U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

44–713 PDF 2009

THE IMPACT OF THE FINANCIAL CRISIS

ON WORKERS’ RETIREMENT SECURITY

HEARING

BEFORE THE

COMMITTEE ON 

EDUCATION AND LABOR

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

HEARING HELD IN WASHINGTON, DC, OCTOBER 7, 2008

Serial No. 110–113

Printed for the use of the Committee on Education and Labor

(

Available on the Internet: 

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

COMMITTEE ON EDUCATION AND LABOR 

GEORGE MILLER, California, Chairman

Dale E. Kildee, Michigan, Vice Chairman 

Donald M. Payne, New Jersey 

Robert E. Andrews, New Jersey 

Robert C. ‘‘Bobby’’ Scott, Virginia 

Lynn C. Woolsey, California 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

Dennis J. Kucinich, Ohio 

David Wu, Oregon 

Rush D. Holt, New Jersey 

Susan A. Davis, California 

Danny K. Davis, Illinois 

Rau ́l M. Grijalva, Arizona 

Timothy H. Bishop, New York 

Linda T. Sa ́nchez, California 

John P. Sarbanes, Maryland 

Joe Sestak, Pennsylvania 

David Loebsack, Iowa 

Mazie Hirono, Hawaii 

Jason Altmire, Pennsylvania 

John A. Yarmuth, Kentucky 

Phil Hare, Illinois 

Yvette D. Clarke, New York 

Joe Courtney, Connecticut 

Carol Shea-Porter, New Hampshire 

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

Senior Republican Member 

Thomas E. Petri, Wisconsin 

Peter Hoekstra, Michigan 

Michael N. Castle, Delaware 

Mark E. Souder, Indiana 

Vernon J. Ehlers, Michigan 

Judy Biggert, Illinois 

Todd Russell Platts, Pennsylvania 

Ric Keller, Florida 

Joe Wilson, South Carolina 

John Kline, Minnesota 

Cathy McMorris Rodgers, Washington 

Kenny Marchant, Texas 

Tom Price, Georgia 

Luis G. Fortun ̃ o, Puerto Rico 

Charles W. Boustany, Jr., Louisiana 

Virginia Foxx, North Carolina 

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

Rob Bishop, Utah 

David Davis, Tennessee 

Timothy Walberg, Michigan 

[Vacancy]

Mark Zuckerman, Staff Director 

Sally Stroup, Republican Staff Director 
(III)

C O N T E N T S 

Page

Hearing held on October 7, 2008 ............................................................................ 1

Statement of Members: 

Altmire, Hon. Jason, a Representative in Congress from the State of 

Pennsylvania, prepared statement of .......................................................... 84

Kucinich, Hon. Dennis J., a Representative in Congress from the State 

of Ohio, article submitted: 

‘‘Lehman Collapse Hits Oslo Oil Fund,’’ dated September 24, 2008 ..... 56

McKeon, Hon. Howard P. ‘‘Buck,’’ Senior Republican Member, Committee 

on Education and Labor: 

Prepared statement of ............................................................................... 71

Statement of the American Benefits Council .......................................... 72

Miller, Hon. George, Chairman, Committee on Education and Labor ......... 1

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

Statement of Investment Company Institute ......................................... 75

Sestak, Hon. Joe, a Representative in Congress from the State of Pennsylvania, letter submitted ............................................................................ 85

Statement of R. Gregory Barton .............................................................. 86

Statement of Witnesses: 

Bramlett, Jerry, president/CEO, BenefitStreet, Inc. ..................................... 20

Prepared statement of ............................................................................... 22

Ghilarducci, Teresa, Irene and Bernard L. Schwartz professor of economic 

policy analysis, the New School for Social Research, Department of 

Economics ...................................................................................................... 36

Prepared statement of ............................................................................... 37

Orszag, Peter R., Director, Congressional Budget Office .............................. 6

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

VanDerhei, Dr. Jack, research director, Employee Benefit Research Institute (EBRI) .................................................................................................... 15

Prepared statement of ............................................................................... 17

Additional submission ............................................................................... 18

Weller, Christian E., Ph.D., associate professor, department of public 

policy and public affairs, University of Massachusetts ............................. 23

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

(1)

THE IMPACT OF THE FINANCIAL CRISIS ON 

WORKERS’ RETIREMENT SECURITY 

Tuesday, October 7, 2008

U.S. House of Representatives 

Committee on Education and Labor 

Washington, DC

The committee met, pursuant to call, at 1:05 p.m., in room 2175, 

Rayburn House Office Building, Hon. George Miller [chairman of 

the committee] presiding. 

Present: Representatives Miller, Andrews, Scott, Tierney, 

Kucinich, Holt, Sarbanes, Sestak, Clarke, and Souder. 

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

Hearing Clerk; Jody Calemine, Labor Policy Deputy Director; Carlos Fenwick, Policy Advisor, Subcommittee on Health, Employment, 

Labor and Pensions; Patrick Findlay, Investigative Counsel; Denise 

Forte, Director of Education Policy; Ryan Holden, Senior Investigator, Oversight; Jessica Kahanek, Press Assistant; Therese Leung, 

Labor Policy Advisor; Sara Lonardo, Junior Legislative Associate, 

Labor; Ricardo Martinez; Policy Advisor, Subcommittee on Higher 

Education, Lifelong Learning and Competitiveness; Alex Nock, 

Deputy Staff Director; Joe Novotny, Chief Clerk; Rachel Racusen, 

Communications Director; Meredith Regine, Junior Legislative Associate, Labor; Melissa Salmanowitz, Press Secretary; James 

Schroll, Staff Assistant; Michele Varnhagen, Labor Policy Director; 

Mark Zuckerman, Staff Director; Robert Borden, Minority General 

Counsel; Cameron Coursen, Minority Assistant Communications 

Director; Ed Gilroy, Minority Director of Workforce Policy; Rob 

Gregg, Minority Senior Legislative Assistant; Alexa Marrero, Minority Communications Director; Ken Serafin, Minority Professional Staff Member; and Linda Stevens, Minority Chief Clerk/Assistant to the General Counsel. 

Chairman MILLER. The Committee on Education and Labor will 

come to order for the purposes of conducting an oversight hearing 

on the impact of the current fiscal and housing crises on workers’ 

retirement security. I want to thank all of the witnesses who have 

agreed to testify this afternoon. And thank you to the staff for putting this hearing together, and to the members of the committee 

who were able to make it for the hearing. 

Last week, Congress approved an emergency rescue plan in response to the worst financial crisis our country has seen since the 

Great Depression. We know that this plan alone will not magically 
2

turn the economy around, but we are confident that, without it, we 

would not have a chance to move forward. 

We insisted that the plan include strong protection for taxpayers 

and tough accountability, neither of which was included in the 

President’s original request to Congress. Immediately after the 

plan was approved, Speaker Pelosi announced that the House 

would conduct a series of hearings to investigate the causes of the 

current financial crises and what steps should be taken next to protect homeowners, workers, and families struggling today. As part 

of that commitment, the Committee on Education and Labor is 

holding a hearing to explore how this financial crisis is impacting 

the retirement security of American families. 

Yesterday, the House Oversight and Government Reform Committee launched the first of many oversight hearings examining the 

toxic mix of corporate greed, recklessness, and deregulation that 

created this financial crisis. 

During his testimony, Lehman Brothers’ CEO, Mr. Fuld, showed 

no remorse at his catastrophic mismanagement of the company. In 

fact, he repeatedly denied responsibility for running the storied 

Lehman Brothers Investment House into financial oblivion. He refused to admit that his own reckless management and his industry’s success in keeping the regulators at bay directly contributed 

to this historic financial crisis that is costing taxpayers, shareholders, and the Nation’s current and future retirees billions of dollars from their nest eggs. All the while he insisted on taking obscene multimillion-dollar bonuses for his executive teammates. Unlike Wall Street executives, America’s families don’t have a golden 

parachute to fall back on. 

It is clear that retirement security may be one of the greatest 

casualties of this financial crisis. The current financial and housing 

crisis are stripping wealth from American families at a record rate. 

A new poll just found that 63 percent of Americans are worried 

that they will not have enough savings for their retirement. Tragically, they may very well be right. 

Due to the collapse of the housing market, and the financial crisis, trillions of dollars that Americans were counting on has been 

lost. Americans were counting on much of this wealth for their retirement. Now it is gone, as is their ability to adequately fund their 

retirement. 

Even before the current meltdown, middle-income families were 

losing ground due to the decline in middle-class wages over the last 

decade, making it harder for them to save for their retirement and 

family emergencies. Retirement and financial experts now predict 

that retirees and older workers who rely on financial investments 

for their retirement income may suffer more than any portion of 

the American population in the coming years. 

According to a survey released today by the AARP, one in five 

middle-aged workers stopped contributing to their retirement plans 

last year because they had trouble making ends meet. One in three 

workers is considering delaying retirement. Now, the number of investors taking loans on their 401(k) accounts is increasing, and 

hardship withdrawals are also increasing. T. Rowe Price estimates 

a 14 percent increase in the hardship withdrawals just in the first 

8 months of 2008, and all of the signs point to an increased fre-
3

quency of 401(k) loans and hardship withdrawals in the coming 

year. It makes sense that more Americans will be raiding their retirement accounts as they deal with rising unemployment and the 

increasing cost of basic necessities. 

Unfortunately, these drastic measures that have been taken by 

workers today will have a long-lasting impact by significantly reducing their account balances once these workers reach retirement 

age. 

Over the past 12 months, more than half a trillion dollars have 

evaporated from more 401(k) plans as a direct result of the crisis 

in the markets. Some experts say it will take as long as 3 years 

to recover market losses in 401(k)-style accounts, but only if the 

market turns around soon. 

Just like consumer-directed retirement plans, traditional pension 

plans are not immune from the financial crisis. Although pension 

plans hire professional money managers, and are required to be diversified, these plans will likely lose value as a result of the weak 

performance in the investment markets. 

Sophisticated pension plans lost 20 to 30 percent of their value 

during the 2001 recession, and took several years to overcome 

those losses. We must keep our eye on these plans and I await further data on the health of our Nation’s pensions. 

While this crisis began on Wall Street, much of the financial burden will ultimately be borne by Main Street. This did not happen 

overnight. With the Republicans’ help, armed with their powerful 

lobbyists, Wall Street cunningly held off fair regulations by Congress, arguing that Americans would be better off if they were left 

to their own devices. As Congress continues our investigations into 

the crisis, we cannot allow those responsible to emerge unscathed. 

The American people are paying a price for this ‘‘Go, go, Wild 

West’’ approach to governing. One cost will be the concern that our 

Nation’s workers will not have sufficient savings to ensure a secure 

retirement after a lifetime of hard work. 

In the coming months, this committee will examine what measures may be needed to ensure safe and secure retirement for workers, retirees, and their families. For starters, we know that 401(k) 

holders lack critical information about how their money is being 

managed and what fees they pay. I am here to say right now those 

days are over. We must have more transparency and complete 

transparency in 401(k) investment practices. The Wall Street veil 

of secrecy must end. 

I would like to thank all of our witnesses for joining us today, 

and I look forward to their testimony. I expect that we will be back 

here repeatedly until we can ensure greater security for the retirement of all hardworking Americans. 

Our first witness will be Dr. Peter Orszag, who is the Director 

of the Congressional Budget Office. CBO’s mission is to provide 

Congress and the public with objective, nonpartisan, and timely 

analysis of economic and budgetary issues, as well as analytic papers and cost estimates of the proposed legislation. 

Dr. Orszag received his BA from Princeton University and his 

MA and PhD from the London School of Economics. 

Next, we will hear from Dr. Jack VanDerhei, who is the Research 

Director for the Employee Benefit Research Institute. He is also 
4

the editor of the Benefits Quarterly, and a member of the advisory 

board of the Pension Research Council at the Wharton School and 

the National Academy for Social Insurance. Dr. VanDerhei received 

a BA and MBA from the University of Wisconsin, Madison, and an 

MA and PhD from the Wharton School of the University of Pennsylvania. 

Mr. Jerry Bramlett currently serves as President and CEO of the 

BenefitStreet, an independent advisor for 401(k) and other defined 

contribution plans. Mr. Bramlett founded the 401(k) Company in 

1983, and has 25 years of retirement industry experience. He holds 

a BA from Southern Methodist University. 

Dr. Christian E. Weller is Associate Professor of Public Policy at 

the University of Massachusetts, Boston, and Senior Fellow at the 

Center for American Progress Action Fund. His work focuses on retirement income security, money and banking, microeconomics, and 

international finance. Dr. Weller holds a PhD in economics from 

the University of Massachusetts at Amherst. 

Dr. Teresa Ghilarducci is the Irene and Bernard Schwartz Professor of Economic Policy Analysis at the New School for Social Research. Dr. Ghilarducci specializes in pension benefits, and is the 

author of several books, including, most recently, ‘‘When I Am 64: 

The Plot Against Pensions and the Plan to Save Them.’’ She received her BA and PhD from the University of California at Berkeley. 

Dr. Orszag, we will begin with you. As you know, you obviously 

have testified so many times in front of Congress, but a green light 

will go on when you begin to testify. We allow you 5 minutes for 

your opening statements. And then an orange light will go on when 

you have 1 minute remaining. We suggest you might want to wrap 

it up, but we want to make sure you complete your thoughts in a 

coherent fashion. And then a red light when your time has run out. 

That will allow time for the members of the committee. 

Again, I want to thank all of the members for showing up. 

Peter, please proceed as you are most comfortable. 

[The statement of Mr. Miller follows:]

Prepared Statement of Hon. George Miller, Chairman, Committee on 

Education and Labor 

Good afternoon. 

Last week, Congress approved an emergency rescue plan in response to the worst 

financial crisis our country has seen since the Great Depression. We know that this 

plan alone will not magically turn the economy around. But we are confident that 

without it we will not have the chance to move forward. 

We insisted that the plan include strong protections for taxpayers and tough accountability—neither of which was included in the President’s original request to 

Congress. 

Immediately after the plan was approved, Speaker Pelosi announced that the 

House would conduct a series of hearings to investigate the causes of the current 

financial crisis and what steps we should take next to protect homeowners, workers 

and families struggling today. 

As part of that commitment, the Committee on Education and Labor today is 

holding a hearing to explore how this financial crisis is impacting the retirement 

security of American families. 

Yesterday, the House Oversight and Government Reform Committee launched the 

first of many oversight hearings examining the toxic mix of corporate greed, recklessness, and deregulation that created this financial crisis. 

During his testimony, Lehman’s CEO, Mr. Fuld, showed no remorse for his catastrophic mismanagement of the company. In fact, he repeatedly denied responsi-
5

bility for running the storied Lehman Brothers investment house into financial oblivion. 

He refused to admit that his own reckless management—and his industry’s success of keeping regulators at bay—directly contributed to this historic financial crisis that is costing taxpayers, shareholders, and the nation’s current and future retirees billions of dollars from their nest eggs. 

All the while, he insisted on taking obscene multi-million dollar bonuses for his 

executive teammates. 

Unlike Wall Street executives, American families don’t have a golden parachute 

to fall back on. 

It’s clear that their retirement security may be one of the greatest casualties of 

this financial crisis. 

The current financial and housing crises are stripping wealth from American families at a record rate. 

A new poll just found that 63 percent of Americans are worried that they will not 

have enough savings for their retirement. Tragically, they may very well be right. 

Due to the collapse of the housing market and the financial crisis, trillions of dollars 

that Americans were counting on has been lost. 

Americans were counting on much of this wealth for their retirement. Now it is 

gone—as is their ability to adequately fund their retirement. 

Even before the current meltdown, middle-income families were losing ground due 

to the decline in middle-class wages over the last decade—making it harder for 

them to save for their retirement and family emergencies. 

Retirement and financial experts now predict that retirees and older workers who 

rely on financial investments for retirement income may suffer more than any portion of the American population in the coming years. 

According a survey released today by the AARP, one in five middle-aged workers 

stopped contributing to their retirement plans in the last year because they had 

trouble making ends meet. One in three workers has considered delaying retirement. 

Now, the number of investors taking loans on their 401(k) accounts is increasing. 

And hardship withdrawals are also increasing. 

T. Rowe Price estimates a 14 percent increase in hardship withdrawals just in the 

first eight months of 2008. 

And, all the signs point to an increased frequency of 401(k) loans and hardship 

withdrawals in the coming year. 

It makes sense that more Americans will be raiding their retirement accounts as 

they deal with rising unemployment and increasing costs of basic necessities. 

Unfortunately, these drastic measures taken by workers today will have a longlasting impact by significantly reducing account balances once these workers reach 

retirement age. 

Over the past 12 months, more than a half trillion dollars have evaporated from 

401(k) plans as a direct result of the crisis in the markets. 

Some experts say that it will take as long as 3 years to recover market losses in 

401(k)style accounts—but only if the market turns around soon. 

Just like consumer directed retirement plans, traditional pension plans are not 

immune from the financial crisis. 

Although pension plans hire professional money managers and are required to be 

diversified, these plans will likely lose value as a result of the weak performance 

of the investment markets. 

Sophisticated pension funds lost 20 to 30 percent of their value during the 2001 

recession and took several years to overcome those losses. 

We must keep our eye on these plans and I await further data on the health of 

our nation’s pensions. 

While this crisis began on Wall Street, much of the financial burden will ultimately be borne by Main Street. And this did not happen overnight. 

With the Republicans’ help and armed with their powerful lobbyists, Wall Street 

cunningly held off fair regulations by Congress, arguing that Americans would be 

better off if left to their own devices. 

As Congress continues our investigations into this crisis, we cannot allow those 

responsible to emerge unscathed. The American people are paying the price of this 

go-go, Wild West approach to governing. 

One cost will be the concern that our nation’s workers will not have sufficient savings to ensure a secure retirement after a lifetime of hard work. In the coming 

months, this committee will examine what measures may be needed to ensure a safe 

and secure retirement for workers, retirees and their families. 

For starters, we know that 401(k) holders lack critical information about how 

their money is managed and what fees they pay. 
6

I’m here to say right now, those days are over. 

We must have more transparency in 401(k) investment practices. The Wall Street 

veil of secrecy must end. 

I would like to thank all of our witnesses for joining us today. I look forward to 

their testimony. 

And I expect that we will be back here repeatedly until we can ensure greater 

security for the retirement of hard-working Americans. 

STATEMENT OF PETER R. ORSZAG, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. ORSZAG. Thank you very much, Mr. Chairman, members of 

the committee. 

The turmoil in financial markets that we have experienced over 

the past year or so will and has affected many aspects of our lives, 

including pensions, but perhaps for many households the effects 

have not really manifested themselves dramatically yet. That may 

start to change as households receive, for example, their 401(k) balances that were mailed out at the end of the last quarter, that are 

either in the mail or about to be received today. 

The most direct effect of the financial market turmoil on pensions occurs through the prices of financial assets, such as corporate equities and bonds. The Standard & Poor’s 500 stock market 

index, for example, has fallen by more than 25 percent over the 

past year, as the outlook for the economy has worsened and corporate profits have deteriorated and financial turmoil has created 

stress in our financial markets. Because the majority of pension assets are held in equities, these declines in stock prices have had a 

significant adverse effect on pension plans. 

Data from the Federal Reserve suggests that the decline in the 

value of financial assets held by pension funds, public and private, 

defined benefit and defined contribution, amounted to roughly $1 

trillion, almost 10 percent, losses on their assets from the second 

quarter of 2007 through the second quarter of 2008. 

Since the end of the second quarter, asset prices have continued 

to decline, and CBO analysis suggests that there may well be another $1 trillion in losses on pension plan assets. In other words, 

over the past 15 months or so, pension plans have experienced a 

roughly $2 trillion decline in the value of their assets. 

As you know, the two principal types of pension plans are defined benefit plans and defined contributions plans. If we look at 

defined benefit plans, CBO’s estimate suggests that the value of 

the assets held by defined benefits plans has declined by roughly 

15 percent over the past year. 

Offsetting that, to some degree, is that the way obligations are 

calculated under defined pension plans involves an interest rate. 

The interest rate that is used for those calculations has increased, 

and that has partially offset the decline in assets to the degree of 

change in the net asset position, if you will, of defined benefit 

plans, has decreased by perhaps only 5 to 10 percent over the past 

year. Still quite substantial. 

Defined contribution plans, if anything, are somewhat even more 

heavily weighted towards equities than defined benefit plans, so 

the declines in their asset values, again, if anything, are more significant on a relative basis than defined benefit assets. 
7

State and local government pension plans have also suffered 

losses. According to data from the Federal Reserve, for example, 

the assets held by State and local government pension plans declined by more than $300 billion between the second quarter of 

2007 and the second quarter of 2008. 

Now, what does this all mean for real people and real household? 

It will mean several things. One is that the decline in the value 

of retirement assets may well lead households to delay buying a 

new house or buying a refrigerator, or what have you, consuming 

things, to the extent that they perceive the assets in their retirement accounts to be part of their net worth. 

Another dimension of response may be that some people will 

delay their retirement. In particular, those on the verge of retirement may decide they can no longer afford to retire, and will continue working longer. 

If we look over a longer period of time, through the 1970s and 

the 1980s, there was a trend towards earlier retirement, which has 

somewhat reversed since then. The evidence is somewhat ambiguous about the impact of financial market changes on retirement 

behavior. For example, after the decline in the stock market earlier 

in 2000, 2001, one paper suggested there was not a significant response on retirement. However, during the boom of the 1990s, 

other evidence suggests that people did retire earlier in response 

to rising values in their retirement accounts and other stock market wealth. One would think that the reverse of that would then 

lead people to retire later. So one dimension of response may well 

be in longer working lives and later retirements. 

I want to just wrap up by commenting on one lesson that we can 

learn from the turmoil that we have been experiencing, which is 

that in a defined contribution plan, like a 401(k) plan, exposure to 

broad market risk is almost unavoidable. That is to say, if all asset 

prices move in a particular direction, workers bear the risk, almost 

by definition, under a 401(k) plan, by design. But too many workers seem to be taking on unnecessary risks even in the stocks that 

they hold. For example, roughly 1 in 15, or about 7 percent of 

workers, hold 90 percent or more of their 401(k) balances in their 

own company’s stock. I think the experience that we are having 

with corporate failures or potential corporate failures should underscore the risk of not only risking your unemployment status but 

also your retirement assets in making a big bet on only one firm. 

Instead, a strategy of diversification is generally sound. It is unavoidable. It doesn’t get away from the risk of an overall market 

decline, as we have been experiencing, but too many workers are 

taking on unnecessary risks over and above the risks they would 

otherwise face in 401(k) plans. 

Thank you very much, Mr. Chairman. 

[The statement of Mr. Orszag follows:]
8
9
10
11
12
13
14
15

Chairman MILLER. Thank you. 

STATEMENT OF DR. JACK VANDERHEI, RESEARCH DIRECTOR, 

EMPLOYEE BENEFIT RESEARCH INSTITUTE (EBRI) 

Mr. VANDERHEI. Chairman Miller, members of the committee, 

thank you for your invitation to testify today on the impact of the 

financial crisis on retirement security. I am Jack VanDerhei, Research Director of the Employee Benefit Research Institute. EBRI 

is a nonpartisan research institute that has been focusing on retirement and health benefits for the past 30 years. EBRI does not take 

policy positions and does not lobby. 
16

With your permission, I have a longer written statement that I 

would like to submit for the Record. 

Chairman MILLER. Without objection. 

Mr. VANDERHEI. Although the current financial crisis may have 

an impact on defined benefit participants, the extent and timing of 

the impact is difficult to assess, given the impact of PPA on plansponsored contributions and/or benefit accruals on amendments. 

Considerably more is known though about the immediate impact 

of the current financial crisis on defined contribution plan participants. It should be emphasized that while older employees have average equity allocations that are lower than their younger counterparts, and hence are thought by some to be less vulnerable to negative returns in the equity markets, their average account balances 

tend to be larger, and therefore they have more to lose in a significant downturn. 

Research has shown that a worker’s age is a major factor in his 

or her ability to recover from an economic downturn. In 2002, 

Sarah Holden and I simulated the likely impact of a major bear 

market on the overall replacement rates that could be provided by 

401(k) accumulations. Based on a baseline replacement rate of 51 

percent for a specific group of employees, the decrease was estimated to be only 3.2 percentage points if it took place at the beginning of the career, but 13.4 percentage points if it took place at the 

end of the career. 

However, building or modifying a simulation model that is able 

to quantify the likely impact of a market downturn on eventual retirement income is a very lengthy process. Consequently, attention 

is typically focused on how a decline in the financial markets has 

impacted the average defined contribution balances. 

For purposes of this testimony, EBRI has taken the most recent 

information in the EBRI/ICI 401(k) database, year-end 2006, and 

used employee-specific information, as well as financial market indices to estimate the percentage change in average account balances among the 2.2 million 401(k) participants that were present 

in the database from year end 1999 to year end 2006. This socalled consistent sample of 401(k) participants was created several 

years ago in the annual analysis of EBRI/ICI 401(k) data to provide 

an estimate of changes in average annual account balances that 

was not biased downward by job-turnover 401(k) participants. 

If you would like a look at the power point slides, figure 1, hopefully, it shows that for the first 9 months of 2008, the percentage 

loss in average account balances among 401(k) participants in this 

consistent sample varies from 7.2 percent to 11.2 percent. As you 

would expect, groups with the lowest average loss tend to have a 

reduced equity exposure, as well as a larger ratio of contributions 

to account balance. 

