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96–091—PDF 2015

S. HRG. 113–723 

RETIREMENT SAVINGS 2.0: UPDATING SAVINGS 

POLICY FOR THE MODERN ECONOMY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 16, 2014 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

RON WYDEN, Oregon, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

SHERROD BROWN, Ohio 

MICHAEL F. BENNET, Colorado 

ROBERT P. CASEY, Jr., Pennsylvania 

MARK R. WARNER, Virginia 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

ROB PORTMAN, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JOSHUA SHEINKMAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee on 

Finance .................................................................................................................. 1 

Hatch, Hon. Orrin G., a U.S. Senator from Utah ................................................. 3 

WITNESSES 

Bogle, John C., founder and former CEO, The Vanguard Group, Inc., Valley 

Forge, PA .............................................................................................................. 5 

Reid, Brian, Ph.D., chief economist, Investment Company Institute, Washington, DC ............................................................................................................. 7 

Betts, Scott F., senior vice president, National Benefit Services, LLC, West 

Jordan, UT ............................................................................................................ 8 

Madrian, Brigitte C., Ph.D., Aetna professor of public policy and corporate 

management, John F. Kennedy School of Government, Harvard University, 

Cambridge, MA .................................................................................................... 10 

Biggs, Andrew G., Ph.D., resident scholar, American Enterprise Institute, 

Washington, DC ................................................................................................... 13 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Betts, Scott F.: 

Testimony .......................................................................................................... 8 

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

Biggs, Andrew G., Ph.D.: 

Testimony .......................................................................................................... 13 

Prepared statement .......................................................................................... 49 

Bogle, John C.: 

Testimony .......................................................................................................... 5 

Prepared statement with attachments ........................................................... 61 

Hatch, Hon. Orrin G.: 

Opening statement ........................................................................................... 3 

Prepared statement with attachments ........................................................... 124 

Madrian, Brigitte C., Ph.D.: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 172 

Reid, Brian, Ph.D.: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 178 

Schultz, Ellen E.: 

Prepared statement .......................................................................................... 210 

Wyden, Hon. Ron: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 216 

‘‘Individual Retirement Accounts: Preliminary Information on IRA Balances Accumulated as of 2011,’’ Government Accountability Office, September 16, 2014 ............................................................................................. 218 

COMMUNICATIONS

The Church Alliance ................................................................................................ 229 

Coalition to Protect Retirement .............................................................................. 233 

Employee-owned S Corporations of America (ESCA) ........................................... 237 

The ERISA Industry Committee (ERIC) ............................................................... 242 

Page

IV 

The ESOP Association ............................................................................................. 250 

Great-West Financial and Putnam Investments .................................................. 259 

National Association of Manufacturers .................................................................. 267 

National Education Association (NEA) .................................................................. 274 

National Volunteer Fire Council (NVFC) .............................................................. 276 

Plan Sponsor Council of America (PSCA) .............................................................. 280 

Principal Financial Group ....................................................................................... 282 

The Savings Coalition of America .......................................................................... 289 

Small Business Council of America and Small Business Legislative Council .... 297 

(1) 

RETIREMENT SAVINGS 2.0: 

UPDATING SAVINGS POLICY FOR 

THE MODERN ECONOMY 

TUESDAY, SEPTEMBER 16, 2014 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:10 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Ron Wyden 

(chairman of the committee) presiding. 

Present: Senators Stabenow, Cantwell, Nelson, Cardin, Brown, 

Casey, Hatch, Grassley, Crapo, Thune, and Portman. 

Also present: Democratic Staff: Kara Getz, Senior Tax Counsel; 

Todd Metcalf, Chief Tax Counsel; and Joshua Sheinkman, Staff Director. Republican Staff: Preston Rutledge, Tax Counsel; and Jeff 

Wrase, Chief Economist. 

OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR 

FROM OREGON, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The Finance Committee will come to order. 

When you take a look at the state of retirement savings in America, it is clear that something is out of whack. The American taxpayer delivers $140 billion each year to subsidize retirement accounts, but still millions of Americans nearing retirement have little or nothing saved. The fact is, the incentives for savings in the 

American tax code just are not getting to those who need them 

most. 

A pair of new studies spells out the issue. The Federal Reserve 

found last month that an employee with middle-of-the-pack savings 

has about $59,000 set aside for retirement. Yet, according to the 

Government Accountability Office, some 9,000 taxpayers have IRA 

accounts worth more than $5 million. It would take several lifetimes of work for the typical middle-class American to save that 

much money. 

[The report from the Government Accountability Office appears 

in the appendix on p. 218.] 

The CHAIRMAN. So how did those massive IRA accounts come to 

be? In many cases, they seem to be sweetheart stock deals that 

most investors would never have access to. Executives buy stocks 

at a special rock-bottom price—sometimes fractions of a penny per 

share—and use an IRA as a tax shelter. The stocks start out dirt 

cheap, but just like that, they turn to gold, and the IRA shoots up 

in value. 

2 

* For more information, see also, ‘‘Present Law and Background Relating to Tax-Favored Retirement Savings,’’Joint Committee on Taxation staff report, September 15, 2014 (JCX–98– 

14),https://www.jct.gov/publications.html?func=startdown&id=4665. 

Now, wise investors have every right to use all of the tools available to them, and no one should begrudge them their success. But 

IRAs were never intended to be a tax shelter for millionaires. They 

were designed to help the typical American save for retirement. As 

the Finance Committee continues to work on modernizing the tax 

code, it needs to take a good and bipartisan look at fixing this 

issue. With limited resources, it is crucial to use taxpayer dollars 

as wisely as possible. 

The same study from the Federal Reserve included another 

alarming piece of information. Nearly a third of workers, according 

to the Fed, have no pension and nothing set aside for retirement. 

It is a fact of today’s economy that millions of Americans are walking on an economic tightrope and are unable to save. 

Report after report has shown that America’s middle class is, at 

best, struggling to stay afloat. Five years after the Great Recession, 

it remains tough for many people to find and keep a steady job. 

The cost of a college education continues to rise. Millions of Americans had their wealth tied up in their homes before the housing 

collapse, and they are not yet close to a full recovery. And many 

working families continue to see their take-home pay drop. 

At the same time workers, especially younger ones, are changing 

jobs more frequently than ever before, and they find it difficult to 

save without portable savings accounts. Women face special challenges to saving that have to be addressed as a part of tax reform. 

That is also true of part-time workers. This ‘‘Leave it to Beaver’’ 

ideal of a worker spending 40 years with one firm and then retiring 

with a generous pension and a gold watch is sorely outdated. 

Retirement policies need to keep up with the times, and the Finance Committee is beginning today to examine those savings 

issues. One proposal worth looking at is being pursued by my home 

State of Oregon. Less than half of Oregon businesses offer retirement plans to their employees, and many Oregonians have trouble 

saving anything at all. So the State set up a Retirement Savings 

Task Force to look at solutions. 

Just yesterday they recommended the State set up an auto-IRA 

program for any Oregon worker who is not covered by an employer 

retirement plan. A percentage of employees’ paychecks would go 

into the savings accounts, and the contributions would rise with 

time. It would not be mandatory. Employees could opt out at any 

time, but it certainly has the potential to be a first step towards 

retirement security for many Oregonians. 

In my view, the tax code should give all Americans the chance 

to get ahead, and making it easier to save is one of the best ways 

to accomplish that. That is why it is important for the committee, 

on a bipartisan basis, to look at how to improve these savings incentives and ensure that they help middle-class Americans prepare 

for retirement and not just set up tax shelters for millionaires.* 

[The prepared statement of Chairman Wyden appears in the appendix.] 

3 

The CHAIRMAN. Senator Hatch, I look forward to working with 

you, as always, on a bipartisan basis on this, and I welcome your 

statement. 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Thank you very much, Mr. Chairman. 

I think this is an important hearing. It is an important topic, and 

we have an outstanding panel of witnesses. I think we are going 

to have a very interesting discussion. 

Retirement policy has always been an especially important topic 

to this committee. It also has always been bipartisan. Most of the 

major pieces of retirement legislation that Congress has passed in 

recent decades have been named for Senators from the committee—one from each party. I am talking, of course, about legislation like Bentsen/Roth, Roth/Breaux, Grassley/Bob Graham, Grassley/Baucus/Hatch/Pryor, which, in the other body, came to be 

known as Portman/Cardin, for the two excellent legislators that I 

am proud to say are now colleagues of ours on this committee. 

I believe this tradition of bipartisanship on these issues can and 

will continue. 

Mr. Chairman, during the recent Highway Bill markup, we 

agreed to work together on multiemployer pension reform. That 

was done in the spirit of bipartisanship. And I have a pension reform bill for the modern economy that just last week received high 

marks from the Urban Institute, and I hope you will work with me 

on that as well. In fact, it received the highest marks. It is my sincere hope that the tradition of bipartisanship in retirement policy 

will continue and that the next retirement bill that comes out of 

this committee and becomes law will be known as Wyden/Hatch. 

We have always had incentives in the tax code to encourage saving for retirement. As the late Chairman Roth was known for saying, ‘‘There are no bad savings.’’ 

Congress has revisited saving incentives on occasion with an eye 

toward improving the incentives and increasing savings. For example, in 2001 Congress increased the limits for contributions to 

401(k) plans so that today a worker may contribute $17,500 to a 

401(k) and $5,000 to an IRA. Congress also added a ‘‘catch-up’’ contribution feature to the code to allow workers to contribute several 

thousands of dollars more beginning in their 50s, an age when 

many workers finally get serious about saving and when workers, 

including spouses, primarily women, who might have left the workforce for a time, finally have the opportunity to save again. 

As reported in the Bluebook published at the time by the Joint 

Committee on Taxation, Congress believed it was important to increase the amount of employee elective deferrals allowed under 

such plans, and other plans that allow deferrals, to better enable 

plan participants to save for their retirement. 

Well, it worked. Since 2000, retirement assets in defined contribution plans have grown from $3 trillion to nearly $6 trillion, despite the market downturn in 2008. Assets in IRAs have grown 

from $2.6 trillion to $6.5 trillion. In fact, increased contribution 

limits worked so well that, in 2006, Congress made those proviVerDate Mar 15 2010 18:06 Oct 01, 2015 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 R:\DOCS\96091.000 TIMD
4 

sions permanent, and the vote to make them permanent was overwhelming: 93 to 5. 

The retirement policies we have pursued have always been about 

helping Americans to help themselves save more of their hardearned money, not less. In the last 25 years, Democrats and Republicans have worked together to respond to a mutually shared goal: 

expanding savings among workers. Republicans agreed to proposals 

targeted to lower-income workers, like the savers credit. Democrats 

agreed that small business owners and managers needed to have 

some tax benefit skin in the game to take on the burdens of adopting and maintaining retirement plans. 

In these areas, members from both parties have resisted partisan 

impulses, and, as a result, we have been able to craft good policy. 

Lately, however, I have become concerned that there is a political 

strategy by some in Congress to turn pension policy into just another partisan battleground. They would turn retirement policy 

into another front in the class warfare that consumes so much energy on some of the other committees in Congress. I am worried 

that some want to disregard the bipartisan good will of the last 25 

years. That would be unfortunate. I especially hope it does not happen in our hearing today. 

Mr. Chairman, what I hope to hear today from the witnesses are 

facts that can inform our policy considerations. We need to know 

how much income Americans are projected to need in retirement, 

how much are they projected to have, and, if there is a shortfall, 

what policies they recommend we enact to help Americans close the 

gap. 

What I hope to not hear today are poll-tested slogans like ‘‘Upside Down Tax Incentives,’’ ‘‘Bang for the Buck,’’ ‘‘Pension Stripping,’’ or ‘‘The System is Rigged’’ without substantiating data. We 

need to hear facts and serious policy proposals, not political slogans. 

I want to thank you again, Mr. Chairman, for holding this hearing. 

