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STRENGTHENING WORKER 

RETIREMENT SECURITY 

HEARING 

BEFORE THE

COMMITTEE ON 

EDUCATION AND LABOR 

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

HEARING HELD IN WASHINGTON, DC, FEBRUARY 24, 2009 

Serial No. 111–3 

Printed for the use of the Committee on Education and Labor 

( 

Available on the Internet: 

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

COMMITTEE ON EDUCATION AND LABOR 

GEORGE MILLER, California, Chairman 

Dale E. Kildee, Michigan, Vice Chairman 

Donald M. Payne, New Jersey 

Robert E. Andrews, New Jersey 

Robert C. ‘‘Bobby’’ Scott, Virginia 

Lynn C. Woolsey, California 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

Dennis J. Kucinich, Ohio 

David Wu, Oregon 

Rush D. Holt, New Jersey 

Susan A. Davis, California 

Rau ́l M. Grijalva, Arizona 

Timothy H. Bishop, New York 

Joe Sestak, Pennsylvania 

David Loebsack, Iowa 

Mazie Hirono, Hawaii 

Jason Altmire, Pennsylvania 

Phil Hare, Illinois 

Yvette D. Clarke, New York 

Joe Courtney, Connecticut 

Carol Shea-Porter, New Hampshire 

Marcia L. Fudge, Ohio 

Jared Polis, Colorado 

Paul Tonko, New York 

Pedro R. Pierluisi, Puerto Rico 

Gregorio Kilili Camacho Sablan, 

Northern Mariana Islands 

Dina Titus, Nevada 

[Vacant] 

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

Senior Republican Member 

Thomas E. Petri, Wisconsin 

Peter Hoekstra, Michigan 

Michael N. Castle, Delaware 

Mark E. Souder, Indiana 

Vernon J. Ehlers, Michigan 

Judy Biggert, Illinois 

Todd Russell Platts, Pennsylvania 

Joe Wilson, South Carolina 

John Kline, Minnesota 

Cathy McMorris Rodgers, Washington 

Tom Price, Georgia 

Rob Bishop, Utah 

Brett Guthrie, Kentucky 

Bill Cassidy, Louisiana 

Tom McClintock, California 

Duncan Hunter, California 

David P. Roe, Tennessee 

Glenn Thompson, Pennsylvania 

Mark Zuckerman, Staff Director 

Sally Stroup, Republican Staff Director 
(III) 

C O N T E N T S 

Page 

Hearing held on February 24, 2009 ....................................................................... 1 

Statement of Members: 

Andrews, Hon. Robert E., a Representative in Congress from the State 

of New Jersey, submission for the record ................................................... 150 

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

on Education and Labor ............................................................................... 4 

Prepared statement of ............................................................................... 6 

McMorris Rodgers, Hon. Cathy, a Representative in Congress from the 

State of Washington, prepared statement of .............................................. 147 

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

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

Additional submissions: 

‘‘10 Myths About 401(k)s—And the Facts’’ ...................................... 74 

Matthew D. Hutcheson, independent pension fiduciary, statement of ............................................................................................. 77 

The American Society of Pension Professionals & Actuaries 

(ASPPA), statement of ................................................................... 83 

The Profit Sharing/401k Council of America (PSCA), statement 

of ...................................................................................................... 88 

Ariel/Schwab Black Investor Survey, Internet address to .............. 109 

Mellody Hobson, president, Ariel Investments, LLC and chairman, Ariel, statement of ................................................................ 109 

The American Benefits Council, statement of ................................. 110 

National Organization for Competency Assurance, statement of .. 122 

Questions submitted to the witnesses for the record ...................... 134 

Titus, Hon. Dina, a Representative in Congress from the State of Nevada, 

prepared statement of ................................................................................... 149 

Statement of Witnesses: 

Baker, Dean, co-director, Center for Economic and Policy Research ........... 18 

Prepared statement of ............................................................................... 20 

Responses to questions for the record ..................................................... 138 

Bogle, John C., founder and former chief executive of the Vanguard 

Group ............................................................................................................. 8 

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

Responses to questions for the record ..................................................... 138 

Munnell, Alicia, director, Center for Retirement Research, Boston College 

and Peter F. Drucker professor of management sciences .......................... 24 

Prepared statement of ............................................................................... 26 

Center for Retirement Research article, dated February 2009 ............. 95 

Responses to questions for the record ..................................................... 141 

Stevens, Paul Schott, president and CEO, Investment Company Institute 

(ICI) ................................................................................................................ 36 

Prepared statement of, Internet address to ............................................ 38 

Additional submission ............................................................................... 39 

Responses to questions for the record ..................................................... 145 

(1) 

STRENGTHENING WORKER 

RETIREMENT SECURITY 

Tuesday, February 24, 2009 

U.S. House of Representatives 

Committee on Education and Labor 

Washington, DC 

The committee met, pursuant to call, at 10:32 a.m., in room 

2175, Rayburn House Office Building, Hon. George Miller [chairman of the committee] presiding. 

