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[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

                   PENSION REFORM FOR SMALL BUSINESS

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                     WASHINGTON, DC, MARCH 28, 2001

                               __________

                            Serial No. 107-2

                               __________

         Printed for the use of the Committee on Small Business

                    U.S. GOVERNMENT PRINTING OFFICE
72-257                      WASHINGTON : 2001

                      COMMITTEE ON SMALL BUSINESS

                  DONALD MANZULLO, Illinois, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
ROSCOE G. BARTLETT, Maryland             California
FRANK A. LoBIONDO, New Jersey        DANNY K. DAVIS, Illinois
SUE W. KELLY, New York               WILLIAM PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio               DONNA M. CHRISTIAN-CHRISTENSEN, 
PHIL ENGLISH, Pennsylvania               Virgin Islands
PATRICK J. TOOMEY, Pennsylvania      ROBERT A. BRADY, Pennsylvania
JIM DeMINT, South Carolina           TOM UDALL, New Mexico
JOHN THUNE, South Dakota             STEPHANIE TUBBS JONES, Ohio
MIKE PENCE, Indiana                  CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey            DAVID D. PHELPS, Illinois
DARRELL E. ISSA, California          GRACE F. NAPOLITANO, California
SAM GRAVES, Missouri                 BRIAN BAIRD, Washington
EDWARD L. SCHROCK, Virginia          MARK UDALL, Colorado
GELIX J. GRUCCI, Jr., New York       JAMES P. LANGEVIN, Rhode Island
TODD W. AKIN, Missouri               MIKE ROSS, Arkansas
SHELLEY MOORE CAPITO, West Virginia  BRAD CARSON, Oklahoma
                                     ANIBAL ACEVEDO-VILA, Puerto Rico
                      Doug Thomas, Staff Director
                  Phil Eskeland, Deputy Staff Director
                  Michael Day, Minority Staff Director

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 28, 2001...................................     1

                               WITNESSES

Cardin, Ben, Member, U.S. House of Representatives...............     1
Salisbury, Dallas, President and CEO, Employee Benefit Research 
  Institute......................................................     9
Calimafde, Paula, Small Business Council of America..............    10
Kelso, Michael, President and CEO, ELS...........................    12
Bachman, John, Managing Partner, Edward Jones Investments........    14

                                APPENDIX

Opening statements:
    Manzullo, Hon. Donald........................................    26
    Velazquez, Hon. Nydia........................................    27
Prepared statements:
    Cardin, Ben..................................................    29
    Salisbury, Dallas............................................    32
    Calimafde, Paula.............................................    47
    Kelso, Michael...............................................    62
    Bachman, John................................................    64
Additional Information:
    Prepared testimony of Honorable Rob Portman, U.S. House of 
      Representatives............................................    69
    Prepared testimony of Kevin Brennan, President, JMI Software 
      Consultants, Inc...........................................    73
    Prepared testimony of Securities Industries Association......    75
    Prepared testimony of the Principal Financial Group..........    78

 
                   PENSION REFORM FOR SMALL BUSINESS

                              ----------                              

                       WEDNESDAY, MARCH 28, 2001

                          House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:03 a.m. in room 
2360, Rayburn House Office Building, Hon. Donald Manzullo 
[chairman of the Committee] presiding.
    Chairman Manzullo. The committee will come to order. We are 
going to move immediately to Congressman Cardin's testimony and 
then after his testimony the ranking minority member and I will 
have our opening statements.
    Congressman Cardin, you are up.
    Mr. Cardin. Thank you, Mr. Chairman.
    Chairman Manzullo. Thank you for being here.
    [Chairman Manzullo's statement may be found in appendix.]

