to fiduciary status. 

• The service provider may provide objective reasons that a plan fiduciary might 

choose one fund over another or might choose one model portfolio over another. 

• In some cases, a plan fiduciary may have decided to remove an investment option and may ask a service provider for a replacement fund that is, based on objective criteria, very similar to the fund being removed. Responding to this request 

with objectively similar funds—or a single fund if only one is objectively similar— 

should not give rise to fiduciary status. 
128 

• In some cases, the service provider encourages a plan to have at least one investment option in every specified asset class and to have a set of target date funds 

(or similar investments). • A service provider might design its arrangements so that all ‘‘mapping’’ is done 

to the plan’s QDIA. • The service provider may also use the seller exemption. It makes little sense 

to prohibit a service provider from using the seller exemption in situations where 

the service provider is selling a particular plan menu. 

Finally, the disclosures regarding ‘‘not undertaking to provide impartial investment advice’’ need to be modified to be accurate, as discussed above. The disclosure 

with respect to the service provider menu should provide as follows: 

The investment alternatives available were selected based on various criteria, 

including past performance, fees, quality of management, popularity, reputation, stability, financial relationships with the service provider, and/or compatibility with the service provider’s administrative systems. 

The disclosure with respect to assistance in selecting the plan menu should be 

modified as follows: 

The service provider may have a financial interest in the investment alternatives that are offered under the plan. 

VALUATION

We have multiple concerns regarding the proposed position that, subject to a narrow exception, asset valuations are fiduciary acts. 

Transaction-Based Distinction 

We believe that it is critical that the regulations draw a distinction between two 

very different types of valuations. On the one hand, there are valuations that affect 

the amount of money that a plan pays or receives for the asset being valued. For 

example, if a plan is buying or selling real estate or closely held securities, a valuation may be relevant in determining how much a plan pays or receives. These valuations can materially affect the total amount of plan assets available to provide benefits to participants. This letter refers to such valuations as ‘‘Transaction-Based 

Valuations.’’ 

On the other hand, there are valuations that do not affect the total amount of 

plan assets available to pay benefits to participants. For example: 

• A plan must value annuity contracts, separate accounts, GICs, and other assets 

without a readily ascertainable value in order to determine the required minimum 

distributions (‘‘RMDs’’) that must be made under section 401(a)(9) of the Internal 

Revenue Code (the ‘‘Code’’). 

• All defined benefit plan assets must be valued in order to determine the plan 

sponsor’s funding obligations, as well as for purposes of applying the various benefit 

restrictions applicable under ERISA section 206(g) and Code section 430. These benefit restrictions include restrictions on a plan’s ability to pay benefits in certain 

forms, such as lump sums. 

• In many circumstances, a participant’s defined contribution plan account may 

hold an interest in an asset such as a separate account, a GIC, an annuity contract, 

collective investment fund, or another asset without a readily ascertainable market 

value. In order to determine the amount payable to a terminating participant, it 

may be necessary to value such assets. 

Though these valuations could affect the timing or form of distribution and/or the 

relative benefits paid to different participants, the valuations have no effect on the 

total assets available to pay benefits to participants. There is thus no risk that total 

plan assets may be inappropriately reduced by such valuations. On the contrary, 

these are everyday valuations that are necessary to the normal operation of a plan. 

Moreover, if these valuations give rise to fiduciary status, holding these types of 

assets in plans will at the very least become much more expensive by reason of (1) 

the significant additional liability assumed by the person valuing the asset, and (2) 

the fact that many service providers will cease providing valuations due to the potential liability. In fact, it is very possible that the prohibited transaction rules 

would preclude many investment product providers from valuing their own products. 

In addition, persons performing routine valuations would be forced to engage in 

new and difficult legal analyses. For example, in valuing assets for purposes of the 

RMD rules, what is a fiduciary’s duty? To minimize the value to preserve as much 

as possible in the plan? To maximize the value to avoid possible plan disqualification and/or participant excise tax problems? In valuing assets for purposes of fund-
129 

ing determinations, is there a duty to minimize the value to increase funding obligations? Or is there a duty to maximize the value to permit the continued availability 

of all forms of distributions? Or should the appraiser be concerned that lump sums 

could drain the plan of assets, so that the valuation should be minimized? 

In addition to sharply increased costs, we envision this regulation creating extremely difficult new issues for which there are no answers, like the issues noted 

above. Thus, routine plan operations will be thrown into question, and many service 

providers may simply refuse to provide such routine valuations, leaving plan sponsors without a means to operate their plans. And what purpose would be served by 

the additional cost, legal uncertainty, and operational chaos? None that we can 

think of. No problem has been identified that would justify the enormous disruption 

triggered by imposing fiduciary status by reason of performing routine valuations 

that do not affect total plan assets. 

Other ‘‘Non-Transaction-Based’’ Issues 

We are very concerned that we have barely scratched the surface of all the issues 

that could arise if the proposed regulations’ treatment of valuations were finalized. 

For example, even custodians that simply report valuations prepared by others 

could be swept into fiduciary status. Similarly, service providers that value managed 

or unitized investment options (such as a fund of funds) based on third-party values 

could be treated as fiduciaries. Clearly neither of these results would be appropriate. 