Let me just say I would like to personally extend a special welcome to my fellow Utahan, Mr. Scott Betts. Scott and his company 

have done excellent work for many years helping Utahans save for 

retirement. I am especially grateful that you would travel all the 

way from Utah to be here today to help us make this a useful hearing. So thank you, Scott, for being here. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Hatch. 

[The prepared statement of Senator Hatch appears in the appendix.] 

The CHAIRMAN. I think you are very right to stress, number one, 

the bipartisan tradition in this committee for focusing on these 

kinds of savings incentives, particularly to create opportunity for 

folks in the middle class. I look forward to pursuing that with you 

in an approach that is really fact-driven. That is why we asked the 

Government Accountability Office to help us get an assessment of 

the most recent developments in savings. 

At that point, I think one way or the other, whatever the bills 

are called, you and I are going to be able to lead the committee in 

a bipartisan way. I look forward to pursuing that. 

5 

Now, we have six witnesses. We have a very talented journalist, 

Ms. Ellen Schultz, who is still battling Amtrak delays. So we are 

hoping that she will be with us. 

John Bogle has figured, as usual, a way to navigate through that, 

and so we are glad that he is here. He is, of course, the founder 

and former CEO of Vanguard. 

Our next witness will be Dr. Brian Reid, chief economist, the Investment Company Institute. 

Our third witness will be Mr. Scott Betts, who is the senior vice 

president of National Benefit Services. 

Our fourth witness will be Dr. Brigitte Madrian, the Aetna professor of public policy and corporate management at the John F. 

Kennedy School of Government at Harvard. She was, I believe, the 

first academic to do research on automatic enrollment in 401(k) 

plans. I know a number of our colleagues are interested in discussing that. 

Our fifth witness is Dr. Andrew Biggs, a resident scholar at the 

American Enterprise Institute. He also lives in Oregon. I told Senator Stabenow that I was wearing my Ducks tie today, and I did 

not wear it for 2 weeks out of respect to Senator Stabenow and the 

State of Michigan after the Ducks triumphed over Michigan State, 

but, Dr. Biggs, I could not hold off any longer. 

Senator STABENOW. There will be another day. 

The CHAIRMAN. There will be another day. 

Senator HATCH. I am glad the fight is between two Democrats 

this time. [Laughter.] 

The CHAIRMAN. We will await Ms. Schultz. Mr. Bogle, welcome, 

and we look forward to your presentation. 

Senator Brown has a very tight schedule this morning, so, when 

all of you are done, Senator Brown will begin the questioning for 

our side, and then we will turn to Senator Hatch. 

Mr. Bogle? 

STATEMENT OF JOHN C. BOGLE, FOUNDER AND FORMER CEO, 

THE VANGUARD GROUP, INC., VALLEY FORGE, PA 

Mr. BOGLE. Good morning, Chairman Wyden, Ranking Member 

Hatch, and other members of the committee. I am honored by your 

invitation to be with you. 

My career in the financial services field began more than 63 

years ago—a long time. In 1974, I founded the Vanguard Group, 

a new company on the mutual fund scene, and we now manage $3 

trillion worth of other people’s money and have become the largest 

mutual fund firm in the world. 

The principal reason for that success—and success is a fair description—is that, since 2008, this single firm has accounted for almost one-half of the mutual fund industry’s entire cash flow. It is 

simple. We were founded with a single focus: to serve mutual fund 

investors. 

Our management company—and this is important—the Vanguard Group, is owned not by its managers, nor by the public, nor 

by a U.S. or foreign insurance company or financial conglomerate— 

today, unfortunately, the industry’s most prevalent corporate structure. We are owned by our mutual funds, which in turn are owned 

6 

by our 20 million mutual fund shareholders. We are uniquely a 

mutual mutual fund complex. 

We operate the funds on an at-cost basis. The substantial profits 

we might otherwise make, which came to $19 billion in 2013 alone, 

were, in effect, rebated to our shareholders in the form of lower 

costs. 

I am also the founder of the world’s first index mutual fund, the 

Vanguard 500 Index Portfolio. As you all know, the index fund simply mimics the portfolio or particular index of prices of stocks or 

bonds. Largely because it pays no investment advisory fee—because it does not require any advice—it carries a rock-bottom expense ratio, as low as 0.02 percent or 0.05 percent. That is what 

we call 2 to 5 basis points, compared to other fund groups charging 

maybe 200 basis points. 

Index funds have accounted for more than 350 percent of U.S. 

equity mutual fund net cash flow since 2007, taking in $750 billion 

while other managed funds were losing $550 billion—the picture is 

pretty clear—and now constitute 33 percent of U.S. equity mutual 

fund assets. At Vanguard, a trillion dollars more than that is 

owned by investors building their own retirement nest eggs or retirement plans for corporations large and small, among them employees of State and local governments as well. 

Among all defined contribution retirement and thrift plans, we 

are now the largest provider of mutual fund assets. So we have a 

huge business stake in assuring our Nation’s retirement plans are 

structurally efficient and fiscally sound. Fund shareholders also 

have a huge stake in minimizing the management costs of their investment. Outside of Vanguard, those costs are grossly excessive. 

Unfortunately, our retirement system today is neither structurally efficient nor fiscally sound. For different reasons, each one 

of the three legs, as we call them, of our retirement system stool— 

Social Security, pension plans, and savings plans—is headed for a 

serious train wreck. Other witnesses seem to assume that Social 

Security and pension funds are soundly financed. Unequivocally, 

they are not. 

Leg one, Social Security, can be fixed with relatively few small 

changes from its imperfections today to moderate the growth of 

benefits and increase contributions. 

Leg two, defined benefit plans, now most deeply under water by 

$4 trillion or more, will require much more realistic assumptions 

of future investment returns than the 8 percent they are using— 

that just is not in the cards—as well as (a) higher employer contributions, and (b) lower employee benefits—tough medicine. 

Leg three, defined contribution plans—the largest and fastestgrowing component of our retirement system—cry out for structural efficiency and cost reductions. The retirement funds investors 

accumulate are slashed when DC plans incur vastly excessive costs. 

Simply, if they invest in low-cost mutual funds, rather than the 

high-cost actively managed fund, an investor’s return—as I show in 

Exhibit Two, I think it is page 10 of my submission—an investor’s 

long-term wealth could be increased by 65 percent, in that example, from $561,000 to $927,000, a $366,000 advantage, just by taking the cost of the system down to where it ought to be. 

7 

We need larger contributions from employees in defined contribution plans. We need to reduce the ability to withdraw savings almost on demand. We need to have some requirement that employers maintain their contributions. We need to expand access to the 

plan—employee participation—and we need to limit the participation of high-cost purveyors in DC plans and the IRAs. 

We also need a Federal standard of fiduciary duty for institutional money managers now, including fund managers, which so far 

have been virtually ignored by policymakers, regulators, and legislators. I will explain these more fully in my prepared testimony. 

Forgive me for going a little bit over my time. Thank you for 

hearing me out. 

The CHAIRMAN. That was very helpful. Thank you. I know we 

will have questions. 

[The prepared statement of Mr. Bogle appears in the appendix.] 

The CHAIRMAN. Dr. Reid, you are next. 

STATEMENT OF BRIAN REID, Ph.D., CHIEF ECONOMIST, 

INVESTMENT COMPANY INSTITUTE, WASHINGTON, DC 

Dr. REID. Thank you, Chairman Wyden and Ranking Member 

Hatch, for the opportunity to testify. I am Brian Reid, chief economist of the Investment Company Institute, the world’s leading association of regulated funds. ICI’s U.S. members manage assets of 

more than $17 trillion and serve more than 90 million shareholders. 

The point of today’s hearing is, mutual funds manage about half 

of the defined contribution plan and the individual retirement account assets. ICI has devoted years of research and considerable resources to making and communicating an accurate assessment of 

America’s retirement system. 

Today such an assessment must recognize three key facts. First, 

America’s retirement system is working to build retirement security for the majority of Americans. Second, the tax incentives for 

retirement saving based in deferral of taxes, not in tax exclusion 

or tax deduction, are key to the successes and strengths of that system. Third, while there are opportunities to improve our retirement 

system, changes should build upon our current structure and not 

put today’s retirement system at risk. 

Those statements may contradict much of what you often hear, 

so let me explain. Not only does Social Security cover nearly all 

working Americans, but 80 percent of near-retiring households in 

2013 had accrued pension benefits. And a wide range of government, academic, and industry research demonstrates that the 

American retirement system has become stronger in the past halfcentury. 

The poverty rate among the elderly has fallen since 1966 from 

nearly 30 percent to 9 percent, the lowest among all age groups. 

Since 1975, the amount of assets that is earmarked for retirement 

per household in the United States has increased sevenfold after 

adjusting for inflation. The share of retirees receiving privatesector pension income has increased by more than 60 percent, and 

the median private-sector income that retirees receive after adjusting for inflation has increased by 40 percent. These statistics speak 

to the impact of Congress’s bipartisan efforts that transformed SoVerDate Mar 15 2010 18:06 Oct 01, 2015 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 R:\DOCS\96091.000 TIMD
8 

cial Security into a strong foundation for America’s retirement system and created a framework of laws and tax incentives on which 

voluntary private employer plans and IRAs have grown and 

thrived. 

As important as the tax incentives are in encouraging employers 

to offer plans and employees to participate in them, the nature and 

role of these incentives is often misunderstood. The tax incentives 

take the form of tax deferrals, because contributions and earnings 

to traditional retirement plans are taxed when a retiree withdraws 

the income. 

This is fundamentally different from a tax deduction or exclusion 

where the initial tax reduction is never recovered. In economic 

terms, it is the after-tax rate of return that is incentive to save. 

Tax deferral effectively taxes investment income at a zero tax rate 

for retirement savers in all income groups. Thus, rather than creating a so-called upside-down incentive for saving, tax deferral 

equalizes the incentive to save across all retirement savers in all 

income groups and encourages support for employer-sponsored pension plans among a wide range of workers. 

The American people overwhelmingly support today’s defined 

contribution retirement plans, including the tax incentives. In a fall 

2013 survey, 86 percent disagreed with the idea of eliminating the 

tax advantages of defined contribution plans, and 83 percent opposed any reduction in employee contribution limits. 

Now, despite the strengths and successes of our system, it can 

be improved, but changes to the current system should build upon 

the existing system, not put it at risk. ICI supports measures to 

promote retirement savings, put Social Security on a sound financial footing as a universal employment-based and progressive plan 

for all Americans, foster innovation and growth in the voluntary retirement savings system, help smaller employers by offering simpler plan features and easier access to multiple-employer plans, 

and provide flexible approaches to retirement income. 

What is central to these ideas is that they build upon and do not 

undermine or replace our current retirement system. This system 

depends critically on the tax incentives Congress has provided for 

retirement savings. Proposals to reduce the tax benefits of 

employer-sponsored retirement plans would not merely affect 

upper-income workers and reduce their desire to participate in 

such plans, but they also would, undoubtedly, reduce the number 

of employers that sponsor a retirement plan and deprive workers 

of all ages and incomes of the many benefits of plan participation. 

In short, our retirement system has many strengths and successes, and building upon our strong voluntary system will enhance 

Americans’ retirement security for generations to come. 

Thank you, and I look forward to your questions. 

The CHAIRMAN. Thank you. 

[The prepared statement of Dr. Reid appears in the appendix.] 

The CHAIRMAN. Our next witness will be Mr. Scott Betts. 

STATEMENT OF SCOTT F. BETTS, SENIOR VICE PRESIDENT, 

NATIONAL BENEFIT SERVICES, LLC, WEST JORDAN, UT 

Mr. BETTS. Thank you, Chairman Wyden, Ranking Member 

Hatch, and members of the Finance Committee, for the opportunity 

9 

to talk with you about our private employer-sponsored retirement 

system. My name is Scott Betts. I am senior vice president of National Benefit Services. 