Figure 2 shows the cumulative experience for 2007, as well as 

the first 9 months of 2008. In 2007, the S&P 500 index return was 

positive, 51⁄2 percent, but not nearly enough to offset the losses in 

the first 9 months of 2008. 

Figure 3 broadens the time span under the analysis and shows 

that, even with the financial market setback suffered so far in 

2008, the percentage change in average account balances from January 1, 2000, through October 1, 2008, was significantly positive 
17

for all groups, and all age cohorts in the two shortest tenure categories at least doubled their account balances in nominal terms. 

The largest increase, as you would expect, was experienced by 

the group with the youngest workers and shortest tenure, in large 

part due to the greater weight of contributions as compared with 

investment returns. Those having the lowest increase were the oldest workers with the longest tenure. However, this number needs 

to be interpreted carefully in light of the ability of many employees 

to start taking in-service distributions from their plans at age 591⁄2. 

A research topic that is urgently needed to better understand the 

vulnerability of 401(k) participants to volatility in equity markets 

deals with the topic of target date funds. 

Figure 4 shows for that same consistent sample the distribution 

of 401(k) participant account balances to equity at year end 2006. 

In this case, equity is defined as a percentage of the participants’ 

401(k) funds in equity funds, company stock, and the equity portion 

of balance and/or target date funds. 

This figure shows that more than one in four, 27 percent of the 

oldest 401(k) participants, those age 56 to 65 in 2006, had 90 percent or more of their 401(k) assets in equities. Another 11 percent 

had 80 to 90 percent in equities, and 10 percent had 70 to 80 percent in equities. 

Target date funds with automatic rebalancing and a ‘‘glide path’’ 

ensuring age-appropriate asset allocation are likely to become 

much more common after full implementation of PPA, with the expected increase in automatic enrollment for 401(k) plans and the 

attendant interest in QDIAs. Based on unpublished EBRI research, 

the average equity allocation for target date funds designed for individuals in that 56 to 65 age range was 51.2 at year-end 2006. 

That would imply that approximately one-half of the consistent 

sample participants in that age category, those on the verge of retirement, would have had at least a 20 percent reduction in equities if they were allocated 100 percent to target-date funds. 

EBRI is currently conducting an extensive research project on 

the provision and utilization of target-date funds, as well as other 

defined contribution trends that are likely to impact the retirement 

income adequacy of today’s workers. We would welcome the opportunity to share these results with you and the committee at your 

convenience. 

I thank you for the opportunity to appear before the committee 

today. 

[The statement of Mr. VanDerhei may be accessed at the following Internet address:] 

http://www.ebri.org 

[Additional submission of Mr. VanDerhei follows:]
18
19
20

Chairman MILLER. Thank you. 

Mr. Bramlett. 

STATEMENT OF JERRY BRAMLETT, CHIEF EXECUTIVE 

OFFICER, BENEFITSTREET, INC. 

Mr. BRAMLETT. Thank you, Chairman Miller, and members of 

the committee, for the opportunity to speak about this critical issue 

facing billions of Americans. 

My name is Jerry Bramlett, President and CEO of BenefitStreet. 

Before that, I founded and ran the 401(k) Company for 25 years, 

beginning in August of 1983. At the time that it was sold to 

Charles Schwab and Company, we had 425,000 participants, and 

our average size plan was about $250 million in assets. Pretty 

much built that business brick by brick over a 25-year period. 

401(k) plans have become the retirement foundation for most 

Americans. Low-income individuals are 20 times more likely to 

save when they are offered a 401(k) plan at work. However, the 

current financial crisis has certainly made clear that ill-prepared 

401(k) participants bear the investment risk. 401(k) participants 

are understandably concerned about their retirement savings. The 

recent substantial decline in the market impacts almost every one 

of them. The pain is particularly acute for those participants closer 

to retirement whose retirement income expectations have been significantly impaired, possibly resulting in the need to postpone retirement. 

Given that most 401(k) participants are not investment experts, 

there is a danger that many of them will overreact to the market 

downturn. I want to caution against this. For participants with 

many years of retirement, a drastic abandonment of equity positions in the retirement account will only serve to lock in as of yet 

unrealized losses. Markets do go up and down, and 401(k) participants must try to think long term. 
21

As recently as September 1987, the market declined over 25 percent; or 3,000 points in today’s terms. In the following years, the 

market rebounded and reached even higher levels. 

Let me emphasize, exchange in the equity investments in your 

retirement account for Treasury bills is not a sound long-term investment strategy and will subject retirees to substantial inflation 

risks. This also applies to participants who are entering retirement, 

who will likely be managing retirement assets for some time. 

To be clear, I am certainly not saying that those with 401(k) accounts should do nothing. Current participants should take the 

time to evaluate where their new contributions are being invested 

and perhaps consider less volatile investments that will allow them 

to better diverse their entire account, which brings me to another 

point. 

I do not believe that the 401(k) system is doing an adequate job 

of educating participants as to how they need to invest their account as they get closer to retirement. If the retirement income of 

a 64-year-old is heavily invested in equities, the impact of a major 

market decline on retirement income expectations can be devastating. However, if that same account had been properly diversified with a greater emphasis on fixed income securities, the impact 

of a major market decline may very well be manageable. 

Although target-date investment funds based on a participant’s 

age has greatly helped in this regard, we need to do more. I would 

recommend that Congress instruct the Department of Labor to develop education materials specifically for 401(k) participants over 

age 50 to assist them in better managing their account in preparation for retirement. 

The current financial crisis also reveals some fundamental flaws 

in the 401(k) system that I want to highlight. Given how this turmoil is impacting large insurance companies and banks, plan fiduciaries need to make sure that when offering a so-called stable 

value fund, or fixed interest fund, such funds are diversified across 

a number of financial institutions. What we have learned over the 

last couple of years is that large institutions can fail. In other 

words, just like plan participants need to diversify the investments 

in their account, plan fiduciaries need to diversify the initial investment providers used by their plan. 

You also may not be aware that if a financial institution holding 

retirement plan assets becomes troubled, a plan fiduciary may not 

be able to do anything about it. For example, there are retirement 

assets invested in insurance contracts that can be subject to backend loads or may even have contractual provisions on taking the 

money out, sometimes as long as 5 years. Congress should consider 

whether such restrictions should be permissible with respect to retirement plan assets. 

Finally, it is critically important that we not forget the issue of 

transparency. While the market is going down, hidden fees are still 

being assessed. As this committee has already heard, hidden fees 

can have an enormous impact on participants’ retirement accounts. 

By some estimates, some participants are experiencing as much as 

40 to 60 percent loss of the retirement income in the future due 

to the fact of excessive fees, most of which are hidden. 
22

Those opposed to a fee transparency say that only the overall net 

return on investment should matter. So what is their argument 

when the return is a substantial loss compounded with hidden 

fees? 

Mr. Chairman, I fully support the bill you introduced this year, 

and very much hope you will continue your quest to shine the light 

on hidden fees in the new Congress. 

Thank you for this opportunity. I welcome any questions. 

[The statement of Mr. Bramlett follows:]

Prepared Statement of Jerry Bramlett, President/CEO, BenefitStreet, Inc. 

Chairman Miller and Congressman Andrews, thank you for this opportunity to 

speak before you today on this critical issue facing tens of millions of Americans. 

My name is Jerry Bramlett, President and CEO of BenefitStreet. BenefitStreet is 

the nation’s premier, independent recordkeeping and plan administration firm with 

more than 1,500 clients across the country. We are a pioneer in the creation and 

delivery of innovative 401(k) solutions and leading-edge technology. 

Throughout my 25 years of building the largest independent 401(k) plan recordkeeping firms in the country, I have experienced every aspect of the retirement industry up close and have developed a good deal of insight as to how we got to this 

point and where we should go from here. 401(k) plans have become the retirement 

foundation for most Americans. In terms of promoting savings they have been immensely successful. Low to moderate income individuals are twenty times more likely to save when they are offered a 401(k) plan at work. However, the current financial crisis has certainly highlighted the fact that 401(k) participants—whose 401(k) 

account represent their sole retirement savings—bear all the investment risk. This 

contrasts to defined benefit plans, where the burden of funding, asset allocation and 

investment selection belong to an employer under the constraints of fiduciary laws. 

With 401(k) plans, all the risk associated with asset allocation and investment selection is shifted to the ill-prepared worker. 401(k) participants are understandably 

concerned about their retirement savings. The recent substantial decline in the market impacts almost every one of them. The pain is particularly acute for those participants closer to retirement whose retirement income expectations have been significantly impaired possibly resulting in the need to postpone retirement. 

Given that most 401(k) participants are not investment experts, there is a danger 

that many of them will over react to this market downturn—I want to caution 

against this. For participants with still many years to retirement, a drastic abandonment of equity positions in their retirement account will only serve to lock-in as 

of yet unrealized losses. Markets do go up and down and 401(k) participants must 

try to remember to think long-term. It is important to remember, that as recently 

as September 1987 the market declined over 25 percent—3,000 points in today’s 

terms. In the following years the market rebounded and reached even higher levels. 

In fact, according to the economist Jeremy Seigel there has never been a 20-year 

period where the stock market has yielded negative returns. 

Let me emphasize, exchanging the equity investments in your retirement account 

for Treasury bills is not a sound long-term investment strategy and will subject retirees to substantial inflation risk. This also applies to participants who are nearing 

or entering retirement who will likely be managing retirement assets for some 

time—on the average another 15 years or so. Even these close-to-retirement employees can impair their long-term retirement assets by acting precipitously. 

To be clear, I am certainly not saying that those with 401(k) accounts should do 

nothing. Current participants should take the time to evaluate where their new contributions are being invested and perhaps consider less volatile investments that 

will allow them to better diversify their entire account. By changing where these 

new contributions are being invested 401(k) participants should seek to have an appropriately diversified allocation of assets with a good balance of both equity and 

fixed income investments. 

Which brings me to another point, I do not believe the 401(k) system is doing an 

adequate job of educating participants as to how they need to invest their account 

as they get closer to retirement. The practical impact of a substantial market decline on a 64-year old worker months away from retirement can be very different 

than the impact on a 50-year old 15 years from retirement. If the retirement account of the 64-year old is heavily invested in equities, the impact of a major market 

decline on retirement income expectations can be devastating. However, if that 

same account had been properly diversified with a greater emphasis on fixed income 
23

securities, the impact of a major market decline may very well be manageable. Although the advent of target-date investment funds based on a participant’s age has 

greatly helped in this regard we need to do more. I would recommend that Congress 

instruct the Department of Labor to develop educational materials specifically for 

401(k) participants that have reached age 50 to assist them in better managing 

their account in preparation for retirement. 

The current financial crisis has also revealed some fundamental flaws in the 

401(k) system that I want to highlight. • Given how this turmoil is impacting large insurance companies and banks, plan 

fiduciaries need to make sure that, when offering a so called stable value or fixed 

interest fund, such funds are diversified across a large number of financial institutions. What we have learned over the last couple of weeks is that very large institutions can fail no matter how stable they may appear on the surface. In other words, 

just like plan participants need to diversify the investments in their account, plan 

fiduciaries need to diversify the investment providers used by the plan. As far as 

I know, the Department of Labor places no emphasis on this. 

• You may not be aware that since this recent financial crisis began certain retirement funds—such as real estate investment funds—have announced that they 

are frozen and not available for distributions to participants due to the illiquid nature of the underlying assets. This means that current participants cannot change 

their investment and retirees cannot get distributions. Congress should examine 

whether investments subject to this susceptibility are appropriate. 

• You also may not be aware that if a financial institution holding retirement 

plan assets becomes troubled, a plan fiduciary may practically or even contractually 

not be able to do anything about it. For example, there are retirement assets invested in insurance contracts that can be subject to significant back-end loads or 

may even have contractual prohibitions on taking the money out. I have seen contracts with such prohibitions lasting as long as five years. Congress should consider 

whether such restrictions should be permissible with respect to retirement plan assets. 

• You should also be concerned about funds that may be advertized as ‘‘low-risk’’ 

(such as short term bond funds) but, in reality, contain high-risk assets that cause 

the fund to perform more like an equity fund in a down market. It is important not 

only to know how a fund is labeled, but what is actually in a given fund regardless 

of what it may be called. 

• Finally, it is critically important that we not forget the issue of fee transparency. While the market is going down, hidden fees are still being assessed. As 

this Committee has already heard, hidden 401(k) fees can have an enormous impact 

on a participant’s retirement account. Those opposed to fee transparency argue that 

only the overall net return on an investment should matter. So what is their argument when the return is a substantial loss compounded with hidden fees? Mr. 

Chairman, I fully support the bill (H.R. 3185) that you introduced this year enhancing 401(k) fee transparency and very much hope you will continue your quest to 

shine the light on hidden fees in the new Congress. 

Thank you for this opportunity to testify on these important issues. I will be 

happy to answer any questions you may have. 

Chairman MILLER. Thank you. 

Dr. Weller. 

STATEMENT OF DR. CHRISTIAN WELLER, ASSOCIATE PROFESSOR, UNIVERSITY OF MASSACHUSETTS, BOSTON, AND 

SENIOR FELLOW, CENTER FOR AMERICAN PROGRESS 

Mr. WELLER. Thank you very much, Chairman Weller, and I 

thank the members of the committee for inviting me here today. 

The current crisis highlights, in my view, the long-term shortfalls 

in retirement savings. However, there is no single silver bullet solution to the retirement crisis. Policymakers instead should take a 

pragmatic approach and pursue policy approaches that are efficient 

and effective. That means strengthening defined benefit pensions, 

since they can deliver benefits at lower costs than existing defined 

contribution plans, as the National Institute on Retirement Security recently showed. Also, it means improving 401(k) plans, par-
24

ticularly by adapting defined benefit features to make them more 

efficient. Let me talk a little bit about the long-term benefit crisis. 

In 2007, just 45 percent of all private sector workers participated 

in employer-sponsored retirement plans, down from 50 percent in 

2000. Minorities, low-income workers, and those working for small 

employers are much less likely than their counterparts to have a 

retirement saving plan at work, and all of those ratios have declined since 2000. 

But, the Investment Company Institute just last week reported 

that when employers offer a retirement savings plan, there is no 

distinction in take-out rates between small and large businesses. 

That means it is efficient to focus on expanding plan sponsorship, 

especially among small businesses. 

Increasingly, however, many workers with retirement saving 

plans have individual accounts that can leave them exposed to 

market fluctuations, and those workers are currently hurt by the 

sharp downturns in the numbers. The data shows several important trends. Let me just highlight a few. 

The total real wealth fell by $4.5 trillion from September 2007, 

the last peak in household wealth, to June, 2008, just 9 months. 

This is an annualized average loss of 10.2 percent for the past 

three quarters compared, for instance, to an average loss of 7 percent in the early 2000s. 

Over the three quarters from September 2007 to June, 2008, 

home equity, which is a large share of retirement savings for older 

workers in particular shrank by $1 trillion, reflecting a decrease in 

annualized average rate of 17.8 percent during those quarters. This 

was the largest decline in home equity since the first three quarters of 1974. Home equity relative to income is now at the lowest 

level since the end of 1976. 

These sharp wealth trends are mirroring peoples’ worries about 

their own retirement income security, which are at the highest levels in most of the service that we know for the past 20 years. Importantly, however, increasing worries about future financial and 

housing market uncertainty can result in under saving asset 

misallocation as we go forward. 

In my view, there are three policy goals: Improve retirement savings coverage, more equity wealth creation, and reduced risk exposures. The policy responses have to be comprehensive, consistent, 

and progressive. Comprehensive because the challenges are large. 

All well-designed options need to be considered and implemented. 

Consistent, to introduce DB plan features into 401(k) while also 

pursuing approaches that are not harmful to DB plans. Progressive, to focus on those who most need help, who currently receive 

a disproportionately small share of saving incentives. 

In particular, there are three general policy approaches that I 

see for policymakers to take in considering to strengthen DB plans. 

First, build up buffers for bad times. That ultimately means encouraging DB plans to overfund during the good times. Promote 

standalone entities. Take the pension plans off the books of companies to avoid the inherent conflicts of interest. The public sector already has standalone entities. In the private sector we have plans. 

I think they are good models. 
25

Encourage regular employer contributions either by requiring 

minimum employer consideration as is done or considered at a 

number of State levels or through changes in the calculations of 

employer contributions, although that will require undoing some 

parts of the Pension Protection Act of 2006. 

The other part to consider is to continue to build a better 401(k) 

plan. Make it easier for people to save. Continue automating of 

savings. Equalize the saving incentives by eliminating, for instance, some of the tax deductions and replacing them with a 

straight-up refundable credit for everybody. 

Third, encourage or even require employer contributions, although that would have to be done very carefully so employers 

don’t just simply unload their existing plans and start going to the 

requirement as a minimum and go through that minimum. 

Then, ultimately also lower the cost of saving. The National Institute on Requirement Security recently showed DB plans are inherently more efficient than DC plans. Among DB advantages is 

professional management and lower fees, which can reduce the cost 

of achieving a given level of benefits by 21 percent, relative to DC 

plans, streamlining investments and helping new plans to build up 

to scale quickly. For instance, through so-called State K plan efforts and default investment options can help protect the nest egg; 

obviously, all of that in addition to more transparency for the existing fees, as Mr. Bramlett already highlighted. 

Thank you very much for inviting me here today. I will be happy 

to answer any questions. 

[The statement of Mr. Weller follows:]

Prepared Statement of Christian E. Weller, Ph.D., Associate Professor, Department of Public Policy and Public Affairs, University of Massachusetts 

Thank you Chairman Miller, Ranking Member McKeon, and members of the 

House Committee on Education and Labor for this opportunity to speak to you 

today. 

My name is Christian Weller. I am an associate professor of public policy in the 

McCormack Graduate School at the University of Massachusetts Boston, a Senior 

Fellow at the Center for American Progress Action Fund in Washington, D.C., and 

an Institute Fellow at the Gerontology Institute at the University of Massachusetts 

Boston. As my affiliations show, I have substantial expertise and experience working on retirement security issues both in a research and policy context. 

I. Introduction and overview 

In my testimony today, I would like to focus on the lessons that can be learned 

from the current financial crisis for retirement income security. In particular, the 

long-term trend in declining retirement security has been exacerbated by the recent 

turmoil in the financial markets, and thus ever more poignantly underscores the 

need for swift and broad action to vastly improve the retirement income security for 

the majority of American families. Too many Americans rely too heavily on their 

homes as their primary source of household wealth. Declines in house prices quickly 

decimate this wealth, especially when families are heavily leveraged, as has been 

increasingly the case in the past few years, when mortgages grew faster than home 

values. And, even those families who have some retirement savings—about three 

quarters of American families nearing retirement—increasingly rely on their own 

luck and investment savvy to reach their retirement savings goals. Yet economists 

have long known that the success of ‘‘Do It Yourself’’ savings plans is severely hampered by the underlying investor psychology, which often leads individual investors 

to buy and sell low in crises like these. 

These data point toward three policy goals. First and foremost, more Americans 

need retirement savings in addition to Social Security and outside of their own 

home. Second, Americans need to save more for retirement, encouraged by progressive saving incentives and supported by their employers. Substantially raising 

Americans’ retirement security is a heavily lift, as the data further below show, and 
26

thus can only be accomplished as a shared responsibility between individuals, employers, and the public. Third, Americans need to be reassured that the money that 

they will save for retirement will actually be there when they need it. The exposure 

to large market swings, as we have experienced twice in the past decade, can send 

individual investors scrambling for an exit at the most inopportune time. This prevents them from saving enough, and actually increases their exposure to financial 

market risks. 

The policy response to these challenges has to be comprehensive, consistent, and 

progressive. It needs to be comprehensive because the challenge is large. That is, 

all well-designed options need to be considered and implemented. No one single silver bullet will accomplish all that needs to get done.1 Moreover, the policy responses 

need to be consistent with each other. It is an inconsistent policy approach to try 

to introduce beneficial features from traditional defined benefit, or DB plans, into 

401(k)-style defined contribution, or DC plans, while at the same time pursuing policy approaches that are harmful to the same DB plans that are used as model for 

retirement savings. And finally, the policy approach needs to be progressive in order 

to focus especially on those families who are most in need of building retirement 

wealth and who are currently receiving a disproportionately small share of the existing retirement saving incentives that the public allocates each year for this purpose. 

With this in mind, there are several specific policy directions that should be explored. Congress should consider both strengthening existing DB plans and vastly 

improving existing 401(k)-style defined contribution plans. 

On improving DB plans, the financial market swings over the past 10 years have 

clearly shown that legislative and regulatory efforts should increase the incentives 

for employers to make regular contributions to their pension plans. A large part of 

the current crisis in retirement security is that employers often either could not or 

did not want to make additional contributions to their pension plans. Thus, they 

may have been less well prepared for the financial market crisis that hit after 2000 

and again in 2008. New legislation, particularly the Pension Protection Act of 2006, 

and proposed accounting rule changes—the same ones that banks are now asking 

Congress to suspend—require smaller contributions during good economic times and 

larger employer contributions during bad economic times than past accounting rules 

did or alternative rules would require. 

As for DC plans, there are two separate directions that should be pursued by policymakers to ‘‘build a better 401(k).’’ First, the movement to making saving for retirement simpler needs to be elevated. This would reduce the chance that individual 

investors will fall prey to the well-known pitfalls of saving for retirement on one’s 

own: reducing contributions when prices drop, not regularly diversifying even when 

prices change dramatically, buying high and selling low by following fads, and hanging on to too much employer stock, among others. Second, Congress should end the 

system of ‘‘upside-down’’ saving incentives, whereby those who are least in need of 

support to save more receive the largest relative incentives, and those who need the 

most help receive the least public support. 

II. It was already bad before the crisis hit 

While the events that have taken place over the past several weeks have shone 

a spotlight on how affected Americans’ retirement plans can be by such volatility 

in the financial markets, it is important to keep in mind that Americans’ retirement 

security has been in distress for much longer than the past few weeks. In fact, retirement security has been a growing concern for Americans for many years due to 

limited retirement plan coverage, little retirement wealth, and increasing risk exposure of the individual. 

Too few people are covered by a retirement savings plan at work. In 2007, the 

most recent year for which data are available, 52.0 percent of full-time private-sector wage and salary workers participated in an employer-sponsored retirement plan. 

That is more than five percentage points lower than the 57.4 percent who participated in an employer-sponsored plan in 2000. Twenty-three percent of part-time 

workers participated in such a plan in 2007, down from 26.9 percent in 2000. Thus, 

overall, just 45.1 percent of all private-sector wage and salary workers participated 

in an employer-sponsored retirement plan in 2007, down from slightly more than 

half of all workers—50.3 percent—in 2000. That is, even at its last peak, almost half 

of all workers did not participate in an employer-sponsored retirement plan and this 

share has substantially shrunk since then (Purcell, 2008a).2

A breakdown by demographics shows that there is little difference in coverage 

trends by gender. Rates of participation in an employer-sponsored retirement plan 

have fallen for both men and women since the beginning of the century. In 2007, 

51.1 percent of male private-sector wage and salary workers participated in an em-
27

ployer-sponsored plan, well below the 58.3 percent who participated in one in 2000. 

Women’s participation rates have not fallen as far as men’s have, but they were not 

as high as men’s rates in 2000 to begin with. In 2000, 56.1 percent of full-time female workers participated in an employer-sponsored retirement plan, but that share 

shrank to 52.6 percent in 2007 (Purcell, 2008a). 

There are, however, substantial differences in retirement saving coverage by race 

and ethnicity. Minorities are less likely to participate in an employee-sponsored retirement plan than whites, and are also more likely to lack sufficient funds for a 

secure retirement than their counterparts. In 2002, the first year for which consistent retirement coverage data by race and ethnicity are available from the Bureau of Labor Statistics’ Current Population Survey, 58.8 percent of white, non-Hispanic, private-sector wage and salary workers participated in an employer-sponsored retirement plan. Less than half of black, non-Hispanic workers—47.5 percent—and less than one-third—31.1 percent—of Hispanic workers did. Participation 

rates were lower for all three of these groups of workers in 2007, with 57.6 percent 

of white workers, 47.1 percent of black, non-Hispanic workers, and only 30.6 percent 

of Hispanic workers participating in such a plan (Purcell, 2008a). 

In addition, participation in retirement saving plans varies with income, such that 

lower-income workers are markedly less likely than higher-income workers to participate. Participation in employer-sponsored retirement plans has declined for all 

quartiles of private-sector workers from 2000 to 2007. Importantly, private-sector 

workers in the bottom half of the wage distribution had especially low participation 

rates to begin with. In 2000, 55.5 percent of private-sector workers in the thirdhighest earnings quartile participated in an employer-sponsored retirement plan, 

but in 2007, less than half—49.7 percent—did. Workers with earnings in the lowest 

quartile, or less than $27,000, have fared even worse. Less than one-third participated in an employer-sponsored retirement plan in both 2000 and 2007, with rates 

of 32.1 percent and 27.7 percent, respectively. Even workers in the highest two 

earnings quartiles have seen their participation rates decline over this period. 

Slightly more than two-thirds—67.1 percent—of workers in the second-highest income quartile participated in an employer-sponsored plan in 2000, but that share 

had dropped to 62.8 percent in 2007. Additionally, 69.2 percent of workers in the 

highest earnings quartile participated in an employer-sponsored retirement plan in 

2007, down from roughly three-quarters—75.5 percent—in 2000 (Purcell, 2008b). 