But it may be particularly helpful to explore the ‘‘non-transaction-based’’ issues 

in the context of one example: investment in uncleared swaps. (Similar issues may 

exist with respect to cleared swaps.) In the case of uncleared swaps (which will still 

exist in large numbers after the Dodd-Frank Act), a swap has to be valued frequently—often daily—in order to adjust the collateral posted by one or the other 

parties to secure the obligation under the swap agreement. Generally, it is the 

‘‘dealer’’ that performs the valuation, subject to review and possible contestation by 

the plan (or other end user). The valuation by the dealer may be a fiduciary act 

under the proposed regulations: 

• The valuation is an appraisal of property; 

• The valuation is provided to a plan or plan fiduciary; 

• The valuation is performed pursuant to a written agreement that it may be considered in connection with making decisions regarding management of assets (i.e., 

the posting of collateral), and the valuation is individualized to the needs of the 

plan; and 

• Neither the seller exemption nor the valuation technically exemption applies. 

(In our view, the seller exemption should clearly apply, as discussed above, but in 

its current form, the exemption may not apply since the valuation is not performed 

in the context of a sale.) 

If the dealer’s valuation is a fiduciary act, then the valuation is also a prohibited 

transaction that runs afoul of ERISA section 406(b), since the dealer’s interest is 

adverse to the plan’s. One might argue that the dealer should not perform the valuation due to its self-interest and that all valuations should be performed by independent third parties. But that would cause very significant disruption in the swaps 

market. Moreover, the plan reviews the dealer’s valuation and has the right to challenge it, so the conflicted nature of the dealer’s valuation is not of concern. But most 

importantly, the Dodd-Frank Act requires the dealer to make the valuation available 

to the plan. See section 731 of the Dodd-Frank, adding section 4s(h)(3)(B)(iii)(II) of 

the Commodity Exchange Act. So the option of solely using an independent third 

party to value the swap is simply unavailable. 

Even if this problem could be solved, an additional problem exists. As noted 

above, the plan has the right to contest the dealer’s valuation and rely instead on 

an independent party’s valuation. This system would no longer be available under 

the proposed regulations. By reason of performing the valuation, the independent 

appraiser would become a fiduciary with an exclusive duty of loyalty to the plan. 

Accordingly, the appraiser would cease to be independent, leaving the dealer and 

the plan with no way to resolve their valuation dispute. 

Thus, the proposed regulations would create unworkable conflicts in the law with 

respect to swaps. How many more conflicts or problems are lurking out there with 

respect to this valuation issue? We do not know, nor does anyone. And that is our 

point. This valuation issue needs far more study and work before it moves forward. 

This is clearly true with respect to Non-Transaction-Based Valuations, since no 

problems or issues have been identified that would justify the disruption and cost 

that would be triggered by finalization of the proposed regulations. 
130 

1See generally Bedrick By & Through Humrickhouse v. Travelers Ins. Co., 93 F.3d 149, 154 

(4th Cir. 1996) (‘‘[t]here is no balancing of interests; ERISA commands undivided loyalty to plan 

participants’’). 

Transaction-Based Valuations 

Transaction-Based Valuations, such as in the context of ESOPs, seem to have provided the impetus for including valuations in the proposed regulations as fiduciary 

acts. The preamble to the regulations specifically states that ‘‘a common problem 

identified in the Department’s recent ESOP national enforcement project involves 

the incorrect valuation of employer securities.’’ 

We have two concerns with respect to Transaction-Based Valuations. First, as in 

the case of Non-Transaction-Based Valuations, we are very uncertain what the fiduciaries’ duties would be. In the preamble, the Department states that it: 

would expect a fiduciary appraiser’s determination of value to be unbiased, fair, 

and objective, and to be made in good faith and based on a prudent investigation under the prevailing circumstances then known to the appraiser. 

If this is truly the standard, it needs to be reflected in the regulations, because 

that would not be how we read the law. A fiduciary is required by law to ‘‘discharge 

its duties with respect to a plan solely in the interest of the participants and beneficiaries.’’ A fiduciary is required by law not to be unbiased and objective; on the 

contrary, a fiduciary is required to represent the participants. For example, in negotiating with a service provider over fees, a fiduciary is required to solely represent 

the plan’s interests, not to be an unbiased and objective arbiter of what level of fees 

are ‘‘fair’’ for both parties.1

Without further regulatory clarification, an appraiser’s duty would be to minimize 

a plan’s purchase price and maximize a plan’s sales price. That would mean that 

the opposing party would be required to hire a second appraiser, doubling the cost, 

and then there could well be a further negotiation based on the disparate valuations 

and, as in the case of swaps, possibly the need to hire an independent appraiser. 

Moreover, as discussed, by requiring that appraisers be plan fiduciaries, the proposed regulations would prohibit such ‘‘independent’’ party from being truly independent, leaving the plan without a mechanism to resolve the dispute. This could 

possibly also leave many ESOPs without a means to satisfy the ‘‘independent appraiser’’ requirement of Code section 401(a)(28)(C). 

In short, applying a true fiduciary duty to an appraiser would be very disruptive, 

as well as unworkable, with respect to all Transaction-Based Valuations. Yet the 

preamble indicates that that is not what the Department intended. In fact, the result intended by the Department—a fair and objective valuation—may not be 

achievable through fiduciary status, which imposes wholly different obligations. 

Thus, we urge the Department to revisit this issue, so as to achieve the worthy objective described in the preamble. 

Second, appraisals do not fall within the statutory definition of fiduciary advice. 

Appraisals are not ‘‘investment advice’’ under ERISA section 3(21)(A)(ii). As aptly 

discussed in Advisory Opinion 76–65, an appraiser is not rendering a view as the 

advisability of an investment decision; an appraiser is simply providing an opinion 

as the value of property. 