Present: Representatives Miller, Kildee, Payne, Andrews, Scott, 

Woolsey, Hinojosa, McCarthy, Kucinich, Wu, Holt, Bishop of New 

York, Sestak, Loebsack, Hirono, Altmire, Hare, Courtney, SheaPorter, Fudge, Polis, Titus, McKeon, Castle, Biggert, Platts, Kline, 

Price, Guthrie, and Roe. 

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

Hearing Clerk; Lynn Dondis, Labor Counsel, Subcommittee on 

Workforce Protections; Carlos Fenwick, Policy Advisor, Subcommittee on Health, Employment, Labor and Pensions; David 

Hartzler, Systems Administrator; Ryan Holden, Senior Investigator, Oversight; Jessica Kahanek, Press Assistant; Therese Leung, 

Labor Policy Advisor; Sara Lonardo, Junior Legislative Associate, 

Labor; Joe Novotny, Chief Clerk; Megan O’Reilly, Labor Counsel; 

Rachel Racusen, Communications Director; Meredith Regine, Junior Legislative Associate, Labor; Michele Varnhagen, Labor Policy 

Director; Mark Zuckerman, Staff Director; Cameron Coursen, Minority Assistant Communications Director; Ed Gilroy, Minority Director of Workforce Policy; Rob Gregg, Minority Senior Legislative 

Assistant; Alexa Marrero,Minority Communications Director; Jim 

Paretti, Minority Workforce Policy Counsel; Ken Serafin, Minority 

Professional Staff Member; and Linda Stevens, Minority Chief 

Clerk/Assistant to the General Counsel. 

Chairman MILLER [presiding]. The House Committee on Education and Labor will come to order. And we meet today to explore 

the shortcomings in our nation’s retirement system and look at solutions, so that Americans can enjoy a safe and secure retirement. 

The current economic crisis has exposed deep flaws in our nation’s retirement system. These flaws were mostly hidden when the 

market was doing well. Since the beginning of this crisis, trillions 

of dollars have evaporated from workers’ 401(k) accounts. Millions 

of workers have seen a significant portion of their retirement balance vanish in just a few short months. 
2 

The committee heard testimony last year that the decline has 

forced many workers to consider postponing retirement or rejoining 

the workforce if they have already retired. For many retirees coping with rising costs for health care and other basic expenses, this 

loss in income is simply devastating. 

For too many Americans, 401(k) plans have become little more 

than a high stakes crap shoot. If you don’t take your retirement 

savings out of the market before the crash, you are likely to take 

years to recoup your losses, if at all. 

As a result, we are realizing that Wall Street’s guarantee of predictable benefits and peace of mind throughout retirement was 

nothing more than a hollow promise. And many more are questioning whether our nation’s retirement system as a whole is sufficient to ensure retirement security. 

Workers and retirees have historically depended upon three 

sources of income during retirement: from the defined contribution 

plans, defined benefit plans and other savings and Social Security. 

One leg of our retirement system is Social Security, and this program has never looked better than it does today. When you consider the trillions that employees have lost in retirement investments, thank goodness we didn’t get sucked into gambling with Social Security funds in the Wall Street casino. 

Another leg is traditional pension plans. But over the last two 

decades, many companies have unceremoniously frozen or terminated pension plans. Defined contribution plans, including 401(k)s, 

and other savings make up the third leg of our nation’s retirement 

system. However, the 401(k) is not the supplemental retirement 

plan as it was originally designed. In fact, more than two-thirds of 

the workers with retirement plans rely solely on 401(k)-type plans 

as their primary retirement vehicle. 

While 401(k)s are a fact of life, this committee has found that 

these plans in their current form do not and will not provide sufficient retirement security for the vast majority of Americans. This 

is why, in the short term, we must preserve and strengthen the 

401(k)s. Hidden fees and conflicts of interest must be rooted out. 

And 401(k)s need to be run in the interest of the account holder, 

not the financial service industry. 

Wall Street middle men live off the billions they generate from 

401(k)s by imposing hidden and excessive fees that swallow up 

workers’ money. Over a lifetime of work, these hidden fees can take 

an enormous bite out of workers’ accounts. 

Last Congress, I proposed a bill that would require simple and 

straightforward disclosure of 401(k) fees. And Wall Street opposed 

it. The ferocity of Wall Street’s response to simple fee disclosure 

leads me to believe that they do not want 401(k) account holders 

to find out the billions they skim from Americans’ hard-earned savings. 

I finally believe that workers have the right to know exactly how 

much is taken from their accounts. Every penny contributed to a 

401(k) account is the worker’s money, and it should be used for the 

worker’s retirement. 

In addition, as one of our witnesses will testify today, the interests of investment managers selling retirement products to workers 

do not line up with the interests of the account holders. Too often, 
3 

the most marketed investment options are the worst for workers in 

terms of expense and performance. 

Finally, in the long term, we should ask ourselves whether our 

current system gives workers the ability to ensure a safe and secure retirement. Witnesses appearing today will discuss how the 

decades-old realignment of our retirement system is putting enormous stress on the Americans’ retirement security. 