Much of the low coverage rate for lower-income earners is explained by their personal characteristics. For instance, the Investment Company Institute (Brady and 

Sigrist, 2008) recently concluded that ‘‘most workers who have the ability to save 

and to be focused primarily on saving for retirement are covered by an employerprovided retirement plan.’’ Low participation is thus often a function of low earnings, young age, and working for a small employer. The link between retirement 

saving participation and income is also supported by the fact that the gap between 

being offered a retirement plan at work and participating in such a plan in the private sector is largest for low-income earners (Purcell, 2008a). 

Additionally, employer size matters. Brady and Sigrist (2008) conclude that only 

18 percent of employees at small businesses—those with less than 10 employees—

have access to an employer-sponsored retirement plan, as compared to 71 percent 

of employees working for an employer with more than 1,000 employees in 2004, 

based on data from the Federal Reserve’s Survey of Consumer Finances. Similarly, 

Purcell (2008a) finds, based on the Bureau of Labor Statistics’ Current Population 

Survey, that only 29.3 percent of employees working for an employer with fewer 

than 25 employees had access to an employer-sponsored retirement plan. Additionally, only 25.5 percent of all employees at such businesses participated in such a 

plan in 2007. In comparison, 75.2 percent of employees at large firms, with more 

than 100 employees, had access to a plan and 65.4 percent participated in 2007. 

The data thus lead to two important conclusions. First, there are substantial differences by demographic characteristics. Second, targeting lower-income workers 

and small businesses in terms of retirement saving policies may generate the largest dividends in terms of improving retirement wealth generation. 

III. The crisis: wealth destruction in action 

Aggregate data show that household wealth has declined sharply over the past 

year and thus has taken a serious toll on the retirement security of individuals. 

With respect to retirement security, it is important to consider total wealth relative 

to disposable income. For one, wealth is interchangeable. Families, for instance, borrow from their 401(k) plans to pay for their home when they are tapped out on other 

loans and do not have sufficient savings for the necessary down payment or renovations (Weller and Wenger, 2008). Also, total wealth is a store of future income that 
28

can be used to replace income, for instance, in the case of an economic emergency, 

a disability, a death of a breadwinner, and in retirement. 

The trends in total household wealth show that families have lost wealth at a 

breathtaking speed over the past year. Total real wealth fell by $4.5 trillion dollars 

from September 2007—the last peak in household wealth—to June 2008. This is an 

annualized average loss of 10.2 percent for the past three quarters. In comparison, 

during the first three quarters of the downturn in the early 2000s, from March 2000 

to December 2000, the rate of decline averaged to an annualized 6.8 percent. For 

the entire wealth loss streak from March 2000 to September 2002, it averaged to 

7.1 percent. That is, the current wealth loss is more than 40 percent faster than 

during the last period of wealth loss.3

Importantly, this sharp drop in household wealth came after families had not recovered from their relative wealth losses incurred during the last crisis. At its peak, 

total family wealth amounted to 619.4 percent of disposable income in December 

1999. By September 2002, this ratio had fallen to 483.8 percent, before climbing to 

575.0 percent in June 2007. For the next four quarters, wealth did not keep pace 

with disposable income and dropped to 517.4 percent. In other words, if total household wealth had kept pace with disposable income after September 1999, families 

in June 2008 would have had an additional $11 trillion.4

Much of the drop in housing wealth is a consequence of the bursting housing bubble, although an even larger share of total wealth losses is concentrated in financial 

wealth. Over the three quarters from September 2007 to June 2008, households lost 

a total of $1.1 trillion in real housing wealth, $351 billion in the last quarter alone. 

Additionally, their home equity shrank by $1.0 trillion, reflecting a decrease at an 

annualized average rate of 17.8 percent during those quarters. This was the secondhighest drop in real home equity over a three-quarter period and the largest since 

the first three quarters of 1974. As a result, home equity amounted to 81.2 percent 

of disposable income in June 2008—its lowest level since the end of 1976.5

The figures clearly show a few noteworthy points. First, the loss in household 

wealth goes well beyond the recent drop in house prices. Second, the drop in household wealth, especially in real estate wealth, is very sharp. Third, the loss of household wealth has put many families in a precarious financial situation by adding to 

existing economic woes, such as a weak labor market. 

IV. Amid the crisis, the public is worried about retirement security 

Given growing discomfort, to say the least, in today’s economic climate, it should 

not be surprising that public opinion polling data also indicate that Americans have 

become increasingly worried about their ability to afford a comfortable retirement. 

Gallup has polled (non-retiree) Americans about whether they expect to have 

enough money to live comfortably in retirement. The share of respondents who said 

that they did expect to have enough money to live comfortably in retirement held 

steady at 59 percent from 2002 though 2004, before falling to 53 percent in 2005, 

and dropping to 46 percent in April 2008. The April 2008 Gallup poll also found that 

nearly two-thirds—63 percent—of Americans are worried that they will not have 

enough money for their retirement. This share is higher than both the share of 

Americans who were worried about their ability to pay medical costs associated with 

an accident or serious illness (56 percent) and the share who were afraid that they 

will not be able to maintain their current standard of living amid 2008’s economic 

troubles (55 percent) (Jacobe, 2008b). 

According to a January 2006 Pew Research Center poll, 71 percent of Americans 

were either very or somewhat concerned about not having enough money for retirement, up from 60 percent in 2005. This was slightly higher than the 68 percent concerned about their ability to afford necessary health care for their family, and considerably higher than the 44 percent who were concerned about receiving a pay cut 

or losing their job. An April 2007 Gallup poll found that 56 percent of those surveyed were either very or moderately worried about not having enough money for 

their retirement. This was a higher percentage than any other economic worry Gallup asked about, including covering unexpected medical costs, maintaining their 

current standard of living, and paying for housing costs. Especially telling is the fact 

that even a majority of those in households earning $75,000 or more per year—who 

would be considered upper-middle income to wealth—indicated that they were worried about their retirement income (Teixeira, 2008). 

Other surveys found similar trends. The 2008 Retirement Confidence Survey, 

which is conducted annually by the Employee Benefit Research Institute, found that 

both workers’ and retirees’ retirement security confidence has dropped in recent 

years. In 2008, just under one-third—61 percent—of workers polled indicated that 

they were either very confident or somewhat confident in their ability to afford a 

comfortable retirement, down from 65 percent in 2005. Additionally, current retir-
29

ees’ confidence has declined, with 64 percent indicating that they were very or somewhat confident in their ability to afford a comfortable retirement, down from 80 percent in 2005 (Employee Benefit Research Institute, 2008). 

A recent poll conducted by Bankrate Inc. found that only about 3 in 10 workers 

expected to have enough money to retire comfortably. Nearly 7 in 10 Americans 

have set low expectations about their retirement prospects. One in five Americans 

said they were afraid they would never be able to retire (Austin Business Journal, 

2008). 

Another way to see this increased worry about personal retirement security is to 

examine the change in how workers expect to fund their retirement. For example, 

in April 2001, only 10 percent of respondents to a Gallup poll expected to use parttime work as a major source of their retirement funding. By April 2005 that share 

had risen to 18 percent. By April 2008, it had increased even more, to 20 percent 

(Jacobe, 2008a). 

Additionally, many Americans of retirement age are already struggling to make ends meet. In 2007, the median income of Americans ages 65 and older was $17,382. 

However, their actual incomes varied widely. Importantly, in 2007, one-fourth of 

people ages 65 and older had incomes of less than $10,722. When one considers just 

the quickly rising costs of necessities, it is easy to see why Americans, both of retirement age and younger, are concerned about their retirement security. While 57 percent of households with a head of the house or spouse aged 65 or older earned income on assets in 2007, half of them received less than $1,585. The overall mean 

income from assets among these households was just $2,254 (Purcell, 2008a). 

Because of these worries, retirement has remained an important issue on Americans’ minds throughout the election year of 2008. A March-April 2008 CBS News/

New York Times poll showed that while paying everyday bills was the public’s top 

personal economic concern, saving for retirement was the second biggest concern 

(American Enterprise Institute Public Opinion Studies, 2008). Additionally, an August 2008 poll for George Washington University found that the public viewed retirement as a more important issue for Congress than the mortgage crisis, taxes, 

or education (Lake Research Partners and The Tarrance Group, 2008). 

Clearly there is both public desire for and a defined need to improve the retirement security of America’s workers. Policymakers must catch up to fill these voids 

and design a more fulfilling retirement plan for America’s workers. To improve retirement security, we must build a better DC plan and strengthen existing DB 

plans. 

V. Building better retirement plans 

If one were to design an ideal retirement plan, it would likely encompass the following features: 

• Broad-based coverage, which covers all workers automatically 

• Secure money for retirement, with limited opportunities for leakage of retirement assets 

• Portability of benefits, which will allow workers to retain benefits if they switch 

jobs 

• Shared financing, with contributions from both employees and employers 

• Lifetime benefits, so that retirement income cannot be outlived 

• Spousal and disability benefits to provide protections against death or the inability to work 

• Professional management of assets 

• Low costs and fees 

It is important to realize that there are already retirement plans in the United 

States that meet almost all of these criteria. In particular, the DB plans that provide retirement benefits to employees of state and local governments typically meet 

all of these criteria for a model retirement system. Also, multiemployer or TaftHartley plans in the private sector tend to fit this description. 

The implication of this is twofold. First, public policy should strengthen the existing DB plans that already do a good job of offering retirement security to American 

families. Second, policymakers should adopt policies that will allow plans that do 

not yet meet these criteria to incorporate features that will bring them closer to this 

ideal. 

The following discussion thus highlights these important plan features, shows 

how they work in multiemployer and public-sector DB plans, and draws policy lessons for the design of policy approaches to improving existing DB and DC plans. 

Broad-based coverage: Employees must simply meet the eligibility requirements 

of the DB plan to earn benefits in a DB plan. They are then automatically enrolled 

without having to make any active decisions. This truly ‘‘automatic’’ enrollment is 

a typical characteristic of all DB plans. 
30

DC plans, on the other hand, often require employees to enroll themselves, and 

then make difficult decisions about how much to save and where to direct their investments. 

Another DB feature that is reflected in proposals to restructure DC is universal 

coverage, which would make saving for retirement easier. However, there is generally a qualitative difference to DB plans. Universal coverage under DB plans automatically includes benefit accruals for vested employees, while proposals for universal DC coverage generally only include universal access to a savings account, i.e. 

the possibility of wealth creation without any assurance of contributions. 

In passing the Pension Protection Act of 2006, Congress acknowledged this inherent flaw in DC plans and attempted to make automatic enrollment and efficient 

asset allocation easier. It is too soon to reach any conclusions about the law’s effectiveness in increasing automatic enrollment in DC plans. Early indications show, 

however, that automatic enrollment is a feature of a growing share of existing DC 

plans. For instance, a survey by Hewitt Associates LLC (2008) showed that 44 percent of responding firms already offer automatic enrollment and 30 percent of those 

who do not are considering implementing it in 2008. Also, Deloitte (2008) reported 

that 42 percent of their survey respondents offered automatic enrollment in 2008, 

up from 23 percent just a year ago. 

The evidence on the impact of automatic enrollment in the existing DC universe 

is too thin to evaluate how much faster employees, especially lower-income ones, are 

accruing retirement savings than in the past. Time will eventually tell how effective 

this policy move has been toward achieving greater retirement security for lowerincome workers, for minorities, and for employees in small businesses. 

Policymakers, though, should not be content with waiting for new evidence to 

emerge with respect to the impact of past policy changes. After all, the automatic 

enrollment features that were passed with the Pension Protection Act of 2006 only 

affect employers, who either already offer a qualified retirement savings plan or 

plan on offering one. 

Instead, policymakers should consider added incentives for employers to offer access to qualified plans. The ‘‘automatic IRA’’ proposal does this by requiring that 

employers above a certain size offer access to direct deposits into an IRA, or by 

changing public saving incentives. In particular, two examples of proposals that 

move toward universal coverage in DC plans are ‘‘automatic IRAs’’ (Iwry and John, 

2006), and ‘‘universal 401(k)s’’ (Sperling, 2005). Under the first plan, ‘‘automatic 

IRAs’’ would require that every employer with 10 or more employees would have 

to offer employees the opportunity of automatic payroll deductions into designated 

IRAs. To increase participation, Iwry and John (2006) suggest that this program 

could be coupled with automatic enrollment. To minimize costs, government administered accounts could be offered as the default investment (Iwry and John, 2006). 

The second proposal goes a step further and pays attention to the particular vulnerability that low- and middle-class workers face because of low levels of savings. 

A universal 401(k), as proposed by my Center for American Progress Action Fund 

colleague Gene Sperling, adds progressive saving incentives, since all of these plans 

allow an employee to opt out of their coverage even if they were ‘‘automatically enrolled’ (Sperling, 2005). Although this would again not automatically guarantee contributions, it would have the advantage of skewing savings incentives more toward 

low-income earners, where savings shortfalls are largest. The combination of universal access and progressive savings incentives could go a long way toward creating 

wealth for many middle-class families who currently do not save enough. 

These proposals are directly targeted at increasing retirement savings coverage 

among employees who work for smaller businesses. As discussed before, the chance 

of being offered a plan when working for a smaller business is substantially lower 

than when working for a larger employer. Both the ‘‘automatic IRA’’ and the ‘‘universal 401(k)’’ proposals are intended to increase retirement savings coverage especially in this market segment. Coupled with automatic enrollment features, the hope 

is that increased coverage will also result in faster wealth accumulation. 

Secure money for retirement: DB plans provide a secure source of income in retirement for a number of reasons. First, one’s funds cannot be borrowed from and 

typically are not distributed as a lump-sum payment. That is, money under a DB 

plan will be there to provide a lifetime stream of retirement income. 

Second, multiemployer DB plans and DB plans for state and local government employees reduce the impact that bankruptcy of an employer may have. In the case 

of multiemployer DB plans this is simply a function of many employers banding together to provide benefits. And, in the public sector, this is a result of the fact that 

state and local governments typically do not go bankrupt. This is sadly not always 

the case for single-employer, private-sector DB plans. 
31

A third point is that pension plans tend to follow prudent investment principles 

and thus secure assets as much as possible. The security of assets in DC plans for 

future retirement income is, by comparison, compromised. Importantly, the vast majority of individuals in DC plans can borrow from their retirement accounts or withdraw funds before retirement age. Economists use the term ‘‘leakage’’ to describe assets that are drawn out of retirement savings plans for purposes other than providing retirement income (Weller and Wenger, 2008). According to one conservative 

estimate, a full 10 percent of all retirement wealth is lost due to leakage from DC 

plans (Englehart, 1999). Loans from DC plans have risen, especially to allow families to smooth over economic hard times, which will likely reduce their retirement 

income security (Weller and Wenger, 2008). 

While employer default risk is generally not an issue for DC plans, individuals 

saving with those plans can be exposed to a number of well-known risks. These include longevity risk, idiosyncratic risk, and market risk among others. Moreover, 

these risks can be exacerbated by typical psychological responses of individual investors as the literature has demonstrated (Benartzi and Thaler, 2007). Policy can 

mitigate some of these risks by encouraging automated plan designs. I will return 

to this point further below. 

This leaves the issue of potential leakages from DC plans due to loans. The policy 

response, however, should not be to eliminate loans from DC plans. It is important 

to recognize that employees typically take out a loan because they are financially 

strapped or because of an economic emergency, especially a sick family member 

(Weller and Wenger, 2008a). Consequently, the complete elimination of loans from 

DC plans may be simply impractical. If loans are prohibited, employees, who want 

to take out a loan because of an emergency, may request a hardship withdrawal instead.6

Policymakers, however, should encourage employers to limit the incidences for 

which employees can take out a loan, e.g. by mandating stricter limits on loans. Employers could discourage loans from DC savings plans by limiting the number of 

loans that can be taken out during a given time period—for example, only two loans 

in a five-year period. Employees could be required to wait for a minimum amount 

of time after a previous loan has been paid off before taking out a new loan. Employers could also further restrict the reasons for which a loan can be taken out and 

require that employees provide proof of those instances. 

Portability of benefits: Portability of benefits can be limited within some DB pension plans. It is important to realize, however, that this is a limited issue in the 

DB world. Single-employer DB plans may not offer lump sum withdrawal options, 

but more and more single-employer plans follow a cash balance plan design where 

a lump sum option is typically offered (Weller, 2005). 

Further, public pension plans are responding to changing workforce needs in public service by offering much greater portability than in the past. Often, if employees 

move to another government position within the state, they are able to carry pension benefits with them. Should they move to other jurisdictions, they can usually 

purchase service credits (Brainard, 2008). 

This portability also exists for most DC plans and in multiemployer plans. Little 

additional policy room exists, except that policymakers may want to consider reducing the maximum vesting period, as was done for cash balance plans in the Pension 

Protection Act of 2006. Shorter vesting periods will allow more mobile workers to 

accrue benefits where they may not accrue any right now, and thus enhance benefit 

portability. 

Shared financing: This is a typical characteristic of public-sector pension plans. 

The funding of state and local DB plans is a shared responsibility between employee 

and employer. Private-sector defined plans, by contrast, have employers typically finance the entire benefit. In 2004, for workers covered by Social Security, the median 

employer contribution rate was 7 percent of salary, while the employee contributed 

an additional 5 percent of salary (Munnell and Soto, 2007). 

More could be done, however, to encourage employer contributions to DB plans. 

Two alternative approaches are available to accomplish this. First, policymakers 

could require a minimum employer contribution as is already the case or considered 

in some states for the employer contribution to existing DB plans (Weller et al., 

2006). Second, funding rules for DB plans could allow for more smoothing of asset 

and liability values. This would reduce the pro-cyclicality of existing rules. Currently, the funding rules require larger contributions during bad economic times, 

when plan sponsors can often ill afford such additional requests on their cash flow. 

Inversely, current rules tend to lower the required contributions during good economic times, when employers can best afford contributing to their plans. An alternative set of funding rules would thus shift the funding burden from the bad to the 

good economic times without lowering benefit security. Weller et al. (2006) discuss 
32

two different valuation approaches to accomplish greater regularity of employer contributions. One of these approaches would allow for the smoothing of pension plan 

asset and liabilities over 20 years and require that employers contribute up to a specific level of assets above liabilities, e.g. 120 percent (Weller and Baker, 2005). 

Further, the Pension Protection Act of 2006 has opened the door to more shared 

financing among DC plans. If employers offer the safe harbor option of automatic 

enrollment, they will have to also offer an employer matching contribution in addition to establishing automatically escalating employee contributions (Groom Law 

Group, 2006). More could be and should be done to encourage employer contributions, either as match or as non-matching contributions. 

In addition, several proposals have included mandatory employer contributions in 

an effort to increase DC plan coverage. For instance, Weller (2007) develops a proposal called ‘‘Personal Universal Retirement’’ accounts. The costs and risks of these 

accounts would be kept low by managing the funds through a government entity, 

for example, the Federal Retirement Thrift Investment Board. Professional fund 

managers invest the funds of PURE accounts according to a worker’s instructions. 

The investment options are the same as those for the Thrift Savings Plan to keep 

administrative costs to a minimum. Furthermore, universal employer contributions 

of at least 3 percent of earnings to a qualified pension plan or to a PURE account 

are required. These contributions would be pre-income tax, but subject to FICA. In 

addition, low-income workers would qualify for direct, non-elective contributions, 

while higher-income earners could qualify, up to a limit, for government matching 

contributions. 

Also, Ghilarducci (2007) proposes ‘‘Guaranteed Retirement Accounts’’ which incorporate the low cost and effective risk management advantages of pooling assets, require coverage, and assure assets are paid-out in annuities. The GRAs are funded 

by a mandated 5 percent contribution on earnings up to the Social Security maximum, split evenly between the employer and employee. The contribution goes into 

a national fund comprised of individual accounts. Contributions are recorded in individual accounts and the account values represent an individual’s claims on future 

benefits. Unlike conventional DC plans, the rates of return are guaranteed; the U.S. 

government will guarantee a rate of return of 3 percent with excess returns added, 

depending on the fund’s earnings. Workers and retirees can add to the accounts at 

any time with pre- and post-tax dollars. By reconfiguring the current tax subsidies 

for retirement plans—that give people earning over $100,000 per year over $7,400 

in tax subsidies while middle- and working-class workers receive practically nothing—each employee will receive a tax credit of $600. This tax rebate will go directly 

into workers’ individual accounts and will add to national savings. The rebate will 

also soften the impact of a 5 percent mandated contribution for lower-income workers—most workers will pay much less than 5 percent. The efficient and well-managed Social Security Administration will administer the account. Qualified DB plans 

will be able to opt out of the mandate. At retirement, the accounts will be 

annuitized, and ‘‘opt to’’ withdraw a lump sum worth a maximum of 10 percent of 

the account value. The GRAs, combined with Social Security, are designed to guarantee the average worker 70 percent of pre-retirement earnings at retirement, approaching the level of 75 to 80 percent of pre-retirement income that is typically 

considered adequate by financial experts. 

Lifetime benefits: State and local DB plans are designed so that retirement income can never be outlived—retirees are guaranteed a paycheck for life. This is also 

the case with private-sector DB plans that have to offer an annuity benefit, even 

if it is as an alternative to a lump-sum distribution. 

This is in stark contrast with DC plans. Here, the burden of managing one’s retirement income, so that retirees do not run out of savings in retirement, falls mostly on the individual. In many cases, however, employees do not understand how 

much money they will need in retirement. The result is that many workers do not 

save sufficiently and face inadequate income in retirement. In order for a privatesector worker to purchase a modest annual annuity of $20,000, she must accumulate an estimated $260,000 in a 401(k). Yet, the median 401(k) balance for heads 

of households approaching retirement in 2004 was just $60,000 (Munnell and Soto, 

2007). Further, Boston College researchers have found that, in part due to the shift 

from DB to DC plans in recent years, between 44 percent and 61 percent of households are at risk of being unable to maintain their living standards in retirement 

(Munnell et al., 2007). 

A study by the National Institute on Retirement Security (Almeida and Fornia, 

2008) recently quantified the additional cost that DC plans incur to provide the 

same retirement benefit to employees, who do not annuitize. Their calculations show 

that if employees self-annuitize, they will have to plan for the maximum life expectancy, instead of the average life expectancy. This increases the required contribu-
33

tions during the build-up phase of a retirement savings account by 15 percent. Consequently, policymakers could lower the implicit costs of DCs and thus deliver a better ‘‘bang for the buck’’ to beneficiaries if they could increase the share of savers, 

who annuitize their savings upon retirement. 

Spousal and disability benefits: DB plans typically provide special protections for 

spouses of married beneficiaries, as well as disability benefits for active employees 

who are stricken by illness or injury that prematurely ends a career. Adding these 

types of benefits to DC plans, however, would require purchasing life insurance and 

disability insurance policies for beneficiaries. Addressing these ancillary benefits is 

beyond the scope of this testimony. 

Professional management of assets: Public-sector plans and private-sector DB 

plans are managed by professionals with ‘‘considerable financial education, experience, discipline, and access to sophisticated investment tools’’ (Watson Wyatt, 2008). 

This is reflected, for instance, in the aggregate asset allocation data of public-sector 

DB pension plans. These plans tend to regularly rebalance their portfolio in response to price changes, show no signs of employer or trustee conflicts of interest, 

and appear to follow a best practices model by pursuing strategies similar to those 

employed by industry leaders (Weller and Wenger, 2008b). 

The individualized nature of DC plans, however, means that these rely on selfmanagement. As the Investment Company Institute found using 2006 year-end 

data, the bulk of 401(k) plan assets are invested in stocks (Investment Company Institute, 2007). When faced with the wide array of complicated and confusing choices 

that most DC plans have, workers may find themselves more vulnerable to the negative impacts of disturbances in the financial market. These can include a lack of 

diversification or an improper assessment of risk associated with their choices. 

One response to this may be well-managed, balanced default investment options 

that allow participants in DC plans to take advantage of professional management 

of assets and thus help to avoid the commonly known pitfalls of individual investing 

(Benartzi and Thaler, 2007). The Investment Company Institute (2008) reported 

that lifecycle funds continued to experience growth from the end of 2007 through 

the first quarter of 2008, despite adverse overall market conditions. Most importantly, more widespread use of default investment options would encourage participants to diversify their assets and regularly rebalance them, thus avoiding the 

underperformance that often arises in DC plans due to an unintended ‘‘buy high, 

sell low’’ investment strategy. If the past is any indication, automatic investment 

options, such as lifecycle funds and model portfolios, will become increasingly prevalent. The Investment Company Institute (2007) reported that recent hires are more 

likely to choose these funds as their investment option. 

Low costs and fees: Evidence shows that administrative costs are substantially 

higher for DC plans as compared to DB plans. An international study of plan costs 

finds that while, on average, fees can range between 0.8 percent and 1.5 percent 

of assets, larger institutional plans can reduce such fees to between 0.6 percent and 

0.2 percent of assets (James et al., 2001). The UK Institute of Actuaries finds very 

high administrative costs for DC plans—of 2.5 percent of contributions and up to 

1.5 percent of assets—leading to the equivalent of a 10 to 20 percent reduction in 

annual contributions. DB administrative costs, however, amount to just 5 to 7 percent of annual contributions (Blake, 2000). Similar differences exist in the United 

States, with DB plans incurring substantially lower fees than DC plans (Council of 

International Investors, 2006; Weller and Jenkins, 2007). 

Almeida and Fornia (2008) estimate that the combination of professional management and lower fees reduces the costs of a DB plan relative to a DC plan by 21 

percent annually. This is by far the largest area of economic inefficiencies in the 

existing DC structure. Policymakers could help to substantially improve retirement 

income security by lowering fees and increasing the performance of DC plans, e.g. 

through more professional management and the avoidance of well-known pitfalls, 

such as lack of diversification, no regular contributions, and emotionally charged investment decisions (‘‘buy high, sell low’’) among others. 