In short, we urge the Department to pursue its worthy objectives with respect to 

the valuation of employer securities through a different approach that is workable 

and consistent with the statute. 

COORDINATION WITH OTHER AGENCIES

As noted above, on January 18, 2011 the President issued an Executive order emphasizing the importance of agency coordination. This means far more than agencies 

letting each other know about regulatory projects being developed. In the President’s words, coordination means ‘‘harmonizing rules’’ and avoiding ‘‘inconsistent’’ or 

‘‘overlapping’’ rules. Such coordination among the Department, the SEC, and the 

CFTC is essential as described below. 

Broker/Dealers: Coordination Between the Department and the SEC 

Under the proposed regulations, a very large number of brokers and dealers will 

become fiduciaries, such as a broker or dealer who gives individualized advice to a 

customer regarding IRA investment. This could present a major problem in light of 

the broker/dealer’s compensation structure. As a fiduciary, the broker/dealer’s opportunity to receive commissions or other compensation in connection with the advice 

would in many cases, absent an applicable exemption, cause the broker/dealer to 

have committed a prohibited transaction solely by reason of the fact that the customers’ trading practices could affect the broker/dealer’s compensation. We recognize 
131 

2 In fact, in order to avoid having to restructure its entire compensation structure, a broker/ 

dealer that is not an investment adviser may in some cases have to refrain from providing individualized advice with respect to plans and IRAs. This would result in far less advice being 

available to investors, especially in the IRA context. In addition, other broker/dealers may decline to seek investment adviser status just so as to enable them to continue to provide nonindividualized advice with respect to plans and IRAs. Again, this would not appear to be a favorable development from a public policy perspective. These approaches, however, may not be possible under the upcoming guidance from the SEC, as discussed below. 

that the Department’s regulations are only proposed, but in their current state, they 

would generally provide broker/dealers with a choice: restructure an entire industry’s compensation arrangements or cease providing certain essential services to 

customers.2 Thus, the Department’s proposed regulations could have a very adverse 

effect on the provision of investment assistance to participants, which is exactly the 

opposite of what is needed. 

The SEC’s Study. The SEC’s staff (‘‘Staff’’) recently completed the study required 

by section 913 of the Dodd-Frank Act regarding the standards of care applicable to 

broker/dealers and investment advisers with respect to the provision of investment 

advice to retail customers (the ‘‘Study’’). The Dodd-Frank Act specifically directs the 

SEC to study the effects of subjecting broker/dealers to the rules applicable to investment advisers. In addition, the SEC is authorized to issue regulations subjecting 

broker/dealers to such rules. 

The Dodd-Frank Act is, however, clear that, unlike the Department’s proposed 

regulations, any possible change in the standard of care applicable to broker/dealers 

is not intended to require ‘‘standard compensation’’ arrangements to be restructured: the ‘‘receipt of compensation based on commission or other standard compensation for the sale of securities shall not, in and of itself, be considered a violation of such standard applied to a broker or dealer.’’ On the contrary, the DoddFrank Act clearly emphasizes addressing broker/dealers’ compensation structures 

through disclosures of ‘‘material conflicts of interest.’’ 

In the Study, the Staff recommended: 

the consideration of rulemakings that would apply expressly and uniformly to 

both broker-dealers and investment advisers, when providing personalized investment advice about securities to retail customers, a fiduciary standard no 

less stringent than currently applied to investment advisers. . . . 

Study at v-vi. 

The Staff’s reasoning for this conclusion included the following: 

a harmonization of regulation—where such harmonization adds meaningful investor protection—would offer several advantages, including that it would provide retail investors the same or substantially similar protections when obtaining the same or substantially similar services from investment advisers and 

broker-dealers. . . . 

[R]etail customers do not understand and are confused by the roles played by 

investment advisers and broker-dealers, and more importantly, the standards 

of care applicable to investment advisers and broker-dealers when providing 

personalized investment advice and recommendations about securities. 

Study at viii, 101. 

Coordination. The regulatory projects undertaken by the Department and the 

SEC have enormous overlap; i.e., they overlap with respect to all retail customers 

saving for retirement under arrangements subject to the Department’s regulations. 

Yet neither the Study nor the Department’s proposed regulations indicate that there 

will be any coordination with the other project. The Study states that ‘‘the requirements of ERISA are beyond the scope of the Study.’’ Study at 87. The Department’s 

proposed regulations do not mention the upcoming Study, despite the fact that it 

addresses the same issue. 

This lack of coordination is of great concern for many reasons: 

• Executive Order. This lack of coordination is directly contrary to the Executive 

order issued by the President on January 18, 2011, which requires coordination, not 

simply notifying other agencies of pending projects. The order is critical of regulatory requirements that are ‘‘inconsistent or overlapping’’ and requires agencies to 

attempt to promote ‘‘coordination, simplification, and harmonization.’’ 

• Inconsistent with the Study. The Study concludes that the existence of differing 

standards harms and confuses investors. Yet without coordination between the two 

agencies, we appear to be moving toward enshrining a system whereby broker/dealers providing advice to the same customer would be subject to two very different 

standards with respect to different parts of the customer’s portfolio. 
132 

The Study also emphasizes ‘‘business model neutrality’’ by not prohibiting any 

business model and thus preserving ‘‘investor choice among . . . services and products and how to pay for these services and products (e.g., by preserving commissionbased accounts, episodic advice, principal trading and the ability to offer only proprietary products to customers).’’ Study at 113. The Department’s proposed regulations 

would directly conflict with the Study’s business model neutrality. 