Being able to save for retirement after a lifetime of hard work 

has always been a core tenet of the American dream. Retirees 

ought to have financial security that allows them to focus on family 

and friends without sacrificing their standard of living. In the 

short-term, Congress must address ways to improve defined contribution plans. The 401(k) needs to be more transparent, fair and 

operated on behalf of account holders, not Wall Street firms. 

But, we must also ask the difficult questions about the state of 

our nation’s retirement system as a whole and look to see whether 

we need to create a new leg of retirement security. I hope this 

marks the beginning of an open and frank discussion on where we 

are today and what we need to do as a country to create a retirement system that works for all Americans, not just the fortunate 

few. 

In the coming weeks and months, this committee and Mr. Andrews’ subcommittee will be exploring these issues. And I look forward to the testimony of today’s witnesses. And with that, I would 

like to recognize Congressman McKeon, my colleague from California, who is the senior Republican on the committee for his opening statement. 

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

Education and Labor 

The Education and Labor Committee meets today to explore shortcomings in our 

nation’s retirement system and look at solutions so that Americans can enjoy a safe 

and secure retirement. 

The current economic crisis has exposed deep flaws in our nation’s retirement system. These flaws were mostly hidden when the market was doing well. 

Since the beginning of this crisis, trillions of dollars have evaporated from workers’ 401(k) accounts. Millions of workers have seen a significant portion of their retirement balance vanish in just a few short months. 

The committee heard testimony last year that the decline has forced many workers to consider postponing retirement or rejoining the workforce if they have already 

retired. For many retirees coping with rising costs for health care and other basic 

expenses, this loss in income is simply devastating. 

For too many Americans, 401(k) plans have become little more than a high stakes 

crap shoot. If you didn’t take your retirement savings out of the market before the 

crash, you are likely to take years to recoup your losses, if at all. 

As a result, we are realizing that Wall Street’s guarantees of predictable benefits 

and peace of mind throughout retirement was nothing more than a hallow promise. 

And, many more are questioning whether our nation’s retirement system as a 

whole is sufficient to ensure retirement security. 

Workers and retirees have historically depended on three sources of income during retirement—from defined contribution plans, defined benefit plans and other 

savings, and Social Security. 

One leg of our retirement system is Social Security, and this program has never 

looked better. When you consider the trillions that employees have lost in retirement investments, thank goodness we didn’t get suckered into gambling Social Security funds at the Wall Street casino. 

Another leg is traditional pension plans. 

But over the last two decades, many companies have unceremoniously frozen or 

terminated pension plans. 
4 

Defined contribution plans, including 401(k)s, and other savings make up the 

third leg of our nation’s retirement system. 

However, the 401(k) is not the supplemental retirement plan as it was originally 

designed. 

In fact, more than two-thirds of workers with retirement plans rely solely on 

401(k) type plans as their primary retirement vehicle. 

While 401(k)s are a fact of life, this committee has found that these plans in their 

current form do not and will not provide sufficient retirement security for the vast 

majority of Americans. 

That is why in the short term, we must preserve and strengthen 401(k)s. 

Hidden fees and conflicts of interest must be rooted out. 

And, 401(k)s need to be run in the interest of account holders, not the financial 

services industry. 

Wall Street middle men live off the billions they generate from 401(k)s by imposing hidden and excessive fees that swallow up workers money. Over a lifetime of 

work, these hidden fees can take an enormous bite out of workers accounts. 

Last Congress, I proposed a bill that would require simple and straightforward 

disclosure of 401(k) fees. Wall Street opposed it. 

The ferocity of Wall Street’s response to simple fee disclosure leads me to believe 

that they do not want 401(k) account holders find out the billions they skim from 

Americans’ hard-earned savings. 

I firmly believe that workers have the right to know exactly how much is taken 

from their accounts. Every penny contributed to a 401(k) is the worker’s money and 

it should be used for the worker’s retirement. 

In addition, as one of our witnesses will testify today, the interest of the investment managers selling retirement products to workers do not line up with the interests of account holders. 

Too often, the most marketed investment options are the worst for workers in 

terms of expense and performance. 

Finally, in the long term, we should ask ourselves whether our current system 

gives workers the ability to ensure a safe and secure retirement. 

Witnesses appearing today will discuss how the decades-old realignment of our retirement system is putting enormous stress on Americans’ retirement security. 

Being able to save for retirement after a lifetime of hard work has always been 

a core tenet of the American Dream. Retirees ought to have financial security that 

allows them to focus on family and friends without sacrificing their standard of living. 

In the short-term, Congress must address ways to improve defined contribution 

plans. The 401(k) needs to be more transparent, fair, and operated on behalf of the 

account holder, not Wall Street firms. 

But, we must also ask the difficult questions about the state of our nation’s retirement system as a whole and look to see whether we need to create a new leg of 

retirement security. 

I hope this marks the beginning of an open and frank discussion on where we 

are today and what we need to do as a country to create a retirement system that 

works for all Americans, not just the fortunate few. 

In the coming weeks and months, this committee and Mr. Andrews’ subcommittee 

will be exploring all these issues. 

I look forward to today’s testimony. 

Mr. MCKEON. Good morning, and thank you, Chairman Miller. 