NBS is a fee-for-service third-party administrator specializing in 

the design and administration of all types of employer-sponsored 

retirement plans. NBS has more than 225 employees located in 

West Jordan, UT and supports more than 7,500 retirement and 

benefit plans in 46 states. Our goal is to give every working American the ability to save for a comfortable retirement. 

I have been working with employers on their retirement plans 

for almost 20 years and can tell you firsthand that qualified retirement plans like 401(k) plans are proving successful for millions of 

American workers. What I see every day is borne out by some important statistics. Middle-class families represent the overwhelming majority of 401(k) participants, 80 percent of participants in 401(k) plans make less than $100,000 per year, and 43 

percent of participants in these plans make less than $50,000 per 

year. 

An analysis by the nonpartisan Employee Benefit Research Institute found that over 70 percent of workers earning between 

$30,000 and $50,000 participated in employer-sponsored retirement 

plans when a plan was available, whereas less than 5 percent of 

those middle-income earners without access to employer-sponsored 

plans contributed to an IRA. In other words, workers in this group 

were 15 times more likely to save for their family’s retirement at 

work than on their own. 

If increasing retirement and financial security is the goal, increasing the availability of workplace plans is the way to get there. 

That is why it is so important that no harm be done to the current 

structure of tax incentives that motivate employers to voluntarily 

sponsor and contribute, along with the employees themselves, to 

those retirement plans. 

The tax incentive for retirement savings is unique: a tax deferral, 

not a permanent write-off. Contributions made this year are not 

taxed this year. Every dollar not taxed today will be taxed in the 

future when the individual starts taking withdrawals from retirement savings. 

Also, the tax incentive for employer-sponsored plans, unlike exclusions such as the home mortgage interest deduction, comes with 

nondiscrimination rules and limits to ensure that contributions do 

not discriminate in favor of more highly compensated employees. 

The result is a tax incentive that is more progressive than our progressive income tax system. For example, in Chart 3 of my written 

testimony, you will see that families earning under $50,000 pay 9 

percent of income taxes but receive 27 percent of the benefit of a 

tax deferral in 401(K) plans. 

The good news is that over 60 million working Americans currently benefit from these tax incentives through participation in 

employer-sponsored retirement plans. The Bureau of Labor Statistics reports that 78 percent of full-time civilian workers had access 

to retirement benefits at work, and 81 percent of those workers 

participated in these arrangements. 

In spite of these positive numbers, there are still millions of 

workers who do not have plans available at their workplace. More 

10 

can and should be done to encourage and help employers, especially small business owners, to set up and operate these plans in 

a cost-effective manner so their employees can save for their retirement. 

There are some changes that can and should be made to streamline plan operations and eliminate pitfalls and penalties for those 

employers that already have a plan. Senator Hatch, your SAFE Retirement Act has the right focus and strikes the right balance. For 

instance, the Starter 401(k) plan proposal would allow business 

owners—who may be reluctant to commit employer contributions— 

a way to offer employees a chance to save in their workplace plan. 

Another important change proposed by Senator Hatch’s bill 

would allow employers to adopt a qualified retirement plan after 

the end of the year when the final results of the business for the 

prior year are available. This common-sense change would literally 

open the window for more plans to be adopted and more employer 

dollars to be contributed. 

Senator Hatch’s bill would also permit small employers to band 

together in multiple-employer plan arrangements, so-called open 

MEPs, while providing critical safeguards for adopting employers 

through creating a new designated MEP service provider. 

Finally, Senator Hatch’s bill also addresses many of the inefficiencies and traps for the unwary employer that increase costs and 

can discourage employers from continuing to sponsor a plan. 

In conclusion, the current retirement system works well for tens 

of millions of Americans who have access to it, but we need to do 

more. The key to continued and expanding success is enacting reforms that will further incent employers to provide a retirement 

savings vehicle for their employees. 

Senator Hatch, your bill is a big step in the right direction toward removing complexities from the system and expanding the 

availability of workplace plans so more business owners will be 

able to provide a better retirement plan for American workers. 

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

The CHAIRMAN. Mr. Betts, thank you, and thank you for being 

here. 

[The prepared statement of Mr. Betts appears in the appendix.] 

The CHAIRMAN. Dr. Madrian? 

STATEMENT OF BRIGITTE C. MADRIAN, Ph.D., AETNA PROFESSOR OF PUBLIC POLICY AND CORPORATE MANAGEMENT, JOHN F. KENNEDY SCHOOL OF GOVERNMENT, HARVARD UNIVERSITY, CAMBRIDGE, MA 

Dr. MADRIAN. Chairman Wyden, Senator Hatch, and other members of the committee, thank you for the opportunity to speak to 

you today and share my thoughts on how we can strengthen America’s retirement savings system. 

Public policy has historically promoted saving for retirement 

using financial incentives. In the United States, the primary inducement to save is the exemption of retirement savings plan contributions—up to a limit—from taxable income. 

The Joint Committee on Taxation places the magnitude of this tax expenditure in 2014 at $127 billion annually. Lower-income 

11 

taxpayers are also eligible for the saver’s credit, as a further enticement to save. In addition, public policy encourages employers who 

sponsor a retirement savings plan to provide their own financial inducements for employees to save, namely the provision of an employer match. 

A large body of academic literature has examined the responsiveness of savings to financial incentives. A rather consistent finding 

from this literature is that the behavioral response to changes in 

incentives is not particularly large. In a recent paper, I surveyed 

the academic literature on the impact of one kind of financial incentive, matching, on savings plan participation and contributions. 

The studies using the most credible empirical methods find strikingly similar results in a variety of different contexts using a variety of different data sources. A matching contribution of 25 percent 

increases savings plan participation by roughly 5 percentage 

points. This is a modest effect at best. 

Conditional on participating in a savings plan, financial incentives can impact how much individuals save. But this effect does 

not come from the magnitude of the financial incentive so much as 

from the fact that at some point the incentive expires. For example, 

in many 401(k) plans, the employer provides a match, but only up 

to a certain fraction of pay—say 6 percent. The saver’s credit gives 

eligible low- and moderate-income households a financial incentive 

to save for retirement, but only for the first $2,000 contributed to 

an IRA or workplace savings plan. When financial incentives to 

save are limited to savings below a certain threshold, this threshold becomes a focal point as individuals decide how much to save. 

For example, data from 401(k) plans show that savings plan participants overwhelmingly choose contribution rates that are either 

multiples of 5—5 percent, 10 percent, 15 percent—or the match 

threshold. This finding suggests that the match threshold may be 

a much more important parameter in a matching scheme than the 

match rate. 

The relatively small impact of financial incentives on savings 

plan participation suggests that a failure to save is not primarily 

the result of inadequate financial incentives. Rather, there are 

other barriers to saving not addressed by traditional policy solutions. The literature on behavioral economics and savings outcomes 

points to a myriad of frictions that impede successful savings: procrastination, a lack of financial literacy coupled with the complexity of determining how much to save and how best to invest for 

retirement, inattention, and the temptation to spend. In many 

cases, countering these frictions leads to increases in savings plan 

participation and asset accumulation that surpass the effects of financial incentives. 

Before discussing policy alternatives to financial incentives that 

are informed by behavioral economics, let me note that, from a behavioral economics standpoint, the tax code is particularly illsuited to generating financial incentives to save. 

First, the tax code is complicated. It is difficult for the average 

taxpayer to even assess the financial incentives he or she faces 

through the tax code. For example, in a research project that I am 

working on, my coauthors and I have found that most individuals 

do not accurately understand the tax implications of saving in a 

12 

Roth versus a regular 401(k) or IRA. For low- or moderate-income 

taxpayers, assessing the incentives of the saver’s credit without the 

help of a tax professional would likely be a daunting task. Indeed, 

I attempted to do so in preparing these remarks and quickly gave 

up. 

Second, individuals are more responsive to immediate than to delayed financial incentives, but many of the financial incentives to 

save that operate through the tax code are delayed. The benefits 

of tax-deferred compounding are delayed, as are the benefits of tax 

deductions or credits that are not processed through payroll deduction or that do not reduce tax withholding throughout the year. 

Ironically, what could perhaps be a very effective financial incentive to encourage individuals to enroll in a workplace savings 

plan—a small but immediate financial reward—is actually not allowed in savings plans under current law. 

If financial incentives are not a savings panacea, what is? By far 

the most effective method to increase savings plan participation is 

automatic enrollment. The impact of automatic enrollment on participation rates can be sizable and is greatest for groups with the 

lowest savings rates initially: younger and lower-income workers. 

Expanding the reach of automatic enrollment is the most promising policy step we can take to increase the fraction of Americans 

who are saving for retirement. This means continuing to increase 

the number of employers with savings plans who use automatic enrollment, increasing the number of employers who offer savings 

plans, and providing simple savings alternatives for individuals 

who are self-employed or whose employers do not and are unlikely 

to ever sponsor a savings plan. Policy initiatives that support these 

measures include auto-IRA proposals and legislation to facilitate 

the creation of multiple-employer plans with limited fiduciary liability. 

Paradoxically, we have a savings system that, in the absence of 

automatic enrollment, makes saving complicated while, at the 

same time, makes it very easy for individuals to tap into their retirement savings before retirement. Another policy response that is 

needed to encourage retirement wealth accumulation is to reduce 

the leakage from our retirement savings system. 

In conclusion, the lessons from behavioral economics research are 

clear: if you want individuals to save, make it easy. If you want 

individuals to save more, make it easy. If you want employers to 

help their workers save, make it easy. And if you want individuals 

to spend less, make it hard. 

The CHAIRMAN. I got the drift that it was all about easy. [Laughter.] 

I just want to make sure everybody understands one point with 

respect to auto-enrollment—because you have been a leading scholar in this. When you talk about auto-enrollment, you still give the 

individual the last word? The individual can choose not to enroll, 

in effect, to opt out? 

Dr. MADRIAN. Yes, the individual can choose to opt out. 

The CHAIRMAN. All right. 

[The prepared statement of Dr. Madrian appears in the appendix.] 

The CHAIRMAN. Dr. Biggs? 

13 

STATEMENT OF ANDREW G. BIGGS, Ph.D., RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC 

Dr. BIGGS. Thank you. Chairman Wyden, Ranking Member 

Hatch, and members of the committee, thank you for the opportunity to testify today with regard to retirement saving and security in America. 

The word ‘‘crisis’’ is often overused. Generally, this is harmless, 

but in public policy the perception of a crisis sometimes causes people to leap before they look. This is the case today when it comes 

to retirement security. One well-known study claims that more 

than 50 percent of Americans are at risk of insufficient retirement 

income. Another study claims that 85 percent of Americans are 

falling short, and the total retirement savings gap may reach $14 

trillion. Yet another study claims that Americans collect only a pittance from their IRA and 401(k) plans. 

In response, some are proposing expensive expansions of Social 

Security benefits. Others are arguing that IRAs and 401(k)s are not 

working and should, effectively, be scrapped. In fact, these claims 

are overblown, and the policies being proposed are non-solutions to 

a non-crisis. 

While this kind of analysis is necessarily complex, I might simplify it with two sets of facts. First, the majority of today’s retirees 

are doing well: 75 percent of current retirees tell pollsters they 

have enough money to live comfortably. Data on poverty and other 

measures of retirement security show that most retirees today are 

able to match their pre-retirement standard of living. 

Second, the best research out there—from a model developed by 

the Social Security Administration’s Office of Policy, using inputs 

from the best retirement experts in and outside of the government—projects that future generations of retirees will have about 

the same level of retirement security as today’s retires. Specifically, 

SSA projects that, in retirement, the GenXers will have the same 

replacement rates as individuals born during the Depression, who 

supposedly enjoyed a golden age of retirement security. 