The Executive order also stresses that, consistent with the law and regulatory objectives, it is important to ‘‘reduce burdens and maintain flexibility and freedom of 

choice for the public.’’ 

Significance of the Regulations. These two regulatory projects have great potential 

to modify the investment information available to millions of Americans and to have 

enormous effects on the financial industry. Projects of this magnitude deserve coordinated, careful consideration. In this regard, a Presidential memorandum issued 

concurrently with the Executive order states that, ‘‘[i]n the current economic environment, it is especially important for agencies to design regulations in a cost-effective manner consistent with the goals of promoting economic growth, innovation, 

competitiveness, and job creation.’’ President Obama echoed this sentiment in the 

recent State of the Union address. 

Small Businesses. Without coordination, there is a great risk that IRA owners and 

employees of small businesses in particular will be cut off from a main source of 

investment advice, since broker/dealers provide substantial assistance in these 

areas. This is not what anyone wants. The President has made clear that his objective is ‘‘to promote innovation’’—not eliminate business opportunities. Moreover, the 

Presidential memorandum places emphasis on ‘‘ensuring that regulations are designed with careful consideration of their effects . . . on small businesses.’’ The lack 

of coordination with respect to broker/dealers does not reflect consideration of small 

business interests. 

Recommendation. The Department and the SEC should coordinate and articulate 

a single standard of conduct applicable to brokers and dealers in providing investment advice. That single standard should apply with respect to (1) the retirement 

savings of ‘‘retail customers’’ (as defined for purposes of the Dodd-Frank Act) and 

(2) any other advice related to retirement savings to which the SEC applies the retail customer standard. Having a single standard is critical because it would not 

serve investors well to have their advisors subject to inconsistent and overlapping 

rules. 

In developing that single standard, the Department and the SEC will need to 

work within the statutory framework of the Dodd-Frank Act, which permits brokers 

and dealers to receive ‘‘standard compensation’’. Standard compensation should be 

interpreted to include, for example, commissions, sales incentives, and the benefits 

of principal trading. Under the Dodd-Frank Act, any issue related to such compensation is to be addressed through disclosure of ‘‘material conflicts of interests’’. 

Interaction With the Business Conduct Standards Regarding Swaps Proposed by 

the CFTC 

On December 22, 2010, the CFTC published proposed business conduct regulations regarding swaps. Those proposed regulations have very significant interactions 

with the Department’s proposed regulations, rendering coordination acutely necessary. If both sets of regulations were finalized in their current state, swap dealers 

and major swap participants (‘‘MSPs’’) that enter into swaps with plans would become plan fiduciaries solely by reason of complying with the business conduct regulations. This would create automatic prohibited transactions, so that the end result 

would be that retirement plans would cease to be able to use swaps, which would 

have a devastating effect on plans and on the swap market. 

The solution is clear. In addition to the specific changes recommended 

below, the Department’s regulations need to state that no action required 

by the CFTC’s business conduct standards shall transform a plan’s 

counterparty into a plan fiduciary. Otherwise, the two sets of regulations 

would be in irreconcilable conflict. 

Defined benefit plans use swaps to hedge their asset and liability risks. Without 

swaps, plan assets and liabilities would be far more volatile, leading to greatly increased funding volatility. Increased funding volatility would, in turn, force plan 

sponsors to set aside much greater reserves to address possible future funding obligations. Those reserves would directly reduce money available to invest in jobs and 

in the economic recovery. In short, making swaps far less available would have farreaching adverse effects throughout the economy. In addition, without swaps, the 

greatly increased volatility with respect to funding adequacy would undermine the 

security of participants’ benefits. 
133 

Risk analysis. Under the CFTC’s proposed regulations, if a plan enters into a 

swap with a swap dealer or MSP, the swap dealer or MSP must provide the plan 

with ‘‘material information concerning the swap in a manner reasonably designed 

to allow the [plan] to assess . . . [t]he material risks of the particular swap, . . . 

[t]he material characteristics of the particular swap, . . . and . . . [t]he material incentives and conflicts of interest that the swap dealer or [MSP] may have in connection with the particular swap.’’ Moreover, in the case of a high-risk complex bilateral 

swap, the swap dealer or MSP must provide the plan with: 

a scenario analysis designed in consultation with the [plan] to allow the [plan] 

to assess its potential exposure in connection with the swap. The scenario analysis shall be done over a range of assumptions, including severe downturn 

stress scenarios that would result in significant loss. 

Prop. Reg. § 23.431(a). The definition of a high-risk complex bilateral swap is not 

entirely clear, but it appears likely broad enough to sweep in many swaps commonly 

entered into by plans. Even if the swap is not a high-risk complex bilateral swap, 

but it is a bilateral swap that is not available for trading on a designated contract 

market or swap execution facility, the swap dealer or MSP must provide the plan 

with a scenario analysis upon request. 

Unless the seller exemption applies, it is clear that a swap dealer or MSP that 

complies with the above would be a fiduciary under the Department’s proposed regulations: (1) the swap dealer or MSP would be providing a plan with individualized 

investment advice regarding investment risks, (2) the advice ‘‘may be considered’’ 

by the plan, and (3) the swap dealer or MSP would receive compensation under the 

swap agreement. Some have taken the position that the swap dealer or MSP’s advice is not really advice, but rather the provision of objective data and thus would 

not trigger fiduciary status under the proposed regulations. We question this position for two reasons. First, risk analyses are not rote exercises based on universally 

accepted facts; they can be highly subjective and will vary greatly, as demonstrated 

by the fact that the CFTC’s regulations recognizes that the scenario analyses may 

be based on confidential proprietary information. Prop. Reg. § 23.431(a)(1)(iv). Second, the Department’s proposed regulations do not contain any general exception for 

advice based on factual data. On the contrary, the existence of very specific exceptions for factual data provided with respect to plan menu issues and for IB 96–1 

raises a strong inference that no such general exception applies. 