Last fall, as our nation’s financial crisis was worsening, the committee held several hearings devoted to the effects of this crisis on 

retirement savings. We heard some troubling testimony about the 

state of our nation’s economic affairs, its impact on workers and retirees and a range of proposals for solutions. Some, I think, we 

would all agree upon. Others were and remain far more controversial. 

As I noted in the fall, our economy is in the midst of a serious 

downturn, constrained by a global credit crisis and burdened by the 

weight of toxic assets that have made it more difficult for businesses large and small to maintain their day-to-day operations, 

much less to create the new jobs our economy needs. 
5 

And while it would be easy to dismiss the woes of the stock market as merely impacting the wealthy, the reality is that millions of 

Americans rely on investments in planning for retirement. Because 

of this, a downturn in our financial markets can have a real impact 

on workers’ retirement security. 

While the two major types of retirement plans, defined-contribution and defined-benefit, have many differences, both are impacted 

by the overall health of our economic system and by investment 

performance in particular. 401(k)-type savings plans are invested 

directly, usually managed by workers. Defined-benefit plans require plan sponsors to manage millions in assets over a period of 

many decades. 

With the collapse in recent years of a number of defined-benefit 

plans, we have seen the risk to workers and retirees when plans 

are not effectively managed, or when benefits are over-promised 

and under-delivered. 

I understand that the bulk of our examination today will be devoted to 401(k) plans and the defined contribution pension system. 

I welcome this examination and trust that the information we hear 

today will be of use to us. 

I would caution, however, that to the extent we focus on one side 

of the equation, the defined contribution side, we must not ignore 

the other. It may be tempting this morning to talk about the risks 

associated with defined contribution plans, and how workers would 

be so much better off if they were all in defined benefit plans. I 

think that simply misstates the case. 

As the Chairman well knows, our nation’s defined benefit plans 

are facing historic challenges in the wake of our financial collapse. 

While workers with retirement savings in 401(k) plans are rightly 

worried about what the market is doing in their retirement plans, 

workers in defined benefit plans face their own worries about 

whether their companies will still be standing, whether their jobs 

will still be there and whether their promised benefits will be delivered in the wake of this financial turmoil. I hope the Committee 

will pay the same attention to those issues as we move forward. 

Second, I hope that this morning’s hearing will acknowledge the 

full scope of the challenges facing Americans planning for or entering retirement. I expect we will hear at some length about fee disclosure in 401(k) plans and the need for improvement. I know this 

is an issue of particular concern to you, Chairman Miller, and one 

on which I expect we will again see legislation in this Congress. 

As I made clear last fall, I think all of us would support improved disclosure that is meaningful and useful to participants. 

And the question of how we go about that improvement is a fair 

question for today’s hearing. 

I would caution, however, that we not suggest that investment 

fees are to blame for the dramatic declines in retirement savings 

which our nation’s workers and retirees have seen as a result of 

this historic financial crisis. 

In a year where the S&P 500 lost 38 percent of its value, to suggest that the problem is merely one of investment fees is simply 

not factual or helpful. And indeed, on that point, it bears note that 

while the S&P lost almost 40 percent of its value, the best numbers 

available now suggest that the average workplace retirement sav-
6 

ings account lost 27 percent of its value—still a difficult loss, but 

it does suggest that plans can and will vary with performance and 

their management. 

Finally, I think it is important to recognize that while our defined contribution system could be improved, it would be a real 

mistake to dismantle it, or nationalize it, as has been suggested in 

this committee in the past. We have a heavy responsibility in both 

the legislation we pass and the debates we undertake. 

In particular, I would make clear that now is not the time to 

frighten people out of the market. Triggering a widespread exodus 

from the system would only exacerbate the market’s downward 

trend, while cementing those deep losses. I hope members and witnesses will keep this in mind with their comments, their remarks 

today. 

Given the fact that, historically and over time, these plans have 

become vital retirement savings vehicles for millions of Americans, 

I am very mindful that we do not take any step, even our conversations, to discourage that this morning. 

With that, I welcome our witnesses and look forward to their testimony and yield back. 

Prepared Statement of Hon. Howard P. ‘‘Buck’’ McKeon, Senior Republican 

Member, Committee on Education and Labor 

Good morning, and thank you, Chairman Miller. 

Last fall, as our nation’s financial crisis was worsening, the Committee held several hearings devoted to the effects of this crisis on retirement savings. We heard 

some troubling testimony about the state of our nation’s economic affairs, its impact 

on workers and retirees, and a range of proposals for solutions. Some I think we 

would all agree upon. Others were and remain far more controversial. 

As I noted in the fall, our economy is in the midst of a serious downturn, constrained by a global credit crisis and burdened by the weight of toxic assets that 

have made it more difficult for businesses large and small to maintain their dayto-day operations, much less to create the new jobs our economy needs. And while 

it would be easy to dismiss the woes of the stock market as merely impacting the 

wealthy, the reality is that millions of Americans rely on investments in planning 

for retirement. Because of this, a downturn in our financial markets can have a real 

impact on workers’ retirement security. 