A number of proposals have focused on the cost savings from pooling a large number of small accounts. Originally, Baker (1999) suggested that the government 

should establish a default investment option modeled on the Thrift Savings Plan for 

federal workers. Investment options would be limited to a small number of index 

funds. Because such a plan could take advantage of economies of scale and simplicity in investment options, management fees would be substantially lower than 

rates prevailing in private-sector plans (Congressional Budget Office, 2004). 

This proposal is currently being studied at the state level as Washington state is 

studying the feasibility of the Economic Opportunity Institute’s proposal for their 

Washington Voluntary Accounts proposal (Idemoto, 2002). This proposal has also 

been brought forth in other states, such as the Pennsylvania Voluntary Account pro-
34

posal of the Keystone Research Center (Weller et al., 2006) or the Michigan Retirement Program Act of 2006 ( Michigan Legislature, 2006).7

VI. Conclusion 

The decline in workers’ retirement security is not a new occurrence, but rather 

a troubling trend, which is especially evident over the course of the current business 

cycle. We may have very well dodged a bullet last week with the actions taken by 

Congress and the administration. However, the long-term problems that were highlighted by the recent turmoil in the financial markets, including the overall weak 

retirement security of Americans overall, will not simply go away. The strength of 

America’s workers’ retirement security has been declining for many years and will 

likely continue to worsen, regardless of what happens as a result of last week’s activities. It is because of this, and because of what America owes its workers, that 

we cannot stand idly by as this happens. We must instead improve retirement security by building a better DC plan and strengthening DB plans so that all Americans 

can look forward to a comfortable retirement and actually have the means to finance 

it. Importantly, there is no single ‘‘silver bullet’’ policy response. Instead, policymakers should take a pragmatic approach. They should consider all efficient policy 

options to increase the number of workers with a retirement savings plan, to raise 

retirement saving—especially among lower-income workers, those who work for 

smaller employers, and minorities—and to reduce the risk exposure of retirement 

savings. 

REFERENCES

Almeida, B., and Fornia, W.B. 2008. ‘‘A Better Bang for the Buck: The Economic 

Efficiencies of Defined Benefit Plans.’’ Washington, DC: National Institute on 

Retirement Security. 

American Enterprise Institute Public Opinion Studies. 2008. ‘‘Economic Insecurity 

Update: Americans’ Concerns about their Jobs, Personal Finances, Retirement, 

Health Care, Housing, and More. ‘‘Washington, DC: AEI. 

Austin Business Journal. 2008. ‘‘Poll reveals Americans feel ill-prepared for retirement.’’ June 23. 

Baker, D. 1999. ‘‘Pensions for the 21st Century.’’ New York, NY: The Century Foundation. 

Benartzi, S., and Thaler, R. 2007. ‘‘Heuristics and Biases in Retirement Savings Behavior.’’ Journal of Economic Perspectives, 21(3): 81—104. 

Blake, D. 2000. ‘‘Does it matter what type of pension scheme you have?’’ The Economic Journal 110 (461): F46-F81. 

Brady, P., and Sigrist, S., 2008. ‘‘Who Gets Retirement Plans and Why.’’ Investment 

Company Institute Perspective 14, no. 2 (September). 

Brainard, K. 2008. ‘‘Redefining Traditional Plans: Variations and Developments in 

Public Employee Retirement Plan Design.’’ Prepared for presentation at the 

Pension Research Council Symposium, May 1-2, 2008. 

Board of Governors, Federal Reserve System. 2008. ‘‘Release Z.1 Flow of Funds Accounts of the United States.’’ Washington, DC: BOG. 

Congressional Budget Office. 2004. ‘‘Administrative Costs of Private Accounts in Social Security.’’ Washington, D.C.: CBO. 

Council of Institutional Investors. 2006. ‘‘Protecting the Nest Egg: A Primer on Defined Benefit and Defined Contribution Retirement Plans.’’ Washington, DC: 

CII. 

Deloitte, 2008. ‘‘401(k) Benchmarking Survey—2008 edition.’’ Zurich, Switzerland: 

Deloitte Touche Tohmatsu. 

Employee Benefit Research Institute. 2008. ‘‘EBRI Issue Brief #316: The 2008 Retirement Confidence Survey: Americans Much More Worried About Retirement, 

Health Costs a big Concern.’’ Washington, DC: EBRI. 

Englehart, G. V. 1999. ‘‘Have 401(k)s Raised Household Saving? Evidence from the 

Health and Retirement Study.’’ Paper 24. Aging Studies Program, Syracuse 

University. 

Ghilarducci, Teresa. 2007. ‘‘Guaranteed Retirement Accounts: Towards Retirement 

Income Security.’’ Working paper, Department of Economics and Policy Studies, 

University of Notre Dame, Notre Dame, Indiana 46556. January 

Government Accountability Office. 1997. ‘‘401(k) Pension Plans: Loan Provisions Enhance Participation But May Affect Income Security for Some.’’ Washington, 

D.C.: GAO. 

Groom Law Group. 2006. ‘‘Summary Comparison of Current Law and the Principal 

Provisions of the Pension Protection Act of 2006: Single-Employer Pension 

Funding Reforms and Cash Balance Provisions.’’ Washington, D.C.: Groom. 
35

Hewitt Associates, LLC. 2008. ‘‘Survey Findings: Hot Topics in Retirement 2008.’’ 

Lincolnshire, IL: Hewitt. 

Idemoto, S. 2002. ‘‘Washington Voluntary Accounts: A Proposal for Universal Pension Access.’’ Seattle, WA: Economic Opportunity Institute. 

Investment Company Institute. 2007. ‘‘Research Perspective: 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2006.’’ Washington, DC: ICI. 

Investment Company Institute. 2008. ‘‘Research Fundamentals: The U.S. Retirement Market, First Quarter 2008.’’ Washington, DC: ICI. 

Iwry. M., and John, D. 2006. ‘‘Pursuing Universal Retirement Security through 

Automatic IRAs.’’ Working paper draft. Washington, D.C.: Retirement Security 

Project. 

Jacobe, D. 2008a. ‘‘A Shift in How Americans Plan to Fund Their Retirement.’’ 

Washington, DC: Gallup. 

Jacobe, D. 2008b. ‘‘Fewer Americans Expect a Comfortable Retirement.’’ Washington, DC: Gallup. 

James, E., Smalhout, J., and Vittas, D., 2001, Administrative Costs and the Organization of Individual Retirement Account Systems: A Comparative Perspective, 

World Bank Policy Research Paper No. 2554, Washington, DC: World Bank. 

Lake Research Partners and The Tarrance Group. 2008. ‘‘George Washington University Battleground 2008 Poll.’’ Washington, DC: Lake Research Partners. 

Madland, D. 2008. ‘‘Reforming Retirement: What the Public Thinks.’’ Washington, 

DC: Georgetown University. 

Michigan Legislature, 2006, Senate Bill 1329 (2006), Lansing, MI: Michigan Legislature. 

Munnell, A. H. and M. Soto. 2007. ‘‘State and Local Pensions are Different from Private Plans.’’ Center for Retirement Research State and Local Pension Plans, No. 

1. Boston College. 

Munnell, A. H., A. Webb, and F. Golub-Sass. 2007. ‘‘Is There Really A Retirement 

Savings Crisis? An NRRI Analysis.’’ CRR Issue in Brief No. 7-11. Boston, MA: 

Boston College, Center for Retirement Research. 

Purcell, P. 2008a. ‘‘Pension Sponsorship and Participation: Summary of Recent 

Trends.’’ Washington, DC: Congressional Research Service. 

Purcell, P. 2008b. ‘‘Income and Poverty Among Older Americans in 2007.’’ Washington, DC: Congressional Research Service. 

Sperling, G. 2005. The Pro-Growth Progressive. New York, NY: Simon & Schuster. 

Teixeira, R. 2008. ‘‘What the Retirement Really Wants on Retirement and Social Security.’’ Washington, DC: Center for American Progress. 

Watson Wyatt. 2008. ‘‘Defined benefit vs. 401(k) plans: Investment returns for 2003-

2006.’’ Watson Wyatt Insider 18(5). 

Weller, C. 2005. ‘‘Ensuring Retirement Income Security With Cash Balance Plans.’’ 

Washington, D.C.: Center for American Progress. 

Weller, C. 2007. ‘‘PURE: A Proposal for More Retirement Income Security.’’ Journal 

of Aging and Social Policy. Winter. 

Weller, C., and Baker, D., 2005, ‘‘Smoothing the Waves of Pension Funding: Could 

Changes in Funding Rules Help Avoid Cyclical Under-funding?’’, Journal of Policy Reform 8, No. 2:131-151. 

Weller, C., and Jenkins, S. 2007. ‘‘Building 401(k) Wealth One Percent at a Time: 

Fees Chip Away at People’s Retirement Nest Eggs.’’ Washington, DC: Center for 

American Progress. 

Weller, C., Price, M., and Margolis, D. 2006. ‘‘Rewarding Hard Work: Give Pennsylvanians a Shot a Middle Class Retirement Benefits.’’ Washington, D.C.: Center for American Progress and Harrisburg, PA: Keystone Research Center. 

Weller, C., and Wenger, J. 2008a. ‘‘Robbing Tomorrow to Pay for Today.’’ Washington, DC: Center for American Progress. 

Weller, C., and Wenger, J., 2008b, Prudent Investors: The Asset Allocation of Public 

Pension Plans, PERI Working Paper No. 175, Amherst, MA: Political Economy 

Research Institute. 

ENDNOTES

1 It is also important to note that voters are not consistent, even when they profess support 

for a particular policy proposal (Madland, 2008). In other words, policymakers need to be mindful that promises of a single policy approach could quickly encounter opposition due to ideological predispositions. Instead, policymakers will need to take a pragmatic approach and promote 

all efficient policy options to increase retirement savings. 2The trends look very similar when the share of workers who have access to an employersponsored retirement plan is considered (Purcell, 2008a). 3 Calculations based on Board of Governors (2008). 

4 Calculations based on BOG (2008). 

5 Calculations based on BOG (2008). 
36

6 In addition, the evidence suggests that the existence of a loan option may result in higher 

contribution rates (GAO, 1997). This link should weaken, if it hasn’t already done so, if default 

employer contribution rates and automatic enrollment become more widespread, since an ever 

smaller share of employees will likely make a contribution decision that will differ from the employers’ default option. This follows logically from the fact that automatic savings options are 

successful because they are taking advantage of people’s inertia. Consequently, more people, 

who otherwise would not have contributed anything to their DC plan, will participate because 

it is the default option and will contribute the default contribution rate. The incentive provided 

by a loan option will thus be no longer necessary and policymakers limiting loan options will 

not inadvertently reduce savings incentives. 7This proposal was introduced as House Bill 6250 and Senate Bill 1329 in 2006, which both 

propose the Michigan Retirement Program Act. The act transfers Michigan’s retirement plan to 

a private or non-profit entity no later than five years after this act is passed. Michigan’s Department of Management and Budget would administer the retirement plan and would be the sole 

fiduciary of any plan. Administrative expenses would be paid by the participants and beneficiaries who have not closed their accounts. 

Chairman MILLER. Dr. Ghilarducci. 

STATEMENT OF DR. TERESA GHILARDUCCI, IRENE AND BERNARD L. SCHWARTZ PROFESSOR OF ECONOMIC POLICY 

ANALYSIS, THE NEW SCHOOL FOR SOCIAL RESEARCH 

Ms. GHILARDUCCI. Thank you, Chairman Miller, for inviting me 

to talk about guaranteed retirement accounts. As you mentioned——

Chairman MILLER. We just heard from four people about the 

unguaranteed plans. So we thought we would have you come. 

Ms. GHILARDUCCI. Yes, I like the placement. It does make sense, 

because my proposal actually meets the principles of Dr. Weller. 

As we sit here, the number that you cited that most Americans 

don’t feel they can live comfortably in retirement has only gotten 

worse. I mean, as we sit here, hour by hour, as the market fails, 

and Peter Orszag’s numbers get worse. The panic now actually tops 

off chronic anxiety that we have been seeing for the last 10 years, 

and that anxiety is caused by the corrosive effects of 401(k) plans 

and other defined contribution plans. 

Despite a 30-year history with 401(k) plans and DC plans, we 

have seen that we have not expanded pension coverage, we have 

not increased the national savings rates. Though, we have added 

to the profits of the financial sector and to the expansion of the financial sector, and we have extracted ever increasing tax subsidies 

from the Treasury. 

Now every English major knows that if you show a gun in the 

first act, it will be used by the last one. I am going to show you 

$80 billion of tax subsidies. By the end of my presentation, I am 

going to spend it, to help everybody. 

Short term, I propose—and last week I did an op ed to the New 

York Times—that the Congress allow workers to swap out their 

401(k) assets, perhaps at August levels, for a guaranteed retirement account. Just a one-time swap, trade in your 401(k) for a 

guaranteed retirement account that will be composed of the equivalent of government bonds that pay 3 percent real return, and the 

promise will be that when you collect Social Security you can draw 

from that account balance for an annuity that would top off your 

Social Security plan. That plan is detailed in a longer paper that 

I have submitted. 

How would this work? You go back to your districts and you 

meet up with a 55-year old who had had $50,000 in his account 
37

last month, and now has $40,000 in the account. He can swap out 

that $50,000, valued in August, for that guarantee of what would 

become, if he retires at 62, a $500 a month addition to Social Security. 

The economy is probably in recession. We economists don’t call 

it until after it is over. But a guaranteed income from his 401(k) 

account could actually take off some anxiety that that recession is 

going to cause him. 

A long run solution is for you all to recognize that we have a 

long-term retirement crisis. It is not in Social Security, but it is in 

this heavily subsidized voluntary commercial tier of retirement security. Half the workers have not been covered at any one point in 

time by any kind of retirement account. Most Americans, especially 

the folks in your districts who are now under 60, are going to be 

at a real risk of not even replacing 70 percent of their retirement 

income. 

I propose that every worker get a guaranteed retirement account, 

that we mandate that they save 5 percent on top of Social Security. 

That will, with a government credit of $600, that will actually give 

every worker at least 1 percent replacement rate, which will, on 

top of Social Security, give you 70 percent replacement rate. 

Where do I get that $600 credit for everybody? I mean everybody, 

people who aren’t covered. I get it from the $80 billion we now 

spend on DC accounts. 

The way the government now encourages 401(k) plans is to 

spend $80 billion in tax breaks, which, with Peter Orszag’s research, we know goes to the very highest income earners. Fifty percent of these subsidies go to 6 percent of the population. All that 

happens is that we transfer money from taxed accounts to untaxed 

accounts. 

Worse, this inefficiency is growing. If you look at your Treasury 

numbers, the value of these tax expenditures to these wasted tax 

breaks are projected to grow 49 percent, while those for traditional 

plans are only going to fall by 8 percent. If we implement automatic IRAs or we expand the 401(k) system, all we are doing is 

adding to this inefficiency. 

So I propose that Congress establish a universal pension plan on 

top of Social Security, funded by workers’ own contributions but 

subsidized by a rejiggering of those tax breaks so that everyone has 

$600 going forward every year into their retirement account. 

Thanks. 

[The statement of Ms. Ghilarducci follows:]

Prepared Statement of Teresa Ghilarducci, Irene and Bernard L. Schwartz 

Professor of Economic Policy Analysis, the New School for Social Research, Department of Economics 

As Congress reacts to the modern financial order changing forever, we should also 

realize that individual retirement plans based on that financial order, have also 

changed forever. In the last few weeks, we’ve been confronted with older worker and 

retirees’ lives being turned upside down; their panic tops-off an already existing 

state of chronic anxiety about retirement futures. Much of both—the panic and anxiety—is caused by the corrosive effects of 401(k) and 401(k)—like plans,1 including 

IRA plans. 410(k) plans have not expanded pension coverage, increase the savings 

national rates; though they did add to the profits and growth of the financial sector 

and extracted ever increasing tax breaks from the Treasury. 
38

Short Term Solution to the Retirement Crises 

Short term, I propose that since 401(k) accounts and the like are financial institutions—the bank about where 38% of the workforce2 can intend to save for their retirement—Congress let workers trade their 401(k) and 401(k)—type plan assets 

(perhaps valued at mid-August prices) for a Guaranteed Retirement Account composed of government bonds (earning a 3% return, adjusted for inflation). When the 

worker collects Social Security, the Guaranteed Retirement Account will pay an inflation adjusted annuity, based on the accumulated funds. How would this work? Take a 55 year old who had $50,000 in his 401(k) account 

in August and faces job loss and eroded assets because of the erosion of his retirement accounts.3 Let him swap out the $50,000 for a guarantee of $500 per month.4

The economy is probably in a recession, but a guaranteed income from his former 

401(k) removes a source of financial anxiety, and—this is not trivial—it end fruitless 

discussions with brokers and financial sales agents, who are also desperate for more 

fees and are often wrong about markets. 

Long Term Solution to Eroding Retirement Income Security 

Because there is a long run retirement crises, not in Social Security, but in the 

heavily tax-subsidized, private, voluntary, and commercial tier of our nation’s retirement income security system, about half of workers will not have enough income 

after age 65 to replace, the bare necessity, 70% of their pre-retirement income according to Boston College’s Retirement Risk Index. The erosion is primarily caused 

by Congressional bias towards 401(k) plans, their fundamentally flawed design and 

little regulation. 

Going forward, I propose Congress establish universal Guaranteed Retirement Accounts and the federal government deposit $600 (inflation indexed) in those Guaranteed Retirement Accounts every year for every worker. 

Every worker (not in an equivalent defined benefit plan) would save 5% of their 

pay into their Guaranteed Retirement Account to which the government pays a 3% 

inflation-indexed guaranteed return. Workers would earn pension credits based on 

these accumulations. 

The 5% target comes from the basic math that an average earner saving 5% of 

pay over a life time with a guaranteed 3% rate of return plus inflation would supplement their Social Security benefits to achieve a 70% replacement rate at retirement. In other words had GRA been in effect instead of 401(k) plans an average 

earner reaching 65 today would have accumulated enough to pay about 1% for every 

year of service. (This rate is equivalent to the average defined benefit pension plan 

payout because it its inflation indexed.) 

This basic math, though, comes up against the basic reality that many Americans 

can not afford to save that much. That is why workers’ contributions would be mitigated by a $600 a year contribution from the federal government indexed for inflation which will be paid for by scaling back substantially the tax breaks for 401(k) 

type accounts. The $600 defrays the expense for most low and middle class workers 

(it pays for all the contribution for a minimum wage worker). Employers could top 

it off, pay a portion, and workers could add to it. 

Advantages of a GRA? 

First, this is a fiscally responsible plan. Rearranging tax breaks is revenue neutral, efficient and fair because the current tax breaks.5 High-income earners get a 

much higher subsidy than anyone else because they are more likely to have a 401(k) 

and contribute more.6 This design has shocking results: 6% of taxpayers with incomes over $100,000 per year get 50% of the tax subsidies.7 And, for all this effort, 

the nation gets no extra savings and workers no extra retirement security (see Appendix). At most, this complicated system creates economic activity when accountants happily transfer money between taxed accounts to tax-sheltered accounts and 

tax payers foot the bill. 

Worse, the inefficiency is growing: the value of tax expenditures for DC plans is 

projected to grow 49 percent while those for traditional plans are projected to fall 

by 8.9 percent between 2009 and 2013. The sooner we admit that our 30 year experiment with 401(k) accounts has failed the sooner we can use these precious government subsidies efficiently and equitably. 

Second, GRAs are responsible because they are prefunded. A government agency 

connected to the Thrift Savings Plan and Social Security (for administration efficiency) governed by trustees representing workers, business, and the public, invests 

the GRA contributions in a range of assets, like the sovereign wealth funds of Alaska, Alabama, New Mexico Wyoming, and many other nations do to ensure the federal government can pay a 3% inflation-indexed rate of return to the Guaranteed 

Retirement Account lifetime annuities. 
39

Third, GRAs are universal; 

Fourth, GRAs provide adequate retirement income and encourages people to save 

more; 

Fifth, the money is locked away until retirement; 

Sixth, the payout is for a person’s life; 

Seven, every America has the opportunity to save in a low cost, professionally 

managed account with guaranteed returns. 

GRAs are better than automatic IRAs. Automatic IRAs add complicated requirements on small and medium sized employers. Automatic IRAs expand the risks 

workers already face in individual retirement account plans: the risks they won’t 

save enough because of high fees and wrong in investments choices; the risk financial markets tank, the risk of inflation eroding income and that you will out-live 

your money. Automatic IRAs cause deadweight losses to the economy because, net 

of fees, 401(k) and other individual retirement accounts are among the lowest earning among all financial vehicles. Add the risks of preretirement—withdrawals, 

moral hazard, and adverse selection Automatic IRAs would entrench inefficiency 

and risk and a dollar of retirement income becomes more expensive to fund. Automatic IRAs are worse than nothing. 

Disadvantages of GRAs 

Scaling back 401(k) deductions going forward may put pressure on vendors to 

lower fees and boost returns. Also people like the option of saving at work for hardships. Fine, Congress may to subsidize precautionary savings but don’t call them retirement accounts. Put them in a separate category. 

Should we mandate savings in a recession? Yes, as long as fiscal policy provides 

for short term stimulus. No one is proposing we suspend Social Security taxes in 

recessions. Households need a source of disciplined savings over the business cycles; 

it is not the job of households to go in debt and spend wildly to get us the nation 

out of recessions. This ethos—debt-led consumer spending—got us in the trouble we 

are in. 

Predicted Popularity of Guaranteed Retirement Accounts 

Even before the financial crises of September 2008, workers are catching on that 

Congress needed to provide more secure sources of retirement income security. 

Surveys show less than 50% of people think they will live comfortably in retirement and, crucially, that they bear personally responsibility for their supplements 

to Social Security benefits. Though they accept the responsibility—they want the 

government to help.8 Over 77% of people support mandated pensions. 

In 2006, HSBC bank asked 21,000 workers in 20 nations what the government 

should do about the expense of aging societies- on average, workers preferred compulsory savings to any other policy. A third of Americans wanted the government 

to force them to save more for retirement; far fewer; 16% would support a tax increase; and, only 9% wanted the government to reduce benefits.9

In October 2007, a whopping 91% of Americans told a Wall Street Journal poll 

that the government should do something to secure retirement and 41% said they 

were not hearing enough from the Presidential candidates about retirement income 

issues.10

Conclusion 

American workers know we have a short term and long term pension crises but 

it is not with Social Security but with the voluntary, self-directed, commercial-account-based pension system. The loss of retirement security is a reversal of fortune 

and the result of very specific flawed governmental policies that have been biased 

toward 401(k) plans, rather than the result of technological change or the logical 

consequences of global economic trends. That is the good news. Government policies 

eroded pensions government can help secure workers’ retirement futures. If you implement the short term 401(k0 asset swap and Guaranteed Retirement Accounts, we 

can look back at the financial crises and bailout and know Congress did permanent 

good for workers’ retirement income security.

TABLE 1

Tax Subsidies for Retirement Plans 2009 ($ Billion) 2009 growth to 

2013 estimated 

DB plans .............................................................................................................................. $45.67 Billion ¥8.9%
40

TABLE 1—Continued

Tax Subsidies for Retirement Plans 2009 ($ Billion) 2009 growth to 

2013 estimated 

401(k) (325 B) Individual retirement plans and Plans covering partners and sole proprietors (‘‘Keogh Plans’’) ................................................................................................ $75. 70 Billion 49.5%

EBRI calculations Original data from Executive Office of the President, Office of Management and Budget, Analytical Perspectives, Budget 

of the United States Government, Fiscal Year 2009 www.whitehouse.gov/omb/budget/fy2009/

APPENDIX: THE SAVINGS PARADOX

Savings rates should be higher now than at any time in the history of the United 

States. The American workforce has never been more educated and people with 

more education save more. Middle-aged workers save more than any other age 

group and there are an estimated 73 million baby boomers in the U.S. who are between age 48 and 63 in 2008. High income people have higher savings rates the 

richest Americans have gained the most income since the 1990s. Further, as national income grows the demand for normal goods grow because when people have 

money they buy more of what they want Ipods, better health, and retirement ‘‘leisure:’’ witness the 1960s and 1970s, when, as the economy grew, older people lived 

longer AND retired earlier.11 And, in an attempt to further increase retirement savings Congress has relentlessly expanded tax breaks for retirement savings since the 

1980s. 

The value of the favorable tax treatment for retirement savings is at an all-time 

high 110 B, while its effectiveness is at an all time low. 

To be clear, saving is hard. Humans often lack the foresight, discipline, and investing skills required to sustain a savings plan. But human characteristics haven’t 

changed as much as retirement savings as eroded. 

The deep decline in national savings rates showed up in the 1990s when employers started to reduce their contributions into defined benefit pension plans,12 these 

plans were a main driver of national savings. The expansion of 401(k)-type plans 

did not boost savings for three reasons: they supplanted already existing defined 

benefit plans, were cheaper for the employer, and did not expand pension coverage 

to people who had no pension plan. This is surprising: although 401(k)—type plans 

are growing,13 they don’t expand pension coverage. Instead, they replace existing 

traditional pension plans. When groups of workers who ordinarily don’t have pensions get them—poultry workers, janitors, home-health care workers, etc.—it is 

most likely because they are included in a newly negotiated collectively-bargained 

defined benefit plan.14

Defined benefit plans are institutionalized, contractual forms of saving that happen automatically at work. Workers have little discretion about whether to save or 

spend. Workers can’t opt out, decide how much to invest, or take out lump-sum payments without difficulty. Even though 401(k) plans do not increase pension coverage 

nor secure retirement income, people like their portability and like to watch their 

individuals accounts grow. People do not like the financial and investment risks, or 

the risks of outliving their money, inherent in 401(k) accounts. 