   STATEMENT OF HON. BENJAMIN L. CARDIN, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MARYLAND

    Mr. Cardin. It is wonderful to be back before this 
committee.
    I come to you asking your support for H.R. 10, a bill that 
truly has been developed in a bipartisan manner. Rob Portman, 
the other person who is sponsoring the bill, could not be with 
us today because of some commitments within the Republican 
leadership, so he sends his apologies. But the two of us have 
worked together on both sides of the aisle to make sure that 
this bill would be produced and move forward as a bipartisan 
bill.
    I am pleased to tell you we have 281 cosponsors to date, a 
strong showing on both sides of the aisle. A similar bill 
passed the House of Representatives twice with over 400 votes. 
So it is a bill that enjoys strong support on both sides of the 
aisle.
    Mr. Chairman, I think it is a good omen that I am here 
today. In September 1995, I had a chance to testify before this 
committee on another pension bill that had been tied up for a 
couple of years. Right after testifying before this committee 
that legislation moved forward and was passed in 1996. And it 
really did mark the change of pension policy, I think, by this 
Congress.
    We had suffered through a couple of decades of changes in 
the pension laws that made it more difficult, particularly for 
small employers, to be able to develop pension plans for their 
employees. The passage of that 1996 bill that was also 
sponsored by Congressman Portman and me started the trend, I 
think, of improving our pension laws to make it easier, 
particularly for small businesses, to provide pension benefits 
for their employees.
    That is particularly important today. I think you all know 
the statistics. If you look at companies under 100 employees, 
only about 20 percent of their employees have employer-
sponsored pension opportunities, whereas if you look at large 
companies today, three out of every four employees are covered 
by pension plans. So pension reform is of particular interest 
to small business and I very much appreciate your sensitivity, 
your committee's sensitivity, to that issue by having this 
hearing today.
    As we look at the need for pension reform generally, I need 
not tell this committee what is happening with regard to the 
baby boomer generation, the number of people who will be 
eligible for Social Security.
    Forty years from now, it is predicted that the number of 
people over 65 will grow from 12.8 percent of our population to 
20 percent of our population. We all know the strain that will 
put on our Social Security system. One of the areas that we 
need to strengthen as far as income security for people who are 
retired is private savings and private retirement.
    As we have gone through the most recent economic expansion 
of our country where we have seen low inflation, low 
unemployment rates, one of the trends that have been going the 
wrong direction has been private savings and private 
retirement. We have actually found that private savings has 
declined over the past two decades to last year where we 
actually had negative quarters of savings in this country.
    So we need to do more to encourage private savings, private 
retirement, for many reasons: income security for individuals, 
to put less pressure on the Social Security system, for the 
strength of our economy. H.R. 10 was developed with that in 
mind, to try to deal with some of these problems.
    Mr. Chairman, I will talk a few minutes about some of the 
provisions that are of particular interest to small businesses 
and then I would be pleased to answer any questions that you 
might have and I would ask that my entire statement be made 
part of your record.
    Chairman Manzullo. Without objection.
    Mr. Cardin. H.R. 10 contains hundreds of changes in the 
pension laws, but a large number are aimed at reducing 
complexity, which is particularly daunting for small companies. 
They find it very difficult to have a pension plan and then 
there are a lot of traps in the law that may trap them with 
penalties. So what we try to do is simplify the pension system, 
particularly for small business, and one of the changes is to 
change the top heavy rules.
    It was identified as perhaps the number one obstacle for 
small businesses developing pension plans, the top heavy rules. 
The Department of Labor ERISA advisory committee actually 
recommended the repeal of the top heavy rules.
    We have not suggested that. Instead, we have modified it to 
deal with, we think, the most difficult problems: the 
definition of key employee, that the contributions of the 
employer, the matching contributions, would count towards the 
required contributions under the minimum contribution rules.
    The family attribution rules would be modified to take care 
of the top heavy rules and the 401(k) safe harbor that I 
mentioned earlier, that if you have a 401(k) safe harbor 
currently the non-discrimination rules would not apply, H.R. 10 
would expand that to the top heavy rules.
    The legislation also significantly increases the amount of 
money that you can put into the pension plans. On the deferred 
compensation plans, it is raised from $10,500 to $15,000. On 
the defined contribution package, it is increased to $40,000 
and the considered compensation limits to $200,000.
    One provision that will be, I think, particularly 
interesting to your committee is the provision that allows for 
the catch-up contributions for those people who have turned 50 
years of age so they can contribute an additional $5,000. This 
is of particular interest to women, but it also affects all 
people in the workforce because we find that many times women 
who did not have the same earning ability because they were out 
of the workforce for part of their career need the opportunity 
to put more money in as they get closer to retirement.
    They have taken care of their family, they now are in the 
workforce, they want to take care of their retirement and the 
contribution limits prevent them from reaching their goal. The 
extra $5,000 will make it a little bit easier for them to reach 
their security goals when they retire.
    There are also some specific provisions that apply only to 
small business: the IRS user fees, the PBGC premium, and the 
Form 5000s that we can get into. But these were put in at the 
request of small business to try to deal with their particular 
problems.
    Mr. Chairman, I think you will find this legislation is a 
comprehensive bill to make it easier for individuals and 
companies to provide for their own retirement and for their 
employees' retirement and I thank you for your help in crafting 
the bill and we look forward to this legislation being enacted 
into law.
    [Mr. Cardin's statement may be found in appendix.]
    Chairman Manzullo. I appreciate that.
    [At this point, the bells ring, indicating a floor vote.]
    Is it one vote?
    Mr. Pascrell. Budget resolution.
    Chairman Manzullo. Budget resolution?
    Mr. Pascrell. On the rule.
    Chairman Manzullo. It is on the rule?
    [To Mr. Cardin:]
    Ben, are you able to come back?
    I think what we will do is go into recess now, take the 
vote, and then come right on back.
    [Recess.]
    Chairman Manzullo. We will reconvene our meeting.
    Congresswoman Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman. I would like 
unanimous consent to enter my opening statement into the 
record.
    Chairman Manzullo. Without objection.
    Ms. Velazquez. Thank you. Mr. Cardin, welcome to the Small 
Business Committee and thank you for your presentation and your 
interest in providing a retirement plan for small businesses.
    When your bill was introduced in the last Congress, it 
contained many incentives for small businesses that currently 
do not provide retirement plans to start a plan. However, as 
the bill was reported out of the committee and passed by the 
full House, several incentives were excluded; in particular, 
the tax credit that will allow small businesses to deduct some 
of the costs of establishing and administering a plan for the 
first five years.
    I am a strong proponent of these tax credits and I believe 
they are very important in providing an incentive for small 
employers to start a pension plan.
    As your bill works its way through the Ways and Means 
Committee, would you advocate to have these tax credit 
incentives put back into the bill?
    Mr. Cardin. Well, I very much appreciate that question and 
the answer is yes. I think that is a very important provision. 
You are correct. The credit for small business start-up costs 
was included in the original Portman-Cardin legislation. As it 
worked its way through the Ways and Means Committee, it was 
derailed for two basic reasons: one, the cost issue, but, 
secondly, because the committee at that time was reluctant to 
move forward with new tax credits.
    I think that there is a changing attitude within the Ways 
and Means Committee on thatparticular issue. I think it is a 
very important provision. I know that Congressman Portman also supports 
that change.
    For introduction purposes, we wanted to introduce primarily 
the same bill that passed the House by such a strong vote last 
year. We did not add that provision. We hope as the bill works 
its way through the house that that provision could be added. 
It is not that expensive and we think it would be a major help 
to small businesses in starting pension plans.
    Ms. Velazquez. What do you think are the prospects of 
including it?
    Mr. Cardin. I think they are good. It is one of the major--
it is on our list, on a very small list of things that we would 
like to see included that were not in the introduced bill, so I 
think we have a good chance to get that included. We know that 
the Senate has a somewhat different view on this bill. They 
support the thrust of the Portman-Cardin bill. Last year, they 
added a tax credit for low wage workers which is, again, 
something that Congressman Portman and I would support as long 
as it is part of the current pension system.
    So I think as the bill works its way through the House and 
the Senate, it is very likely that some tax credits will be 
added to the mix and we think the small business start-up cost 
provision is an important provision to include.
    Ms. Velazquez. Would you consider supporting an amendment 
that will expand the administrative relief provided under your 
bill to a greater number of small businesses by raising the 
asset threshold for exempting a business from filing Form 5500?
    Mr. Cardin. As you know, we did provide some special rules 
currently for 5500 filings and we would be glad to work with 
you and the committee as to additional relief. We clearly want 
to make it easier on the filings. We think that we made some 
improvement in this area, but we think we should make more and 
we would be very happy to work with you on that.
    Ms. Velazquez. My final question is looking at the results 
of the 2000 survey, I have concerns about two groups of people. 
The first group is the small business owners that have 
unreliable or uncertain income flows and therefore cannot 
afford to start pension plans. I am concerned that those 
businesses will not be able to compete with large and even 
other small businesses for quality employees.
    The second group I am concerned about is the seasonal 
worker. I am concerned that because of the nature of their work 
they are at risk of never having the opportunity to participate 
in a retirement plan.
    What are the provisions in the bill that you see as 
benefiting these two groups?
    Mr. Cardin. Well, thank you very much for that question 
also. In regards to the small employer, there are two major 
obstacles in current law for why small employers will never set 
up a pension plan which will benefit not only the small 