This model from Social Security incorporates some of the same 

data from the Federal Reserve study that you were referencing earlier, Senator Wyden. The Employee Benefit Research Institute also 

projects that retirement security for future generations will roughly 

hold steady with today’s retirees. Put those two facts together and 

you come to this conclusion: if we do not have a crisis today, it does 

not appear we will have one in the future. Yes, some Americans 

are under-prepared for retirement—around 25 percent according to 

some studies—with relatively modest savings shortfalls among 

those who are fully insured. But these shortfalls are targeted. For 

instance, one study finds that single, less-educated women are 

roughly twice as likely to fall short in retirement as pretty much 

any other demographic group. So, while we do not need to reinvent 

the wheel, we do need to do something. 

I am fully in favor of auto-enrollment pension plans, but lesseducated workers are less likely to be offered pensions on the job. 

Senator Marco Rubio has a proposal to allow workers who are not 

offered a pension by their employer the chance to participate in the 

Federal Thrift Savings Plan. Similarly, others have proposed a socalled ‘‘Super Simple’’ pension. It is designed to reduce administraVerDate Mar 15 2010 18:06 Oct 01, 2015 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 R:\DOCS\96091.000 TIMD
14 

tive and compliance costs for small employers who are least likely 

to offer pensions. 

Senator Wyden, you have referenced today State-based plans to 

enhance pension offerings for workers who are not offered plans on 

the job. Senator Hatch, your own legislation has provisions designed to encourage the offering of pensions to low-wage workers 

who might not otherwise be offered one. 

Still, though, this may not be enough. For instance, many single 

women without a high school education are likely to have only sporadic attachment to the labor force, so personal savings can only 

go so far for these individuals. At the same time, though, Social Security treats single women far less well than it does married 

women. So they are not getting much help from that end of things 

either. 

That is one reason that I and others have proposed reforming Social Security to include a flat, universal benefit set at the poverty 

level that would go to all retirees regardless of income or labor 

force participation. On top of that, individuals would save in supplemental retirement accounts provided either through their employer or, if not available, through the government. 

This approach is qualitatively similar to that of the U.K., Australia, Canada, and New Zealand. In the U.S. context, it could 

affordably reduce the elderly poverty rate from today’s level of 

roughly 9 percent to approximately zero percent, while increasing 

real retirement savings among the middle- and high-income workers who truly should be saving more. 

The lesson of all of this is that there are no simple problems and 

no simple solutions, but a small, if more complex, problem is better 

than a retirement crisis. 

Thank you very much. 

The CHAIRMAN. Thank you. 

[The prepared statement of Dr. Biggs appears in the appendix.] 

The CHAIRMAN. Senator Brown has a hearing in a few minutes. 

Let us start with him. 

Senator BROWN. Thank you, Mr. Chairman. I know all of my colleagues, as Senator Cardin pointed out too, have busy schedules. 

I have to chair Banking, and thank you for the special dispensation 

here. 

In 1970, a political scientist named Ben Wattenberg decided to 

try to find out what person represented America best, who was the 

prototypical American. He settled on a white woman in Dayton, 

OH, married to a union machinist—retired—who had a pension 

plan, a defined benefit pension plan. In those days, her family income was about $60,000. She was right in the middle. Half of 

America was poorer than she. Half of America was wealthier than 

she. 

Today, that machinist’s wife in Dayton probably would not have 

a union plan. She certainly would not have a defined pension benefit. She and her husband would probably have less equity in their 

home. Depending on the estimates, if she is in her mid-50s, she 

would have savings of somewhere in the vicinity—I know scholars 

differ on this—of as little as $11,000. If you look at Fed numbers, 

she could have up to maybe $50,000. Take the middle. Whatever 

15 

that number is, she will have to rely on Social Security for most 

of her income when she retires. 

In fact, today in my State—Ohio is not much different from other 

States—the majority of people on Social Security rely on Social Security for more than half of their income. The person in the middle 

will get no more than $1,300 or $1,400 a month. So we know that, 

for an enormous percentage of American workers—again, she is 

right in the middle; half are poorer than she is—retirement security is in doubt. 

Mr. Bogle, in your testimony, you make a number of important 

points about adequacy. One very important point is that high-cost 

funds and too many choices can rob unsophisticated investors, 

those in the broad middle or slightly lower, of the ability to adequately save. Dr. Madrian said, ‘‘Make it easy.’’ 

My question to you, Mr. Bogle, is, should Congress make it mandatory to auto-enroll and auto-escalate into low-cost index funds? 

Should Congress make it mandatory to auto-enroll and autoescalate? 

Mr. BOGLE. Well, with auto-enroll it is pretty easy to say, why 

not have it mandated? I, for one, would be the champion for mandating index funds. For heaven’s sake, just look at it this way, Senator: all of the investors in America, all of the retirement plan investors, own the total stock market together. They are a giant 

index fund, so they can go to an index fund and own that total 

share of the stock market for 2 to 5 basis points. And, if they want 

to fight among themselves to see who is best and get managers to 

try to outguess the others, they are going to get the market return, 

less 200 basis points. 

So, it is mathematically correct, but alas—I probably should not 

get into this here—it is probably politically undoable. But it should 

be made a more important qualification for entry into the system. 

Senator BROWN. And the auto-escalate? 

Mr. BOGLE. Auto-escalate is good. 

Senator BROWN. As people’s income goes up, a slightly higher 

percentage will go into that fund? 

Mr. BOGLE. Let me say that these things are right and correct 

as principles. The fact of the matter is, every family is different. 

Should you auto-escalate for a man with six children all going to 

college and a wife who may be ill? In other words, when you go 

from generalities to particulars, it is a tough—— 

Senator BROWN. But that, Mr. Bogle, is why you give the option 

to opt out. 

Mr. BOGLE. Yes. 

Senator BROWN. You are able to do that. Thank you, Mr. Bogle. 

Dr. Madrian, you said you should not already have to be in the 

middle class to get access to tax-preferenced savings vehicles. They 

should be designed to help workers get into the middle class. What 

are the policy changes we need to make to ensure that this happens; for instance, raise the minimum wage, make the saver’s credit refundable—all of the above? What policy changes do we make 

to give people a lift, to be of some assistance to get into the middle 

class and get access to these savings vehicles? 

Dr. MADRIAN. In my mind, the biggest problem with the current 

system is that many workers do not have the ability to save for reVerDate Mar 15 2010 18:06 Oct 01, 2015 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 R:\DOCS\96091.000 TIMD
16 

tirement through payroll deduction because their employer is not 

offering a savings plan or they are not eligible for the savings plan 

that their employer is offering, so I think we need initiatives to encourage small employers to offer a savings plan. 

The small employer is a lot like the individual investor. Joe from 

Joe’s Pizza does not have an MBA, does not have a dedicated 

human resources professional, and is no better at picking a savings 

plan for his employees than his employees are at picking from 

8,000 mutual funds what the best way to save for retirement is. 

Having an option that is easy for Joe’s Pizza to opt into, and other 

employers like Joe, would help close the access gap. 

So we should allow communities to have the chamber of commerce sponsor a multiple-employer pension plan where Joe does 

not have to worry about the fiduciary liability of picking the right 

or wrong investment options, and the employees who are in the 

same workforce in a locality have a similar benefit plan—they can 

talk about it, they can learn about it. Things like that would go a 

long way towards closing the access gap. 

We should provide incentives for companies to open their savings 

plans to all employees. In some companies, part-time workers are 

excluded. These are simple measures that could go a long way. 

Another point that I brought up in my testimony is, current law 

right now does not allow for companies to give a small financial incentive to sign up for the savings plan in the first place. So if you 

did not have automatic enrollment, or even if you did, to encourage 

employees to opt in rather than opt out, you could not, for example, 

say, sign up before the end of the month and you will get a $50 

Amazon gift card, or, sign up by the end of the month and we will 

enter you in a drawing for an iPad. Things that banks have used 

in the past to get people to sign up for a savings account, that 

phone companies have used to get employees to sign up for a cell 

phone plan, those are not allowed under current law, even though 

the literature on employee behavior suggests that small immediate 

financial rewards are, in fact, very effective types of incentives. 

The CHAIRMAN. We are going to have to move on at this point. 

Senator BROWN. Thank you. 

The CHAIRMAN. Thank you, Senator Brown. 

Senator Hatch? 

Senator HATCH. Well, thank you, Mr. Chairman. I would just as 

soon you go ahead of me. 

The CHAIRMAN. No, please. 

Senator HATCH. All right. Mr. Betts, you have real-life experience 

trying to convince small employers to adopt a retirement plan for 

their workers. Can you explain further: (1) what are their motivations when they make a decision to offer a plan, and (2) what sort 

of things convince them to say ‘‘no’’ to setting up a new plan? 

Mr. BETTS. Thank you, Senator Hatch, for the question. Working 

with employers for many years, it has been the incentives that the 

government has included in these plans that have incentivized employers to set them up. These incentives have motivated the employers to provide this retirement plan for their employees, so the 

effect of the incentive is very powerful. 

Now, many employers like to do it because it is the right thing. 

Today many job-seeking employees seek employers that have a reVerDate Mar 15 2010 18:06 Oct 01, 2015 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 R:\DOCS\96091.000 TIMD
17 

tirement plan. They will ask, do you have a 401(k) plan for me? 

But that incentive is the key piece. If that were changed or removed, many employers would end those plans. 

Also, the incentive is what allows new employers to start plans 

and get benefits in place in these plans. So I think the power of 

it is there and is demonstrated in the numbers of Americans who 

are saving today. 

Senator HATCH. Thank you. Dr. Betts, and, Dr. Reid, maybe too, 

the end result of many of the proposals I read about would be to 

effectively cap employee deferrals. All of these proposals seem to 

rely on the premise of lower contribution limits for workers who increase their savings rate. The proposals also assume that reduced 

tax incentives for companies will have no effect on the willingness 

of the business to keep its plan in operation or even to start a new 

plan. 

Well, I do not believe that. I think if we roll back the laws Congress has enacted that raised contribution levels and increased tax 

incentives to save, then two very bad things would happen at a 

minimum. First, businesses would stop contributing to pension 

plans because they are too complex and expensive to put up without adequate tax incentives. Secondly, employees would stop saving 

so much because the tax incentives would be less for most workers. 

I do not think academics, generally, understand either of these 

points. 

Now, Mr. Betts, what does your real-world experience working 

with business people making these decisions tell you? After you finish maybe, Dr. Reid, you might care to comment. 

Mr. BETTS. The tax incentive is very powerful in middle-class 

America in making these decisions. The tax incentive to contribute 

is very motivational. Now, I agree with a lot of the auto-enrollment 

abilities—that has added to the number of Americans participating—but it is really that incentive that motivates people to 

enter those plans. 

Senator HATCH. All right. Dr. Reid? 

Dr. REID. Senator Hatch, I think there are two points that I 

would like to make here. The first point is about the tax incentives 

and what is the incentive to save. This is really the key question. 

So, as you know, the current system for retirement savers is that 

we defer our taxes. So, when we make a contribution, we do not 

pay income taxes on the money that we put in or the earnings as 

they build up. But when we take money out of these traditional retirement plans, a 401(k) or an IRA, we pay the income tax when 

it comes out. It is, therefore, a deferral, not a deduction or exclusion. 

What this deferral does is, effectively, it gives a zero tax rate on 

the investment income in that plan. And that is the incentive. It 

removes the tax wedge and allows the return for the investor to 

come up to the point of the market return as opposed to a belowmarket return after the tax. 

Why is that important? Some of these proposals to cap the upfront deduction would actually turn the tax incentive on its head. 

So one example is, for instance, to cap the up-front deduction at 28 

percent and give you a credit. So anyone in an income tax level 

above 28 percent, let us say 35 percent, would have to pay a tax 

18 

going into the plan, and then they would pay their full tax rate 

coming out of the plan. 

What this, effectively, would do is disincentivize someone who is 

putting money into that plan in that upper-income level, and actually make it almost preferential to put money into a taxable account. They would have to hold the money in that retirement plan 

for 13 years to catch up from that extra tax hit at the beginning. 