Therefore we understate the true spending on pensions because the U.S. Government maker uses ‘‘tax expenditures’’—the value of the tax code’s exemption of income generated for certain activities—to encourage workers and the nation’s business owners to spend their income in socially approved ways. In 2007, Social Security and Medicare cost $800 billion. Tax expenditures for retirement plans—traditional employer pensions (defined benefit plans), 401(k) plans, 

Individual Retirement Accounts, other savings vehicles dedicated for disbursement 

at older ages, and exemptions of Social Security and other federal pensions from 

tax—totaled over $156 billion in 2007.15

In 2004, taxes not collected on pension contributions and earnings equal a fourth of annual Social Security contributions and, at over $114 billion, are perversely larger than household saving of over $102 billion.16 The tax breaks were supposed to 

expand pension coverage and increasing retirement security. 

Pension tax breaks are deductions from income; high-income earners get more breaks than low-income workers. If a lawyer earning $200,000 makes a $1000 contribution to his 401(k) plan, he reduces his income tax by $350. If his receptionist, 

earning $20,000, makes the same $1000 contribution (which is much less likely), she 

will save only $150 in taxes. The Brookings Institution and Urban Institute calculate that the 3% of taxpayers with incomes over $200,000 per year get 20% of the 

tax subsidies.17 And, for all this effort, the nation gets no extra savings. At most, 

this complicated system creates economic activity when accountants happily transfer money between taxed accounts to tax-sheltered accounts and tax payers foot the 
41

bill. The value of tax expenditures for 401(k) plans is projected to grow 49 percent 

while those for traditional plans are projected to fall by 2.1 percent between 2009 

and 20013.18 (The estimated tax expenditures for 401(k) plans, Individual Retirement Accounts, and Keogh plans in 2009 is estimated to be $75.1 billion and for 

defined benefit plans $45.7 billion.) 

In sum, the shift towards 401(k) plans increases tax expenditures, does little to 

expand retirement savings, and favors workers who need the help least. All told, 

the tax subsidies are not meeting a public purpose. The top heavy benefits for 

401(k) plans create a sad paradox: since 1999, tax expenditures for retirement plans 

grew by 20%, while retirement plan coverage fell. 

401(k) plans Exist Because They are Cheaper for Employers; but they Earn Subpar 

Returns 

If 401(k) plans are so bad why are there so many of them? Though workers don’t 

gain much from 401(k) plans, some employers and Wall Street firms do. I followed 

700 firms over 17 years and found that firms that adopted a 401(k) lowered pension 

expenses by 3.5—5% without sparking worker complaints.19 Since 401(k) plans are 

voluntary, many (about 20%) workers who can don’t bother to contribute ‘‘leave 

money on the table’’ by not accepting the employer match. Employers’ contributions 

are 26% lower than they would be if everyone participated.20 Employers could pay 

the match to every worker, as they do under defined benefit plans. Because workers 

have to trigger the match, and some don’t, 401(k) plans boosts profits at the expense 

of retirement income security. Firms find sponsoring 401(k) plans is more profitable 

than sponsoring defined benefit plans. For firms, defined contribution plans are less 

costly, less risky, and can be funded with their own stock, not with hard cash. 

Wall Street firms collect over $40.5 billion annually in 401(k) fees.21 Yet, brokers 

and human resources often tell workers the fees on their accounts are zero. A good 

way to see what workers lose when they invest in a 401(k) plan rather than a 

group—based pension fund is to compare what each earns after fees are subtracted. 

A comprehensive study by Dutch and Canadian researchers Ron Bauer and Keith 

Ambachtsheer22 found that U.S defined benefit plans—where individuals do not direct their own accounts—earned a 2.66% higher return NET of fees on equities than 

did retail mutual funds. In Canada, the skim was even higher; the retail mutual 

funds earned 3.16% less. (These shortfalls are the averages for the 25 year period 

between 1980 and 2004.) The gap makes sense—investing in retail funds means investors pay for advertising, shareholder profits, and glossy brochures. Add the fact 

that workers buy high and sell low—because people follow the leaders and buy stock 

as its rising in value and sell when its falling—and you have self-directed accounts 

earning much less. This isn’t just a leakage, it’s a levee break. Hidden from view, 

workers are unwittingly transferring huge sums of money to financial firms. 

The unpublished report confirmed that the GRA 3% real rate of return was a conservative long-run estimate under a range of plausible investment strategies that 

a government agency could undertake and not take any substantial risk of underperforming.23

ENDNOTES

1 401(k)—type plans are defined contribution plans include and include the following: 401(k) 

plans [about 80% of participants in defined contribution plans are in 401(k) plans]; profit sharing plans; money purchase plans; individual retirement accounts; and 403(b) plans which are 

401(k) plans for employees in the public sector. 2 Center for Retirement Research Boston College. 2004. ‘‘Eligibility and Participation in 401(k) 

Plans by Age, 2001 and 2004’’ http://crr.bc.edu/frequently—requested—data/frequently—requested—data.html accessed October 4, 2009. 3 Note the macroeconomic destabilizing effects of 401(k) plans—and all defined contribution 

plans—when asset values go down; people increase their job search just when jobs become 

scarce. This makes the recession worse. 4This is what the annuity would pay at a 3% inflation rate and a 3% real return. 

5The GRA plan as written is budget neutral. If we allow tax breaks for the first $5000 in 

voluntary 401(k) contributions the plan will cost $25 billion. But know that accounts that allow 

hardship withdrawals are savings for hardship which is different from retirement income security. 6 Because the tax subsidies come in the form of tax deductions and not credits they are regressive. For example, if a lawyer earning $200,000 makes a $1000 contribution to his 401(k) plan, 

he reduces his income tax by $350. If his receptionist, earning $20,000, makes the same $1000 

contribution (which is much less likely), she will save only $150 in taxes. 7 A good paper on the distributional effects of the tax expenditures for DC plans is Burman, 

Leonard E.,William G. Gale, Matthew Hall, and Peter R. Orszag. 2004a. Distributional Effects 

of Defined Contribution Plans and Individual Retirement Accounts. Washington, D.C.: UrbanBrookings Tax Policy Center. 
42

8Madland, David. 2008. ‘‘Reforming Retirement: What the Public Thinks.’’ For the Georgetown University conference on ‘‘The Future of Retirement Security.’’ Held October 3, 2008. department of History 9 HSBC Bank. ‘‘How should governments finance ageing populations’’ http://www.hsbc.com/

1/PA—1—1—S5/content/assets/retirement/2006—for—news—release—final.pdf.) HSBC. 2007. 

‘‘The Future of Retirement: What People Want.’’ http://a248.e.akamai.net/7/248/3622/

7d1c0ed7aa1283/www.img.ghq.hsbc.com/public/groupsite/assets/retirement—future/2006—

for—what—people—want.pdf (accessed online February 2, 2007). 10 Bright, WSJ.com November 2007 online Harris personal finance poll 11Ghilarducci, Teresa. 2008. When I am Sixty Four: The Plot Against Pensions and the Plan 

to Save Them. Princeton University Press, Princeton, NJ. Chapter 1. 12 Bosworth, Barry, and Lisa Bell. 2005. The Decline in Saving: What Can We Learn from 

Survey Data?’’ Unpublished draft written for the 7th Annual Joint Conference of the Retirement 

Research Consortium, ‘‘Creating a Secure Retirement’’ (Washington, DC, August 11-12, 2005). 

http://www.bc.edu/centers/crr/dummy/seventh—annual.shtml. 13 401(k)—type plans are defined contribution plans include and include the following: 401(k) 

plans [about 80% of participants in defined contribution plans are in 401(k) plans]; profit sharing plans; money purchase plans; individual retirement accounts; and 403(b) plans which are 

401(k) plans for employees in the public sector. 14From 1999-2005, the correlation between defined benefit coverage growth rates and pension 

coverage growth rates was 79%, while the correlation between defined contribution and pension 

coverage growth rates was a negative 10%. Ghilarducci. Teresa. 2006. ‘‘Future Retirement Income Security Needs Defined Benefit Pensions.’’ Center for American Progress. 

www.americanprogress.org/kf/defined—benefit—layout.pdf 

Back in 1981, Congress rejected President Carter’s Pension Commission’s call to reconsider 

the social value of these tax breaks and create a mandatory universal pension system (MUPS). 

Because they are designed to meet a social goal there were always conditions on these tax 

breaks. When the federal income tax was implemented in 1913, employer pension contributions 

were given special tax treatment only if the managerial plans included most of the rank and 

file. This is in direct acknowledgement that the tax breaks were targeted to the wealthy. The 

wrangling—over how many tax breaks that higher income employees get in exchange for how 

many lower paid workers are in employer pension plans—continues to this day and is part of 

a healthy process of assessing if the federal government tax breaks have the intended effects. 

Instead, in that same year, Congress satisfied the lobbyists for executives and made way for 

401(k) plans by creating a section of the tax code which allowed workers to save, pre tax, in 

plans at work. After Wall Street firms and consultants successfully marketed 401(k) plans, the 

rest—to use a shop-worn phrase—is a history we all know: 401(k)-type plans replaced traditional defined benefit (DBs) pensions.—over 63% of pensions are DC plans; whereas, in 1975, 

most pensions were DBs. 15 Employee Benefit Research Institute. 2008. ‘‘Facts From EBRI: Tax Expenditures and Employee Benefits: Estimates from the FY 2009 Budget.’’ EBRI, 1100 13th St. NW #878, Washington, DC 20005. February 16See Bell, Elizabeth Adam Carasso and C. Eugene Steuerle, ‘‘Retirement Savings Incentives 

and Personal Savings,’’Tax Notes, December 20, 2004.for this provocative insight. 17 A good paper on the distributional effects of the tax expenditures for DC plans: Burman, 

Leonard E.,William G. Gale,Matthew Hall, and Peter R. Orszag. 2004. ‘‘Distributional Effects 

of Defined Contribution Plans and Individual Retirement Accounts.’’Washington, D.C.: UrbanBrookings Tax Policy Center. 18 Employee Benefit Research Institute. 2008. ‘‘Facts From EBRI: Tax Expenditures and Employee Benefits: Estimates from the FY 2009 Budget.’’ EBRI, 1100 13th St. NW #878, Washington, DC 20005. February 19Ghilarducci and Sun 2006. How Defined Contribution Plans and 401(k)s Affect Employer 

Pension Costs: 1981-1998.’’ With Wei Sun. Journal of Pension Economics and Finance, 5(2): 175-

19620 I used information from Munnell and Sunden. 2004. Munnell, Alicia, and Annika Sunden. 

2004. Coming Up Short: The Challenge of 401(k) Plans. Washington, DC: Brookings Institution 

Press to get participation rates, average contribution levels by earnings, the distribution of employees by earnings (Calculated from the CPS (2003) to make the three billion dollar estimate. 

The average savings per worker is $156, calculated for their sample of over 800 employees in 

one firm that the employer saved over $250 per older worker who did not participate in the 

40(k) even when they were eligible. Choi, James J., Laibson, David I. and Madrian, Brigitte 

C.,$100 Bills on the Sidewalk: Suboptimal Investment in 401(K) Plans(August 2005). NBER 

Working Paper No. W11554. Fidelity’s (2004) annual report documents employers’ match behavior. 21There are $2.7 trillion in 401(k) assets Employee Benefit Research Institute. 2007. ‘‘401(k) 

Plan Asset Allocation, Account Balances, and Loan Activity’’ An Information Sheet from the Employee Benefit Research Institute (EBRI). www.ebri.org/pdf/InfSheet.QDIA.23Oct07.Final.pdf. 

The average fee is over $700 per year and average fees are 1.5% of assets which equals $40.5 

billion. 22 Ambachtsheer, Keith, Bauer, Rob. 2007. ‘‘Losing Ground.’’ Canadian Investment Review; 

Spring, Vol. 20 Issue 1, p8-14. 23My report for the Economic Policy Institute explains the GRA plan in depth Ghilarducci, 

Teresa 2007. ‘‘Guaranteed Retirement Accounts Toward Retirement Income Security’’ Economic 

Policy Institute, 1333 H Street, NW Suite 300, East Tower Washington, DC 20005-4707 (202) 

775-8810, Economic Policy Briefing Paper #204, November 20. 
43

Chairman MILLER. Thanks very much. Well, if I may characterize what I heard, we are talking about a system—a number of 

you touched on broader pension issues, but with respect to the 

401(k), it appears to be a plan that is not really well devised for 

the changes in the market, that we load an awful lot onto the back 

of the individual. I have been to more seminars and conferences 

where they ask for more and more education about savings and investing. 

But we keep asking this person to get smarter and smarter about 

their savings, and that is sort of it, and they are on their own. 

Then the market takes an abrupt turn, or they are not tuned in, 

they don’t see it, and all of a sudden their future has changed to 

some extent. 

I think the key point raised by Dr. Ghilarducci and, Mr. Orszag, 

I direct this to you, is that we have invested $80 billion a year into 

subsidizing this activity which originally I thought was sort of a 

savings plan and now it has become a retirement plan. I don’t 

know when it changed, but now everybody is told that is their retirement supplement. 

Again, it appears that while we lament it all the time, the savings rate isn’t going up with the investment of this $80 billion. In 

fact, it is probably going down. It has been on a downward trend 

a number of years. 

What is the policy? What do we have to start to think about in 

Congress about whether we want to continue to invest that $80 billion for a policy that is not generating what we now say it should? 

Mr. ORSZAG. Let me say three things. Let me start with your 

comment about 401(k) plans because they involve shifting two 

things onto workers. The first is risk and the second is decisionmaking responsibility. That first shifting of some risk is unavoidable to the design of a 401(k) plan as opposed to a defined benefit 

plan. It is who bears the risk. 

The second part though, in terms of decision-making burdens, we 

could do a lot more to help workers, and we are starting through 

the Pension Protection Act and what have you to help workers. I 

would raise a big caution flag about the benefits that we should expect from financial education. I think as we look back over the history of financial education efforts, I am starting to become increasingly skeptical that they work. And we can talk more about that. 

The second part of this is now what about the tax preferences for 

401(k) plans. We have designed them relatively inefficient. They 

are tilted towards higher income households because they are 

linked to your marginal tax rate. So you put $1 into a 401(k), and 

you are in the 15 percent tax bracket, you are saving 15 cents. If 

you are in the 35 percent tax bracket, you are saving 35 cents. 

That would make sense if higher income workers are more responsive to the tax incentive or were more deserving of financial assistance. I think it is hard to make the argument in either case that 

this is an efficient approach. 

The idea has already been mentioned that instead of that you 

could on a revenue neutral basis take that same amount of money 

and when you put $1 in, you get 35 cents if you are high-income 

worker and 15 cents if you are a middle-income worker, everyone 

gets 20 or 25 cents matched into their account on a revenue neu-
44

tral basis. That would arguably not only be more fair, but do more 

to promote retirement saving. Here is the reason. 

High income households are much more likely to have other assets that they can just shift into the 401(k) plan. So that dollar 

showing up into the 401(k) plan is much less likely to be new saving as opposed to just shifting from a nontax preferred account if 

it comes from a high-income worker than if it comes from a middleincome or low-income worker. 

So the more you tilt the tax benefits towards low-income workers 

and middle-income workers, the more likely it is that you are on 

net raising total savings as opposed to just sloshing funds around, 

in addition to any distributional concerns you would have. 

The final point is I think the entire history of trying to promote 

retirement saving through the tax preference reflects an over emphasis on what I call Econ 101 thinking. I think we need to dial 

way down Econ 101 thinking and dial way up Psychology 101 

thinking in not only retirement saving but in health care and lots 

of other areas, and thinking that we are all hyper rational super 

computers that are just optimizing our lifetime income and behaving perfectly rationally is not likely to correspond to actual behavior. 

Chairman MILLER. With the indulgence of my colleagues, I would 

like to ask one more question because of the title of the hearing. 

Given that this is what is going on out there, and we had a housing 

crisis in the eighties and sort of in the nineties, and we had a tech 

bust, and now we have a combination of all of those, and we are 

talking about people who appear at the outset that they may not 

have the ability to recover those assets for the purpose for which 

they were going to use them. 

We know that people not only are losing money in the market, 

but huge numbers of people have tapped the equity in their homes, 

and as a result of the housing crunch and the market’s failure, 

they are also getting credit card bills with new higher interest 

rates or cutting off their lines of credit, and wages haven’t kept up 

terribly well. That is a very bleak picture, from where I sit. 

But we have these studies on whether people will be able to recover or not. Mr. VanDerhei, you have talked about this long-term 

study that you have done. I just want to ask, and if you can touch 

on it because I would like to come back to it in the next round, but 

what do you anticipate and, Peter, this has a lot of other policy 

considerations for the Congress because these people could end up 

using a lot more public services later in life, but what do you really 

think about the ability of these families or individuals to recover 

sufficiently to provide for the retirement that they were considering 

in January 1 of this year? 

Mr. ORSZAG. Well, other than dramatic asset recovery, I mean financial market booms which may or may not happen that can offset the losses, there are basically three things: You can spend less 

now and save more to offset it; you can spend less when you retire; 

or you can retire later. You have to respond in one of those three 

ways, other than just hoping for a financial market recovery, which 

may or may not happen, and is not a wise or prudent course to adjust to a financial market downturn like we are experiencing. 
45

Chairman MILLER. But in one of those three options you are suggesting that people would be able to continue to provide something 

for savings. 

Mr. ORSZAG. Well, this is just simple accounting, in some sense. 

One way you can adjust is by saving more and spending less today. 

By the way, in the very short run that will adversely affect the 

overall economy. In addition to the financial market downturn that 

we are experiencing, I think it is implausible that, given the employment numbers that we are seeing and the strength of the credit crisis that we are experiencing, that this period will ultimately 

not be termed a recession. In that environment, having households 

spend even less is exactly the opposite of what you want in the 

short run. 

Chairman MILLER. Thank you. 

Mr. VanDerhei. 

Mr. VANDERHEI. I certainly agree with everything Peter just 

stated. One thing that might be instructive to take a look at is in 

2003 EBRI actually did a series of simulation models for the various States to show what this type of impact would be on their 

Medicaid system. One very important point of that is as these individuals hit retirement age, if they have insufficient assets what is 

going to happen with respect to the potentially catastrophic health 

care costs they have, which are not being picked up obviously by 

Medicare, more and more of this is being shifted in our modeling 

to the State governments through their programs as far as picking 

up the overall things like nursing home costs. 

Chairman MILLER. Mr. Bramlett. 

Mr. BRAMLETT. Just in terms of more of a long-term issue and 

then talk about the short-term issue. This issue of fees I think is—

we just don’t talk about it enough. We have gone——

Chairman MILLER. I try. God knows, I try. 

Mr. BRAMLETT. We have gone from an economy that 2 percent 

of the GDP’s earnings were from financial institutions to over 20 

percent. That is a tenfold increase in 20 years. We have gone from 

the estimated cost of securities intermediation from $2.8 billion in 

the last 28 years to $528 billion. 

To quote John Bogle here, ‘‘Does this explosion intermediation 

cost create an opportunity for money managers? You better believe 

it does. Does it create a problem for investors? You better recognize 

that too. For as long as financial service systems delivers to our investors in the aggregate, whatever returns our stock and bond markets are generous enough to deliver, but only after the cost of financial intermediation are deducted. These enormous costs seriously undermine the odds in favor of success for our systems who 

are accumulating savings for retirement. A loss, as we all know, investor fees are at the bottom of the costly food chain.’’

Then he goes on to say, ‘‘In any event, we are moving, so it 

seems, towards becoming a country where we no longer are making 

anything. We are merely trading pieces of paper, swapping stocks 

and bonds back and forth to one another and paying our financial 

properers,’’ I think that is somebody who works a roulette wheel, 

right—‘‘a veritable fortune. We are also adding even more costs by 

creating even more complex financial derivatives in which huge 
46

and unfathomable risks have been built into our financial system.’’ 

And it is this implosion that we are seeing right now. 

Chairman MILLER. Quickly. Did you want to finish? 

Mr. BRAMLETT. The only other thing I would say is that where 

we are today, it is not inconceivable—I don’t think a huge program 

that rescues a system is something that would necessarily be good 

for the system. But I think that there will have to be adjustments 

made, and I think those adjustments need to be made in that area. 

Chairman MILLER. Dr. Weller. 

Mr. WELLER. I think we have to realize we have had massive 

losses, and they came very quickly in the last year. A lot of them 

in terms of absolute amounts are concentrated especially among 

those nearing retirement. I was recently asked what I see as the 

biggest challenges to retirement savings, and the answer is, quite 

frankly, the labor market. We have had the weakest labor market 

performance since the Great Depression in terms of jobs, wages, 

and benefits. I think we need to focus on getting people good jobs 

that will allow them to save rather than crossing our fingers that 

somehow asset values will rebound from the current downtime. 

Chairman MILLER. Thank you. 

Dr. Ghilarducci. Sure. Do what you can. You added on a stimulus 

package to help out the job loss and the recession. But to refer back 

to retirement income security, I propose that you treat 401(k) asset 

accounts like the banks and take some of those toxic assets away 

from workers and give them a vehicle so they know they can get 

a guaranteed retirement on top of Social Security. That won’t solve 

the recession, but it will certainly help this problem we are talking 

about today. 

Also, I am just very curious about Mr. Bramlett’s testimony because on one hand he gives a most powerful indictment of our experiment with 401(k) plans. He says that the 401(k) plans is actually a part of the problem of the meltdown in the financial industry 

and the misstructuring of our economy, and yet he wants to expand 

it with education programs from the DOL. 

I really have one point here and that is to end the experiment 

with tax subsidized 401(k) accounts as a retirement vehicle. They 

are fatally flawed in a way that Mr. Orszag pointed out. They are 

too risky, and it is not good policy to have workers run their own 

retirement plan. They want government help and they also want 

to be responsible. 

So savings. And all sorts of studies shows that this is a way that 

people actually become engaged in their own futures, and they 

need Congress’ help to do it in a secure way. 

Chairman MILLER. Thank you. 

Mr. Andrews. 

Mr. ANDREWS. Thank you, Mr. Chairman. Thank you for convening us today at a time when these questions really need to be 

asked and answered. I thank the witnesses for very provocative, 

thought-provoking testimony. 

Dr. Ghilarducci, I want to go back to the 55-year old constituent 

that you hypothesized about and think about what her situation 

looks like today. Let me first confess my bias. I wish she were in 

a defined benefit plan. Because if she were, the value of the fiduciary duty would have protected her. I am not saying that defined 
47

benefit plans are immune from the virus that is sickening the 

American economy, but I think my constituents who are in them 

are a heck of a lot better off than those who aren’t today. That is 

something I think we better think about. 

But, second, I want to think about how she is faring if she is in 

a defined contribution 401(k) type account. Dr. VanDerhei tells us 

in his research that going into 2007, at the end of calendar 2006, 

of people over the age of 55, about half of them, 48 percent, had 

at least 70 percent of their assets in equities. Now we don’t know 

what those numbers are today, but we do know that across the 

economy a lot of American investors are rushing to the protection 

and security of Treasury bills to protect themselves. 

I want to explore what this 55-year old constituent’s options are 

today under the 401(k) regime; what she has going for her, what 

her risks are. First of all, I don’t know that there are any data 

about how many plans do not have the option of switching to an 

account that is largely government secure. Does anybody know 

that? I think most plans have such an option. But does anybody 

know how many plans or what percentage of them do not offer that 

as an option to a participant? 

Mr. Bramlett, Dr. VanDerhei. 

Mr. BRAMLETT. You have government bonds, but they can go up 

and down in the market. There is no government guarantee that 

I am aware of. 

Mr. ANDREWS. I didn’t say guarantee, I said a plan that is largely government securities. T bills. 

Ms. GHILARDUCCI. You can go into cash or you can go into government bonds. But that would not be a good thing to do now. 

Mr. ANDREWS. It may or may not. The question I am asking is 

I have this image of this 55-year old standing aboard the deck of 

the Titanic as it is sinking and seeing other people getting on lifeboats in the form of Treasury bills, escaping the risk market to do 

that. How many of our 401(k) plan participants don’t have an option like that in their plan right now? Does anybody know? 

Mr. ORSZAG. I can’t quote a specific number, but I think the vast 

majority of 401(k) plans offer the option to go into a fixed income 

kind of thing. 

Mr. ANDREWS. Do you think we should require that all of them 

offer such an option? What do you think? 

Mr. BRAMLETT. I mean the risk in the U.S. Treasury is essentially mainly inflation risk. 

Mr. ANDREWS. Of course there are tips. 

Mr. BRAMLETT. That as well. That is possible. 

Mr. ORSZAG. You are asking a different question. 

Mr. ANDREWS. I am asking whether we should require DC plans 

to offer a government-fixed income type option as an option. Should 

it be required? 

Mr. ORSZAG. I think it is hard to make an argument necessarily 

against that, although again I am not sure how binding it will be 

because I think that option exists in most cases. 