employer's employees but himself or herself also. And the first 
problem that I mentioned is the complexity. There are a lot of 
traps in the law.
    A small company cannot hire a pension consultant or a 
pension person to handle the pension system. Usually, the 
employer handles it himself or herself. And it is complicated, 
it is difficult and many of these tests were put in for large 
companies who could afford this administrative cost. So we have 
to get the administrative burdens reduced and this bill 
significantly reduces the administrative burdens overall for 
pension plans but particularly for small businesses through 
many of the provisions I mentioned earlier.
    The second is that it has to pay for the owner to set up 
the plan and with the low limits, it just does not pay for an 
owner to set up a plan. The owner could get almost the same 
benefits from a non-employer sponsored pension plan. So why 
bother?
    So one of the reasons we are recommending increasing the 
limits is for those individuals who make the decision whether 
the company will have a pension plan or not to realize that it 
is in their financial interests to do that.
    In regards to seasonal workers, we have modified 
dramatically the portability rules and one of the things that 
we find is that a lot of people have small earnings here or 
small earnings there and it is difficult to justify keeping 
these accounts, particularly with the administrative costs, so 
what we do is provide complete portability between all types of 
plans, whether they are non-profit, for profit, government. You 
can have portability and merge the accounts into one pension 
plan.
    Ms. Velazquez. Thank you.
    [Ms. Velazquez's statement may be found in appendix.]
    Chairman Manzullo. I just have one question.
    Congressman, about two or three years ago, I believe, we 
passed a bill to make a pool of money available for educating 
people about pension plans. Do you remember that?
    Mr. Cardin. Yes.
    Chairman Manzullo. Would any of that--and I think that was 
signed into law.
    Mr. Cardin. Well, there is no question that we need to do a 
better job of promoting what the pension laws provide so people 
can take advantage of it. We know that with our own thrift plan 
here as federal employees. The more information we get to our 
workforce about the advantages of the thrift plan, the more 
employees sign up for the plan and our participation rates are 
pretty high.
    There are two basic things. First, the government offers 
incentives for their employees to participate and, second, we 
have gotten the information out so people know that they can 
take advantage of it. It is clear that just passing the laws in 
and of themselves will not change behavior. We need to also get 
adequate information out.
    You are going to hear in the next panel, you have a lot of 
people from the private sector which will tell you what they 
are doing in the private sector to get this information out to 
employees. They are professionals at it.
    I think that if H.R. 10 were to be enacted that it would 
offer incredible incentives for companies working with the 
private sector to get information to their employees to take 
advantage of it, particularly younger employees, who have been 
our lowest percentage of participants.
    Chairman Manzullo. OK.
    Mr. Brady.
    Mr. Brady. I have no questions; I have a statement.
    Thank you. Thank you, Mr. Chairman, and Ranking Member 
Velazquez. I would like to thank you for calling this important 
hearing on H.R. 10.
    I am wearing two hats here, being a congressman and also a 
member of organized labor, that this bill, bill 415, hopefully 
this will add to bill 415, that it will allow multi-pension 
people that work in unions, some people that work for the 
unions, they get capped out on a three-year basis and a lot of 
times their pension is more than their cap and they get 
penalized for working that hard.
    As you well know, union people, the jobs that they have 
sometimes do not have longevity, they can work after 30, 40 
years, so they are being penalized. And being penalized, that 
money is not being utilized. It goes back into the union 
pension fund and it just sits there and it gets either invested 
and rolls over and rolls over, probably to a next life with 
somebody else.
    So I appreciate, Congressman, you bringing this to the 
light and having this bill brought up and I hope that we can 
get enough votes this time to pass it and I thank both of you 
for having this hearing.
    Chairman Manzullo. Thank you.
    Mr. Pence.
    Mr. Pence. Thank you, Mr. Chairman, and Congresswoman 
Velazquez. Thank you for the opportunity to speak.
    I want to congratulate my colleague, Congressman Cardin, 
for a visionary piece of legislation, one that as a new member 
of Congress I was very anxious to support. Coming from a 
midwestern district that is dominated by small business, coming 
out of a small business family and having built my own small 
business, I appreciate the struggles that you are addressing in 
this legislation and am delighted with the enthusiasm with 
which it is being embraced.
    Specifically, I found very compelling your testimony about 
the catch-up provisions. We do see in Indiana, Congressman, we 
see a great number of women who will make a decision to be at-
home mothers, but then use their education or background to 
enter the workforce, oftentimes in small business, oftentimes 
as entrepreneurs and small business owners.
    I wanted to ask you to address the provision of H.R. 10 
that while it does not specifically address women in the 
workforce, I thought your comments to be very thoughtful in 
that regard.
    How did you arrive at the $5,000 catch-up provision number 
and what was the thinking going in the arriving specifically at 
that number?
    Mr. Cardin. Well, Congressman, thank you for that question. 
I appreciate your comments.
    First of all, the age 50 we picked because that is normally 
the age where people get a lot more serious about making their 
retirement security a reality. And, secondly, it is normally 
the time that people have finished raising their families, 
sending their children to college and the home mortgage is much 
more manageable, if it is not paid off. So it is a time when 
people are thinking more about retirement.
    It is also the age, as you pointed out, that many times 
people who have left the workforce to take care of their 
families are returning to the workforce and have adequate 
income where they can put money away for their retirement.
    We were facing up to $15,000 on the deferred compensation 
plans and we felt adding another one-third made some additional 
sense. There was no magic to the $5,000, although we felt that 
it fit well in talking to the people in the private sector as 
to how much interest there would be and how much money could be 
contributed. We felt that was the right level.
    There is always one consideration when you look at limits. 
You might ask why do we have limits? At one time, we did not 
have limits. You could defer as much of your compensation as 
you wanted to, other than your FICA taxes, you could defer. And 
the reason why we have limits was part of the compromise 
reached to keep this bill a very bipartisan bill because the 
higher the limits the argument is made that wealthier wage 
earners will put more money away than lower wage earners.
    I do not think that is necessarily true, but we wanted to 
reach a balance that we could have a broad coalition in support 
of the legislation and one of the reasons that we used the 
$5,000 rather than a higher number was to keep that broad 
coalition.
    Mr. Pence. One other follow-up question, if I may, Mr. 
Chairman.
    I think that the statistics that you presented in your 
testimony about companies with fewer than 100 employees, as 
many as 80 percent of the workforce, have no retirement savings 
plan.
    As you look at your legislation, Congressman, what do you 
believe or economists that you trust believe will be the effect 
on those size companies if your legislation is enacted by 
Congress?
    Mr. Cardin. That is a good question. I really do not know 
the answer to it. We are movingin the wrong direction now. 
There is actually an erosion of employer-sponsored pension plans, 
particularly with small business.
    We think this legislation will certainly stop the erosion 
and we will find more people that will be covered by pension 
plans by small employers. I cannot give you any specific number 
because we really do not know that. And I think the chairman's 
question about trying to get information out is going to be a 
key to this.
    One thing is absolutely certain and that is Social Security 
is not adequate for your retirement needs. It never was 
intended to be the sole source of people's retirement. We 
always assumed that individuals would also have private savings 
and private retirement. I think it is incumbent upon us to 
develop a system where every person in the workforce can put 
money away for their retirement in addition to Social Security. 
And certainly one of our objectives in H.R. 10 is to make that 
more of a reality. So we hope that it will make a significant 
improvement on the number of people who will have employer-
sponsored pension plans or participate in IRAs.
    Chairman Manzullo. Mr. DeMint, did you have any questions?
    [Mr. DeMint indicated no.]
    Chairman Manzullo. OK. Congressman Cardin, thank you very 
much for coming here this morning.
    The question I wanted to ask you was what can we do to get 
the Senate to move this? I mean, it has died in, what, two 
Congresses now?
    Mr. Cardin. Yes. We have had some problems in the Senate. 
We are not the only people that have had problems in the 
Senate. It seems to be a common dilemma. We hope very much that 
this bill will move very shortly in the House as a separate tax 
bill and I think Chairman Thomas of the Ways and Means 
Committee is prepared to do that. And I think you will find a 
very strong bipartisan support on the House floor.
    The problem in the United States Senate, as you know, it is 
difficult to move individual bills, particularly early in the 
session, unless you get unanimous consent which is almost 
unheard of in the Senate because every senator has his or her 
own individual agenda.
    So I think the best thing we could do is continue to stress 
the importance of this legislation and that it needs to move 
quickly if it is going to have an impact on people shortly.
    The next panel you have will, I think, help us in that 
argument. They can tell us what practical effect it will have. 
And I have found one of the best ways to get this legislation 
moving is to have the people in the private sector who know 
directly how this will affect behavior as far as retirement is 
concerned talking to the senators.
    Chairman Manzullo. OK. Thank you, Congressman.
    Mr. Cardin. Thank you.
    Chairman Manzullo. Ben, just a second.
    [Pause.]
    Chairman Manzullo. OK. Thank you very much. Thank you, 
Congressman.
    The second panel, if you could be seated, please?
    While the second panel are taking their seats, let me 
briefly introduce who they will be.
    Dallas Salisbury is the president and CEO of the Employee 
Benefit Research Institute here in Washington.
    Paula Calimafde is an attorney with the Paley Rothman law 
firm out of Bethesda.
    Mike Kelso, president and CEO of ELS, Inc., also a small 
business owner and engineering consultant from Arlington.
    And John Bachmann, managing partner in charge of a major 
marketer, Edward Jones Investment Company out of St. Louis.
    Mr. Salisbury, we will start with you. The clock in front 
of you starts at green, turns to yellow and then when it hits 
red, I will bring this down. It is on five minutes and I am 
sure we will have plenty of time for questions and answers 
thereafter.
    Thank you for coming.