We strongly believe that the right answer in this case is that the seller exemption 

should apply to the swap dealer or MSP in this case. The swap dealer or MSP is 

the opposing party, and the plan knows not to rely on anything provided by such 

an opposing party. It is critical, however, that the applicability of the seller exemption be clarified to apply to swap counterparties. Without this clarification, swap 

dealers or MSPs would be required to be fiduciaries and, as such, would be engaging 

in a prohibited transaction in the case of swaps with plans. Thus, all plan swaps 

would be required to cease. 

Review of plan’s representative. Under the CFTC’s proposed regulations, if a swap 

dealer or MSP is simply entering into a swap with a plan, the swap dealer or MSP 

must engage in a swap-by-swap in-depth analysis of whether the plan’s representative is qualified to function as an advisor to the plan. Prop. Reg. § 23.450. It is clear 

under the CFTC’s regulations that the swap dealer may not simply accept representations to that effect, but rather must engage in its own scrutiny of any representations given. 

Thus, there is a very strong argument that the swap dealer or MSP is effectively 

rendering advice to the plan regarding its choice of an advisor. As noted in the preamble to the Department’s proposed regulations, advice to a plan regarding its 

choice of an investment advisor is a fiduciary act under the proposed regulations. 

Thus, the swap dealer or MSP may be treated as a fiduciary with respect to the 

plan under the proposed regulations, triggering a prohibited transaction in the case 

of swaps with plans. Unless the two sets of proposed regulations are modified, this 

analysis could result in a cessation of all plan swaps. 

Recommending a swap. Under the CFTC’s proposed regulations, if a swap dealer 

or MSP ‘‘recommends’’ a swap or trading strategy to a plan, the swap dealer or MSP 

has (1) a duty to act in the best interests of the plan, and (2) a duty to have a reasonable basis to believe that the swap is suitable for the plan. 

So the question is: under what circumstances would a swap dealer or MSP be 

treated as ‘‘recommending’’ a swap or trading strategy. This is very unclear under 

the CFTC’s proposed regulations. The preamble to the CFTC’s proposed regulations 

states that a: 

recommendation would include any communication by which a swap dealer or 

major swap participant provides information to a counterparty about a par-
134 

ticular swap or trading strategy that is tailored to the needs or characteristics 

of the counterparty, but would not include information that is general transaction, financial, or market information, swap terms in response to a competitive bid request from the counterparty. 

In our view, if the swap dealer or MSP clearly informs the plan in writing that 

the swap dealer or MSP is functioning as a counterparty and not as an advisor, everything communicated to the plan by the swap dealer or MSP should be treated 

as ‘‘selling’’ not recommendations. But the CFTC’s proposed regulations contain no 

such seller exemption. On the contrary, under the CFTC’s proposed regulations, it 

is very possible that the CFTC’s proposed regulations could be interpreted differently to turn common-place selling—e.g., ‘‘this is appropriate for you because it 

addresses your need to hedge your interest rate risk’’—-into a ‘‘recommendation’’, 

triggering a duty of the swap dealer or MSP to act in the best interests of the plan. 

If that is so, problems arise. 

If a swap dealer or MSP must act in the best interests of the plan, that would 

seem to imply a duty to advise the plan regarding the swap. Unless the seller exemption applies, that would clearly make the swap dealer or MSP a fiduciary under 

the Department’s proposed regulations, creating a prohibited transaction in the case 

of swaps with plans. Thus, again it is critical that the seller exemption be clarified 

to apply to the swap dealer or MSP. 

DISTRIBUTION ADVICE

The preamble to the proposed regulations invites comments regarding ‘‘whether 

and to what extent the final regulations should define the provision of investment 

advice to encompass recommendations related to taking a plan distribution.’’ This 

issue needs to be divided into two analytically separate parts: (1) advice regarding 

whether to take a distribution, and (2) advice regarding how to invest any distribution that may be made. As discussed below, from a statutory and conceptual perspective, these questions need to be addressed separately. 

Distribution Advice is Not Fiduciary Advice Under the Statute 

ERISA section 3(21)(A)(ii), on which the proposed regulations are based, specifically refers to ‘‘investment advice.’’ A decision whether to invest in an S&P 500 

index fund inside a plan or to take a distribution from the plan and invest in the 

same fund outside the plan is simply not an investment decision. Thus, advice regarding that decision is not investment advice under the statute, and the Department lacks the statutory authority to treat such advice as giving rise to fiduciary 

status. 

Distribution Advice Cannot Be Fiduciary Advice Conceptually 

The lack of a statutory basis to treat distribution advice as fiduciary advice makes 

conceptual sense. A fiduciary has a duty to the participants as participants. A distribution decision is a decision in which an individual must weigh his or her needs 

as a participant versus his or her needs as a non-participant. By definition, a fiduciary cannot help in that regard, since a fiduciary is required by law to act on behalf 

of a participant as a participant and not consider the participant’s needs as a nonparticipant. So, advice regarding distributions is, by definition, made in a non-fiduciary capacity. 