So I think these proposals to cap the deduction, make it a credit, 

and put a tax penalty on higher-income savers would be very detrimental for higher-income savers. Many of them would be better to 

pull out. 

The second point is that the contribution limits are really important. And one reason those contribution levels are currently important is because people’s ability and willingness to save for retirement changes over their lifetimes. So we find individuals, as they 

move into their 50s and 60s, are more likely to participate and contribute at the limit. Fifteen percent of people in their 50s and 60s 

are contributing at the contribution limits. 

Senator HATCH. Well, thank you. 

Mr. Chairman, if I—— 

The CHAIRMAN. Senator Hatch, please go ahead. 

Senator HATCH. If I could just ask a question of Dr. Madrian— 

Doctor, while behavioral economics has shown a couple of successes, some of us are concerned that the field contains some who, 

rather than providing a nudge to, perhaps, help people navigate 

difficult decision-making, would provide full-fledged open field tackles of private citizens. It seems as though some behaviorists operate from a notion that academic and government technocrats are 

infallible and need to tell fallible private citizens of their mistakes 

and how they should lead their lives and allocate their resources. 

As an example, a former Treasury official in the Obama administration, along with a Harvard professor, has written about ‘‘behaviorally informed financial services regulation.’’ One of their proposed schemes is to nationalize all late fees on credit cards, give 

card issuers a small amount determined to be fair by some government technocrat, and use the nationalized pool of funds for financial education and other ways to help fallible private citizens. 

Dr. Madrian, how do you feel about such a proposal, and do you 

believe that infallible government technocrats need to, effectively, 

make decisions for private citizens on credit cards, or on retirement 

savings, under the notion that those citizens are not doing what 

the technocrats want them to do? 

Dr. MADRIAN. So, I will have to confess that I was not prepared 

to answer that question when I walked into the room. I know 

whom you are talking about, and I have read the article that you 

refer to more than once. 

I guess I would say—— 

Senator HATCH. Take a swing at it. [Laughter.] 

Dr. MADRIAN. How about if I answer a slightly different question? 

Senator HATCH. That would be fine. 

Dr. MADRIAN. I guess my view of behavioral economics is that 

what it does is try to expand the scope of understanding of what 

is actually driving behavior and what are the tools that you could 

19 

use to influence behavior. Whether you want to take a light-handed 

approach or a heavy-handed approach, that is a matter of personal 

preference. So I disagree with painting all behavioral economists 

with the same brush. I think you are going to find people along an 

entire spectrum, but I would be happy to go back and look at that 

article and send you a response to your questions—— 

Senator HATCH. I would like to have that. 

Dr. MADRIAN [continuing]. When I have had more time to think 

about it. 

Senator HATCH. I would like to have that. 

Mr. Chairman, I have to leave, but I just want to mention that 

this is an excellent panel. I have questions for each one of you. I 

apologize that we have run out of time, but forgive me for having 

to leave at this point. 

The CHAIRMAN. Well, thank you, Senator Hatch. As you and I 

have talked about in the past, this is going to be a focus of bipartisan tax reform. Thank you very much. I look forward to working 

with you. 

Senator HATCH. Vice versa. 

The CHAIRMAN. Senator Stabenow? 

Senator STABENOW. Thank you very much, Mr. Chairman, to you 

and our distinguished ranking member. This is a very, very important issue, and I appreciate the focus now and look forward to 

working with you. 

Let me just start by saying that I am a little surprised at what 

feels like an optimistic view that most people are saving and somehow people are going to have enough, and they are doing well. I 

would just throw out a couple of different numbers. Boston College 

Center for Retirement Research said in 2010 that we would have 

at least a $6.6-trillion deficit in terms of what people needed and 

what they were saving. Last year, 2013, the National Institute on 

Retirement Security said that 92 percent of working households did 

not meet the targets they needed for savings, somewhere between 

$6.8 trillion and $14 trillion. 

So I am concerned about the differences there, but I want to ask 

specifically about a group of folks I think we have not talked about 

this morning. As we look at what happened in the Great Recession 

with people losing their jobs and their homes—and they lost the equity in their homes, which was a major way that people saved, 

middle-class families, for retirement—and we look at what has 

happened to so many folks, we know that a lot of people took hardship withdrawals from their retirement accounts. We are told that 

they increased as much as 40 percent. So folks were saving, and 

then they had to take a hardship withdrawal because of what was 

happening to them, on top of losing the equity in their home. So, 

I am very concerned about folks who are now in a deficit position, 

who were doing the right thing and were caught up short because 

of something that happened that was way beyond their control in 

all of this. 

Mr. Bogle, I would ask you first: are there options that you 

would suggest to us that would help these workers rebuild a secure 

retirement who got put behind the eight ball because of the recession? 

20 

Mr. BOGLE. Well, that is not an easy problem to solve, Senator, 

to say the least. 

Senator STABENOW. Right. 

Mr. BOGLE. I do think that we have to face up—as we look at 

our whole retirement system—to the fact that, according to the ICI, 

33 percent of our population households have no retirement plans 

at all. The Federal Reserve says—and a very reliable source they 

are—only about a quarter of our households are preparing for retirement. 

I look at those kinds of data as more important than all of the 

tail data you see about how many dollars are here and how many 

dollars are there. Here is a case where I think common sense and 

the superficial data should override the complex data which concludes, as you now have all found out, just about any answer you 

want. 

So how to help somebody who is in real trouble is not easy. We 

should face the fact that the lower quintile of American income is 

$20,000 a year before taxes, unchanged on a real basis, cost of living adjusted, since 1979. And those people are not able to save. If 

we want to help them, there is simply no recourse than to increase 

benefits at the lower end of Social Security. It is complex, but the 

money has to come from somewhere. And that would be, I think, 

the best answer I can give to your question. We have to look elsewhere than the private retirement system. 

Senator STABENOW. Well, to add to that—and I would ask each 

of you if you could briefly respond—right now it is costing us about 

$800 billion over the next 5 years alone as we look at retirement 

account pension contributions. I certainly support this as a major 

area where we are focusing tax policy, but we also do know that, 

according to the CBO, the top 20 percent of households receive 

nearly twice as much of the tax benefits for retirement savings as 

the bottom 80 percent combined. Now we understand why that is, 

but the problem is, as we are looking at tax reform, the households 

that need the least help in saving for retirement are getting the 

biggest help, and the people who need the most are getting the 

least help. 

How would you suggest, or would you suggest that we do anything to improve the targeting of the tax incentives for retirement? 

Also, if anybody has a thought on how we could help the folks who 

got put in a hole here in the recession, we would appreciate that. 

Mr. BOGLE. Well first, looking at the high end of that, this is 

something—I will actually stand in for Ellen Schultz, because I 

read her book. 

Senator STABENOW. So did I. Yes. 

Mr. BOGLE. People at the high end of the income scale have so 

many retirement plans, such as deferred compensation, reimbursements for taxes paid, things that are in my opinion socially outrageous—if you can handle an opinion that strong—and get all 

kinds of benefits that are above and beyond what we can do and 

what we even think about in our retirement system. I would say 

that was the place to begin reform, and if those savings from making retirement so easy for our wealthiest citizens can somehow be 

transferred to those lower on the income scale, I think that would 

be desirable. But, alas, I cannot tell you how to do it today. 

21 

Senator STABENOW. Well, thank you very much. I will ask everybody briefly, but, Dr. Reid? 

Dr. REID. Senator, I think there are a couple of things at issue 

here. The first is that, if you think about the entire retirement system, putting employer plans together with Social Security, it still 

is a progressive system. And it really is the combination of those 

two that creates joint incentives to save. 

The second point is—and I think this is where we have provided 

some caution—there will be consequences if you begin to scale back 

contribution limits. Really, right now, the contribution limits are 

pretty modest relative to where they were historically, when 

ERISA was first set up, and individuals who take advantage of 

them tend to be in their peak earning years. If you begin to carve 

that back or begin to tinker with how those tax incentives are created, you could have higher-income employees not interested in 

participating anymore. Employers may then decide that it is just 

better to give them current compensation and not offer a retirement plan, and we could actually end up reducing overall participation. 

I think an example of that is, in 1986 we removed the ability of 

high-income workers to participate in an IRA. The following year, 

not only did high-income workers no longer participate in IRAs, but 

even low-income workers stopped participating in IRAs. And it is 

complex why that happened, but I think it is a cautionary tale. 

The CHAIRMAN. Senator Stabenow is asking a very good question. 

If you all can give short answers, that would be good. 

Senator STABENOW. I guess what I would say, in the interest of 

time, Mr. Chairman, is, does anybody think we ought to target incentives, and if so, how? 

Mr. BETTS. I would increase incentives or remove the disincentives out of these retirement plans that can be put in by employers 

so that we can expand the access. 

Senator STABENOW. And you would do that for everyone? 

Mr. BETTS. There are disincentives already built into the system 

that make it difficult for the small employer to start these plans. 

Senator Hatch’s bill has a number of things that remove some of 

those disincentives and make it easier for small employers to start 

a plan so more Americans could be saving. 

Senator STABENOW. Thank you. 

Dr. MADRIAN. If you were worried about low-income and vulnerable taxpayers, another characteristic that would describe many of 

those individuals is, they are not particularly financially literate. 

You can create all sorts of complicated tax incentives, and you are 

not going to get a lot of traction, because the tax incentives are not 

solving the problem. The reason those households are not saving is 

not because they are facing small tax incentives, it is because they 

do not know what to do or their employers do not offer a plan. 

So, a far more sensible margin for spending public dollars would 

be to create the incentives for employers to offer savings plans and 

automatically enroll their low-income workers, because that solves 

the problem of inaction and individuals not really knowing what to 

do. 

The CHAIRMAN. Is there anything you would like to add, Dr. 

Reid? 

22 

Dr. REID. I would just briefly reiterate a point from my testimony, which is that folks who end up in retirement without a lot 

of savings, without a lot of wealth, are often people with very sporadic attachment to the labor force during their working years. 

These are folks for whom employer-based savings plans are not 

going to do very much. But they are also folks who often fall 

through the safety net—Social Security. Social Security serves a lot 

of these folks not particularly well, because it is an earnings-based 

program, and because it has very odd distributions of benefits even 

among low-income people. 

So I think we do need some rethinking of who is falling short. 

What do we need to do for them? For some it is more individual—— 

The CHAIRMAN. That is important. I am going to have to stop you 

at this point. 

Senator STABENOW. Thank you. 

The CHAIRMAN. Senator Grassley? 

Senator GRASSLEY. I am going to start with Mr. Betts. In your 

testimony, you state that our current tax savings system is ‘‘more 

progressive than our progressive income tax.’’ Now that is an important point from my standpoint, because critics of current savings incentives frequently argue just the opposite. So I am going 

to give you a chance to elaborate on how the current savings incentives are actually progressive. 

Mr. BETTS. Thank you, Senator Grassley. Yes, in my testimony 

I provide a chart that demonstrates that Americans who earn less 

than $100,000 basically represent 28 percent of the tax collection. 

But the same group of Americans receives 49 percent of the benefit 

through the employer-sponsored retirement plans. That seems 

quite a bit more progressive. 

In addition, what is not noted in that is the many employers that 

actually provide employer contributions into these plans because of 

the way they are designed. The nondiscrimination rules and opportunities and incentives for employers permit them to put in more 

employer dollars that are not even covered in this chart. 

Senator GRASSLEY. All right. For Dr. Reid: as you know, there 

are currently several proposals that would limit the ability of 

upper-income individuals to deduct retirement contributions. That 

28 percent limitation is an example. 

Now you discussed this with Senator Hatch from the employee 

standpoint. I would ask you: how does your research suggest employers offering defined contribution plans would respond to proposals such as the President’s? 

Dr. REID. So, it is important to keep in mind, Senator, that a 

401(k) plan is an employee benefit. It is something that, when an 

employer is looking to attract employees, they know that to attract 

high-quality employees, they want to offer this benefit like they 

would any other benefit. 