  STATEMENT OF DALLAS SALISBURY, PRESIDENT AND CEO, EMPLOYEE 
                   BENEFIT RESEARCH INSTITUTE

    Mr. Salisbury. Thank you, Mr. Chairman, and members of the 
committee. It is a pleasure to be here. I know my entire 
statement will be printed in the record.
    Chairman Manzullo. All of the statements of the witnesses 
and any members of Congress will be submitted in the record 
without objection.
    Mr. Salisbury. So I would go directly to page 2 of my 
testimony and to the direct issue of the hearing which is what 
provisions of the Portman-Cardin act might well assist in 
expanding the realm of sponsorship of employer-sponsored plans 
in the small employer sector.
    Chairman Manzullo. Mr. Salisbury, could you move the mike 
up? Tip it--try that.
    Mr. Salisbury. I can do that.
    Chairman Manzullo. Thank you.
    Mr. Salisbury. And I refer you to the table that is in the 
testimony that relates to reasons for not offering a retirement 
plan by small employers that do not.
    The most important of those reasons is employers noting 
that employees prefer wages and/or other benefits. I would note 
that this Congress enacted the Saver Act, the savings are 
essential for all employees, and that led to the 1998 summit on 
retirement savings.
    There will be a 2000 summit on retirement savings. One of 
the issues carried forth in that summit and in our own Choose 
to Save Education program on the importance of savings is to 
increase employee understanding as to the virtue of employees 
being convinced to save and contribute, the Saver Act leading 
to that, and education. It is not necessary for employers, if 
you will, to have funds to contribute.
    Obviously employer contributions plus employee 
contributions are the most desirable, but one of the issues at 
hand is simply to get employers to begin sponsoring these 
programs.
    Too many government regulations is dealt with by the many 
simplification provisions of this act.
    Vesting requirements causing too much money to go to short-
term employees is dealt with by the alternative provisions in 
this act relative to top heavy provisions.
    The issue of employers not knowing where to go for 
information on starting a plan, as the congresswoman noted, has 
been dealt with partially by congressional action giving money 
to the Small Business Administration and the Department of 
Labor. That has led to the development of a combined website by 
those organizations, as well as new educational materials 
available through the Pueblo government information 800 number.
    The website now created by SBA and DOL does allow any small 
employer to go there and to do a very thorough analysis of plan 
options available to them. That has only been available in 
about the last nine months.
    Tax benefits for the owner that are too small are dealt 
with by the limits and by the catch-up contributions.
    And so I think that looking at this issue of why small 
employers do not provide for plans, this act does provide 
provisions that deal with all of them.
    Our survey also underlined that there are many small 
employers that say I am inclined to create a plan, which is 
shown on page 5 of the statement, and so it does, combined with 
past analysis that we have published, underline that with the 
types of changes contemplated in this act our econometric 
modeling suggests that you could readily see as many as 7 to 12 
million employees who do not currently have pension coverage 
gain pension coverage.
    Thank you, Mr. Chairman.
    [Mr. Salisbury's statement may be found in appendix.]
    Chairman Manzullo. Thank you very much.
    Is it Calimafalde?
    Ms. Calimafde. No, you did better the first time. 
Calimafde.
    Chairman Manzullo. Calimafde. Thank you very much. May I 
call you Paula so I do not butcher your name again?
    Ms. Calimafde. I have been called Paula since kindergarten.
    Chairman Manzullo. OK. Thank you very much. Go ahead.