While the two major types of retirement plans—defined-contribution and definedbenefit—have many differences, both are impacted by the overall health of our economic system and by investment performance in particular. 401(k)-type savings 

plans are invested directly, usually managed by workers. Defined-benefit plans require plan sponsors to manage millions in assets over a period of many decades. 

With the collapse in recent years of a number of defined-benefit plans, we have seen 

the risk to workers and retirees when plans are not effectively managed, or when 

benefits are over-promised and under-delivered. 

I understand that the bulk of our examination today will be devoted to 401(k) 

plans, and the defined contribution pension system. I welcome this examination, and 

trust that the information we hear today will be of use to us. I would caution, however, that to the extent we focus on one side of the equation—the defined contribution side—we must not ignore the other. It may be tempting this morning to talk 

about the risks associated with defined contribution plans, and how workers would 

be so much better off if they were all in defined benefit plans. I think that simply 

misstates the case. 

As the Chairman well knows, our nation’s defined benefit plans are facing historic 

challenges in the wake of our financial collapse. While workers with retirement savings in 401(k) plans are rightly worried about what the market is doing to their retirement plans, workers in defined benefit plans face their own worries about 

whether their companies will still be standing, whether their jobs will still be there, 

and whether their promised benefits will be delivered in the wake of this financial 

turmoil. I hope the Committee will pay the same attention to these issues as we 

move forward. 
7 

Second, I hope that this morning’s hearing will acknowledge the full scope of the 

challenges facing Americans planning for, or entering, retirement. I expect we will 

hear at some length about ‘‘fee disclosure’’ in 401(k) plans, and the need for improvement. I know this is an issue of particular concern to you, Chairman Miller, 

and one on which I expect we will again see legislation in this Congress. As I made 

clear last fall, I think all of us would support improved disclosure that is meaningful 

and useful to participants. And the question of how we go about that improvement 

is a fair question for today’s hearing. 

I would caution, however, that we not suggest that investment fees are to blame 

for the dramatic declines in retirement savings which our nation’s workers and retirees have seen as result of this historic financial crisis. In a year where the S&P 

500 lost 38 percent of its value, to suggest that the ‘‘problem’’ is merely one of investment fees is simply not factual or helpful. And indeed, on that point, it bears 

note that while the S&P lost almost 40 percent of its value, the best numbers available now suggest that the average workplace retirement savings account lost 27 percent of its value—still a difficult loss, but it does suggest that plans can and will 

vary with performance and their management. 

Finally, I think it is important to recognize that while our defined contribution 

system could be improved, it would be a real mistake to dismantle it, or nationalize 

it, as has been suggested in this Committee in the past. We have a heavy responsibility in both the legislation we pass and in the debates we undertake. In particular, 

I would make clear that now is not the time to frighten people out of the market. 

Triggering a widespread exodus from the system would only exacerbate the market’s 

downward trend, while cementing these deep losses. I hope Members and witnesses 

will keep this in mind with their remarks today. Given the fact that historically, 

and over time, these plans have become vital retirement savings vehicles for millions of Americans, I am very mindful that we do not take any step, even in our 

conversations, to discourage that this morning. 

With that, I welcome our witnesses and look forward to their testimony. I yield 

back. 

Chairman MILLER. I thank the gentleman for his statement. And 

I would just, if I might remark on it, it is the intent of the chair 

of this committee to have an exhaustive set of hearings on pension 

security in this country, including public plans, including defined 

benefit plans, including the Pension Guaranty Corporation, under 

the of leadership of Mr. Andrews and his subcommittee. 

As I said earlier, the market shined a light on serious problems 

with 401(k) plans, it is also shining the light on serious problems 

with other pension plans in terms of, certainly, the expectations of 

the participants, but also their ability to deliver. 

Thank you to all of the witnesses for agreeing to testify today 

and to give us the benefit of your experience and expertise. 

Our first witness will be John C. Bogle who is the founder and 

former chief executive of Vanguard, the mutual fund organization 

he created in 1974. While at Vanguard, Mr. Bogle founded the first 

indexed mutual fund. And Vanguard is now among the largest mutual fund organizations in the world with current assets totaling 

over $1 trillion. Mr. Bogle received his BA Princeton University. 

Dr. Dean Baker is the co-director of the Center of Economic and 

Policy Research, which he founded in 1999. Dr. Baker is the author 

of many books on economic issues, including Plunder and Blunder, 

the Rise and Fall of the Bubble Economy. He received a BA from 

Swarthmore College and his Ph.D. in Economics from the University of Michigan. 

Dr. Alicia H. Munnell is Peter Drucker professor of management 

sciences at Boston College’s Carol School of Management and also 

serves as the Director for the Center of Retirement Research in 

Boston College. Prior to joining Boston College, she served during 

the Clinton Administration as both the Treasury Department and 
8 

the Social Security Administration. Dr. Munnell has earned her BA 

from Wellesley College, and MA from Boston University, and a 

Ph.D. from Harvard University. 

Paul Schott Stevens has served as president and chief executive 

officer of the Investment Company Institute since 2004. Outside 

ICI, Mr. Stevens’ career included various roles in private law practice as corporate counsel and in government service. Mr. Stevens 

received his BA from Yale University and received his JD from the 

University of Virginia. 