Advice Regarding Investment of Distributed Assets in an IRA or Another Plan Can 

Be Investment Advice, Subject to the Seller Exemption 

We appreciate the Department’s concern with respect to advice provided to participants regarding how to invest distributed assets in an IRA or another plan. Such 

advice could be investment advice with respect to the IRA or other plan. However, 

this issue is an excellent reminder of how critical the seller exemption is, and how 

important it is that the scope of that exemption be clarified in accordance with our 

recommendations so that entities are able to promote and sell investment products 

for IRAs, subject to the clear disclosures discussed above with respect to the seller 

exemption. 

Coordinating With Other Guidance 

If the Department decides to issue guidance that goes beyond the framework discussed above, it is critical that the Department do so in a coordinated manner. 

Issuance of any guidance treating distributions as fiduciary advice should be coordinated with expansion of IB 96–1 to apply to distributions so that the retirement 

plan community understands how to stop short of fiduciary advice but still provide 

valuable education. For example, guidance regarding the allocation between annuity 

distributions and non-annuity distributions should be treated as education to the ex-
135 

tent that no specific options (such as a particular provider’s annuity) are recommended. In addition, the investment advice area contains many prohibited transaction exemptions that permit advice to be given under appropriate circumstances 

not contemplated expressly by the statute. We would certainly need similar prohibited transaction exemptions to make the distribution area function appropriately if 

distribution recommendations become fiduciary advice. So any regulatory guidance 

treating distribution advice as fiduciary advice should be combined with appropriate 

prohibited transaction exemptions. Providing the regulatory guidance without prohibited transaction exemptions would almost certainly create the same type of havoc 

that withdrawing all investment advice prohibited transaction exemptions would 

create. 

However, as noted above, we strongly believe that there is no statutory basis to 

treat distribution recommendations as fiduciary advice. 

Advisory Opinion 2005–23A 

Finally, we urge the Department to revisit Advisory Opinion 2005–23A. In the Advisory Opinion, recommendations regarding the investment of distributed assets 

made by any plan fiduciary are automatically fiduciary advice. This is inconsistent 

with the clear longstanding rule of law that an entity is only an ERISA fiduciary 

with respect to those functions for which it has fiduciary powers and duties. So, for 

example, if an affiliate of a directed trustee that has no responsibility regarding the 

investment of plan assets were to make recommendations regarding the investment 

of distributed assets, such affiliate is clearly not a plan fiduciary with respect to 

those recommendations and there is no reason to treat it as such. We urge the Department to revise Advisory Opinion 2005–23A accordingly. 

Our position here is not inconsistent with Varity Corporation v. Howe, 516 U.S. 

489(1996). In Varity, the plan administrator, acting as the plan administrator, provided misleading information regarding the plan. This case stands for the proposition that a fiduciary, when acting as a fiduciary, is subject to ERISA’s fiduciary 

standards. It does not apply to a plan fiduciary who is acting as a wholly separate 

capacity, i.e., as a seller of services unrelated to its status as a plan fiduciary. 

IRA AND NON-ERISA PLAN ISSUES: APPLICATION OF IB 96–1 AND THE INVESTMENT

MENU EXCEPTIONS

The proposed regulations apply to IRAs. We are concerned that the regulations 

were developed in the plan context and do not reflect consideration of the many 

unique factors affecting IRAs. This letter does not address in a substantive way the 

issue of whether IEAs should be covered by these regulations. This is an issue that 

can be more directly addressed by other organizations, but we believe that the Department should consider separating the proposed regulations into two parts, one 

addressing plan issues and one addressing IRA issues. 

At a minimum, however, we note that the proposed regulation can be read not 

to apply the IB 96–1 and investment menu exceptions to IRAs and non-ERISA plans 

subject to the Code. This should be corrected. IRA owners and non-ERISA plan participants need investment education, just as ERISA plan participants do, so there 

is no reason not to make the IB 96-1 exception applicable to IRAs and non-ERISA 

plans subject to the Code. In addition, IRA sponsors and non-ERISA plans subject 

to the Code can provide a menu of investment options and can provide objective assistance with respect to choosing among such options, just as service providers in 

the ERISA plan area would do. The investment menu exceptions should thus apply 

to IRAs and non-ERISA plans subject to the Code. 

In short, we believe that the proposed regulations address a wide range of critical 

issues. An extended and robust public policy dialogue on all of these issues is needed to avoid (1) a material reduction in the services, investment education, and guidance available to plans, plan participants, IRA owners, and plan sponsors and (2) 

a substantial increase in costs. 

We very much appreciate the opportunity to comment on these important proposed regulations. 

Sincerely, 

JAN JACOBSON, 

Senior Counsel, Retirement Policy. 
136 

1See H.R. 2, 93d Cong. § 462(g) (as passed by the Senate, Mar. 4, 1974); Staff of S. Comm. 

on Labor and Public Welfare, 93d Cong., Summary of Differences Between the Senate Version 

and the House Version of H.R. 2 to Provide for Pension Reform 18 (Comm. Print 1974). Although 

the heading was changed from ‘‘Termination of Substantial Facility’’ to ‘‘Treatment of Substantial Cessation of Operations,’’ the language of the provision has not changed since it was first 

introduced. Moreover, the heading still indicates that a cessation of operations at a facility refers to something ‘‘substantial.’’ 

THE ERISA INDUSTRY COMMITTEE, 

WASHINGTON, DC 20005, 

November 12, 2010. 

RIN 1212–AB20

LEGISLATIVE AND REGULATORY DEPARTMENT, 

Pension Benefit Guaranty Corporation, 

1200 K Street, NW, 

Washington, DC 20005–4026. 