 STATEMENT OF PAULA A. CALIMAFDE, ESQUIRE, PALEY, ROTHMAN, ET 
                              AL.

    Ms. Calimafde. My name is Paula Calimafde. I am the chair 
of the Small Business Council of America. I am also a member of 
the Board of Directors of the Small Business Legislative 
Council. I am a practicing tax lawyer. I have been working in 
the field of qualified retirement plans for more than 20 years. 
I work with the pension tax laws day in and day out, whether I 
want to or not.
    Today, I am here representing the Small Business Council of 
America, the Small Business Legislative Council and ASPA, the 
American Society of Pension Actuaries.
    In our opinion, H.R. 10 will significantly promote small 
business plan formation and that is critical because, I think 
as you know, small business coverage lags dramatically.
    According to the Small Business Administration, the small 
business sector employs more than 53 percent of all the workers 
in the private sector and yet coverage of those workers is 
somewhere in the 30 percent range. If you are with an employer 
who is more than 25 but less than 99 employees, you are 
somewhere in the 48 percent range. If you work for an employer 
with less than 25 employees, you are usually in the 19 percent 
range. So coverage is a serious issue.
    This bill, in my opinion--I hate to refer to it as a tax 
law because what you are really doing is shoring up the 
retirement plan system, and if Portman-Cardin works the way it 
is intended, you will lose short-term tax revenue because 
people will be putting money into 401(k) plans and more money 
will be deferred--but if you look at this bill from a long-
range perspective of where we should put our nation's money, in 
my opinion this bill may be one of the most important bills 
Congress will see this year. A young person 30, 35, who puts 
$2000 into a 401(k) plan this year and gets a match, that money 
will grow significantly by the time they retire and it may be 
the difference between a comfortable retirement and no 
retirement at all.
    I cannot convey to you how important small business plan 
coverage is. There is an interesting statistic that has evolved 
which is that when a small business plan is sponsored, 
participation in the plan is at the same level as a larger 
entity. In other words, if you build it, they will come. And 
what Portman-Cardin is doing is sort of building the field and 
hopefully small business willcome and start joining the 
qualified voluntary retirement system.
    Well, why doesn't small business sponsor more plans? Dallas 
Salisbury gave you some reasons. There is another reason which 
is if you look at the legislation of the 1980s and early 1990s, 
there was constant legislation that cut back on benefits and 
increased administrative burdens and small business was singled 
out for the harshest rules.
    Somehow the concept arose that small business did not treat 
their employees fairly and even today you can hear people 
talking in terms of, well, we cannot do that kind of plan 
because the small businesses will not tell their employees that 
they are sponsoring it. There is a basic misunderstanding of 
what a small business is and how important the employees are to 
that small business.
    With a retirement plan, it is a cost benefit analysis to 
the owners of that business whether they are going to sponsor 
it. It costs money to sponsor it.
    So, yes, the employees have to appreciate it and Dallas is 
doing a phenomenal job, in my opinion, of getting the word out 
there that you had better start saving for retirement, Social 
Security cannot do it all for you.
    But there has to be something in it for the company, so (a) 
the employees have to appreciate it, but (b) it has to provide 
some benefits for the owners also. And I think Portman-Cardin 
is trying to redress that cost benefit analysis. It went out of 
whack in the 1980s and early 1990s. This bill, I think, will 
bring it at least to neutral.
    What major provisions in this bill will help small 
business? There are many, many provisions. In particular, the 
changes in the 401(k) area are very important. One provision 
right now, if employees make 401(k) contributions, that counts 
against the company's 15 percent overall deduction level to a 
profit sharing plan. What this means in the context of the 
small business world is if a company wanted to make a 15 
percent contribution, the employees could not make a 401(k) 
contribution. And in the small business area, very often 
companies make significant contributions to these plans.
    The 404 deduction level, increasing it to 20 percent helps.
    There is 401(k) safe harbor match that is a very important 
provision which will really help small business.
    Do we have enough plans right now? Does Congress have to 
come up with new plans? I do not think so. You have a very nice 
balance of plans. There is a start-up plan, the SIMPLE. It is 
basically an IRA. We just have to educate people about it.
    If a company wants to move on, hopefully they will move on 
to the 401(k) safe harbor, a strong plan. Why? Because it keeps 
the employees' money in the plan until they actually retire, 
become disabled, die or leave.
    There is a lot of flexibility out there and it is from 
simple to complex and I think the companies can work with it. 
This bill will really help small business plan formation.
    [Ms. Calimafde's statement may be found in appendix.]
    Chairman Manzullo. Thank you very much.
    Mr. Kelso.

  STATEMENT OF MICHAEL P. KELSO, PRESIDENT AND CEO, ELS, INC.

    Mr. Kelso. Mr. Chairman, and members of the committee, I 
appreciate the opportunity to speak before you. As you perhaps 
can tell by the brevity of the statement I provided, this is my 
first time testifying before the Congress.
    My name is Mike Kelso and I am president and CEO of ELS, 
Inc., which is a small engineering consulting company in 
Crystal City. We provide engineering and consulting services to 
the federal government, mainly to the Department of Defense. We 
were founded in 1976. We are, as you can tell by the number of 
people, a small company. In 1987 we used an ESOP, an employee 
stock ownership plan, leveraged buyout of a retiring owner to 
purchase the company and today we are a 100 percent employee 
owned company.
    One of the means of differentiating, as Congresswoman 
Velazquez indicated earlier, between large companies and small 
companies in attraction of employees is the benefit plan. A 
quality retirement plan for employees in a small business is a 
must if you are going to compete with the big businesses.
    The latest study by the Profit Sharing/401(k) Council of 
America indicated that small firms, people with fewer than 50 
people, those who do have retirement plans contribute up to 
almost 20 percent of net profit to these retirement plans.
    I would like to summarize briefly what we are doing in the 
way of retirement planning for our people at ELS and how H.R. 
10 will enhance these efforts.
    First off, as I indicated earlier, we have an ESOP and that 
ESOP has been in place since 1987. We contribute 6 percent of 
covered salary per year into that plan. That 6 percent goes 
toward the 25 percent limit that is going to be relieved by 
H.R. 10.
    Our 401(k) plan is rather unique in a lot of ways, but in 
particular in its matching feature. We do a dollar-for-dollar 
match up to 4 percent of salary or $2000, whichever is greater. 
The significance of that $2000 limit is that people who make 
less then $50,000 a year receive a greater match than those who 
make more then $50,000. This is mainly the people that we are 
trying to attract to these 401(k) retirement plans. You do not 
have to convince the older folks to participate, you have to 
convince the younger ones. As an example, a person making 
$40,000 a year who defers $2000 will get a $2000 match or 5 
percent. The lower the salary, the higher percentage match the 
company provides.
    The other thing we do is allocate the non-vested portions 
of people's accounts. If somebody leaves the company before 
they are 100 percent vested, they forfeit the non-vested 
portion of their accounts and, instead of using those funds to 
reduce future contributions for the company, we reallocate 
those to the participants. In 2001, this year, those 
forfeitures are going to be quite substantial, amounting to 
about 7.6 percent of salary. There is a corporate benefit to 
the company that I do not want to minimize that will derive 
from H.R.10.
    As Ms. Calimafde indicated, the employee deferral counts 
toward the 15 percent corporate deduction. Anything over 15 
percent, we pay an excise tax on that. So the fact that we have 
one highly compensated person, believe it or not, who is not 
participating in the plan, everybody else is, we have over 7 
percent contributions of non-highly compensated people going 
into the plan on average. The 6 percent ESOP.
    The company is providing the 18.6 percent of salary 
contribution to retirement plans in 2000 and 2001. Above the 15 
percent limit, we pay an excise tax. That is the price we pay 
for that generosity. And, in addition to that, the employee 
deferral counts toward the 25 percent limit.
    That is the benefit to the company, which I do not see as a 
major reason for me being here. The most important reason for 
me being here is the elimination of the 25 percent limit 
because of its effect on junior and mid-level, as opposed to 
senior people like me.
    Last year, in the year 2000, I had to tell 75 percent of my 
non-highly compensated people that they had to stop deferring 
to the 401(k) plan because they were exceeding the 25 percent 
limit. It did not affect me and, with all due respect to the 
members of the committee, if you were employed by ELS last 
year, you would not have been affected by the 25 percent limit 
either.
    The first person who was affected by that was a single 
mother of two who is over 50. She will benefit in multiple ways 
by H.R. 10. This woman who makes $36,000 a year, Maria Pingree 
spoke at the introduction of the Portman-Cardin bill a couple 
of weeks ago.
    I had to tell Maria last July to stop deferring into the 
401(k) plan. She wanted to defer 10 percent of her salary, 
$3,600 into the plan, and I had to tell her she had to limit 
that to $2,500 last year. She will be similarly affected this 
year if H.R. 10 is not passed.
    I apologize for running over.
    [Mr. Kelso's statement may be found in appendix.]
    Chairman Manzullo. You do not have to apologize. Mr. 
Bachmann?