Mr. Bogle, you are 80 years old. And we are still worried about 

where you went to college. It is kind of interesting, isn’t it? We 

keep going back in time. Anyway, we are going to begin with you. 

A green light will go on when you begin to testify. Then there will 

be an orange light after 4 minutes. 

We would suggest that you think about wrapping up your statement at that time. But we want you to finish your thoughts and 

the purposes of your testimony. And then we will open it up for 

questions from the committee. 

We will go through all of the witnesses first for your testimony. 

And I believe you are going to have to turn on your mike, Mr. 

Bogle. And again, welcome to the committee. And we look forward 

to your testimony. 

STATEMENT OF JOHN C. BOGLE, FOUNDER, VANGUARD 

GROUP 

Mr. BOGLE. All right. Am I on the air now? 

Chairman MILLER. You are on the air. 

Mr. BOGLE. All right. Well, good morning, Chairman Miller, and 

thank you. And members of the committee, thank you for your invitation to join you today to talk about some things that have been 

on my mind for a very long time. 

I think it is perhaps best for me to begin by summarizing the 

ideal system that I think is the ideal system for retirement today. 

Chairman MILLER. We are going to bring the mike a little closer 

to you. 

Mr. BOGLE. Okay, very good—that I have outlined in my statement. Number one, for individual savers who have the financial 

ability to save for retirement, there would be a single defined contribution plan structured, consolidating all those 401(k), IRAs, Roth 

IRAs, 403(b)s and so on, a defined contribution system, a unitary 

defined contribution system that would be open to all of our citizens. 

It would be dominated by low-cost, even mutual, providers of 

services, yes, inevitably focused on all market index funds, investing for the long term and overseen by a newly created federal retirement board that would establish sound principles for the private sector to observe, and asset allocation and diversification, in 

order to assure appropriate investment risk for each participant in 

the system, and also to assure full disclosure of all plan costs. 

The board, in essence, would also restrict loans very greatly from 

the system and preclude cash outs when employees change jobs, 

and would also appraise and approve qualified service providers. 

Number two, the idea of number one, is to establish appropriate 

investment risk, something we have lost sight of for individuals. 
9 

And point two is to deal with longevity risk, that other great risk 

to retirement security that we outlive our resources, mitigated by 

creating a simple, low-cost annuity plan as a mandatory offering at 

some point in all DC plans, with some portion of each participants’ 

balance going into this option on retirement. 

And number three, and most importantly, we should extend the 

existing ERISA requirement that plan sponsors, corporations, meet 

a standard of fiduciary duty to encompass mutual fund planned 

providers as well. In fact, I think we need to go further. 

I believe we need a federal standard of fiduciary duty for all 

money managers who are agents, who in my opinion have failed 

abjectly in their responsibility to serve first the interest of their 

principals, all those mutual fund shareowners and pension beneficiaries. Therefore these agents bear a heavy responsibility for the 

financial crisis we are now facing. 

Now, why do we have to reform the system? Well, we need a new 

system of worker retirement security, because the present system 

is imperiled and is headed toward a train wreck of considerable 

force. 

It is not just the 50 percent plus the client in stock prices that 

we have seen, with $10 trillion, almost $10 trillion of market value 

erased, some of which—I should importantly—I can’t deal with it 

in my opening statement. But it is in my testimony and my prepared statement, some of which represented speculative phantom 

wealth, overvalued markets developed by speculators that are described in the statement. So some of the wealth that has evaporated was phantom wealth. 

But that only begins that market decline, that big loss, the list 

of reasons for retirement plans to change the system, the problems 

that we have created in the system. Retirement plans own about 

half of all U.S. stock. And in turn, they have borne about $5 trillion 

of the $10 trillion decline, a whopping—I am using 30 percent, 

Congressman. But 27 percent might be a better number—a whopping 27 percent hit to the retirement system itself. 

So we are not saving nearly enough. We now know, for retirement, corporations have been stingy in funding their defined benefit plans. And they assumed higher levels of return, they are even 

remotely capable of achieving. They are, in effect, a bad joke, the 

future 8.5 percent returns these retirement plans were claiming before the great fall of the market last year. And in addition, they 

have been derelict in funding their defined contribution plans, 

largely 401(k)s, which have a balance of a pitiful $15,000, the median balance. 

What is more, nearly 100 companies already in the last year 

have either reduced or suspended their contributions to their benefit plans, just as stock prices have come down by that huge 

amount, creating some kind of extra value at some point. In addition, pension managers and plan participants have made unwise 

and often speculative investment choices. Too much in equities, especially for investors nearing retirement; too many hedge funds, 

also known as absolute return funds, now known as absolute negative return funds; too much real estate, and so on. 

Our financial system, especially our mutual funds and our hedge 

funds also are greedy to fault. And they consume far too large a 
10 

1The opinions expressed in this speech do not necessarily represent the views of Vanguard’s 

present management. 

share of the returns created by our business and economic system. 

So we must recognize that the interest of our money managers and 

marketers are in direct conflict with the financial interests of the 

investors to whom they provide services. 