If you have something in place that makes participating in that 

defined contribution plan unattractive for a group of potential or 

existing employees, the employer is going to say, well, I am going 

to use my resources elsewhere. I may just simply increase wages 

or something else and not offer a plan. 

23 

The example that I gave was, by putting a cap or a credit in 

place, what will happen is that certain individuals, employees, will 

have to pay a tax goinginto the 401(k), and then they would have 

to pay the full tax rate coming out. Actually then, for some of these 

employees, they would be better off simply putting their savings in 

a taxable account outside of their employer’s plan. 

The employer then, if that begins to happen, is going to say, well, 

this is not a benefit that a substantial number of my employees 

want. I am just not going to offer that anymore. I think, as many 

of the other panelists have pointed out, the benefit is having that 

employer plan there and in place. And being able to, in many cases, 

auto-enroll people actually increases participation. 

I think, with the President’s proposals, we would be taking significant steps backwards from the actions that Congress has taken 

over the last 50 years, and we would actually potentially reduce 

plan participation. 

Senator GRASSLEY. I am going to go back to Mr. Betts. Employersponsored retirement plans are an important component of any retirement plan. While 80 percent of the full-time workers have access to a retirement plan, this number is only around 50 percent 

for employees working for small employers with fewer than 100 

workers. 

Mr. Betts, as someone who worked with businesses in the administration of their retirement plans, what do you see as the biggest 

barrier to employers, particularly small employers, offering retirement plans? Probably a more important question would be the second one, so spend more time on this: what single reform, if implemented, do you believe would do the most to increase the number 

of small businesses offering retirement plans? 

Mr. BETTS. Thank you. Yes, there are several older rules in the 

nondiscrimination rules that were put in place early on in these 

plans. Newer rules have done better at managing the nondiscrimination requirements in these plans. One of the ones that 

could be removed would be the top-heavy requirement. That has 

disincentivized many small employers from starting a plan because 

of the risk of how much employer money they may have to put into 

a plan to satisfy that rule. 

Another big step in the right direction would be Senator Hatch’s 

Starter 401(k), being able to provide an employer plan so employees can start contributing where there is no risk of an employer 

contribution until such time as that an employer becomes financially stable and can benefit from a larger plan. 

Senator GRASSLEY. All right. My last question would be both to 

Dr. Biggs and Dr. Reid. What are your thoughts on the reform proposals, such as Chairman Camp’s, that would generally push more 

retirement savings into Roth-style 401(k)s and IRAs? Should Congress consider consolidating the types of retirement accounts in 

order to reduce confusion for savers, or is it important for individuals to have more options? 

Dr. REID. Senator, I think we are always in favor of simplification. I think one of the concerns that we would have in terms of 

potential consolidation is that, unlike some of the proposals like 

Senator Hatch’s and others that are trying to find ways to make 

it simpler for small employers to offer a plan, consolidation could 

24 

actually then narrow the options, making it more difficult for small 

employers to offer a plan. So that is why we have been in favor of 

concepts such as Starter 401(k), to enhance and broaden the scope 

of employer offerings of retirement plans. 

Senator GRASSLEY. Mr. Betts, do you have anything to add? 

Mr. BETTS. No, thank you. 

Senator GRASSLEY. All right. I am done, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Grassley. 

Senator Cardin? 

Senator CARDIN. Mr. Chairman, first of all, thank you for holding 

this hearing. I agree this is a critically important issue. It has been 

15 years since then-Congressman Portman and I recognized that 

we had a significant problem in our economy. Fifteen years ago, 

our economy was growing, and our workforce was growing, and income was growing. We led the world in just about every economic 

indicator, positive, except one. That was savings. Our savings ratios were, in fact, negative during some of those years. 

We also recognized that Americans did not have enough money 

for retirement, particularly lower-wage workers and younger workers. So we tried to do something about it. We were able to get several significant provisions incorporated into our tax code. I want to 

build on that. 

Our first principle was to try to simplify and to increase the limits, particularly the catch-up contributions, because of the point 

that some of you have raised that, when you are young, you have 

family, you have homes, you have all of these issues, including education expenses, and you do not think about retirement until later 

in life. Then the limits prevent you from building up enough in 

order to provide for retirement security. 

Our purpose is pretty simple, and that is what all of you have 

mentioned: access to retirement plans. If an employer does not 

offer a plan, there is going to be limited access. If you simplify, and 

if the limits are high enough to make it worthwhile, more employers will provide plans. That has been the result of legislation allowing for higher limits and more simplified plans. 

We also recognize that when employers put money on the table, 

more people will participate. Look at the Federal Government, the 

Federal Thrift Savings Plan. Our workers participate in it. Why? 

Because they do not want to leave money on the table. So, when 

an employer sets up a plan and provides matching contributions, 

it is much more likely that workers will participate. That is one of 

the things that we try to encourage. 

The alternative to that is to try to put some money on the table 

through the government, because, as important as the tax deferral 

benefit in employer-provided plans is, it is not enough for lowerwage workers and younger workers to participate at the levels we 

would like them to. So the saver’s credit was the substitute, and 

the saver’s credit has worked. Millions of Americans today are 

using the saver’s credit. 

So we have been able to get more participation. Automatic enrollment is important for getting people to enroll, Mr. Chairman, but 

also the default investment option is more sensitive to the person’s 

age, which means there are better investments made for them, 

rather than them making decisions themselves. 

25 

Lastly, you have mentioned financial literacy and investment advice. All of that was a part of what we tried to do over a decade 

ago. As a result, we have made progress. More people have retirement plans than would have had retirement plans. More money is 

in retirement options. 

As you know, we have gone through a recession. During a recession, you try to encourage people to spend, not save. As a result, 

we have lost ground. There is no question about it. We have to do 

a lot more. We have been on the defense for the last 4 or 5 years 

in this Congress trying to preserve the options we currently have. 

That has been our strategy. It is time for us to have a strategy to 

move forward. That is why I am particularly pleased about this 

hearing. 

How can we build on what has worked, and how can we deal 

with the issues that many of you have talked about with low-wage 

workers, the younger workers, not putting enough away for retirement? Mr. Chairman, there are some easy things we can do. 

Senator Portman and I have introduced legislation called the 

Church Plan Clarification Act. It deals with the practical problems 

that church plans have with ERISA. We should pass that. It is another easy thing we can do. We also have the DB-DC freeze legislation that addresses problems that arise when companies move from 

defined benefit plans to defined contribution plans. They are trying 

to do what is right for employees who are in the defined benefit 

plan by preserving those options, but the nondiscrimination testing 

rules can be very challenging. Our bill addresses that. 

I would hope these modest changes could be done quickly, because they are affecting retirement options today, and we should 

not wait for comprehensive reform when we can get some progress 

made. We should move forward and improve the saver’s credit. We 

should improve the automatic enrollment process. We should continue to try to simplify. 

I would like to ask—let me start with Dr. Reid—a question. One 

of the things that has frustrated me is that, when we designed 

these plans, we made it too easy, in my view, for people to take 

retirement money for things other than retirement. We also made 

it easier for them to take lump sums out rather than taking out 

lifetime income. One of our objectives is to have retirement security, to have an income source that takes the pressure off of Social 

Security, which was never intended to be the sole source of income 

for people who are retired. 

So what can we do to encourage more lifetime income options for 

retirement funds rather than having money taken out too early either through a lump-sum distribution or for other purposes? 

Dr. REID. So I think with the current system, certainly if you 

look at what people do within their 401(k)s or IRAs, we find that 

the vast majority of the money that is in 401(k)s is rolled over to 

IRAs. We also find that individuals tend to start tapping the 

money, actually, at age 701⁄2. It is the minority of individuals who 

do not. 

I think that ideas to help individuals to spread out those savings 

over their lifetime are valuable. I think our concern is driving tax 

incentives to a particular product. For many low- and moderateincome households, they are already heavily annuitized through 

26 

Social Security. They may have that lump-sum nest egg then for 

emergency purposes or for healthcare needs or something like that. 

We would not want to penalize these individuals for wanting to 

keep a lump sum to be able to tap. 

Other types of proposals to help people spread that savings over 

time and to draw on it, I think would be valuable. We just want 

to make sure that these are product-neutral approaches. 

Senator CARDIN. One of the proposals is to give an exemption for 

a certain amount of retirement funds from the minimum required 

distribution for the purposes you just said: so that you can keep a 

nest egg. One of the concerns that we have is that people just take 

money out when they should not, and we want to provide incentives—and not any one product—but incentives for income flows 

that can help people avoid outliving their income, which happens 

too frequently. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Cardin, and I also want to 

be clear that I am very interested in working with you and Senator 

Portman on the Church Plan Clarification Act. For those who are 

following this, this important legislation does what it sounds like. 

Church plans or retirement plans of churches, they generally are 

not subject to ERISA, and so we have a situation where we would 

have to preempt State law so that you could add these autoenrollment features that are so popular. 

I want you to know that we have a score request pending. We 

are going to work very closely with you. I think it is a sensible suggestion. I do not think it is going to score a lot. 

Senator CARDIN. Thank you, Mr. Chairman. I appreciate that. 

The CHAIRMAN. Thank you. 

Senator Casey? 

Senator CASEY. Mr. Chairman, thank you very much for the 

hearing. I want to thank our panel for your presence today and 

your work on these issues. 

I will start with Mr. Bogle, not only because of his Pennsylvania 

residence and his impact in our State and our country, but we are 

grateful you are here, sir. Thank you very much. 

Mr. BOGLE. Thank you, Senator. 

Senator CASEY. I want to ask you about this, the basic dynamic 

that has played out over a number of decades now: the shift from 

defined benefit plans to defined contribution plans and the implications of that. As you noted, there has been a transfer of trillions 

of dollars in savings and risk to individual investors and away from 

corporations. 

Give me a sense, if you can—as we try to design policy around 

the questions of giving those individual investors the tools they 

need to deal with that basic change, the question of educating investors—what more can we do? What model works in terms of giving them, at least, the opportunity to become better educated? 

Mr. BOGLE. Well, to begin with, what we have to do is take what 

was designed as the 401(k) was, for example—it was designed as 

a thrift plan system—and turn it into a retirement plan system. If 

you could just think that one through, you would get very close to 

where you want to be. 

27 

In terms of greater utility and greater efficiency for investors, 

there is just no question in my mind that their investment returns 

will be improved if they get the cost, the dickens, out of the system. 

Owning an index fund—let us call it owning the stock market, Senator—is such an easy thing to conceptualize as compared to picking 

the right manager here and picking the right manager there and, 

when he does not do well or she does not do well, picking another 

manager. We find that, for investors in mutual funds—I think this 

is in my testimony—because of that confusion, the idea that you 

can pick a good manager for a lifetime of investing simply does not 

work. 

So investors lose another 2 percent. They have a cost built into 

our system, about 2 percent a year, a staggering number. Making 

the wrong fund choices is another 2 percent a year, 4 percent a 

year, that they lag by. So I think if we would simplify the system 

and at the same time take the cost out of it, investors would have 

a lot of the mystery removed and be much more willing to sign up 

for a plan. 

Senator CASEY. Is there any experience, based upon your work 

or based upon the work of Vanguard, as to the age at which or the 

period of time within an individual’s life where this education could 

be especially significant? In other words, is it starting earlier? I 

know we have had legislative attempts to make sure that even students at a very young age are exposed to it. Is there any strategy 

that Vanguard has or has been successful with? 

Mr. BOGLE. Well, to give you my own impression, first, the way 

we now introduce young people to investing is to have stock-picking 

contests. That is sending exactly the wrong message to them. 

We should start with a compound interest table and show them 

how a percentage point of difference in return mounts up over a 

lifetime to an astonishing, absolutely astonishing amount. When 

you get to a higher level of age, I do not think there is a single— 

well, very, very few, maybe, to be fair—business school or finance 

school professor who would not tell you exactly what I am telling 

you: it is an inefficient system that is ill-serving mutual fund investors. 