  STATEMENT OF JOHN BACHMANN, MANAGING PARTNER, EDWARD JONES 
                       INVESTMENT COMPANY

    Mr. Bachmann. Thank you, Mr. Chairman. Like my colleagues, 
we appreciate the opportunity to have this forum to talk about 
what is clearly a very, very timely issue.
    I really think that if you step back the heart of the 
matter that we are addressing here is that of demographics, 
which simply says we have an aging population.
    My company, Edward Jones, has about 7500 offices in the 
United States, Canada and United Kingdom and it is not an 
American problem. This is a problem in most of the economically 
developed world, this shift from a young population to much 
more an aging population and the historic notion has always 
been that you fund retirement through wealth transfer where the 
people working support the people who are retired and that 
system simply does not work with the demographics and the 
expanding ages of people.
    So we are confronted with what do you do? And we do know 
that people want a comfortable retirement. They do not want to 
work and then at the end of their lives have to dramatically 
change their life style.
    Among our customers, and we have about 5 million, the most 
important concern of older people is family, second is health 
and third is freedom and dignity in retirement. So the only way 
we can see to do this is to give people as individuals the 
opportunity to take responsibility for their retirement and 
that is a matter, we believe, of public policy which should 
encourage people to be able to set aside for retirement. And we 
think that the time is not simply right, we think the time is 
overdue for this legislation.
    It is difficult, frankly, for some of us to understand how 
legislation can go through the House of Representatives by such 
a massive majority and not be sufficiently an urgent need of 
the people to become a matter of law. I think we probably share 
that view with you all, but it is an important matter because 
delay is the silent thief.
    Every year that goes by that people cannot set aside money 
for retirement is a year that it does not compound, that it is 
not helping them prepare for a more comfortable retirement. So 
we certainly believe that the legislation that Congressmen 
Cardin and Portman have put forward is urgent.
    We are also grateful for the work of Congressmen Blunt and 
Bentsen who introduced legislation specifically targeting the 
very smallest businesses, and these are really the businesses 
that right now are almost economically forced into non-
participation.
    Going back to the summit of 1998, the retirement summit, 
two of the points that were made are that the system we have 
now is too complex for small businesses. You have both 
complianceissues and you have reporting issues that are far 
more complex than they should be and these lead to the second issue, 
which is cost. It is very expensive to support these when you have to 
comply with the same kinds of requirements that large businesses can 
where they can spread it over many employees.
    So we believe that the simplification, the streamlining, 
the addressing of cost, the raising of the limits are all very, 
very important and we think that that importance is greatest 
among the very, very smallest businesses which include many of 
our customers. And, as has been cited, less than 20 percent of 
the employees in these smallest organizations have an 
opportunity to participate in this and we believe that number 
would expand significantly and perhaps even dramatically if 
there were encouragement through the streamlining, 
simplification and perhaps some of the tax relief that I 
believe was mentioned by the congressman earlier.
    I could go on, but why don't we stop there?
    [Mr. Bachmann's statement may be found in appendix.]
    Chairman Manzullo. I appreciate it very much.
    Congresswoman Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Salisbury, let me make sure I am reading the 2000 
survey correctly. According to the survey, when small employers 
that do not currently offer pension or retirement plans were 
asked what would seriously make them consider sponsoring a 
plan, 65 percent of them responded that a tax credit for 
starting a plan will make them seriously consider offering a 
plan. Is that correct?
    Mr. Salisbury. That is correct.
    Ms. Velazquez. And is it correct that this response was 
second only to an increase in business profits as to the 
incentives that would make them start a plan?
    Mr. Salisbury. That is correct.
    Ms. Velazquez. So would you agree with me that the Cardin-
Portman legislation as it is today will not be an avenue for 
this 65 percent who said that a tax credit will be an important 
tool for them to start a plan?
    Mr. Salisbury. Portman-Cardin would be more effective in 
achieving the objective based on the survey responses if it 
included the tax credit provision. Yes.
    Ms. Velazquez. Thank you.
    Ms. Calimafde, in light of the statistics I just cited from 
the 2000 small employer retirement survey regarding tax 
credits, what is your position on Congress returning the small 
business tax credit to the Portman-Cardin bill?
    Ms. Calimafde. I am in favor of it. I think there are very 
few things I would change with Portman-Cardin because I think 
it is important to get the bill passed through Congress this 
year, but that is one that I would definitely think should be 
added.
    Ms. Velazquez. Are there any other legislative changes you 
would like to see made in an effort to make pension plans more 
accessible to small businesses?
    Ms. Calimafde. In addition to Portman-Cardin?
    Ms. Velazquez. Yes.
    Ms. Calimafde. There are, but I would again say, first, I 
think Portman-Cardin is a giant step forward. After that, I 
think that we still need to roll back a lot of these sort of 
unnecessarily complex rules that are still layered in this 
area.
    Most of them do not really do anything from a technical 
viewpoint and some of them, such as the top heavy rules, people 
feel really do a lot but when you are in the trenches you 
realize they do very little. So my opinion is that the next 
bill would continue to take away some of this unnecessary 
complexity.
    There are a few little things needed for instance in the 3 
percent 401(k) safe harbor which many of us are hoping will be 
like the next big plan for small businesses--right now, there 
is a notice requirement on the 3 percent 401(k) safe harbor. 
Well, the notice serves no rational purpose. In the 401(k) 
match it does because if you give notice, employees might 
change their behavior because they know there is a match. 
Whether an employer is going to make a contribution or not 
really would not change your behavior.
    So that is the type of thing, but compared to what Portman-
Cardin is achieving, this would be a clean-up type of bill.
    Ms. Velazquez. Thank you.
    Mr. Bachmann, in your testimony you mentioned your support 
for the Blunt-Bentsen bill and some of the reforms included in 
the Blunt-Bentsen bill have been included in the Portman-Cardin 
bill. However, the tax credit provisions of Blunt-Bentsen have 
not been included in Portman-Cardin.
    You also mentioned in your testimony that many small 
businesses cannot afford to set up pension plans for their 
employees in the early years of the business. Could you explain 
to the committee how incorporating tax credit provisions into 
Portman-Cardin will help make pension plans more accessible to 
small businesses that are just getting started?
    Mr. Bachmann. Well, I think there are certain basic costs 
that are going to be incurred regardless of the size of the 
organization and the smaller it is and the newer it is the more 
onerous those become as a portion of the business expenses. New 
businesses are typically concerned about survival issues and to 
add any extra cost becomes an impediment. So I think that the 
larger the organization the less important these costs are. The 
smaller the organization, the more important these costs are. 
And I know there are exceptions.
    Sadly, you have cited the very small business of the 
professional individual who has a very large income but that 
wipes out a lot of people who are in exactly the category that 
you are talking about, struggling, trying to make a go of 
things and many of these are operated from people's homes, they 
are very small, but they are the ones that tend to 
systematically be left out.
    Ms. Velazquez. Thank you.
    Mr. Kelso, in your testimony you stated that your company 
was founded in 1996?
    Mr. Kelso. 1976. I am sorry.
    Ms. Velazquez. And that in 1987 you used an employee stock 
ownership plan to purchase the company. Does that mean that 
between 1976 and 1987 your company did not have any type of 
pension or retirement plan?
    Mr. Kelso. No. At that time, we had a defined benefit 
pension plan that existed. We used the assets of that plan to 
leverage the ESOP, the employee stock ownership plan.
    There was a sole founder of the company back in 1976 and he 
did set up a defined benefit pension plan.
    Ms. Velazquez. Had Congress provided tax credit incentives 
for small businesses to start pension plans back in 1976, do 
you think this would have encouraged your firm to do that 
earlier?
    Mr. Kelso. Well, the best I could answer that is to tell 
you what happened in 1987. There were, as you are probably 
aware, in ERISA, the tax incentives that were granted to owners 
who would sell to employees through the ESOP legislation. It 
was very much the reason why that principal owner did sell the 
company to the employees.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Manzullo. Congresswoman Christian-Christensen.
    Ms. Christian-Christensen. Thank you, Mr. Chairman.
    Welcome to our panelists this morning.
    I have two questions and I guess I will direct this to Ms. 
Calimafde, but anyone else can answer it.
    According to the 2000 small business employer retirement 
survey, one of the reasons cited by small business employers 
when not offering the pension plans is that the employees 
prefer other benefits such as health care or vacation time. 
Actually, I think that was number one. Health care and 
retirement plans are equally important, and I am a physician, 
so therefore this question. How do you think we can avoid 
creating an either/or situation for small business workers when 
it comes to these two priorities?
    Ms. Calimafde. Boy, that is a tough question and actually I 
know your chairman is very involved in the health care cost 
issue which is a huge problem for small business and, in my 
opinion, is getting worse. It is going to be a bigger problem. 
And when we talk about how many dollars are available for 
benefits, I believe employees of small business choose health 
care first. That is their first choice, then the retirement 
plan. And the problem is compounded by a lack of education of 
understanding how dollars grow in a tax-free environment and 
how you can put relatively little in at an early date and have 
it really grow to a significant amount.
    I was also at the National Retirement Summit and I think 
one of the most exciting things that came out of that Summit 
was this concept of educating employees about the need to save 
for retirement and to save early. I think Dallas Salisbury and 
his group and ASEC have done a terrific job of getting spots on 
TV and radio. Before they started doing this, no one ever 
talked about saving for retirement. It just was a non-issue. 
And if you think about how often people talk about Social 
Security and how seldom they talk about retirement savings, 
there is a disconnect somewhere and I am not sure I understand 
why.
    So I think part of the problem with the bill we are talking 
about today is somehow the press has not picked up on how 
important this issue is. I mean, this is one of the most vital 
issues we have on the table today.
    I am hoping that through education employees are going to 
realize how important this is.
    Now, what I have seen in a number of my clients, my own 
firm, is once a 401(k) goes in and employees start seeing the 
money grow tax-free and they see their account balance growing 
and they have the option to pick among a number of mutual funds 
and they have an 800 number to call and they get investment 
advice, it is like a whole new world opens up and once that 
account balance gets large enough, and I am not sure what the 
magic number is, they do not want to touch it any more. They 
want to see it grow.
    So I know that all you have to do is get it going and the 
thing works. But I still think if a small business is very 