If I could just make one more point, I guess my time has run out 

here, has it? I would like to just make one more really important 

point, if I may. All this trading back and forth among investors is 

not a zero-sum game. The financial system, the traders, the brokers, the investment bankers, the money managers, the middlemen, Wall Street as it were, takes a cut of all this frenzied activity, 

leaving investors as a group only with what is left. Yes, the investor feeds at the bottom of the food chain of investing. 

So what do we have to do to encourage and maximize retirement 

savings? Using a biblical phrase, if I may, we must drive the 

money changers, or at least most of them, out of the temples of finance. 

Now, here is the most important point in my remarks. I asked 

you in my testimony to read it twice. If we investors collectively 

own the markets, as we do, but individually compete to beat our 

fellow market participants, we lose the game because of those 

costs. But if we investors abandoned our inevitably futile attempts 

to obtain an edge over other market participants and simply hold 

our share of the market portfolio, we win the game. It is not very 

complicated. 

So that is why, inevitably, we will be focused on stock and bond 

index funds. 

Thank you, Mr. Chairman. Sorry to run a little over. 

[The statement of Mr. Bogle follows:] 

Prepared Statement of John C. Bogle, Founder and Former Chief Executive 

of the Vanguard Group1

Our nation’s system of retirement security is imperiled, headed for a serious train 

wreck. That wreck is not merely waiting to happen; we are running on a dangerous 

track that is leading directly to a serious crash that will disable major parts of our 

retirement system. Federal support—which, in today’s world, is already being 

tapped at unprecedented levels—seems to be the only short-term remedy. But longterm reforms in our retirement funding system, if only we have the wisdom and 

courage to implement them, can move us to a better path toward retirement security for the nation’s workers. 

One of the causes of the coming crisis—but hardly the only cause—is the collapse 

of our stock market, erasing some $8 trillion in market value from its $17 trillion 

capitalization at the market’s high in October 2007, less than 18 months ago. However, this stunning loss of wealth reflects, in important part, a growing and substantial overvaluation of stocks during the late 1990s and early 2000s, ‘‘phantom 

wealth’’ which proved unjustified by corporate intrinsic value. (I’ll discuss this subject in greater depth later in my statement.) 

But four other causes must not be ignored. One is the inadequacy of national savings being directed into retirement plans. ‘‘Thrift’’ has been out in America; ‘‘instant 

gratification’’ in our consumer-driven economy has been in. As a nation, we are not 

saving nearly enough to meet our future retirement needs. Too few citizens have 

chosen to establish personal retirement accounts, and even those who have established them are funding them inadequately and only sporadically. Further, our corporations have been funding their pension plans on the mistaken assumption that 

stocks would produce future returns at the generous levels of the past, raising their 

prospective return assumptions even as the market reached valuations that were far 
11 

2For example, in 1981, when the yield on long-term U.S. Treasury bonds was 131⁄2 percent, 

corporations assumed that future returns on their pension plans would average 6 percent. At 

the end of 2007, despite the sharp decline in the Treasury bond yield to 4.8 percent, the assumed future return soared to 81⁄2 percent. Even without the large losses incurred in the 2008 

bear market, it seems highly unlikely that such a return will be realized. 

above historical norms.2 And the pension plans of our state and local governments 

seem to be in the worst financial condition of all. (Because of poor transparency, inadequate disclosure, and non-standardized financial reporting, we really don’t know 

the dimension of the shortfall.) 

Second is the plethora of unsound, unwise, and often speculative investment 

choices made not only by individuals responsible for managing their own tax-sheltered retirement investment programs (such as individual retirement accounts and 

defined-contribution pension plans such as 401(k) thrift plans provided by corporations and 403(b) savings plans provided by non-profit institutions), but also professionally managed defined benefit plans, largely created in earlier days by our nation’s larger corporations and by our state and local governments. 

Third, conflicts of interest are rife throughout our financial system. Both the managers of mutual funds held in corporate 401(k) plans and the money managers of 

corporate pension plans face a potential conflict when they hold the shares of the 

corporations that are their clients. It is not beyond imagination that when a manager votes proxy shares against a company management’s recommendation, it might 

not sit well with company executives who select the plan’s provider of investment 

advice. (There is a debate about the extent to which those conflicts have actually 

materialized.) In trade union plans, actual conflicts of interest among union leaders, 

union workers, investment advisers, and money managers have been documented in 

the press and in court. In defined benefit plans, corporate senior officers face an obvious short-term conflict between minimizing pension costs in order to maximize the 

earnings growth that market participants demand, and incurring larger pension 

costs by making timely and adequate contributions to their companies’ pension 

plans in order to assure long-term security for the pension benefits they have promised to their workers. 

Fourth, our financial system is a greedy system, consuming far too large a share 

of the returns created by our business and economic system. Corporations generate 

earnings for the owners of their stocks, pay dividends, and reinvest what’s left in 

the business. In the aggregate, over the past century, the returns generated by our 

businesses have grown at an annual rate of about 91⁄2 percent per year, including 

about 41⁄2 percent from dividend yields and 5 percent from earnings growth. Similarly, corporate and government bonds pay interest, and the aggregate return on 

bonds averaged about 5 percent during the same period. 