Mr. ANDREWS. I think it does, too. Let me ask a second question, 

which I think is more vexing. In 2006 we had a long and tortuous 

debate over conflicted versus independent investment advice. Looking at that debate in this context becomes even more interesting. 
48

The chairman and I were pretty steadfastly on the side that any 

conflicted investment advice ran great risk, and I think this is the 

day that we were talking about that coming. 

It is my understanding that the Department of Labor is considering two loopholes in a regulatory sense to the statute that we 

passed in 2006; one dealing with the use of subsidiaries and the 

other dealing with—I frankly forget the substance of it, but two potential loopholes. 

Does anybody on the panel think this is a good time to be considering loopholes to the prohibition against conflicted investment advice? 

Mr. BRAMLETT. Absolutely not. 

Mr. ANDREWS. Anybody else care to offer a thought on that? I 

don’t mean that to be a rhetorical question. There were good solid 

arguments made in 2005 and 2006 that deregulation, to coin a 

phrase, the deregulation of this ERISA provision was a good idea 

because it would open up investment advice for people who don’t 

have it. In retrospect, that doesn’t seem like such a good idea to 

me. 

Mr. BRAMLETT. In many ways, it is salt into the wound because 

investment advice is a very simple, straightforward thing that can 

be given at a very low cost across a broad number of employees. 

We showed that at the 401(k) Company for many, many years. It 

can be provided for literally pennies per participant. To add that 

fee on top of all the other fees is just another, to me, more salt in 

the wound. 

Mr. ANDREWS. I see my time has expired. The comment I would 

simply make is that one can only imagine the potential for abuse 

in this kind of context where firms are starving for cash, and a 

likely person to give bad advice to is someone who has a modest 

401(k) plan. This is an issue I think we have to revisit. I, frankly, 

think the compromise we struck in 2006 is not terribly workable 

or wise. I hope we are here to revisit it in January, 2009. 

Mr. WELLER. I think it goes back to the question of is it efficient; 

is it a good use of, in this case, investor dollars; and in this case 

it probably isn’t. And I am with Peter, I think the value of financial 

education and financial advice is often overstated. I think in terms 

of the regulation side, you are better off just simply automating, for 

instance, default investment options possibly giving some sort of 

guaranteed income options in a 401(k). There is a bigger bang for 

the buck for the investor. 

Mr. ANDREWS. I think we also have to reexamine the department’s QDIA thoughts that happened before this crisis came along, 

too. Thank you. 

Mr. SCOTT. Mr. Chairman, thank you for holding the hearing. 

Just following up, we have always had problems—some of us 

have had problems with the idea that the investment adviser 

would have a direct financial interest in your decisions, which suggests that you may not get the best advice, you might get the advice that would steer you to that particular product. And in terms 

of what your investment ought to be, we have talked about the 

safest investments. But isn’t it true that long term, if you are a 

young person, the safest investments through a lifetime will offer 

you the worst returns? 
49

Mr. ORSZAG. Yes. In general, when you reduce your risk exposure, you are also reducing your expected return over long periods 

of time. 

Mr. SCOTT. We have talked about these defined contributions. 

That is where you put in a defined amount of money, and at the 

end what you see is what you get based on whatever the market 

did. 

Dr. Orszag, you mentioned how worse off people were after a few 

months from this year. What were those totals again, 10 percent 

in last quarter and——

Mr. ORSZAG. So from the second quarter of 2007 through the second quarter of 2008, the end of the second quarter, pension plan 

assets combined, public-private defined benefit, defined contribution, declined by about $1 trillion. Our estimates suggest that since 

the end of the second quarter——

Mr. SCOTT. What does that mean to somebody’s individual account? What kind of percentage drop are we talking about? 

Mr. ORSZAG. That is roughly a 10 percent decline in overall pension assets. Again that includes defined benefit plans. Defined contributions plans, actually, since they are weighted slightly more 

heavily towards equities, the percentage may be slightly higher. 

Mr. SCOTT. What has it done since the end of the quarter? 

Mr. ORSZAG. Roughly same decline since then. 

Mr. SCOTT. So it is about a 20 percent drop——

Mr. ORSZAG. Yes. 

Mr. SCOTT [continuing]. On average, in a defined contribution 

plan. What does that mean to somebody’s check upon retirement? 

If they had retired back at the beginning of this drop they would 

have made something. If they retired now, they would be getting 

20 percent less. Is that a fair estimate? 

Mr. ORSZAG. From the retirement slice—and we need to remember that for a significant share of the population, Social Security 

is the bulk of their retirement income, and of course that is not directly——

Mr. SCOTT. Just from the pension you are going to get 20 percent 

less by waiting——

Mr. ORSZAG. If they experience a 20 percent decline in that account balance then a feature of the 401(k) system is in general you 

have 20 percent less to consume in retirement. 

Mr. SCOTT. You alluded to the Social Security part, which you 

kind of inferred that that is a secure payment. If a few years ago 

we had gone to this privatization thing and people could be betting 

on the stock market, is it fair to say their whole retirement would 

have dropped 20 percent if we had privatized Social Security? 

Mr. ORSZAG. That depends on the structure. Those plans have 

different structures. It depends on the structure of the plan. 

Mr. SCOTT. If you had gotten into a you can invest in your own 

kind of thing, your retirement would have gone down with the market. 

Mr. ORSZAG. What is clear is that a lot of those plans do have 

the feature of more financial market risk in the upside, but more 

financial market risk is shifted to individual workers. And in the 

current environment that would mean that in general there would 

be a larger deterioration in retirement prospects. 
50

Mr. SCOTT. Mr. Weller, you mentioned something about a standalone pension. If you have a defined contribution plan where you 

have your own account, is that not stand-alone? 

Mr. WELLER. Those are stand-alone, but my remarks were specifically toward targeting. If you think about what works in the DB 

world, in the the defined benefit world, it is the stand-alone entities, the Taft-Hartley plans in the private sector, or the government pension plans. And I think it can serve as a good model for 

the defined contribution world. 

Mr. SCOTT. Now, on a defined defined benefit when you suggested it is separate, is the defined benefit plan now part of the 

corporate balance sheet? 

Mr. WELLER. The single employer plans are, and that does create 

enormous conflicts of interests and created some of the problems 

we have seen since 2001. 

Mr. SCOTT. For example, underfunded funds. 

Mr. WELLER. Largely there are good strong incentives to take advantage of the good times and basically take advantage of contribution holidays in the public sector where we are struggling with 

some of that, but the States are tackling that aggressively by putting a floor, for instance, under employer contributions. In the 

multi-employer plan and the Taft-Hartley plan, the collective bargaining agreement actually sets a rate of contribution into the plan 

and their contribution holidays are less likely to happen. 

Mr. SCOTT. A couple of years ago when this committee looked 

into it, a lot of the major corporations in America were at about 

two-thirds solvency. We considered legislation to try to make them 

more solvent. If we separated it and required the funds to be solvent, what effect would that have? 

Mr. WELLER. Well, it is hard to say. I think if you generally, 

however, look at what employers wanted—and we had substantial 

discussions during the negotiations of the Pension Protection Act—

what employers were were looking for in particular was regular 

contributions. So I think if Congress required or set up rules that 

regularized contributions to DB plans, we would ultimately have 

better-funded plans and we would have more of them. 

I think the Pension Protection Act of 2006 went exactly the opposite direction and made, for instance, the contribution to pension 

plans much less predictable and ultimately led a lot of employers 

to abandon their plans. 

Ms. CLARKE. Mr. Chairman, thank you so much for calling this 

very timely hearing, and to each of the panelists thank you for 

sharing your expertise today. I have to tell you that I just got back 

from my district, and what we are talking about here is flying 

above the heads of everybody. They are just reeling from what is 

happening to them and are really in a state of shock. 

And so my question to you is really coming from the people of 

the district. What they do understand is that we are in the midst 

of a reorganization of our financial system. They do understand 

that. Some people paint it as demise. But at the end of the day, 

we are going to have a system. And they recollect that there were 

tax cuts for the wealthy. That is a piece they really, really, really 

remember. And in the midst of this current financial crisis, they 
51

are trying to figure out, how do I just hold on? How do I hold on 

and land safely and work things through? 

As a result of the current financial crisis, many of my constituents are either borrowing or contemplating borrowing from their 

401(k) plans either in the form of a loan for themselves, to themselves, or as a hardship withdrawal. These actions either carry a 

penalty, hidden fees for early withdrawal and/or possible exposure 

to additional taxation if they are unable to pay back the loan. 

In your opinion would it be appropriate for Congress, in light of 

our current economic downturn, to repeal the penalties and/or the 

imposition of taxes for withdrawals from 401(k) plans? 

Mr. WELLER. A colleague of mine, Professor Wenger from the 

University of Georgia, and I wrote a paper this summer on 401(k) 

loans. I think it is a fairly tough issue because a lot of families 

need to take those loans. In our research we find that they often 

serve for supplemental unemployment insurance or supplemental 

medical insurance. I think there you could help them out. 

But on the other hand our research also showed that even a 

small amount of loans can have severe impacts on retirement security. For a typical average earner, $40,000 a year, if that person 

took a $5,000 loan early in their career, and even paid that off it 

can reduce their retirement savings ultimately by 15 to 20 percent. 

So I think where we are at this point, my recommendation would 

be to restrict access to loans to really just the emergencies and 

maybe help out there. But we have, unfortunately over time, moved 

towards making it easier for people to rob their future retirement 

income security to pay for their current financial security. 

Ms. CLARKE. I want to go back and, I am trying to recall who 

it was who said we are actually dealing with a psychological issue 

here. So when you talk about robbing your retirement, people feel 

robbed right now. Right now. We want to be very honest with the 

American people. We want to really deal with this in a constructive 

way. People are trying to make ends meet. And they feel like their 

life is in crisis right now, whether they are ready to retire or not. 

And so the options to them are few and far between. 

Think about the psychology of that and looking at what is happening with their 401(k) and trying to figure out mortgage payment, or do I watch this 401(k) continue to diminish? Maybe this 

is the time to do what I can, is reorganizing our financial system 

to at least save myself for now. 

Can anyone respond to that type of psychological pressure that 

is hitting the American people right now? 

Mr. BRAMLETT. Keep in mind the difference between financial 

hardship and a loan. Financial hardship, you are taking money out 

that can’t go back in. There is a penalty. On a loan you are actually 

borrowing the money from yourself. You are paying yourself back, 

the money goes back into the plan. Ultimately there are limits set 

on that, and basically whatever the interest rate return is on the 

loan is the earnings that you are getting on the loan. So to me it 

is fairly easy to rationalize loans as a way of distribution. 

Financial hardship is another thing, and that is a more difficult 

thing. So it is a real challenge because they need it now, but they 

are going to need it in the future. And with life being extended, 

and it will continue to be extended, people are going to be chal-
52

lenged in their older age. And so we have got to find ways to help 

people keep money in these accounts when it is very difficult and 

it is very challenging. 

I don’t want to sound harsh but there is a study recently that 

said people’s happiness maximizes at $17,000 a year, and that is 

hard to believe. But the reality is that your basics, once they are 

taken care of, you know, and in the future, people in retirement 

may not be able to take care of their basics. And so there may not 

be anybody there to help them. It would be great to have acrossthe-board plans, but chances are that is going to be challenging. 

But loans I think are a good positive thing. 

Ms. GHILARDUCCI. I just want to say that if you do that, if you 

need to do that, then you just know that Congress should just 

abandon the subsidies for 401(k)s going forward, because those 

penalties were put in by Congress to preserve it for retirement. If 

in a recession you now reduce those penalties, then you have actually erased all the reasons to have those tax subsidies. So if you 

do it, you can only do it once and, going forward, don’t have tax 

subsidies for the way that 401(k)s are structured now. 

Ms. CLARKE. Just in closing, Mr. Chairman, the whole issue of 

the loan, if you don’t pay back the loan, the money is added as income and taxed. Isn’t that correct? 

Ms. GHILARDUCCI. Yes. Right. 

Ms. CLARKE. So I think it is just important as we go through this 

process for the layperson out there who is really just trying to figure out what life needs to be like for them right now, these are the 

types of bread-and-butter issues that they are drawing upon right 

now. And they are looking to us to come up with the best way to 

navigate and to hold onto the life preserver. And they are looking 

at their 401(k)s, they are seeing them shrink, and they are thinking my life preserver is melting away before my eyes. 

Thank you very much, Mr. Chairman. 

Chairman MILLER. Thank you. Mr. Sarbanes. 

Mr. SARBANES. Thank you, Mr. Chairman. 

What is the credit access of retirees? In other words I know that 

you can get a fair number of credit cards with pretty high limits 

on them if you are a working adult. But what does that world look 

like for your typical retiree? Anybody. Quick. 

Mr. WELLER. Well, the data does show that more retirees or 

more older households have loans these days than in the past. 

These data are before the current crisis, so we know for instance 

increased access in particular for mortgages, that is typically where 

we see the expansion of credit for older households. Less so among 

credit cards. 

Mr. SARBANES. So reverse equity loans and so forth. They are 

pulling the equity out of their homes essentially. 

Mr. WELLER. Yeah, or prolonging——

Mr. SARBANES. So they don’t have as much access to the typical 

credit card, the value of their home is dropping, and their retirement is sinking. So all the directions they could turn to try to come 

up with dollars to get through the day basically are on the 

downslope. So everything that is happening right now is hitting 

them. 
53

Mr. WELLER. There are fewer job opportunities for them in the 

current market. 

Mr. SARBANES. That is a fourth one. 

Let me ask you this. I represent a district that has a very high 

number of retirees and an increasingly high number of retirees, so 

I am very sensitive to these issues. Do we have a pension system 

in this country? 

Ms. GHILARDUCCI. Yes, we have a tiered pension system. On the 

bottom is Social Security. It is in pretty good shape. In the middle 

tier are employer pensions subsidized very generously by Congress. 

They are increasingly individual-directed, they are defined contribution, and they are heavily tax subsidized, and that system is 

eroding. 

On top of that is personal savings which you just alluded to is 

also eroding. There is in that top also home equity which is an important part of our pension system. We don’t usually talk about 

that. But we have a pension system, but it is increasingly only secure in the Social Security base. 

Mr. SARBANES. I guess what I am getting at is that doesn’t strike 

me as a system. If it is eroding, if two of the tiers are eroding, how 

is that a system? And compare it if you could, anybody who knows 

enough about it, to systems other places. Is there any country out 

there that has a pretty decent system that is not sort of eroding 

every time you turn around? 

Mr. BRAMLETT. Well, there are the European systems which are 

the strongest, but they are largely underfunded and they also exclude a lot of people who are immigrants and so——

Mr. SARBANES. Why are they the strongest quote-unquote? What 

makes them strong? 

Mr. BRAMLETT. They are the most comprehensive in terms of coverage, from in terms of——

Mr. SARBANES. Is there more of a public-private partnership? 

Mr. BRAMLETT. For instance in 2012, the U.K. Will have a program that will require every single employer to contribute to a plan 

which will be matched and employees will automatically be defaulted into that, and it is called the personal account. And so 

there are systems that are emerging that are broad based, that are 

government mandated, that require employer contributions and require employee contributions and are not optional. And so those 

exist out there. 

And the issue I think, really, is how competitive can we be on 

a worldwide basis with our own labor, in our own economic system, 

if we have a hugely expensive pension system and people are living 

very long and there is just no money there to pay for it? 

Mr. SARBANES. If they don’t have money then they can’t buy 

things, as Mr. Orszag was saying too, which is going to undermine 

the economy. 

Mr. ORSZAG. I think the defining characteristic of many of those 

other systems is that they involve a mandate somewhere. It is really hard to get to basically universal coverage on a pension system 

solely through voluntary means. And so if you are looking at, you 

had said, an eroding system which is partially because we don’t 

have anywhere near full coverage, one of the reasons is that we do 

rely on incentives for both planned sponsorship and then for par-
54

ticipation. And you don’t get full kick to that, you don’t get universal take-up in part because it is optional. 

Mr. SARBANES. What I see here is that we really have like a pension evaporation system in our country. And the problem is we 

never told the retirees that that is what it was. We actually represented to them, employers represented to them, people that entered into collective bargaining agreements represented to workers, 

et cetera, that we actually had a pension system. And it turns out 

we don’t really have a pension system. And so a lot of these people 

who thought they were going to be looked after in their retirement 

years are figuring out where they are going to go get a job. 

Mr. SOUDER. Thank you, Mr. Chairman. I am sorry, I was over 

with AIG asking questions over there. 

Chairman MILLER. How are things going over there? 

Mr. SOUDER. Pretty rowdy. 

I have a general question first, and that is that in the retirement 

funds, wasn’t the higher—in other words if you received higher 

benefits you were taking higher risks—maybe you have covered 

some of this ground, but was that risk fully disclosed? 

Now what has happened here is that it was very hard to predict 

the very high risk we have. But anybody who was trying to maximize and got more return presumably had more risk. Could you 

comment on that? Because part of the question here is that while 

certainly some people scammed the system and should go to jail 

and others manipulated the weaknesses in the regulation, some of 

this was everybody was trying to maximize their return, which encouraged people to take riskier and riskier subprimes and all that 

type of thing. Would you kind of discuss that from a retirement——

Mr. WELLER. I would say we could definitely do more in terms 

of disclosing and showing risks. By and large, especially with the 

mutual fund industry, what you do is, what is your attitude toward 

risk, and you check a few boxes and they put you in the green 

bucket, the yellow bucket, and the red bucket, red being the 

riskiest one, and you go on your merry way. There is more you can 

do. There is a chance if you go in this red bucket in your investments, your chance of losing 20 percent in the next 5 years is much 

higher than if you stayed in the green bucket. So there is definitely 

more to be done in terms of disclosure. 

But let me also say the one thing that Peter Orszag already alluded to, we have to get back to psychology 101. We know that people do make what seems irrational choices for economists. In particular, about 20 percent of all 401(k) assets are in employer stock. 

Peter had some numbers that 15 percent of people have more than 

90 percent of their money in employer stocks. So that is one thing; 

the lack of diversification; the phenomenon of buying high and selling low. 

People started opening up subprime loan funds in 2006. That 

doesn’t seem like such a wise decision today. But clearly a lot of 

people did. So clearly—there is not much that you can do in terms 

of disclosure, you can’t tell the participant at the bottom of your 

fund prospectus ‘‘Warning, your psychology may lead you to make 

irrational choices.’’ So I think we have to think about how we can 

structure better 401(k) plans. 
55

Mr. SOUDER. But one of the questions is, when people—my fundamental question is: Is there anything that pays higher return 

that doesn’t have higher risk? 

Ms. GHILARDUCCI. No, there isn’t. But if the stock market is 

going up, surveys show that more and more people will say their 

stock market can never go down. Or more people will say, yes, I 

can expect 8 percent return. All the retirement calculators on the 

Web, all the financial education you get, start with assuming you 

get 6 and then you get to choose whether or not you want to assume 8 or 10 percent. 

So we have an industry that actually wasn’t up against irrational 

humans, but actually knew these irrational humans and made 

enormous profits. So the financial sector went from 2 percent of the 

economy to 20 percent on the backs of these 401(k) plans and on 

the backs of congressional subsidy. This means, what Representatives Clarke and Andrews said, that all the disclosure in the world 

would not fix the problem we have now; that people who have 

these 401(k) assets have no flight to safety. It is just practically not 

an option for them. They didn’t know they needed the safety. And 

if they do do it, they are stuck with selling at the very bottom of 

the market. They are instructed to not save anymore because Congress is not helping them restructure their other debt. 

Why don’t you pass laws that make every credit card company, 

every home mortgage, restructure the debt before you have them 

go into the only asset they have? I would suggest that. 

So we have set up a system, and there is really no way of fixing 

it on the margin, that requires people what they can’t have, and 

setting up a whole vendor, a commercial vending class that will 

take advantage of what humans do when they try to do something 

that they are not trained to do. It is fundamentally flawed. 

Mr. BRAMLETT. We need a paternalistic system. Except the parents we have put in charge turned out to be—the furthest paternalistic system has been the financial institutions. And that is like the 

fox guarding the chicken house, as they say. 

So, you know, there is what Teresa is saying is that what the average person experiences in a stock plan in terms of return is about 

half of what that actual fund actually produces. And that is because they get in too late, and they follow the returns in, that kind 

of thing. And there are all kinds of reasons for this. The average 

turnover in a mutual fund has gone from 20 percent in 1970 to 113 

percent today. What in the world has happened between 1970 and 

today that we have had to have turnover go up from 20 percent to 

113 percent? So that the average stock being held in a mutual fund 

is like 8 months. Is that long-term investing? And why is it churning so much? And how much expenses are being generated as a result of that? 

So yes, risky assets do. But people don’t take advantage of that 

return. 

Mr. BRAMLETT. If I could just add and summarize briefly, Congressman, you have identified exactly the right point, which is that 

in general when you assume more risk you get a higher expected 

return. However, there are two parts of the 401(k) system where 

we need to modify that conclusion. First, people assume too much 

risk that they don’t get compensated for by investing in a single 
56

stock, their employers’, and way overinvesting in that single stock 

and not diversifying. And you don’t get compensated for that so the 

normal trade-off doesn’t work. And secondly, as has already been 

mentioned, administrative costs, especially on actively managed 

funds, are higher than on passively managed index funds, and the 

academic research suggests you don’t get anything in return for 

those additional fees. So many investors are overinvested in a single stock instead of being diversified, and therefore they don’t get 

the extra return in return for extra risk. And then they are overinvested in a high-cost fund which the research suggests doesn’t 

get you any extra return; you just pay higher fees. 

Chairman MILLER. Mr. Kucinich. 

Mr. KUCINICH. Thank you, Mr. Chairman. I also just came over 

from the AIG hearings, so if I ask any questions that have already 

been answered, forgive me. But these are areas that I think bear 

scrutiny. 

A few years ago, there was a lot of talk in Congress about 

privatizing Social Security, which meant that Social Security would 

have bought into, quote, invested, unquote, in the market. We 

know now that would have been an absolute disaster for the American workers. As a matter of fact, I think it was the Lehman Brothers, had holdings which included the country of Norway’s pension 

funds, invested in the U.S. market. And that has gone down. What 

is going to happen to those people? We don’t hear much discussion 

about it. But it is in Norway. 

I have for the record here, Mr. Chairman, without objection, an 

article that says Norway’s Finance Minister was being summoned 

to the Parliament this week to answer questions tied to investments made by the country’s oil fund in a bankrupt U.S. investment bank, Lehman Brothers. Without objection. 

[The information follows:]

[From Upstream, Wednesday, September 24, 2008]

Lehman Collapse Hits Oslo Oil Fund

By Upstream Staff 

Norway’s Finance Minister Kristin Halvorsen will address parliament later this 

week after it emerged that the country’s oil fund substantially boosted its holdings 

in now-bankrupt US investment bank Lehman Brothers in the final stages of the 

bank’s collapse. 

The move follows a report published in the Financial Times which revealed that 

as the investment bank’s share price fell to catastrophic levels, some schemes invested heavily in Lehman shares, effectively placing speculative bets that private 

or government groups would bail it out. 

Halvorsen initially refused to answer questions about the fund’s potential losses 

on the investment, but will now address parliament, daily newspaper Aftenposten 

said. 

According to the FT, the $346 billion Norwegian Government Pension Fund—

Global, the country’s oil fund, looks set to be one of the largest Lehman victims. 

Norges Bank Investment Management (NBIM), the fund’s investment manager, 

added 15 million Lehman shares to its holding in the latter phase of the collapse. 

This took the total number of shares held in the bank to 17.5 million. 

The FT said that, according to the shareholder database of Mutual Fund Facts 

About Individual Stocks (MFFAIS), the scheme could face up to $238 million in equity losses. 

NBIM would not comment about any losses or the most recent value of its holdings in Lehman Brothers. 

An NBIM spokeswoman told the FT: ‘‘We are very concerned and are following 

the situation closely. But we only disclose our holdings once a year in our annual 

report and will not comment on any single investment.’’
57

However, equity losses could be the least of the fund’s worries. It is believed that 

the fund has exposure to debt securities in Lehman, as well as more holdings in 

Lehman subsidiaries and existing mandates and contracts with the collapsed bank. 

The losses will be difficult to calculate, the FT reported, at least until the bank’s 

remaining assets are sold off. 

The report added that the oil fund has $779 million in Lehman debt securities 

that are now trading at distressed levels. It also has both bond and equity holdings 

in various Lehman subsidiaries. 

Mr. KUCINICH. I am looking at this report that Mr. Orszag has 

done, and thank you for your excellent work, and you talk about 

mitigating financial market risks by sensibly designing pension 

plans. But here it is: If you had any degree of money in the market 

one way or another you were putting aside for your pensions, there 

are many people who have put themselves—who are in a situation 

right now, where they are going to have to continue working, right? 

Is that true? 

Mr. ORSZAG. That is likely to be one response, yes. People will 

live longer. 

Mr. KUCINICH. So somebody who may have been saving to retire 

at age 64 or 65 is quite likely, as a result of these circumstances 

with the market, could be working until they are 70 or more; is 

that not true? 

Mr. ORSZAG. It is possible. One caveat is, and one would expect 

that to be part of the response. One caveat is that in response to 

the decline in the stock market in 2001 and 2002, when you would 

have expected the same thing, the research that has been done 

there doesn’t suggest any significant effect on delaying retirement 

post the 2001 decline. 

But I would say that one would expect, again, at least directionally, that one response would be to delay retirement. 

Mr. KUCINICH. And if people are delaying their retirement, they 

are also wearing out at a faster rate physically. It is just axiomatic. 