tight on profits, they are going to have to provide health care 
first. I really do. To keep those employees. We have a labor 
shortage going on, so that is helping us in this goal to 
promote small business formation, plan formation. But somehow 
we are going to have to get our hands around the health care 
cost increase and I have a feeling your committee is going to 
do a lot to help that issue also.
    Would anyone else want to respond to that question?
    Mr. Salisbury. I would just underline that if one looks at 
the small employer retirement survey, 98 percent of those with 
a pension plan also sponsor health benefits; 69 percent of 
those without a plan do have health benefits that they sponsor, 
which would suggest that there is a substantial population of 
small employers that are saying they are interested in starting 
a planbecause they have already taken that next step of 
retirement benefits.
    If we look at the surveyed group, we find that 20 percent 
of the employers, the small employers with plans have had them 
less than one year, a cumulative 33 percent less than two 
years, a cumulative 43 percent less than four years and a 
cumulative 52 percent less than six years. So I think one of 
the things to be stressed is small employers want to have these 
programs. They are continuing each and every year to put these 
programs in at the point they can afford to do so.
    And I think the emphasis of all of the witnesses today is 
to the degree some of the barriers that would serve to be 
eliminated and would serve to bring down the cost of 
implementing a plan, there appears to be every reason to 
believe that more and more small employers would continue to 
put in particularly the 401(k) plans if that option was there.
    I stress 401(k) because the other thing we found in this 
survey is of those that report having a plan, 9 percent report 
having a defined benefit plan, 91 percent report having a 
defined contribution plan. So even if one were to say the 
defined benefit plan is preferable, as a practical matter of 
life, it is the defined contribution plan that has been put in 
place.
    [To Ms. Christian-Christensen]
    Ms. Velazquez. Would the gentlelady yield?
    Ms. Christian-Christensen. Yes.
    Ms. Velazquez. Mr. Salisbury, I wonder if in those surveys 
at any time have you gathered any information that could tell 
us that when the unemployment rate is high there is less of a 
desire--or not a desire, but because the competition for worker 
retention is going to be less, if there is any correlation?
    Mr. Salisbury. We have not looked at that in a survey 
sense. I think that if one looks even with the slowing of the 
economy we have experienced thus far that where it does not yet 
seem to have shown up is in the unemployment rate. One of the 
reasons for that is you do have projections of relatively tight 
labor markets in terms of new entrants to the labor market at 
least for the next 18 years just on pure demographics.
    So we may end up with a very strange situation: a slowing 
economy and weak markets without a tremendous up tick in the 
overall unemployment rate. But clearly business profitability 
and free cash flow is essential to the creation of these 
programs and if a slowing economy cuts into small business 
revenues and profits, then clearly that will discourage the 
creation of new plans.
    Ms. Velazquez. Thank you.
    Ms. Calimafde. Could I quickly respond to that question?
    Chairman Manzullo. Sure. Go ahead.
    Ms. Calimafde. I think small business suffers greatly when 
there is employee turnover and I have a sense it suffers more 
than a larger business does. I think small businesses try very 
hard to retain their employees. I have heard small business 
owners complain that they have a valuable employee and that 
employee left for a larger business because the benefits are 
better. So, you know, that is sort of a countervailing balance 
to, well, it is easy to get good labor out there so we do not 
have to offer the plan. I think small business, knowing its 
labor force so well and wanting to keep them, if the employees 
said we really want this, I think they would try to provide it.
    Chairman Manzullo. I have a question that really goes to 
marketing of the available plans. I practiced law for over 20 
years and set up a lot of small businesses and corporations. I 
know the last thing they had in mind, or at least their 
attorney did, was to get them a quick introduction to pension 
plans that are available.
    In fact, in my own law firm, which I established in 1977, 
it was not until 1977, it was not until five years later that I 
set up a defined benefit plan. I wish I had set it up earlier. 
But a lot of it is through--you know, in law school, we had no 
courses on this, even though I graduated in 1970. I do not know 
what law schools are doing today, but there just seems to be 
nothing practical, like how to close a real estate transaction, 
about doing the legals of setting up a business.
    I mean, how do you tell small business people, how do you 
get out the word that there is an affordable plan out there? 
Anybody.
    Mr. Bachmann. Well, we make our living doing that. Some of 
us are doing it full time. It is interesting how the media is 
able to focus attention and make people aware of things that 
otherwise are much more difficult to sell. We conduct seminars, 
we go see business people. We are a part of the local chambers 
of commerce and other networking kinds of organizations, but--
    Chairman Manzullo. Does Edward Jones actually set up the 
plan for the individuals? How do you do that?
    Mr. Bachmann. We do not administer most of them ourselves.
    Chairman Manzullo. How do you go about it? If I am running 
a retail store in Freeport, Illinois and interested in setting 
up a plan, do you make blind calls, is that it? Or send out 
letters explaining that you can help?
    Mr. Bachmann. Yes.
    Chairman Manzullo. Okay. Could you answer that, Mr. Kelso?
    Mr. Kelso. As a small company, in 1993, we set up our 
401(k) plan. The way we went about doing it was exactly that. 
We contacted several who we knew were providers of 401(k) 
plans.
    Chairman Manzullo. But how did you know about it?
    Mr. Kelso. How did I know about it? Hmm.
    Chairman Manzullo. Did you read it somewhere? Did you see 
it on TV?
    Mr. Kelso. I do tend to read a lot in the business world 
and I guess I just picked it up in articles and, as an ESOP 
company, I also attended a number of ESOP conferences and there 
were lots of discussions about merging ESOP and 401(k) plans 
together.
    Chairman Manzullo. You had a head start on it.
    Mr. Kelso. Probably.
    Chairman Manzullo. But do any of your colleagues that have 
small businesses not have pension plans?
    Mr. Kelso. I would say the number in my industry is very 
small because the availability of other companies that do the 
same thing and the movement of people in between that industry 
is so pervasive right across the river in Crystal City that you 
have to have it in order to be able to attract the people.
    Chairman Manzullo. What about a company with, say, five 
employees? What is available out there? Anybody.
    Mr. Bachmann. These are what we are concerned about. There 
is very little available because the cost of administration 
eats into these things.
    At Edward Jones, we had heard about an organization that 
had really solved the riddle of how you administer very small 
plans and so they flew to St. Louis from New York and sat down 
and announced that they could do plans for as few as 100 
people. Well, we were thinking about five people. We were 
thinking about the truly--exactly what you are talking about. 
And this is why, frankly, we worked with Congressmen Blunt and 
Bentsen in designing the piece of legislation that affects the 
very small businesses because we see these as the ones that the 
system simply inadvertently works against.
    Chairman Manzullo. Well, there are 650,000 members of the 
NFIB and the average number of employees is three.
    Mr. Bachmann. Yes.
    Ms. Calimafde. Mr. Chairman, there is an answer and the 
answer is called SIMPLE. And Congress put this together, I 
think, two or three years ago and it is basically an IRA based 
plan and the company simply has to go to a brokerage house or a 
bank and ask for a SIMPLE plan and the brokerage house sets up 
IRAs for each of the employees. There is virtually no 
administration. It was designed to be the starter plan, to just 
get these companies used to putting money away.
    I do not look at it as the end-all, but for a simple, 
beginning micro business, it is the obvious first step.
    The reason why I would ultimately like to see those 
businesses move on to the 401(k) area or the 401(k) safe harbor 
is money in a 401(k) plan cannot be accessed at any time by the 
employee. It can only be accessed by a loan if the plan allows 
loans and that is a written loan or due to hardship and 
hardship is a difficult standard.
    Chairman Manzullo. You want to use it as a retirement, not 
a savings account.
    Ms. Calimafde. Exactly. And the SIMPLE, hopefully, is the 
starter plan that gets the small business in, there is no 
administration, it is really--you cannot get easier for a small 
business. And then you move them into the 401(k) hopefully.
    Chairman Manzullo. Mr. Bachmann, does your firm set up the 
SIMPLE plans?
    Mr. Bachmann. Yes.
    Chairman Manzullo. What is it, just a form that you can get 
from the IRS and you sign the bottom of it, or how does that 
work?
    Mr. Bachmann. I cannot tell you the details. I do not know 
exactly the detail, but I know that it is a very important part 
of our business because those are many of the people that we 
serve. When you mentioned Freeport, Illinois, that is one of 
the communities we are in and I believe we have a couple of 
offices there.
    Chairman Manzullo. You do.
    Mr. Bachmann. And it is intended to be available to the 
people in that community. So we will set up whatever we can for 
them and typically they start with a SIMPLE plan, but, you 
know, people do want more.
    Chairman Manzullo. Mr. Kelso.
    Mr. Kelso. I can only offer conjecture on my part, again, 
because I did not found my company. We bought it through the 
ESOP. But I firmly believe that if some of the parts of H.R. 10 
go through like raising the salary coverage to $200,000 and the 
$40,000 limit and the $15,000, then you are going to be able to 
show the business owner that this is a benefit to him or her 
and if you do not show that benefit to him or her, then they 
are not going to put it in for the real small company. That is 
my opinion.
    Chairman Manzullo. Well, I like Congresswoman Velazquez's 
approach. When you have Republicans and Democrats talking about 
tax credit, you know, this is pretty bipartisan, and what 
Congresswoman Velazquez is saying is, hey, you have your 
choice: either you pay taxes or you start up the beginning of a 
retirement plan. Good point. That is a good hook.
    Ms. Velazquez. Do not be so surprised. Democrats, we also 
support that tax credit.
    Chairman Manzullo. I know that. I know that.
    Thank you.
    Congressman Bartlett.
    Mr. Bartlett. Thank you very much. I spent a number of 
years of another life in the business world. I was a mid level 
manager in one of the larger companies, IBM, and then I had my 
own small business. I am one of probably 35 people in the 
Congress who belonged to NFIB, an active member of NFIB, before 
we came here. So I am very familiar with the problems of small 
business.
    A startling statistic relative to the recovery from our 
last recession was that most of the new jobs were in companies 
that had from zero to four employees. Most of the new jobs that 
brought us out of that recession were in companies from zero to 
four employees. And that speaks to the importance of these 
companies.
    Having worked in really big business and in a small 
business, I know that they are really very different. 
Regulations that simply require a person or two in a company 
the size of IBM are no burden that cannot be borne. If you have 
six employees and two of them have to be monitoring government 
regulations, that is a burden that buries you.
    I am really concerned about the availability of these plans 
to the smallest of businesses and I know that this is a good 
bill, but my question is do we need to do something after this 
to make sure that our smallest businesses can be players?
    Ms. Calimafde. I will start off, but this is an excellent 
panel so I am sure you are going to have some other opinions 
also.