Re: Comments on Proposed Rule Regarding Liability for Termination of Single-Employer Plans; Treatment of Substantial Cessation or Operations (RIN1212– 

AB20) 

LADIES AND GENTLEMEN: The ERISA Industry Committee (‘‘ERIC’’) is pleased to 

submit these comments on the proposed regulation under ERISA § 4062(e), regarding the consequences of a substantial cessation of operations at a facility in any location. The proposed regulation was published in the Federal Register on August 10, 

2010. 

ERIC is a nonprofit association committed to the advancement of the employee 

retirement benefit plans of America’s largest employers. ERIC’s members provide 

comprehensive retirement benefits to tens of millions of active and retired workers 

and their families. ERIC has a strong interest in proposals that would affect its 

members’ ability to provide secure pension benefits in a cost-effective manner. 

ERIC is deeply concerned that the proposed regulation is inconsistent with the 

text and purpose of § 4062(e). The proposed regulation would expand the application 

of § 4062(e) to routine events that are far less significant than ‘‘ceas[ing] operations 

at a facility in any location.’’ For example, the proposed regulation would reach 

operational changes within an ongoing facility, and the relocation or sale of an ongoing operation. 

Such an expansion would have the effect of overriding the reporting waivers for 

many events covered by § 4043. In addition, because the § 4062(e) liability is calculated using the PBGC’s termination assumptions (rather than ERISA’s funding 

assumptions), expanding the application of § 4062(e) would require many employers 

to make contributions far in excess of what ERISA generally requires; this undermines ERISA’s detailed and highly reticulated funding rules. 

The PBGC should withdraw the proposed regulation and issue a new proposed 

regulation that corrects the following deficiencies in the current proposal: 

1. The proposed definitions of ‘‘operations,’’ ‘‘facility,’’ and ‘‘cessation’’ are inconsistent with the statute. They should be revised to follow the statutory mandate 

that § 4062(e) does not apply unless a facility closes. 

2. By stating that the relocation or sale of an ongoing operation triggers the application of § 4062(e), the proposed regulation departs from 34 years of consistent administrative practice. 

3. The proposed regulation fails to keep within reasonable bounds the circumstances in which an employee’s separation from employment would be deemed 

to occur ‘‘as a result’’ of a cessation of operations at a facility. It allows all employee 

separations that can be connected by a virtually limitless daisy chain of events to 

be deemed to result from a cessation of operations at a facility at the beginning of 

the chain. 

4. The proposed regulation fails to address the special but commonplace circumstances of frozen plans. 

5. The proposed regulation fails to include a reasonable exemption for well-funded 

plans. 

ERIC reserves the right to supplement these comments. 

DISCUSSION

1. Definitions of ‘‘Operations,’’ ‘‘Facility,’’ and ‘‘Cessation’’ 

Section 4062(e) was first introduced as a provision related to ‘‘termination of a 

substantial facility.’’ 1 In the last 36 years, the language of § 4062(e) has not 

changed: § 4062(e) applies only if ‘‘an employer ceases operations at a facility in any 
137 

location.’’ This simple phrase has been understood to mean that § 4062(e) applies 

only if operations cease—i.e., the facility is closed. 

Rather than define the statute’s phrase as a whole, the proposed regulation 

breaks it down into separate definitions of ‘‘operation,’’ ‘‘facility,’’ and ‘‘cessation.’’ By 

doing so, the proposed regulation expands the application of § 4062(e) to routine 

events that do not rise to the level of a ‘‘cessation of operations at a facility in any 

location.’’ ERIC has the following concerns with each proposed definition: 

• ‘‘Operation.’’ The statute does not authorize the proposal to replace the term 

‘‘operations’’ with ‘‘an operation.’’ This change could result in § 4062(e) being triggered by routine events that are anything but cessations of operations—e.g., changing the way a space is used or outsourcing an operation within an ongoing facility. • ‘‘Facility.’’ The term ‘‘facility’’ should be defined based on its location, rather 

than an operation. By stating that a single facility may be comprised of more than 

one building, without any geographic restrictions, the proposed regulation leaves 

open the possibility that a single facility can be spread across the country. This possibility ignores the statute’s phrase ‘‘in any location.’’ • ‘‘Cessation.’’ A stoppage of operations should not constitute a cessation unless 

the facts and circumstances indicate that the stoppage is permanent. The proposed 

1 week resumption rule (for a voluntary cessation) and 30-day discontinuance rule 

(for an involuntary cessation) are arbitrary and would sweep in common events that 

are not intended to be cessations. For example, a disaster like Hurricane Katrina 

would have been treated like a cessation of operations for many businesses in New 

Orleans that never intended to close and eventually resumed operations. 

In accordance with the statute, ‘‘facility’’ should be defined by reference to its location: a ‘‘facility at any location’’ means a building (or buildings on a campus) at a 

particular location. ‘‘Operations’’ should be defined as the work performed at the facility; and a cessation of operations at the facility should not be deemed to occur 

unless all of the facility’s operations have ceased—i.e., the facility has closed. Any 

concern that an employer might try to avoid § 4062(e) liability by continuing only 

an operation related to basic maintenance of a building (as distinct from changing 

the operations performed at the facility) should be addressed through an anti-abuse 

rule. 

In addition, stopping operations should not result in a ‘‘cessation’’ unless the facts 

and circumstances indicate that the stoppage is permanent. The determination of 

whether a stoppage is permanent should not be based on a fixed time period. If the 

PBGC nevertheless determines that a time period is necessary, (a) the time period 

should be no less than 90 days; (b) the time period should not apply in the case 

of a labor disruption; and (c) the standard should be rebuttable. 