My concern is that with the Pension Benefit Guaranty Corporation 

seeing even more stress as a result of these circumstances, what 

do we say to all these Americans who are on the threshold of retirement about what can the government do? Maybe you have covered this already. But what should we be doing to try to find a way 

to salvage the retirement position of American workers? 

You know, it seems that Congress—excuse me, with no disrespect to anybody on this panel—rushed to protect Wall Street in 

hopes that some benefits would trickle down to workers, right? And 

the question is what should we be doing apart from the bailout—

which I voted against because I thought it was a fraud—what 

should we be doing to help America’s workers right now? What 

kind of legislative action should we be taking now? 

Mr. ORSZAG. I would say three things. First, it is not legislative 

but just a reminder, as you know, that for the majority of American 

households in retirement, Social Security does provide a majority 

of their income, and that is a base; it is not a full solution, and it 

is not anything that anyone would want to live on exclusively, but 

it is a base. Secondly, that the best outcome for 401(k) balances 

will be a general recovery of the economy and a general recovery 

of financial markets so we can talk more about the steps that 

would bolster the economy in the short run. 
58

Mr. KUCINICH. If we prime the pump of the economy, for example? 

Mr. ORSZAG. As I said earlier, I think at this point it is very undoubtedly the case that when the official NBR committee that looks 

back on these things looks back at this period, given the strength 

of the credit crisis that we are experiencing and therefore the further diminution in economic activity that will come and the job 

losses that have already occurred, it seems implausible to me that 

this period will not be labeled a recession. In that kind of setting, 

there are additional aggregate demand steps that could be beneficial.

Mr. KUCINICH. Mr. Chairman, I just want to say—my time has 

concluded for questioning—that I think Congress has a chance here 

to really do something that will help pensions as well as other 

areas by taking steps to have the government assume a controlling 

interest in these mortgage-backed securities, so that we can create 

a fix for people who are worried about losing their homes, through 

changing the terms of their repayments of their mortgage and also 

create jobs. This is something the Chairman certainly knows about 

because this is the religion that a lot of Democrats were raised on, 

priming the pump of the economy, getting people back to work, 

help people save their homes. And that has a percolating effect on 

banks and on markets. 

So I want to mention that, because apparently the market isn’t 

responding too well to the bailout and maybe we will get a chance 

to do something else. 

Thank you, Mr. Chairman. 

Chairman MILLER. I would like, to say you might want to direct 

yourself—I know you came in late and didn’t get an opportunity to 

hear Dr. Ghilarducci’s suggestions about allowing a swap-out of 

401(k)s for government bonds. 

Mr. KUCINICH. If you could, I would appreciate it if you would 

just give me a synopsis. 

Chairman MILLER. I will let the author do that. I am smarter 

than that. 

Ms. GHILARDUCCI. I will do it in 15 seconds. I propose that you 

offer up to 401(k) asset holders now a swap-out of their toxic assets 

for a government guarantee, so you do for them what you have 

done for the banks. 

Mr. KUCINICH. I am ready with the legislation, Mr. Chairman. 

Chairman MILLER. You have to run faster than that. If I might—

thank you. Oh, Mr. Holt—I am sorry—Mr. Holt. 

Mr. HOLT. Thank you, Mr. Chairman, and thank you for arranging this hearing. I thank the witnesses. I apologize for arriving 

late. I was caught up on some of what has transpired. 

I would like to ask Dr. Weller, if I may, a little about the savings 

problem. You state that low- and middle-income workers are particularly vulnerable in retirement because of low levels of savings, 

and you suggest the use of various kinds of progressive incentives. 

Could you describe a little bit more, if you haven’t already put 

this in the record, dollar-for-dollar matching, tax credits, et cetera, 

to encourage savings? And who would provide those incentives? Is 

this going to be another obligation of the Federal Government? 

How could that be done? 
59

Mr. WELLER. There are basically, the way I would describe it, 

three different approaches. All would require essentially taking 

back the current tax incentives for saving, largely tax deductibility 

off contributions to qualified plans and replacing them with something else. You have professor Ghilarducci’s proposal where everybody would get a $600 flat amount. 

You have the proposal of my colleague and friend, Gene Spurling, 

where it would be a match of—I think 20 percent is Gene’s proposal, if I am remembering correctly. Again, it is intended to be 

revenue-neutral in that case by taking back some of the tax deductions that you have. 

And then the third part that a number of people, including myself, have proposed is to match—to give additional matches to lowincome people, let’s say a 2-for-1 match or 3-for-1 match that would 

gradually be phased out. Again, that could be done, either revenueneutral by taking back some of the tax deduction incentives that 

you have, or by taking back some of the tax cuts that were implemented since 2001 and pay for that. For instance, some of the estate tax reductions. 

So those are generally the three approaches to make the tax incentives under the current system substantially more progressive. 

Mr. HOLT. Mr. Orszag, or others, would you care to comment on 

the effectiveness of those kinds of incentives? 

Mr. ORSZAG. I would say the effectiveness of the current tax system is relatively low in encouraging net additions to saving. And 

I touched upon this earlier. But the reason is that the current tax 

incentives are tilted towards—for each dollar of contribution—towards higher income households who more easily can shift assets, 

and the evidence suggests that is what they do. They shift assets 

from tax accounts into the tax preferred accounts, and when you 

are just shifting assets around you are not getting any new saving. 

So a lot of these ideas are aimed at trying to focus incentives on 

lower- to moderate-income households who don’t have as many 

other assets, and therefore any dollar—any assets outside of retirement accounts—any dollar that shows up in a 401(k) plan from 

them is much more likely to be new saving rather than just asset 

shifting. And that is important. 

Mr. HOLT. Dr. Ghilarducci. 

Ms. GHILARDUCCI. I used to be a fan of progressive incentives, 

and that experiment is over. My reading of the research is that the 

systems that work, either in this country, and when people are—

defined benefit systems, big employer groups, or, in the Netherlands, Australia, and in other systems—the only thing that works 

is a mandatory tier on top of a basic state plan. In this country it 

would be Social Security. 

So I have proposed a mandatory universal pension system on top 

of Social Security where workers would save 5 percent of their income all their working lives and much of that would be subsidized 

by a rearranging of the government subsidies that we have now 

that don’t work for 401(k). 

Mr. HOLT. Quickly in the moment I have remaining, let me ask 

about what appears to be a disincentive, which is something known 

as ‘‘reserve plus’’ that allows you to have a debit card where you 
60

can draw on your 401(k), pay it back over 60 months at 2.9 percent 

above prime. Should we allow that? 

Mr. WELLER. I am usually not a big fan of outlawing financial 

products, but I call this the subprime version of the 401(k) world, 

yes. Because it is exactly 3 percent more. It is enormously punitive. 

It is exactly the wrong direction to go in 401(k)s. 

I know that Members of Congress have proposed outlawing it, 

and I think that is probably the right direction. 

Mr. BRAMLETT. Just to follow up to the comment on progressive 

versus mandate, to me it is either/or. In other words, if you mandate the system it works. If you don’t mandate the system, then 

it has to be progressive. 

The small employer is the one who has the—the employee of the 

small employer has the lowest 401(k) account balance. They have 

about one-third of the average account balance of a Fortune 500 

company. They typically also do not have a defined benefit plan, so 

they have the smallest amount. So there has to be incentives for 

the small employer to establish 401(k) plans which are tax incentives for the highly paid people. And that works to some degree, 

not to a perfect degree. To take that away and not go to a mandatory system is probably not going to work. It is one or the other. 

Mr. ORSZAG. Could I just add one other counterproductive thing, 

which is that in many cases we are encouraging people to save in 

401(k)s and IRAs. And then it is often the case, and people will experience this to some degree during an economic downturn like 

today, that because of the asset tests that apply in programs like 

Medicaid and Food Stamps and other means-tested benefit programs, we have encouraged people to save. And then if they do, we 

often then cut off their access to programs that help them during 

economic downturn, which, from a rational economics perspective, 

is effectively a tax on saving. 

So on the one hand we are trying to encourage saving through 

the Tax Code, and on the other hand we have a huge potential disincentive to saving through the asset tests that apply to many of 

these programs, although there have been some improvements recently. 

Chairman MILLER. Thank you. I am a little concerned that we 

are here having this discussion and we are using the language that 

might be appropriate to yesterday, last year, 2000. We act as if this 

is the same, and if you just hang onto your 401(k), your pension 

plans, whatever you do, it will all come back to you. Some of you 

may be too old and it won’t come back in time, but for most of you 

it will come back. 

My sense is that this somehow is different. In just the negotiations over the recovery plan, we watched the Secretary of the 

Treasury, essentially with his partner, the Chairman of the Fed, 

sort of like Butch Cassidy and Sundance, they kicked open the 

doors of the Congress, they said give us $700 billion, no questions 

asked, and no liability. That is after four times they told us they 

thought they had it contained. I don’t fault them. But I still think 

that they were looking as if this was sort of typical. 

I am maybe one of the oldest guys in the room here, but I don’t 

remember when we had an implosion of the housing market, that 

we had an implosion of financial institutions, what now appears on 
61

a worldwide scale, implosion of the credit markets and the seizing 

of the credit markets and an implosion of the stock market. I don’t 

know how you just get well tomorrow the way you did yesterday. 

There is something wrong in this equation here. 

I think for the millions of families and certainly for the families 

that I visited this weekend in my district, the fear factor is huge 

and they don’t see the availability of resources to them to get well. 

They are openly talking about if they can, deferring retirement; or 

if they can, go back to work; if they can, they hope the housing 

market recovers, because they may own their home or they may 

have a loan on it. They are not in trouble with the home, but they 

know the value is dropping rapidly and that was part of their saving and retirement plan. 

So in every window they look out, there is trouble. And the idea 

that, well, you just gather yourself and hold on and in 3 to 7 years 

it will all be back. The Japanese waited 12 or 14 years before it 

ever got back. And now more and more people are saying instead 

of this being deep and long—I mean shallow and long, this is going 

to be deep and long in terms of the recovery. 

And so I just think that we as policymakers have got to think 

about what do we do for these people who are in this fix? We are 

going to inherit them one way or the other if they don’t have adequate resources for their retirement. We are going to inherit them 

in public expenditures for nutrition, for savings for health care. 

And a lot of people don’t want to see themselves in that position. 

They wouldn’t talk in those terms. But the margin between being 

in a public program in health care and health care is not too great 

anymore today. And you don’t control it. And this is why we are 

having this hearing. 

I don’t know if Dr. Ghilarducci’s proposal is right, or what used 

to be the Orszag plan, or the other plans, talking about how we rationalize——

Mr. ORSZAG. I didn’t know I had a plan. 

Chairman MILLER. You worked on one for years, in your other 

life. But the point is, somehow we have to rationalize what is the 

security going to be, the financial security going to be for American 

citizens who worked their entire lives? I think that has been 

thrown into the abyss at this moment. Maybe I am wrong and 

maybe this is something like we have seen before. Except most of 

the people that saw this before I call them mom and dad, you 

know, so I don’t know how this—and that is why I guess people 

are kind of blowing by the ‘‘recession’’ word. But they are thinking 

when it was cataclysmic, it was something other than that. And 

this starts to look very cataclysmic for middle-class families, very 

cataclysmic for middle-class families. 

I was struck, I was crossing the Golden Gate Bridge, listening to 

the discussion of the financial situation on the radio and about 

what is happening to families, and there was the largest sailboat 

in the world, $125 million I think spent on a sailboat cruising 

around San Francisco Bay. And I thought, my God, what has happened here? 

And I am deeply concerned that people are—you know, we did—

somehow this economy did a magnificent job of lifting a huge num-
62

ber of senior citizens out of poverty with health care, with Social 

Security, with economic expansion and the rest of that. 

I am really very concerned about whether or not there is a significant cohort of people, 45 and older—maybe I am starting too 

young, but I think this is a serious dislocation that has taken 

place—that are going to be in a position to provide for their wherewithal for themselves, their family, and their immediate family. 

And I just am very concerned that the idea is, well, you know, dollar cost averaging, you all get back there. I don’t know that that 

is the case. 

Mr. ORSZAG. Could I make a comment, because I would agree. I 

think the period we are experiencing is arguably the greatest collapse in confidence that we have experienced since the Great Depression. And one of the frustrations is that even before this immediate period, as has already been remarked upon, both the pension 

system and the health care system and other aspects of our—the 

way in which we conduct our economic activities had imperfections, 

were tattering or fraying, and the political system does not deal 

well with gradual long-term problems like retirement security or 

like rising health care cost. 

So I think a key question out of this crisis, is there an opportunity to refashion things that had to be refashioned anyway in a 

much more sensible way? And I would hope that the Congress and 

other policymakers, as we struggle with a very challenging economic environment, will look to trying to solve those underlying 

problems, because we can do that. I am confident that we can do 

that if we seize an opportunity to refashion things in a way that 

actually will work better for not only the American public but for 

the public fisc. 

Chairman MILLER. I think that people in good faith invested. 

Some people took more risk than they should have. Some people 

took more debt than they should have. All those things happened, 

and that is human nature and that exists and that is typical and 

we recovered from those ideas. 

But when you are talking about the pace of the implosion here, 

the loss of $2 trillion, Peter, in a very short period of time in pension assets, $2 trillion, and then you kick that with the loss of equity in homes, that is multi-trillions of dollars for individuals. 

Whether they are in mortgage trouble or not, they have lost that 

value and they had plans for it. Maybe they were wrongfully 

placed, but that is what was going on in America. 

We have got to think about now that health care system can trip 

them up, the pension system can trip them up, the unemployment 

system can trip them up, and they really do engage in a personal 

catastrophe, and their ability to recover from that is nil, I think 

probably, given what their age is. 

But these other systems, as you point out, that aren’t properly 

designed for today’s economy and today’s society are also really 

hazards to them at this point in terms of them entering into bankruptcy or whatever financial difficulties they find on the road. 

Mr. Weller. 

Mr. WELLER. If I my may, I think the numbers are staggering. 

If you look—actually, if wealth had stayed the same relative to in-
63

come since 1999, households would have another $11 trillion in 

wealth, so clearly the last 7 years——

Chairman MILLER. That is a huge chunk of wealth, the stripping 

of wealth that has taken place. 

Mr. WELLER. We have certainly set an incredible wealth destruction machine into motion over the last 7 years. And that is only 

one part of the overall equation. You have to remember at the 

same time we have not kept pace in terms of employment generation, for instance. That is one of the biggest sources of wealth for 

families is their labor income, and we have not kept pace in terms 

of employment generation relative to population growth. 

And I think that gets me back to a larger point. We can debate, 

we can certainly agree on how to build a better retirement plan. 

But I think this may, as challenging as these times are, certainly 

be an opportunity to rethink what kind of economy do we want and 

how do we make sure that we get growth back on track? 

Certainly the last 7 years have shown us how not to get it back 

on track. And how do we then translate job economic growth into 

job growth, into wage growth so that families are well prepared? 

So I think this could be an opportunity to really start thinking and 

talking about what does a solid, short-term, medium-term, longterm economic recovery plan look like? And I think that is ultimately what is needed to recover these trillions of dollars that have 

been lost. 

Chairman MILLER. I just don’t see that people have the assets to 

recover. Wages haven’t kept up with the real cost of living. So, 

again, where do they turn to make this recovery? To spend less? 

We already know that they are taking on huge amounts of debt 

just to stay even. 

Mr. WELLER. They are turning to local governments. I think we 

are going to see more demands on local and State governments because that is often where the social services, the first-line defense 

are being paid. And ultimately local governments have to make the 

choices between providing education, health care, and social services. 

Ms. GHILARDUCCI. But I think Congress has helped. 

Chairman MILLER. We must help. 

Ms. GHILARDUCCI. I have proposed that you provide special issue 

bonds so that people can swap out their 401(k) eroding assets, once 

and for all, and that will be a permanent asset for them to use at 

retirement. So that is a very short-term proposal. 

I also urge Congress to think about helping people restructure 

their other debt. Interest rates are going up. Stop that. Let people 

rejigger their debt. That usually happens in bankruptcy court. Do 

a fast track for that restructuring of debt. 

Also going forward, don’t have a tax system that subsidizes those 

sailboats when there is a financial crisis. And the way that you 

subsidize that middle tier of retirement accounts, turn those tax 

deductions into tax credits. The fairest way I have come up with, 

the easiest, simplest one, is $600 for everyone, going forward. 

Chairman MILLER. Mr. Bramlett. 

Mr. BRAMLETT. I keep going back to $528 billion in securities 

intermediation, what is a future value of that? And we have allowed the 401(k) participants for 25 years to essentially be preyed 
64

upon by the financial services institutions. We have had a body of 

law called ERISA that says every plan’s sponsor must act in the 

best interest of the participants, and they have a fiduciary obligation to do so. And they haven’t, and it is clear. 

There is now a whole slew of plaintiff lawsuits, about 20 of them. 

They may generate something tantamount to what the tobacco 

suits have generated in terms of capital. But everything you mentioned is all financially related. We are talking about a bloated financial system that is not necessary for us to function as a good 

economy. And that threatens not only us, individual retirement income, it threatens us as a country. 

If we are just trading and selling each others’ stocks and bonds 

and insurance, and young minds are going off and sitting in front 

of Bloomberg screens and buying and selling IBM all day long, 

what are we going to be providing the world? And so we need serious financial reform of the financial services. We need people to be 

given access to the real economy at the lowest possible cost. 

Chairman MILLER. Mr. Andrews. 

Mr. ANDREWS. Thank you, Mr. Chairman. I think we are all prisoners of our present circumstances, and I think the Chairman has 

liberated us from that for a minute. And I would echo what he says 

in this regard. I don’t think the question is whether we are in a 

recession or not. I think we clearly are. I think the question is, how 

are we going to deal with what I would view as a shift of the 

tectonic plates that underlie the domestic economy? 

I don’t think we are in the middle of a blip in the business cycle. 

I think we are in the middle of a fundamental long-term change 

in the way Americans work and save and earn and spend. And I 

would argue there are two things different about our present circumstances. 

One is that capital can move at the speed of light. Labor cannot. 

In the 1970s when there was a recession, an auto plant would lay 

people off, but it couldn’t just rematerialize in Asia in a week. Well, 

now a call center essentially can. A financial services back office essentially can. So that is the first change. 

And then the second one is that I think there no longer is an 

American economy. There is a global economy of which we are a 

part. So decisions, bank failures that happened in Europe last 

week, had a profound effect on the ability of small businesses in 

my district to borrow money. Problems in the Japanese economy 

had an effect on the price of commodities that my construction 

firms use to either hire or not hire bricklayers and welders and 

electricians. So this is all reality. 

So given that, I would argue that the last 100 years of economic 

history in this country can be characterized as resolving or negotiating the tension between preserving the dynamism that makes 

new companies and new industries grow, but providing a safety net 

or a floor below which decent innocent people cannot fall. 

Teddy Roosevelt answered that question with antitrust laws. 

Franklin Roosevelt answered that question with the New Deal. 

Lyndon Johnson answered that question with the Great Society. 

And I think it is our time to answer that question now. And I think 

the tools from the 1970s or fifties or sixties don’t work because the 

circumstances are different. And we find ourselves in a situation 
65

with retirement savings where an increasing number of people are 

not in a defined benefit plan. They are in a sort of ‘‘wild wild west’’ 

of the defined contribution world where there is a fiduciary duty 

to safeguard assets, and it is a fiduciary duty taken very seriously 

by plan sponsors and vendors. They do a very good job. 

But of course that fiduciary duty does not extend, by definition, 

to the preservation of wealth. Those are not the ground rules of a 

401(k) or defined contribution plan. The present system is built on 

choice by the individual worker or investor or retiree. So if that is 

the case, I would come back to my earlier questions about whether 

the range of choices are adequate or sufficient to protect the interests of people. And I think that focuses on three questions: 

One, are workers getting sufficient independent investment advice? I think the answer is no. And I think we have to figure out 

a way they can get that advice. 

The second is how many workers are offered the most stable and 

safe choice? The question I began with in my first round of questions—and Michele has found in the 51st annual survey of profit 

sharing 401(k) plans, an interesting piece of data: that the percentage of plans that offer a cash equivalent or CD money-market-type 

option, which I would argue is sort of the safest thing out there 

right now, is only 47 percent. So half of the plans, at least according to this document, do not offer what I would regard as the safest 

vanilla—but I don’t just regard it that way, by the way. So do 

wealthy investors. They are flocking to the T-bill market in droves 

right now. So I think we have to revisit that. 

But here is a question I want to ask more directly for Ms. 

Ghilarducci. Your proposal, which would institutionalize in statute 

a whole different kind of choice for people where they could opt into 

this guaranteed income plan, is this an irreversible choice? If we 

adopted your idea and someone opted in, could they ever opt out 

again, or are they in for good? 

Ms. GHILARDUCCI. Yes, they are in for good; like you are in Social 

Security, which is actually the only thing that is working now. 

Mr. ANDREWS. So they wouldn’t get the upside if things turn 

back up again? 

Ms. GHILARDUCCI. What you get is a 3 percent guarantee from 

the government, plus inflation. 

Mr. ANDREWS. Would you cap the assets that someone could 

choose to put in? What if I had—which I do not—$20 million in a 

DC plan? Could I put all of it in this? 

Ms. GHILARDUCCI. Yes. It is capped 5 percent up to the Social Security maximum; otherwise you are subsidizing millionaires. 

Mr. ANDREWS. Is it open to any age group? Is it open to young 

people like myself? 

Ms. GHILARDUCCI. Yes, that is the point. 

Mr. ANDREWS. When this cash is collected—let’s say that my constituents en masse swap for this idea—who holds the cash? How 

do they invest it? Under what ground rules do they invest it? 

Ms. GHILARDUCCI. The cash is held by TARP, by the critter that 

you just created, by the Federal Government; and the Federal Government will invest it and hold it in the way that you all are seeing 

fit. The point is that you can do it better than any other financial 
66

institution that is around. The government is now a financial institution. 

Mr. ANDREWS. If the Federal Government makes a profit on this, 

if we would pay out 3 percent present value and make 6 or 7 the 

way we hope the TARP program does, sort of, who gets to keep the 

profit? What do we do with it? 

Ms. GHILARDUCCI. I have that figured out. There would be a 

board of trustees that would decide how much of a reserve fund the 

government needed, and if you went above that, then they would 

pay extra interest. I am in TIAA-CREF for college professors; TI 

is actually very similar to the plan that I am proposing. We all love 

it. It is a hybrid, DC/ DB plan, and those of us who are young and 

conservative, we have most of our money there and we are doing 

just fine in this financial crisis, like many other people in hybrid 

DC plans, DB plans. 

Mr. ANDREWS. My time has expired. I want to thank the panel 

for very thought-provoking testimony this afternoon. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Mr. Weller, you mentioned that the home equity as a function of 

income is the lowest since 1974? 

Mr. WELLER. 1976. The ratio of home equity relative to disposable income is the lowest since 1976. 

Mr. SCOTT. What about home prices? 

Mr. WELLER. Haven’t they fallen 10 percent since last year? We 

have a lot more to go. 

So we have a lot more to go. 

Mr. SCOTT. Are the home prices as a multiple of income at a low 

range or high range? 

Mr. WELLER. They are at the higher range still, but the problem 

is that for the past 10 years we have increased mortgages faster 

than home values, and thereby we have leveraged houses. At this 

point, homeowners own, on average, about 46 percent of their 

homes. 

Mr. SCOTT. And that is a fairly low percentage? 

Mr. WELLER. That is the lowest since 1952, since the Federal Reserve has started collecting data. 

Mr. SCOTT. We have heard all about the defined contribution 

plan, where you define what you put in but don’t know what you 

are going to get out, as opposed to the defined benefit plan, where 

you know what your pension is going to be when you get it. Now, 

all of the stock market decline, if you are in a defined benefit 

plan—are any people in a defined benefit plan at risk because of 

the collapse of the stock market? 

Ms. GHILARDUCCI. No. Only if they are employer-sponsored defaults. There is some risk that if it is underfunded, they won’t have 

improvements, but much less risk. 

Mr. SCOTT. So as long as the corporation, the employer is solvent, 

their benefit is protected? 

Ms. GHILARDUCCI. You also have the government guarantee, the 

Pension Benefit Guarantee Corporation. 

Mr. WELLER. You have also got to remember the largest group 

of American workers with the defined benefit plans are State and 

local government employees. We presume that they 

won’t all go bankrupt. 
67

Mr. SCOTT. When I was in the State legislature, the stock market 

was doing great, and some years we figured we didn’t have to contribute anything. Other years, it even did better, we actually took 

a little bit out to fund the rest of government. I assume the private 

employers were doing the same thing. 

Mr. WELLER. That is correct. 

Mr. SCOTT. Now when the market goes down, can they afford to 

make up—I mean what do they have to do when the market goes 

down precipitously? 

Mr. WELLER. Under the current system, they have to start—depends, again, on the rules of the system they are in. Depends on 

how many reserves they have. But they have to make up the shortfall faster than before. But the problem is that we didn’t really 

build up more reserves than we had in the past. So it is entirely 

possible that a private sector underfunded plan can move towards 

a crisis situation and then ultimately require substantial additional 

contributions from the employer. 

So far, yes, I think we can do more. I agree we should do more 

in terms of building plans to build up buffers and require them actually to build up buffers during the good times, so that when the 

bad time happens——

Mr. SCOTT. Continue to make contributions even though it looks 

like it is well funded. 

Mr. WELLER. Correct. I have suggested 120 percent of liabilities 

as the target you should fund to, not 90 percent or 100 percent, but 

really build up a buffer. 

Mr. SCOTT. Not 65 percent, where a lot of them are now. 