    I think that we are going to need to see if the SIMPLE and 
the 401(k) safe harbor plans are going to work. We have had the 
SIMPLE I think about three years, the 401(k) safe harbor, this 
is going on its third year but Treasury just worked with small 
business last year to try to make it more workable.
    One of the key things, and I think you are all onto it is 
we have to get the word out to small business that there are 
easy plans that do not require a lot of heartache to put in. 
Dallas is working hard on that. DOL has a webpage on it. But we 
really need the brokerage houses out there making ads about we 
need SIMPLE and 401(k) plans, we can do this for you easily.
    I do think that we have to see--if Portman-Cardin became 
law, we have to see whether the incentives in Portman-Cardin 
work. Some of the problem we had in the 1980s was that we were 
getting retirement plan law changes literally every year and 
almost all of them were negative. So what happened was it just 
brought the system to a halt. Now we are in an era, I would say 
the last five years, Congress has been passing favorable bills 
in this area. This is like the big one, but each step has been 
a good step forward.
    And what I would like to see is let us see what the 
statistics show. Are we getting new plans? Most of the 
statistics out there are still based on 1997 data, so we do not 
even know if SIMPLE is working yet. But I guess my thinking is 
let us get this bill passed, get the brokerage houses doing 
more in the way of selling these plans, have ASEC and EBRI 
continue to explain to people why they have to save for 
retirement, get the press involved a little bit and see what 
happens.
    There is a clean-up bill behind this one, it is clear to 
me, but then I think we should just see if the system catches 
on. This may be enough to revive the whole system.
    Ms. Velazquez. Mr. Chairman, may I?
    Chairman Manzullo. Sure.
    Ms. Velazquez. Ms. Calimafde, when you say to get this 
legislation passed, Portman-Cardin, would that mean that it 
will include tax credit or without the tax credit incentives?
    Ms. Calimafde. My belief is that when this goes through the 
Senate the tax credit will be back on. Congressman Cardin has 
indicated that would not be a deal breaker. I think they would 
be happy to have the tax credit back on.
    Ms. Velazquez. The only problem that I have is just, I do 
not trust the Senate.
    Ms. Calimafde. Well, my problem is the Senate does not pass 
any bills.
    Chairman Manzullo. Mr. Bartlett, the time is yours.
    Mr. Bartlett. You know, when a government person comes to a 
small business and says I am from the government and I am here 
to help you, there maybe is outright laughter involved. Somehow 
we have to get the message out that, in spite of the 
government, that this is doable for small businesses, because 
they are just very disbelieving that anything that is 
government run is going to be easy for them to do. This is 
going to be a hard sell.
    Mr. Bachmann. Well, I think that--in addition to my Edward 
Jones hat, I am involved with the Financial Services 
Roundtable, the Financial Services Forum, and the U.S. Chamber 
of Commerce. And the Portman-Cardin legislation is at the top 
of all of those agendas. I mean, those are very different 
organizations with different objectives, but this just crosses 
all of the traditional barriers.
    I can say the same for the securities industry association, 
which I am a member there as well. And I think that the thing 
that is amazing to some of us is that this can have the kind of 
support it has. When it comes through the Congress the way it 
has come through the Congress, it clearly has the very broad 
support of the people. Now, what is needed to solve the riddle 
on the other side----
    Mr. Bartlett. Yes. That is my concern. Clearly with 280 co-
signers and broad bipartisan support----
    Chairman Manzullo. You can say the word Senate in here.
    Mr. Bachmann. I was not sure I could, but I do not want 
to--I have to go over there and talk to them, too. I do not 
want to make them sore, but----
    We at Edward Jones find that this is a far more emotional 
issue than people seem to realize it is. When you bring it to 
the attention of the small business people and they discover 
that these are here and they are not being moved forward, I 
think that there is going to be--there is ultimately going to 
be a strong reaction.
    I think there was a strong feeling last year that this is 
going to get through and suddenly at the end of the year, it is 
not through. So I would expect each of the groups that I just 
mentioned to take a very active role in not only calling for 
it, but in mobilizing constituencies to speak out on the issue. 
We have done it in the past and we will continue to do it at 
Edward Jones.
    Chairman Manzullo. We appreciate that.
    Mr. Bartlett. So your general consensus is that we need to 
wait and see whether this fixes the problem for really small 
businesses, or do we need follow-on?
    Mr. Bachmann. I think you have to get legislation passed as 
quickly as possible. This is very, very important legislation.
    Chairman Manzullo. Okay. Let us move on to Mr. Issa.
    Mr. Bartlett. Okay. Thank you.
    Mr. Issa. Thank you, Mr. Chairman.
    Last year, I was the CEO of a 200-person, $100 million 
company; 18 years earlier, it was micro and somewhere in 
between those years I passed through what some people would 
call small, but I think I was still small when I left.
    My predecessor told me that I would have to deal with two 
definitions of any bill: when a bill has something you do not 
like in it, you call it a bad bill and when there is something 
you like in it, you call it a good bill. Every bill would be 
definable either way depending on which part of the bill you 
look at. H.R. 10 is no exception. It is a bad bill if you look 
at the accelerated vestingprovision, which is clearly a slam on 
the flexibility of employers to help stem the tide of quick turnover.
    Many proponents of accelerated vesting have, in a defeatist 
way, said we cannot change the fact that everyone is going to 
leave every two years. I hope those who support this idea have 
the same attitude as a Member of Congress because it is exactly 
that same sort of a thing. The House of Representatives 
survives because some people stay longer and we would like to 
encourage good people to stay longer. That concerns me about 
H.R. 10.
    One of the burdens that small business faces is unlimited 
liability with the IRS for something that you do not manage or 
control. Our plan was controlled by Principal Financial. All we 
did was wire transfer money every pay period, for which we 
still had full liability and IRS audits and the like.
    I see what is wrong with this and I would appreciate it if 
you would comment on either of these two deficiencies in the 
bill. However before I give up my time, I would like to say 
that I am thrilled to see that H.R. 10 provides the opportunity 
for employees, like the 200 that I left behind, to save more. 
Many of my employees relatively senior but relatively low paid 
in the $30,000 or $40,000 range were trying to save much more 
than they could because they were catching up for a lifetime of 
not saving. So I leave the negative portion of H.R. 10 for you 
to comment on.
    Mr. Kelso. If I may, I agree totally with Congressman Issa 
about the vesting. We have what we feel is a very reasonable 
vesting schedule, 20 percent a year over five and a half years, 
a year qualifying and then 20 percent a year. And, again, 
turnover is a horrendous problem for a small company. When I 
first heard about the safe harbor rules, about the 3 percent 
match and then a 2 percent match on the next $2 and the like, I 
was ecstatic because I was already doing a dollar-for-dollar 
match up to 4 percent which exceeded the limits set by safe 
harbor.
    The problem was I could not take advantage of safe harbor 
because of the immediate vesting. There is no way in my 
industry that I can support full vesting immediately because 
that is just one more incentive for someone to move down the 
street for more money. Vesting is a very, very important issue, 
I think, for small businesses in the way of retention.
    Mr. Bachmann. I have a different view. We are a fairly 
large company who was a very small company and have sort of 
made that move from about 50 people to about--we are over 
20,000 workers. So we are a different company than then, but 
when we were a much smaller company, my predecessor who was the 
chief executive said I think people should have the right to 
vest immediately. We think that in effect it is their money.
    So while I understand that you can tie people to the 
company with vesting periods, we found that most people did not 
stay or go because of whether they were vested or not. We found 
that if we created a workplace and were competitive in other 
things that--I cannot think of a single case where vesting was 
an issue one way or the other. It frightened me when my 
predecessor went to that because I thought we should have a 
five-year vesting and I have become persuaded that the money 
really does belong to the workers and I think portability is 
important.
    We know that that cuts both ways and most people are going 
to have a number of jobs in a number of different places as 
society changes.
    Chairman Manzullo. Well, related to that is--I know in 
Congress we just changed it so that you are eligible to 
participate by payments, I think, by paying into the 401(k), I 
think it is 30 days now as opposed to year. Is that correct? I 
thought we changed it for federal workers. Does anybody want to 
help me out on it? For federal workers. The thrift savings 
plan, from 30 days to one year.
    Ms. Calimafde. Mr. Chairman, can I make a comment on that?
    I am finding that when I discuss with my small business 
clients the 401(k) safe harbor, which I thought would be 
embraced by them, the biggest stumbling block is the 100 
percent vesting and it is very interesting because if you 
think--a small business basically has two vesting choices: a 
three-year cliff, which means after three years they are 100 
percent, or six-year graded, which means after two years they 
are 20 percent vested and then they get an additional 20 
percent vesting each year thereafter until six years when they 
are 100 percent vested. To my mind, there was not a great deal 
of difference between three-year cliff vesting and immediate 
vesting, but I have found that to be a major stumbling block.
    Now, you know, that is in the statute and I guess I would 
say let us see what happens and see if it works out, but the 
real life experience, I am finding out there is that small 
businesses are very reluctant to leave the three-year cliff 
vesting and it does come down to loyalty. They feel they do not 
want to be giving pension benefits to someone who is there for 
six to eight months and leaves.
    Mr. Salisbury. Mr. Chairman, I would note that as a small 
employer, we have 25 employees, in our 401(k) plan we do 
provide for full and immediate vesting on both the match and on 
the employee dollars. In our money purchase defined 
contribution plan, which we are the total contributor for, we 
use four-year graded vesting at 25 percent per year. Going to 
the survey data, if one looks at the respondents among small 
employers who do not have plans, 30 percent cite the vesting 
standards as a major reason for not making the decision, 22 
percent cite it as a minor reason, 46 percent say that it has 
nothing to do with their decision making.
    So I think as with the members of this panel, what it 
underlines is for many small employers, it is not an adverse 
issue, but if one is talking about barriers to decision making 
by some substantial portion of small employers, the vesting 
issue clearly is important to a large number of them.
    Chairman Manzullo. Does anybody else have any questions?
    [No response.]
    Chairman Manzullo. Okay. Well, we really appreciate your 
coming. As Congresswoman Velazquez and I sat here listening to 
this testimony, it appeared to us that perhaps one of the 
things that we could do, the two of us, is appear before the 
Ways and Means Committee and request that they have an 
amendment on the tax credit and we would ask--our staff will 
probably be in contact with one or more of you for the exact 
language on that amendment. We really appreciate your taking 
the opportunity to be here.
    This committee is adjourned.
    [Whereupon, at 11:39 a.m., the committee was adjourned.]
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