I have in my prepared testimony a statement that is far stronger 

than that about the inadequacies of the mutual fund system, given 

by David Swensen, who manages the Yale Endowment with such 

success and is a person of impeccable integrity. You could easily 

say I have a vested interest in index funds. I really do not, because 

anyone can start one, and I would like to have more competition 

in the index area. It comes down to simplification and owning the 

market, rather than owning a bunch of different managers, if you 

are investing for a lifetime. 

Senator CASEY. Thank you. I will submit some questions for the 

record for Mr. Bogle and for others. 

In the less than a minute that I have, Dr. Madrian, I wanted to 

ask you—you made a pointed reference to automatic enrollment 

and the benefits of that. If you had to look at this purely from the 

point of view of the tax code, either where we are today or, frankly, 

where we hope to be, would you have any recommendations for improvements we could make to the code to make it more effective 

28 

or, I should say, changes to the tax code to make savings incentives 

more effective? 

Dr. MADRIAN. Yes. I have a one-word answer, and I will spell it 

out: s-i-m-p-l-e. 

Senator CASEY. Simplify, yes. 

Dr. MADRIAN. Yes. 

Senator CASEY. Mechanically, what is the best way to do that? 

In other words, when you look at where we are today, the code as 

it stands today, what change would you hope we would make? 

Dr. MADRIAN. That is an excellent question. I think that the tax 

code overall is very complicated. I think for middle- and higherincome tax payers, the Alternative Minimum Tax and how that 

interacts with the rest of the tax code makes it a complete mystery. 

You have no idea what the incentives are that you are facing, or 

the penalties to do one thing or the other. 

On the lower end of the income scale, you then have the interactions between the tax code and all of our social welfare programs. 

I think very few individuals accurately understand the tax incentives that they are facing. I think the saver’s credit, the motivation 

behind that to give low-income families an incentive to save, is 

well-intentioned, but if someone with a Ph.D. in economics from 

MIT cannot sit down and figure it out in 10 minutes, it is too complicated. I think the fact that we have so many different taxfavored ways to save, makes it complicated. 

It is not just the retirement system. So, if I am an employee and 

my employer offers an employee stock purchase plan, a 401(k) plan, 

and a health savings account, and I have a limited budget for how 

much I can save, it is very complicated to figure out where I should 

put that money. Plus we have 529 plans. We have lots of different 

tax-favored ways to save. 

I think some simplification and some consistency across these 

different plans would be helpful. Why a 403(b) plan has to have different rules than a 401(k) versus an IRA—a lot of it does not make 

sense to me. I think there are a lot things to do to make things 

simpler, more straightforward, for both employers offering plans 

and for individuals trying to decide how to save for health care, for 

education, for retirement, for a mortgage, things like that. 

Senator CASEY. Thanks very much. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Casey. 

Senator Portman, I do not know if you were here, but you are 

already on a roll this morning with your Church Plan Clarification 

Act legislation to promote auto-enrollment and preempt State law, 

so just keep going. 

Senator PORTMAN. Excellent. Well, thank you. Did our panelists 

all say they agreed with it and it was going to get enacted into 

law? 

The CHAIRMAN. We are getting a score as quickly as possible. I 

think it a very constructive idea. I am looking forward to working 

with you. 

Senator PORTMAN. Great. Thank you, Mr. Chairman. I appreciate 

your interest in this area and having the hearing today. I was here 

earlier to get to hear some of the great testimony, and what a terrific panel. Thanks for what you are doing. 

29 

I know Ben Cardin was here earlier, and, as you know, Ben and 

I did a lot of work together in the House on these issues, and we 

have introduced this church plan recently, but also soon we are 

going to introduce another bill on the whole issue of the nondiscrimination testing and the hard freeze and soft freeze issue. 

This is something we have actually talked to Treasury about in 

open testimony here, and I think this will be another good clarification plan that will help. 

I am excited about what we have been able to do over the years. 

I think it has made a big difference. I am looking at some statistics 

right here, some charts on 401(k)s and IRAs, and I know that some 

are critical of these programs. Here is the reality: even with our 

tough economic times we have had and during the financial crisis, 

we have gone from about $4 to $5 trillion in assets in 401(k)s and 

IRAs to about $10 trillion, over $10 trillion last year. 

So that is not bad, given, again, what happened during 2008, 

2009, 2010. We have to just keep it up. We have to figure out how 

to get more small businesses to provide these plans, and that is the 

key, to me: encouraging every small business to offer something so 

that every employee has the opportunity. 

As Dr. Madrian just said, keep it simple. We do actually have a 

simple plan now that came out of the Portman-Cardin work in the 

House for small businesses. It is actually called ‘‘SIMPLE,’’ but 

there is more work to be done in terms of taking out some of the 

complication and the cost, and even the liability in it. 

The saver’s credit, I think, has worked pretty well. We would 

love to have your views on that going forward, as to how we can 

make that work better. 

On the auto-enrollment issue, when I talk to companies—and I 

know you all talked about this earlier—we go from about 75 percent participation on average to 95 percent. That is, obviously, a 

great opportunity. There is more opportunity there, I believe, obviously, to expand that to more companies. 

Recently, Senator Warren and I actually introduced a bill that 

we hope will get hot-lined soon. We would love your support on this 

bill, which would simply move the default option in the Thrift Savings Plan from being government bonds to a life cycle plan. I do 

not know what you all think about that, but a life cycle fund, it 

seems to me, makes a lot more sense for Federal employees. If you 

are interested in that, now is the week to weigh in. 

So I ask you that. What do you all think of that for a default in 

the Thrift Savings Plan? Maybe Dr. Reid and Dr. Madrian, you 

could start. 

Dr. REID. Well, certainly in the private sector, the defaults that 

we have put in place in the rules, that Congress put in place 

around balanced funds and life cycle funds, have been extremely 

popular. I think that they do help get younger investors into and 

saving more heavily in the stock market. What we saw is, even 

while there was talk about younger investors pulling out of the 

stock market, those life cycle funds did certainly keep individuals 

who were in 401(k)s contributing. 

I think another point here that we would like to make is that, 

for ways of expansion—going to your broader question—the MEP 

concept, I think again, for smaller employers, to help them more 

30 

easily offer a plan, would be a beneficial change to our system as 

well. 

Senator PORTMAN. Thank you. I agree. Dr. Madrian? 

Dr. MADRIAN. Yes. I completely agree with changing the default 

fund for the TSP. A huge volume of evidence shows that the default 

fund is extremely persistent under automatic enrollment. So, if the 

default fund is a bond fund, most of the assets are going to be flowing into the bond fund. 

To harken back to Senator Casey’s question earlier—how do individuals learn and become more financially literate—the best evidence is that they learn through experience. So, if we want individuals to understand how the stock market works and how diversification works and things like that, having them invested in a life 

cycle fund which contains a better mix of assets makes a lot of 

sense. 

Senator PORTMAN. There are so many things I would love to talk 

to this expert panel about, but one is the minimum distribution 

rules. One idea that is out there that I find intriguing, but would 

love to hear reviews on, particularly if anybody disagrees, is, 

should we eliminate minimum distribution rules for plans under a 

certain amount, say $100,000? A lot of people who are 701⁄2 are still 

working, as you know. 

I just left the CEO of a major steel company. Unfortunately, they 

are trying to keep their older workers there because they have a 

serious skills gap. So what do you all think about that? Who wants 

to talk about that? 

Dr. REID. I think any ways in which we can help to encourage 

people to spread out their balances over a longer period of time— 

we certainly find that most people wait and do not withdraw until 

they hit that age of 701⁄2. Given the fact that life expectancies have 

increased and that the minimum distribution age has not changed, 

it certainly merits looking at whether or not that really needs to 

be adjusted—as long as what we do is product-neutral again. I 

think, again, what we want to make sure of is that—no matter how 

you are invested—the minimum distribution age is available to everyone. 

Senator PORTMAN. Mr. Bogle? 

Mr. BOGLE. I think your conclusion is correct, that there ought 

to be some exemption for minimum distribution requirements, say 

$100,000, that can be taken out without its being required to be 

taken out. I would also say, on the Thrift Savings Plan, I do think 

the Thrift Savings Plan needs an option, if you will, where investors can say, I want my money safe for the last 2 years before retirement, let us say. I do not know what the market is going to do, 

maybe it is going to go down 50 percent all over again. No one 

knows that, so if that investor really wants protection late in the 

period before he retires, he should have a highly safe option. 

Senator PORTMAN. That, as you know, is the theory with these 

life cycle funds: you go to fixed income towards the end of the cycle, 

and I need to look at that more carefully to see if it is the last 2 

years. 

Let me ask you all a general question, if I might. I am over time 

already. Thanks, Mr. Chairman, for the indulgence. 

31 

There is discussion, as you know, about savings in general and 

our still-low rate of savings in this country and how it affects the 

economy. And Senator Cardin and I believe that it does, and I 

think the chairman does as well. So there is talk about a universal 

savings vehicle. This came up in the Bush administration. It has 

come up again recently with some discussion of new ideas about a 

universal savings vehicle that would be available to everyone. 

The analogy has been what they are doing in Canada, for instance, if you followed that at all. It is a Roth-type vehicle therein 

terms of tax treatment. 

What do you all think of that as it would relate to retirement 

savings? One of the concerns always is, well, if people have the opportunity to save for anything and to pull out for anything, you 

would have even more leakage. You would have even less assets for 

retirement. But is that all right because you are increasing savings 

and financial literacy and banking and so on? Maybe those of you 

who have not talked yet could just comment on it. 

The CHAIRMAN. Quickly, witnesses, so we can get Senator Cantwell in. 

Dr. BIGGS. I will pass in the interest of time. 

Dr. MADRIAN. I do not know the particulars of the type of proposal you are talking about, but I do know that it would not make 

sense to have a universal savings plan where you could put money 

in and take it out for anything unless you have much stronger incentives to encourage accumulation in that plan. 

If you are going to let people take the money out for anything, 

they have to be putting more money in in the first place, if they 

have to cover everything they are doing. You would need higher 

limits. You would need financial incentives. You would need every 

lever out there. 

We know from behavioral economics that people engage in a lot 

of mental accounting in organizing their financial accounts, and 

one problem with the retirement savings system right now is that 

we do allow people to take the money out. So it is not clear whether a 401(k) is a retirement plan, or is it a universal savings plan? 

Senator PORTMAN. Yes. What penalty, though? 

I am sorry, Senator Cantwell. I did not know you had yet to ask 

questions. I will let you go now, but I just want to say that, if any 

of you have any thoughts on that, please send them to me, including Dr. Biggs. We may do some follow-up questions as well. Thank 

you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Portman. 

Senator Cantwell? 

Senator CANTWELL. Thank you, Mr. Chairman, and thank you 

for this important hearing. I know, according to a New America 

Foundation study, 92 percent of Americans are not meeting their 

retirement savings goals. I know that as we look at our budget for 

Social Security and Medicare, and programs like SNAP, this is 

going to have an impact on them. So to me, I want to look at ways 

to encourage more savings and certainly offer more of a lifetime 

stream of savings. 

So, Mr. Betts, I was wondering if you could comment on programs like a lifetime guaranteed annuity product as a way to 

incent Americans to further save, and a way to help them get more 

32 

efficiency out of their dollars. This is something that could be further incented by Congress. 

Mr. BETTS. Well, Senator Cantwell, our business is helping employers design, implement, and manage employer-based retirement 

plans. We do not get into the products that go into them, but we 

have seen current legislative actions that have introduced opportunities into these plans to have annuity-based structures, things to 

help better at retirement with these plans. 

Our biggest focus, really, is expanding the access so that more 

dollars are going in. We would like to see less of the disincentives 

that prevent small employers from starting these plans, so that 

more Americans can be contributing. As they grow, as these small 

employers grow, then the employers will put more employer dollars 

in. 