2. Relocation and Sale of Ongoing Operations 

PBGC Opinion Letters from the last 34 years have consistently indicated that relocating or selling an ongoing business generally does not trigger a § 4062(e) inquiry. 

Absent a change to the statute, the new regulation should preserve this history. Accordingly: 

• When ongoing operations are relocated, § 4062(e) should not apply if the operations are continued—regardless of how many employees make the move. See, e.g., Op. Ltr. 77–134. • When ongoing are sold (whether in an asset sale or a stock sale), § 4062(e) 

should not apply if the operations are continued. At the very least, § 4062(e) should 

not apply if (a) the facility’s employee population does not shrink by more than 20 

percent and (b) the buyer continues the plan or a similar plan without substantial 

changes. See, e.g., Op. Ltrs. 86–13, 82–29, 78–29, 76–52. 

The proposed regulation appropriately allows an employee’s separation to be ignored if a replacement is hired before the cessation is complete. This rule should 

be expanded to apply when replacement employees are hired within a reasonable 

period after the cessation. For example, if ongoing operations are relocated from 

City A to City B and the employer intends to replace the employees who do not 

make the move, the employer should not be penalized merely because some positions are not filled for a reasonable period after the move. Also, replacement employees should be taken into account from their date of hire, without regard to whether 

they are eligible to participate in the plan. 

ERIC appreciates that the PBGC may waive the § 4062(e) liability in appropriate 

circumstances. However, in order to ensure reasonably consistent results and to 

ease the burden on employers and the PBGC in cases involving insignificant events, 

the regulation should include safe harbor standards under which waiver or reduced 

liability is automatic. At a minimum, the regulation should provide for an automatic 

waiver of the § 4062(e) liability (including the reporting requirement) in the circumstances described above. 
138 

3. ‘‘As a Result’’ 

The proposed rule that a separation from employment at one facility can be ‘‘as 

a result’’ of a cessation of operations at another facility is overly broad and vague. 

It allows all employee separations that can be connected by a virtually limitless 

daisy chain of events to be deemed to result from a cessation of operations at a facility at the beginning of the chain. 

Although there might be cases where a cessation of operations at one facility affects employment at other facilities, linking causation across facilities should be the 

exception rather than the rule. The regulation should include a rebuttable presumption that separations at one facility do not result from a cessation of operations at 

another facility. In other words, the proposed standard for a plan administrator to 

decide whether a § 4062(e) event has occurred, when to file a notice of an event, and 

how many affected participants to report should end the inquiry unless there are 

unusual circumstances. 

To the extent that linking causation across facilities is permitted, the regulation 

should limit the time period over which a chain reaction may occur to 30 days or 

less. No separation occurring after this period should be linked to a cessation of operations that occurred before the period started. 

4. Plans Frozen to New Entrants 

When a plan is frozen to new entrants, the percentage of active employees who 

participate in the Plan declines steadily over time—especially if the plan sponsor’s 

business is successful. By ignoring this fact, the proposed regulation would sweep 

in many insignificant events. 

For example, suppose a plan was frozen to new entrants in the 1990’s. At the time 

of the freeze, the plan sponsor had 20,000 employees in the United States and all 

of them participated in the plan. Since the freeze, attrition has resulted in the number of active employees participating in the plan falling to 1,000, but the size of the 

business has remained steady or grown. Under the proposed regulation, a cessation 

that results in only 200 participating employees losing their jobs—1 percent or less 

of the total U.S.-based employee population—would be a § 4062(e) event. 

As another example, suppose that when a plan was frozen, the employer had 

5,000 employees and they all participated in the plan. Since that time, the employer’s business has grown and it now employs 20,000 employees. Under the proposed 

regulation, a cessation that results in 1,000 participating employees losing their 

jobs—only 5 percent of the total employee population—would be a § 4062(e) event. 

In order to avoid these absurd results, the regulation should include an exemption 

for frozen plans that meet minimum funding requirements. Alternatively, the regulation should allow the active participant base to include employees who would have 

been active participants if not for the freeze. 

5. Exemption for Well-Funded Plans 

ERIC appreciates that the PBGC intends to continue its practice of negotiating 

with affected employers in appropriate cases. However, in order to ensure reasonably consistent results and to alleviate the burden of a reporting requirement in 

cases where the risk to the PBGC is not significant, the regulation should specify 

criteria under which no action will be required. 

Many plans that are not fully funded on a termination basis nevertheless do not 

pose a significant risk to the PBGC. For example, a plan with an Adjusted Funding 

Target Attainment Percentage (‘‘AFTAP’’) of 90 percent or more does not pose a significant risk to the PBGC. The regulation should relieve the sponsors of plans in 

this category from worrying about § 4062(e). 

Adding a reasonable exemption for plans that do not pose a significant risk to the 

PBGC would not only ease the burden on plan sponsors, allowing them to deliver 

benefits more efficiently: it would enable the PBGC to allocate its limited resources 

to the cases that warrant attention. 
139 

ERIC appreciates the opportunity to submit these comments. We look forward to 

working with you to create workable rules that enable the PBGC to protect itself 

against the cost of terminating underfunded plans without imposing unnecessary 

burdens on employers. If we can be of further assistance, please let us know. 

Sincerely, 

MARK J. UGORETZ, 

President & CEO. 

[Whereupon, at 4:03 p.m., the hearing was adjourned.] 

Æ