Mr. BRAMLETT. If Britain is any sign, DB plans will be gone from 

this country before too long. 

Mr. SCOTT. I am sorry? 

Mr. BRAMLETT. If Britain is any sign of what will happen, DB 

plans will be gone, because these employers with these heavy restrictions will not want to continue. So they will keep terminating 

them and terminating them. 

Mr. SCOTT. Because they want to shift the risk of the market 

going up and down from the corporate to the employee. 

Mr. ORSZAG. Can I just comment on that? That trend has been 

going on for a while. One reason is that workers have undervalued 

the risk protection that they get through a defined benefit plan. I 

wouldn’t want to hazard guesses here, but it is plausible the kind 

of experience that we are currently going through will refocus attention on why that kind of protection is very valuable. If that were 

to occur, then firms would start to offer something that workers 

saw as valuable. 

Mr. WELLER. It is certainly the case that some employees do not 

fully value the DB plans, but I think we also have got to look at 

what happened in Britain that has driven employers away, and has 

also happened in the U.S., and that is changes in the valuation 

rules that make the contributions from the pension plans substantially volatile and have ultimately led a lot of employers to abandon 

their plans. I think that is something Congress should revisit. 

Mr. SCOTT. If I could, Mr. Chairman, very quickly. What effect on all of this will the recent legislation, the $700 billion bailout, 

have on all the problems we are having with pensions? 
68

Ms. GHILARDUCCI. There is a provision for the bailout to help out 

defined benefit plans. I think Congress can do more to recognize 

that extracting more contributions in a recession from corporations 

will just, like the Pension Protection Act does, just accelerates their 

decline. So we didn’t focus on how to help defined benefits plan in 

this hearing. Perhaps we should have. But you can use some of the 

provisions in what you just passed and actually double back and 

repeal some of the aspects of the PPA. 

Mr. SCOTT. That would mean it would make less contributions to 

the plans? 

Ms. GHILARDUCCI. To give them some relief during the depression, and then implement what Christian Weller has proposed, is 

to make the target 120 percent of liability. 

Mr. SCOTT. Temporarily they would be less solvent than they are 

now? 

Ms. GHILARDUCCI. Yes, but they won’t disappear. 

Mr. WELLER. The proposal I testified before Congress several 

years ago, we would smooth the assets and the liabilities over 20 

years. That would require fewer contributions during bad economic 

times but substantially more contributions during good economic 

times, and your target would be about 120 percent of liabilities. I 

think that still seems like a completely reasonable proposal to me, 

but it is exactly the opposite direction from where the PPA went 

in 2006. 

Mr. BRAMLETT. Which is why a lot us in the industry call the 

Pension Protection Act somewhat of an oxymoron, because of the 

fact it actually encouraged the termination of defined benefit plans 

rather than encouraged their preservation. 

Chairman MILLER. Ms. Clarke. 

Ms. CLARKE. I want to add another dimension to the questions 

that I have asked today. Everything we are talking about is relative to your position along the financial spectrum, and a concern 

I have out of my district is the large numbers of single-headed female households. With wage discrimination lowering a woman’s 

lifetime earnings, thereby reducing the amount of money that 

women put into their pension plans, 401(k)s generally inhibiting 

their ability to save for retirement, women, and women of color, 

suffer more adverse effects than their male counterparts when it 

comes to wage discrimination. 

My question is twofold. First, can you discuss the impact that the 

current financial crisis is having on women, women’s retirement security in general, and if any of you know, what effect does this current financial crisis have specifically on retirement security for 

women of color? And then I have some other follow-up questions. 

Ms. GHILARDUCCI. We just had a conference on this at my university. Women generally do poorly in retirement security because 

they live longer. So it is lower wages, lower savings rates, and 

these longer lives. So that has to be put into place. 

The good news is that for many low-income single women the 

most valuable source of retirement income security is Social Security. Since you didn’t touch Social Security 2 years ago, the good 

news is they didn’t have that many assets so they haven’t lost that 

many. However, their chronic problem still persists. 
69

There is a good case to be made to expand Social Security now 

to solve the problems of very high risks of poverty of older women. 

So that is another subject. But we go back to the fact that when 

we had a financial crisis this deep, the response was the Social Security system and aid to families with dependent children. It was 

a massive income replacement and income security bill. 

Ms. CLARKE. My next question is to Mr. Jerry Bramlett. I haven’t 

heard this explicitly yet but I am trying to get a sense of how the 

recent financial crisis impacts current retirees, those who are already living off the proceeds of their 401(k) accounts. Can you give 

me a sense of what they would be going through right now if they 

are actually living off that? 

Mr. BRAMLETT. There is a lot of encouragement in the financial 

services industry to invest in equities. And I believe that that is 

rooted in the fact that people make more money when they sell equities than when they sell other types of vehicles. That is why you 

see a lot of things slanted towards equities. 

A lot of people are told at retirement, Gosh, you know, you’re 

going to live another 15, 20, 25 years. The market always rebounds 

in a 10-year period, or whatever. You can afford to have a large 

percentage in equities. And so we do have an inordinate amount 

of people in retirement who do have large exposure to equities and 

are being hit very hard. I don’t know the exact numbers on that, 

but I know I have heard a lot of stories about that. 

The other thing to remember, 60 percent of all participants in 

401(k) plans make an election and they never change it again. So, 

60 percent. So if I retire, I leave my money in a 401(k) plan, and 

I start to draw down on it, I am probably not making any changes 

either. 

Here, again, that is why there is a need for more oversight for 

these individuals, more help, more maternalism, if you will, but it 

needs to not be the people who are making the money off of the 

products, which has been the case the last 25 years. 

Ms. CLARKE. Just in closing, you stated that due to the current 

financial crisis, certain retirement funds such as real estate investment funds have announced that they are frozen and not available 

for distribution to participants due to the liquid nature of their underlying assets. You suggest that Congress should examine whether investments subjected to this susceptibility are appropriate. 

My question to you is: Can you suggest some investments that 

would be appropriate, meaning that they would not be susceptible 

to the liquid nature of the underlying assets? 

Mr. BRAMLETT. One of the things that is required under ERISA 

is that a person be an informed, prudent person. If they cannot be 

informed and understand what they are doing, they need to hire 

an outside expert. So the whole idea is you can’t just look at the 

label, you have got to look at the underlying securities themselves. 

You need to hire outside independent investment advice, understand how they are being paid, who is paying them to help you look 

through these vehicles. 

There are certain situations where a real estate fund, for instance, because of its very nature could freeze up on you and you 

can’t create liquidations. There are other real estate funds in which 

you can. So it is not as if real estate should not be an investment 
70

in a 401(k) plan, it is just the nature of the vehicle should be highly liquid. That was the basis of 404(c), was that people be able to 

trade from one fund to the other without any kind of restrictions. 

Now, people have found themselves locked in. The same thing 

goes for interest contracts with back-end loads, redemption fees, all 

these little things that they get hit with whenever they try to move 

money around. They should have some freedom in order to be able 

do that. And it should be on the burden of the plan sponsor as fiduciary, held under the law of ERISA, to be able to make sure that 

happens. 

Ms. CLARKE. Thank you, Mr. Chairman. 

Chairman MILLER. Mr. Holt, you can have the last question here. 

Mr. HOLT. Thank you again, Mr. Chairman. I thank the witnesses. It is a reminder that I think this committee has some action to take if we are supposed to give shape to the retirement situation of America’s workers. I, of course, lament the decline of the 

defined benefit programs, but since it has gone that way, let me 

ask about defined contribution. 

How serious a problem is the lack of diversity in the equities employees who are encouraged to buy in their own company, for example? There have been some changes and some different patterns, 

I think. But is that a serious problem and, if so, what is to be done 

about it? Is this legislation that we should be considering? 

Mr. ORSZAG. I consider it to be a very serious problem. Again, 

there are some risks that in a 401(k) plan are unavoidable, especially if you are trying to get over the long term some expected return. But overinvesting in an individual stock is not sound financial theory, and overinvesting in a single stock that happens to be 

your employer is particularly problematic because you are not only 

exposed to that company’s well-being through your job but also 

through your retirement fund. 

It is extraordinarily difficult to come up with any scenario where 

on average for workers it makes sense to be investing so dramatically in your own employer stock. Again, something like 7 percent, 

so 1 out of every 15 workers has 90 percent or more of their account balance in their employer’s stock. It is very difficult to justify 

that kind of lack of diversification under any finance theory. 

We had discussions earlier about the different funds that are offered, trying to move toward diversified funds, and just briefly I 

would note that while the CD and money markets were only offered by about half the funds, bond funds and stable value funds 

and what have you would raise that number dramatically and get 

you close to 100 percent. 

But I think moving towards defaults where people are automatically invested in diversified low-cost index funds offers the most 

auspicious way forward for balancing the various tradeoffs. I can’t 

justify the over concentration in employer stock that pervades the 

pension system. 

Mr. HOLT. Other witnesses, and in particular should we be imposing requirements? 

Mr. VANDERHEI. Could I add some actual real data here? The 

numbers Peter gave had been very representative of what the situation had been prior to Enron. For 20 million individuals that we 
71

track, in 2006 the number has gone down to only 7.3, which admittedly is still a large number that have 90 percent or more. 

The good news is what is going on with respect to the new participants. A lot of that money, as Peter and others have mentioned, 

is very sticky. Once the money is put in company stock, oftentimes 

people do not diversify out. The good news is if you look at the new 

individuals, people who have been in the plan 2 years or less, the 

number now that have 90 percent or more in company stock is 

down to 4.8. That had been up as high as 11.1 percent. 

Mr. ANDREWS. Will the gentleman yield? 

Mr. HOLT. Looks like Dr. Ghilarducci and Dr. Weller want to get 

a word in. 

Yes. 

Mr. ANDREWS. To what extent is that attributable to the QDIA 

provision? 

Mr. VANDERHEI. That is exactly the point I was going to make. 

We don’t have the ability to go back and break out to the extent 

to which employers have either allowed diversification more rapidly 

on the part of the employees and/or change——

Mr. ANDREWS. That is very material to Mr. Holt’s question 

though because it is happening by default. That is nice, but it is 

not really addressing the problem he is raising. Right? 

Mr. BRAMLETT. One option in our plan, BenefitStreet plan, we 

don’t have individual asset classes, we only have portfolios. A lot 

of the advisers who come to us, a lot of them especially who use 

ETFs, low-cost index funds, do not have individual asset classes, 

they only have portfolios, be they target-date portfolios or targetrisk portfolios. So one very simple way to do it is to simply eliminate the ability of an individual to buy an individual asset class 

within a plan. That may seem a little Draconian, but that would 

guarantee you immediate diversification for all employees. 

Mr. WELLER. You can never really make a DC plan as efficient 

economically as a DB plan. But one big step forward is exactly 

what Peter said, a well diversified default low-cost index can go a 

long way, according to the calculations. You can really improve retirement savings by 20 percent by simply giving a better investment option. 

Ms. GHILARDUCCI. A dollar in a defined benefit plan goes further 

than a dollar in a defined contribution plan because of fees, because of the asset allocation. If you do limit single stock in a plan, 

that is a good idea. You also might have the effect of smoothing out 

the volatility in the stock market because a place where companies 

lard up their stock value is by shoving it onto their employees. So 

you have these microeconomic good effects as well. 

Mr. HOLT. Thank you again, Mr. Chairman. 

Chairman MILLER. Thank you very much. I want to insert in the 

record a statement by Ranking Member Buck McKeon and also a 

statement from the American Benefits Council. 

[The statement of Mr. McKeon follows:]

Prepared Statement of Hon. Howard P. ‘‘Buck’’ McKeon, Senior Republican 

Member, Committee on Education and Labor 

The American economy is in the midst of a serious downturn, constrained by a 

global credit crisis and burdened by the weight of toxic assets that have made it 
72

more difficult for businesses large and small to maintain their day-to-day operations, much less to create the new jobs our economy needs. 

The stock market is often a reflection of the nation’s mood, and today’s widespread economic uncertainty can be seen clearly in the stock price rollercoaster ride 

of the past few weeks. And while it would be easy to dismiss the woes of the stock 

market as merely impacting the wealthy, the reality is that millions of Americans 

rely on investments in planning for retirement. Because of this, a downturn in our 

financial markets can have a real impact on workers’ retirement security. 

An increasing number of workers rely on 401(k)-type savings plans, in which they 

invest pre-tax earnings that are often matched by their employer. These plans are 

portable and protected, in that an employer or a union can never take away the benefits an employee has accrued. 

A smaller share of workers participates in defined-benefit plans, in which a plan 

sponsor—usually an employer or a union—agrees to pay an established benefit 

throughout retirement. 

While these plans—defined-contribution and defined-benefit—have many differences, both are impacted in large measure by the overall health of our economic 

system and by investment performance in particular. 401(k)-type savings plans are 

invested directly, usually managed by workers. Defined-benefit plans require plan 

sponsors to manage millions in assets over a period of many decades, requiring effective management of resources and risk. With the collapse in recent years of a 

number of defined-benefit plans, we have seen the risk to workers and retirees when 

plans are not effectively managed, or when benefits are over-promised and underdelivered. 

The current downturn in our financial markets has brought considerable uncertainty, particularly for those workers nearing retirement. More than half of people 

surveyed in an Associated Press-GfK poll released last week said they worry that 

they will have to work longer because the value of their retirement savings has declined. Particularly for those workers whose savings were held in too risky a portfolio for their savings goals, or for those who were not well-diversified, these are difficult times. 

Recognizing the challenges Americans face in planning for retirement, Congress 

passed crucial reforms in 2006—through the ‘‘Pension Protection Act’’—to shore-up 

defined-benefit plans, increase participation in defined-contribution plans, and, importantly, to allow workers to access high-quality investment advice in managing 

their retirement savings. In these times of financial turmoil, those reforms should 

help to make a real difference for workers and retirees. 

Today’s hearing is an important first step in examining how the ups and downs 

of the financial markets impact workers’ retirement security. However, this issue 

cannot be understood in a vacuum. Our committee does not have jurisdiction over 

the government sponsored enterprise mortgage giants Fannie Mae and Freddie Mac, 

but it is clear that the appropriate committees in both the House and Senate must 

ask the tough questions and hold to account those who allowed these agencies to 

put us on this path to economic instability. 

And while I commend Chairman Miller for holding today’s hearing, it is critical 

that Congressional oversight in this area not be limited to pre-election political theater. Members on both sides of the aisle should be permitted to examine these 

issues when Congress is in session, and with a full opportunity to explore the causes 

of the current financial crisis, the impact on workers and families, and what can 

be done to prevent such a catastrophe in the future.’’

[The statement of the American Benefits Council follows:]

Prepared Statement of the American Benefits Council 

Chairman Miller and Ranking Member McKeon, these are indeed unsettling times 

for American workers and American employers. The current difficulties in our financial system are posing a wide range of challenges for individual American families 

and American businesses. One of the challenges faced by American workers is an 

understandable sense of anxiety regarding their retirement planning and retirement 

security. We appreciate your consideration of these issues in today’s hearing and are 

pleased to share our perspective on the effect of these periods of market and financial uncertainty on our nation’s employer-sponsored retirement system. 

We appreciate the opportunity to submit this statement on behalf of the American 

Benefits Council in conjunction with the hearing you are holding today on The Impact of the Financial Crisis on Workers’ Retirement Security. The Council is a public policy organization representing principally Fortune 500 companies and other or-
73

ganizations 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 covering more than 100 million Americans. 

The Strengths of the Employer-Sponsored Retirement System 

The Council and its members have worked collaboratively with this Committee 

and with the entire Congress to build an employer-sponsored retirement system 

that is strong and resilient and that helps to advance the retirement security of 

American families. This successful system is marked by a number of key characteristics. It facilitates employer sponsorship of plans, encourages employee participation in pension programs, promotes prudent investing, insists on transparency, operates at reasonable cost and is subject to strict fiduciary obligations and sound regulatory oversight. This is a system that is built to serve the long-term retirement interests of workers and that is designed to weather changes in market, financial and 

economic conditions, even conditions as anxiety-provoking as the ones we are experiencing today. We, like you, believe we should always be asking whether this system 

can be improved to better serve the interests of plan participants, and today’s economic challenges present another opportunity to ask such questions. But we believe 

our current employer-sponsored retirement system plays a critical role in advancing 

workers’ retirement security, even when markets, 401(k) account balances and pension funding levels are down. 

The Long-Term Focus of Defined Benefit Plans 

Employer-sponsored retirement plans, whether defined benefit or defined contribution, provide an invaluable supplement to workers’ Social Security benefits and 

personal retirement savings. Defined benefit plans provide broad coverage, employer 

financing, professional asset management, spousal protections and lifetime income 

backed by guarantees from the Pension Benefit Guaranty Corporation. In managing 

defined benefit plan assets, fiduciaries must act prudently and solely in participants’ 

interests and must diversify plan investments so as to minimize large losses. Defined benefit plan sponsors invest for the long-term so as to secure the promises employers make to provide benefits many decades into the future. Unlike some others, 

defined benefit asset managers do not have a short-term investment focus. Pursuant 

to these legal obligations and investment principles, defined benefit plan sponsors 

invest in a broad array of asset classes and have avoided the heavy focus on mortgage-related investments that has contributed to the collapse of certain financial institutions and the weakening of others. As is true of all investors when markets fall, 

funding levels in defined benefit plans are down somewhat and this will impose financial obligations on employers, some of which may be struggling in the current 

economic environment. As the Chairman and Ranking Member are aware, we believe there are certain steps Congress could take to address these challenges, such 

as prompt enactment of two provisions relating to the funding requirements of the 

Pension Protection Act of 2006 (PPA). One of these provisions would clarify the permissibility of asset smoothing under PPA and the other would institute a more effective transition regime to the PPA funding rules. Both changes would help avoid 

undue financial burdens on employers. The Council has recommended these two 

steps for some time as we believe they will assist in providing needed predictability 

and stability to the defined benefit system. Given the current economic situation, 

they have become even more important. 

We also hope to continue our conversations with policymakers regarding the accounting standards applicable to defined benefit plans. The Financial Accounting 

Standards Board has recently adopted new standards in this area and even more 

dramatic changes are on the horizon. These new approaches pose significant challenges for employer sponsors and contribute to the concern among some that defined 

benefit plans are simply too unpredictable from a financial perspective. 

The Recent Enhancements to Defined Contribution Plans 

Defined contribution plans likewise offer important benefits to workers, among 

them choice and control over investments, portability and access to funds in times 

of financial distress. As defined contribution plans have become more dominant in 

the workplace, Congress has taken a number of important steps to make these plans 

even more successful and to assist plan participants in carrying out their responsibilities under these plans. The Pension Protection Act, in particular, strengthened 

the defined contribution plan system in ways that fundamentally assist participants—especially in financial circumstances such as those we face today. PPA encouraged automatic enrollment so that more employees would participate in plans, 

it facilitated default investments, which are a critical component of automatic enrollment arrangements, it provided new diversification rights so that employees 

would avoid the concentrations in company stock that proved so heartbreaking for 
74

the workers at Enron and it expanded opportunities for investment advice so that 

employees could have professional counsel, which is particularly important in times 

such as these (most especially for workers nearing retirement). While implementation of these PPA provisions is continuing, participants are in better shape to 

weather the current market downturn because they have been put in place. 

This Committee has been at the forefront of the recent efforts to ensure that our 

defined contribution system is marked by transparency regarding fees. We share the 

Committee’s strong commitment to ensuring that plan participants have clear information about the fees they are charged and that plan fiduciaries have clear information about the compensation earned by plan service providers. Such transparency 

regarding fees facilitates sound decision-making by both participants and sponsors 

and helps ensures that fees are reasonable in light of the services, features and 

quality provided. As members of the Committee have noted. when fees are kept at 

reasonable levels, participants have more in their accounts at retirement. This is 

an outcome we can all support. We look forward to working with this Committee 

and with the regulators at the Department of Labor to ensure that changes to fee 

disclosure practices are implemented smoothly, in a coordinated fashion and with 

sufficient transition periods. We want to be certain that the advantages of enhanced 

transparency are achieved without in any way deterring plan participation or plan 

sponsorship. 

The Added Value of Employer Sponsorship 

Regardless of the type of plan (or plans) an employer offers to its workforce, there 

is a dimension of employer plan sponsorship that deserves particular mention as it 

brings tremendous value to plan participants in financial circumstances like those 

we are experiencing. That is the simple fact of employer plan sponsorship and the 

fiduciary oversight that accompanies this employer role. Retirement plan participants have a fiduciary whose legal obligation it is to act solely in the interest of 

participants and beneficiaries and for the exclusive purpose of providing benefits. 

The benefits of this employer sponsorship and fiduciary oversight are manifold—preselection of quality investments, ongoing investment oversight, use of employer bargaining power regarding fee and service levels and investment education, to name 

but a few. In response to current market events, many plan sponsors have communicated with plan participants and made information available about key investment principles and the importance of continuing to calmly review one’s financial 

situation. Plan sponsors are also devoting particular attention at this time to their 

ongoing monitoring of plan investments. Thus, despite today’s market challenges, 

those who participate in employer-sponsored retirement plans are fortunate relative 

to those who do not. We hope to continue to work with the Committee to expand 

the number of employers that sponsor retirement plans and further increase the 

number of workers who participate. Certainly we should take no steps that would 

frustrate either of these important goals. 

The Importance of Financial Literacy 

Chairman Miller and Ranking Member McKeon, another issue that is worth discussing in the context of today’s hearing is one that the Council highlighted in our 

2004 report, Safe and Sound: A Ten-Year Plan for Promoting Personal Financial Security. That is the issue of financial literacy. While knowledge and understanding 

of financial principles cannot completely conquer the anxiety that many Americans 

are feeling today, it certainly can reduce such anxiety and can help prompt sound 

decision-making in challenging times such as these. In Safe and Sound, we articulated a goal that ‘‘by 2014, virtually all households will have access to some form 

of investment education and advice and 75 percent of households will have calculated the amount of retirement savings needed to maintain their standard of living throughout retirement, as well as the savings rate needed to achieve this target.’’ To assist in reaching this goal and to facilitate the equally important goal of 

improving financial literacy generally, our report recommended (1) expansion of financial education efforts by employers, the government and other stakeholders, (2) 

the establishment of financial literacy requirements at the high school and college 

level, and (3) the inclusion in the annual Social Security statement of a tool to calculate retirement savings goals. Adoption of these steps will ensure both that Americans are financially prepared for challenging economic times and equipped with the 

skills and knowledge to make sound decisions in times of market turbulence. 

The Council sincerely appreciates your consideration of our views. We look forward to collaborating with the Committee to analyze the effects of the current financial environment on workers’ retirement security and to determine whether there 

are any policy steps that can be taken to promote this security and further strengthen the nation’s voluntary employer-sponsored retirement system. 
75

Chairman MILLER. The record of this hearing will remain open 

for 14 days so members will have an opportunity to submit additional materials for the hearing record. Also, they may have followup questions. We would ask that you would respond to those when 

we forward them to you. 

Thank you very much for your time and your expertise and your 

experience in this. I suspect this is the beginning of a new conversation and a new atmosphere about the need to protect people’s 

retirement and pensions. I hope that we will be able to continue 

to call on your expertise as we work our way through this in the 

next Congress and the next administration. Thank you very much. 

With that, the committee stands adjourned. 

[Additional submission of Mr. Miller follows:]
76
77
78
79
80
81
82
83
84

[The statement of Mr. Altmire follows:]

Prepared Statement of Hon. Jason Altmire, a Representative in Congress 

From the State of Pennsylvania 

Thank you, Chairman Miller, for holding this important hearing on the impact of 

the financial crisis on workers’ retirement security. 

The recent events in the global financial markets have highlighted the vulnerability of American’s retirement plans. Over the last year, American workers have 

lost nearly $2 trillion in retirement savings. The problems we are now confronting 

in the financial market bring to light the problems that have plagued our nation’s 

retirees for years. The American Association for Retired People (AARP) reported 

that in the last year, 20 percent of baby boomers have stopped contributing to their 

retirement plans because they need that money at the end of the month to make 
85

ends meet. Additionally, the AARP found that about a third of workers in the U.S. 

are considering delaying retirement as a result of the housing and financial crisis. 

Americans have worked hard throughout their lives believing that they would one 

day be able to enjoy retirement, but instead are forced to put their retirement on 

hold. Action must be taken to stabilize our markets and ensure protection for American workers’ retirement. 

Thank you again, Mr. Chairman, for holding this hearing. I yield back the balance 

of my time. 

[Submission of Mr. Sestak follows:]

U.S. CONGRESS, 

Washington, DC, October 21, 2008. 

Hon. GEORGE MILLER, Chairman; Hon. HOWARD MCKEON, RANKING MEMBER, 

Committee on Education and Labor, Rayburn House Office Building, Washington, 

DC. 

DEAR CHAIRMAN MILLER AND RANKING MEMBER MCKEON: At the request of Vanguard, a well-established financial institution based in my district, I am submitting 

the attached report as written testimony to be included in the record of the House 

Committee on Education and Labor’s hearing on October 7, 2008, on ‘‘The Impact 

of the Financial Crisis on Workers’ Retirement Security’’. As I have discussed with 

the Vanguard representative, I respect their right to have their views heard, but 

I am not necessarily in full agreement with all of their conclusions. 

Sincerely, 

JOE SESTAK, 

Member of Congress. 
86
87
88
89
90
91
92
93
94
95
96

[Whereupon, at 3:21 p.m., the committee was adjourned.]

Æ