So it is really, from our perspective, getting access and contributing sufficiently. We know at retirement there are a variety of different situations, and people need the flexibility to design the retirement program they need. So the right amount of tools for an 

American person inside their retirement plan is important. 

Senator CANTWELL. Do you like the annuities that businesses are 

offering? Do you think they are successful? 

Mr. BETTS. They have a place for the right person who needs 

that type of structure, but that is not something we work on in our 

business. 

Senator CANTWELL. Mr. Bogle, do you have any input about annuities? 

Mr. BOGLE. The problem with annuities today, like any investments with a fixed-income portfolio, is that the rates are just so 

terribly low. I have always thought there was a place for an annuity—because it eliminates longevity risk—and a place for bonds. 

But those returns are so unattractive today that I think investors, 

and I think their advisors, have to at least vaguely think about 

whether they are attractive investments. 

When you think about a savings plan, a universal savings plan, 

we really know from history that, because of inflation, putting 

money into savings over the long term is a loser’s game. It probably 

has a negative return of about 1 percent a year after the cost of 

living is adjusted. 

So I think we have to think differently about short-term investments, and long-term investments. I think annuities have a place, 

but I think they have to come out of the commercial system and 

go into more of a public system where the annuitant gets a fair return. 

Senator CANTWELL. And how would you do that? 

Mr. BOGLE. Well, TIAA–CREF does a pretty good job of it themselves. It has to be an annuity that is run for the investors and not 

run for the salesmen. It really comes down to that. The costs are 

horrendous in annuities and life insurance products, if you will forgive my expression. I do not think anybody would disagree with 

that. If you take the cost out, the rates that you get paid are still 

going to be low, but for a certain type of investor who wants to assure the longevity risk and has no other assets, I think they are 

an attractive option if fixed. 

33 

Senator CANTWELL. But don’t you think, given the crisis that we 

are facing, that it is important to have that opportunity fixed? 

Mr. BOGLE. Yes, we should have that opportunity. 

Senator CANTWELL. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Cantwell. 

Let me tell you, first of all, this has been very helpful. Obviously, 

there are a whole host of issues to be examined. It is not a topic 

for today, but I feel very strongly about getting people to start saving very early in life. That is why we have been talking about child 

savings accounts. Here again, there are some common-sense approaches you can take. 

One of the things that struck me very early on is, when you are 

talking about people of modest means, their eligibility for various 

programs can be damaged because somebody sets aside some 

money, and they set it aside early on. And we may need to waive 

those kinds of rules so as to start building a savings ethic early. 

Today, I think you have to be troubled by where this debate has 

gone. The Government Accountability Office has told us that welloff taxpayers, more than 9,000 of them, had over $5 million in their 

IRA accounts in 2011. We have also seen press reports of executives in the high-tech sector with Roth IRAs with balances over $30 

million and over $90 million. So you contrast that with what you 

all have been talking about for the last 2 hours, with the median 

IRA account balance in 2012 being about $21,000, and it is pretty 

clear there is some important work to be done. 

So I think what I would like to do, just in terms of wrapping up, 

is to have you all almost pretend that the roles are reversed here, 

and you are up on this side of the dais. And Senator Hatch and 

I, and all of our colleagues, are going to try on a bipartisan basis 

to encourage retirement saving. 

And the way the debate is going to start, when we get to it as 

part of tax reform, is, right now the American taxpayer is putting 

up about $140 billion each year to subsidize retirement savings accounts. This is the second-biggest tax expenditure in the code. You 

take that and you juxtapose it next to what the Government Accountability Office has told us about those mega-IRAs and the 

$21,000 that people have—a median amount in their account—and 

it is pretty clear this committee is going to have some tough choices 

to make. 

What I would like to do is go down the row and ask each one 

of you for just one suggestion of where, as part of that effort—with 

the $140 billion that is used to assist these accounts—where would 

you make a change to get a bigger bang for the taxpayer buck? You 

get to make one choice because that is going to be fairly similar to 

what the debate will be here in the committee as part of tax reform—making the choice along those lines. 

Mr. Bogle? 

Mr. BOGLE. Well, the first thing you would obviously do—— 

The CHAIRMAN. You get one. You do not get a first. [Laughter.] 

Mr. BOGLE. All right. Thank you. One thing that we would do is 

eliminate the larger deductions or have a tax credit instead of a tax 

deduction, which would impact large investors the most. I would 

not do that, but that is a choice. 

The CHAIRMAN. Very good. 

34 

Dr. Reid? 

Dr. REID. I would try to expand the system to make sure that 

more small employers could more easily offer plans, so something 

like Starter (401)k or MEP. 

The CHAIRMAN. All Right. 

Mr. BETTS. Similar answer—remove the disincentives and increase the incentives for small employers to start those plans. 

The CHAIRMAN. And what is one way you would like to do that? 

Mr. BETTS. Starter (401)k and the multiple-employer plan. 

The CHAIRMAN. All right. 

Dr. Madrian? 

Dr. MADRIAN. Well, you do not get to $5 million in your 401(k) 

or your IRA by investing up to the limits we currently have and 

putting it into well-diversified mutual funds. You get there by putting it into employer stock and getting really, really lucky. For 

every winner with employer stock, there are lots of losers whose 

companies go bankrupt. So I do not think it makes sense to encourage gambling through the tax code by allowing employers’ stock as 

an investment option in tax-favored savings plans. 

The CHAIRMAN. So you would support a change in that area? 

Dr. MADRIAN. Yes. 

The CHAIRMAN. All right. 

Dr. Biggs? 

Dr. BIGGS. I would echo the other witnesses’ call to simplify plan 

offerings for smaller employers to get at the low-income workers 

and improve the incentives for them to offer those plans. 

The CHAIRMAN. All right. At this point, we have Senator Nelson 

on his way. I think what I would like to do is ask our guests, can 

you all stay a few more minutes? 

Mr. BOGLE. Yes. 

Dr. REID. Yes. 

Mr. BETTS. Yes 

Dr. MADRIAN. Yes. 

Dr. BIGGS. Yes 

The CHAIRMAN. All right. What we will do is, when Senator Nelson returns, he will ask his questions, and then the Finance Committee will be adjourned. So we will suspend here for a few minutes, and Senator Nelson will be here to wrap up. Thank you all 

for your professionalism and for your patience with us on a hectic 

day. 

Poor Ms. Schultz must still be stranded somewhere in Amtrak 

land. 

Mr. BOGLE. I tried to help her. 

[Whereupon, at 11:54 a.m., the hearing was recessed, reconvening at 11:55 a.m.] 

The CHAIRMAN. Senator Nelson has arrived, and he has had a 

hectic day. Senator Nelson, it is our plan that you will ask the 

questions that are important to you and, at that point, you will adjourn the committee. Is that acceptable? 

Senator NELSON. All right, Mr. Chairman—and questions that 

are important to you because you are a member of the Committee 

on Aging as well. 

We had a hearing about theextraordinary debt that is carried by 

seniors, and would you believe—of all things—student loan debt? 

35 

Then, if they cannot pay, lo and behold, their Social Security is garnished, and that brings them below the poverty level, because you 

can garnish down to $750, down to that level. And $750 a month 

for a senior citizen today is below the poverty level. 

The CHAIRMAN. Senator Nelson, you are doing very important 

work here. I am sorry that I am going to have to go, but the fact 

that so many seniors have racked up these eye-popping debts that, 

in effect, are going to color so many of their retirement decisions 

in the future, is especially important. I look forward to working 

with you. 

Senator NELSON. What I wanted to ask the panel is, what impact 

does debt have on workers trying to put money aside for retirement. Anyone? 

Mr. BOGLE. It puts them in an impossible position. The student 

loan debt is enormous, selective but enormous. I do not see how 

you can save beyond that when you are still trying to pay it off, 

Senator. 

Senator NELSON. That is right. Now we recently had somebody 

talking about our Thrift Savings Plan. The Senate has a very successful Thrift Savings Plan. If you were in a company, they would 

call it a profit-sharing plan. Here it is called a Thrift Savings Plan. 

The question was, propose an idea of opening up a Thrift Savings 

Plan-type entity to everyone. Do you want to give us any thoughts 

on the concept? 

Yes, sir? 

Dr. BIGGS. Senator, I mentioned this in my written testimony. I 

referenced your colleague from Florida who has advocated this 

idea. 

There are obviously practical issues that need to be overcome, in 

the sense that the Thrift Savings Plan is a plan for government 

employees. They have streamlined bookkeeping. So it is in that 

sense a very easy plan to administer and handle. 

I do favor the idea of giving savings options to low-income workers, in particular, who are not offered pensions by their employers. 

So, whether it is explicitly through the TSP or whether it is 

through a structure that looks very much like the TSP, I think that 

is a very good idea. It is an extremely well-run plan. It is simple. 

It is low-cost. It offers annuities so you can convert your balance 

into a lifetime income. 

So, when you look at the TSP, it answers a lot of the questions 

we have about retirement security. We can design a good plan. The 

key is, we just actually have to go out and do it. 

Senator NELSON. How would you go about setting up, administratively, a plan like that for anyone who wanted to buy into it? 

Dr. BIGGS. The question is, do you have it run through those individuals’ employers, where they would not run the plan, but they 

would deduct the money and send it to the TSP, or do you run it 

something like an IRA, where the individuals themselves would 

have to do it? Having their employers do it puts an administrative 

burden on the employers and may make it less attractive to them, 

but it is easier for the employee. 

If you run it in an IRA setup, the employee makes the decision. 

That puts no burden on the employers. It is very easy on that end. 

On the other hand, many employees will fail to do it. 

36 

So the question is, how do you make it cheap and easy? The 

problem for small employers—if you are a large employer who does 

electronic bookkeeping, electronic wage records, that is a fairly easy 

thing to do. Your computer does it for you. It is the small employers who are most likely to be writing out the check by hand each 

month, and the difficulty is, how do you make it work for them? 

I think that goes back to one of the points we all made at the 

end: a key for encouraging retirement savings is making it easier 

for small employers to offer these sorts of plans. 

Mr. BOGLE. Senator, the Thrift Savings Plan is essentially—with 

all of the long-term money in it, except for the short-term reserves—100 percent index funds. They charge, I believe the number is about 0.025 percent a year, 2.5 basis points for it, which you 

could argue is even better than the Vanguard 500 Index Fund, 

which charges a shocking 5 basis points, twice as much. However, 

the Thrift Savings Plan has their portfolio accounting, the accounting for their participants and beneficiaries, paid in a different 

source. So they are probably about the same. 

I would answer, essentially a Thrift Savings Plan in a different 

guise is already available to any employer of any size in the Nation. 

Dr. REID. Senator, I think, to echo both points, if you would open 

up the Thrift Savings Plan to potentially millions of employers, you 

would not have the Thrift Savings Plan anymore, in part because 

the administrative savings that the TSP gets from one employer 

with long-tenured employees with very large accounts, those efficiencies would, obviously, go away. As Mr. Bogle says, there are 

low-cost options within the private sector through mutual funds. 

You can be in index funds if you choose. You can be in low-cost actively managed funds as well. You can call up any one of the fund 

companies or a discount broker and open up an IRA or a plan, or 

a small employer can work with one of them to open up a payroll 

deduction plan through an IRA as well. So the private market actually does have something that actually is working very well. 

Mr. BETTS. I am not able to speak to the TSP, but I can say 

that—like my colleagues—expanding the accessibility of these savings plans is very important. In fact, I think you have in one of 

your bills the suggestion to expand multiple-employer plans, which 

would allow more small employers to offer these retirement plans, 

savings plans, with some of these types of investments that may 

be similar to a TSP. 

Senator NELSON. Yes, ma’am? 

Dr. MADRIAN. I agree with what the other panelists have said. 

Senator NELSON. Well, thank you all for participating in this. 

Anything further? 

[No response.] 

Senator NELSON. All right. The hearing is adjourned. 

[Whereupon, at 12:02 p.m., the hearing was concluded.] 

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