But these are the gross returns generated by the corporations that dominate our 

system of competitive capitalism (and by government borrowings). Investors who 

hold these financial instruments, either directly or through the collective investment 

programs provided by mutual funds and defined benefit pension plans, receive their 

returns only after the cost of acquiring them and then trading them back and forth 

among one another. While some of this activity is necessary to provide the liquidity 

that has been the hallmark of U.S. financial markets, it has grown into an orgy of 

speculation that pits one manager against another, and one investor (or speculator) 

against another—a ‘‘paper economy’’ that has, predictably, come to threaten the real 

economy where our citizens save and invest. It must be obvious that our present 

economic crisis was, by and large, foisted on Main Street by Wall Street—the mostly 

innocent public taken to the cleaners, as it were, by the mostly greedy financiers. 

Extracting Value From Society 

I’ve written about our absurd and counterproductive financial sector at length. 

Writing in the Journal of Portfolio Management in its Winter 2008 issue, here are 

some of the things that I said about the costs of our financial system: ‘‘* * * mutual 

fund expenses, plus all those fees paid to hedge fund and pension fund managers, 

to trust companies and to insurance companies, plus their trading costs and investment banking fees * * * totaled about $528 billion in 2007. These enormous costs 

seriously undermine the odds in favor of success for citizens who are accumulating 

savings for retirement. Alas, the investor feeds at the bottom of the costly food chain 

of investing, paid only after all the agency costs of investing are deducted from the 

markets’ returns * * * Once a profession in which business was subservient, the 

field of money management has largely become a business in which the profession 

is subservient. Harvard Business School Professor Rakesh Khurana is right when 

he defines the standard of conduct for a true professional with these words: ‘I will 
12 

3 I have been investing 15 percent of my annual compensation in the DC plan of the company 

(and its predecessor) that has employed me since July 1951, when I first entered the work force. 

I can therefore give my personal assurance that tax-deferred defined contribution pension plans, 

added to regularly, reasonably allocated among stocks and bonds, highly diversified, and managed at low cost, compounded over a long period, are capable of providing wealth accumulations 

that are little short of miraculous. 

create value for society, rather than extract it.’ And yet money management, by definition, extracts value from the returns earned by our business enterprises.’’ 

These views are not only mine, and they have applied for a long time. Hear Nobel 

laureate economist James Tobin, presciently writing in 1984: ‘‘* * * we are throwing more and more of our resources into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity, a ‘paper economy’ facilitating speculation 

which is short-sighted and inefficient.’’ 

In his remarks, Tobin cited the eminent British economist John Maynard Keynes. 

But he failed to cite Keynes’s profound warning: ‘‘When enterprise becomes a mere 

bubble on a whirlpool of speculation, the consequences may be dire * * * when the 

capital development of a country becomes a by-product of the activities of a casino 

* * * the job (of capitalism) will be ill-done.’’ That job is indeed being ill-done today. 

Business enterprise has taken a back seat to financial speculation. The multiple 

failings of our flawed financial sector are jeopardizing, not only the retirement security of our nation’s savers but the economy in which our entire society participates. 

Our Retirement System Today 

The present crisis in worker retirement security is well within our capacity to 

measure. It is not a pretty picture: 

Defined Benefit Plans. Until the early 1990s, investment risk and the longevity 

risk of pensioners (the risk of outliving one’s resources) were borne by the defined 

benefit (DB) plans of our corporations and state and local governments, the pervasive approach to retirement savings outside of the huge DB plan we call Social Security. But in the face of a major shift away from DB plans in favor of defined contribution (DC) plans, DB growth has essentially halted. Assets of corporate pension 

plans have declined from $2.1 trillion as far back as 1999 to an estimated $1.9 trillion as 2009 began. These plans are now severely underfunded. For the companies 

in the Standard & Poor’s 500 Index, pension plan assets to cover future payments 

to retirees has tumbled from a surplus of some $270 billion in 1999 to a deficit of 

$376 billion at the end of 2008. Largely because of the stock market’s sharp decline, 

assets of state and local plans have also tumbled, from a high of $3.3 trillion early 

in 2007 to an estimated $2.5 trillion last year. 

The Pension Benefit Guaranty Corporation. This federal agency, responsible for 

guaranteeing the pension benefits of failing corporate sponsors is itself faltering, 

with a $14 billion deficit in December 2007. Yet early in 2008—just before the worst 

of the stock market’s collapse—the agency made the odd decision to raise its allocation to diversified equity investments to 45 percent of its assets, and add another 

10 percent to ‘‘alternative investments,’’ including real estate and private equity, essentially doubling the PBGC’s equity participation at what turned out to be the 

worst possible moment. 

Defined Contribution Plans. DC plans are gradually replacing DB plans, a massive transfer from business enterprises to their employees of both investment risk 

(and return) and the longevity risk of retirement funding. While DC plans have 

been available to provide the benefits of tax-deferral for retirement savings for well 

over a half-century,3 it has only been with the rise of employer thrift plans such 

as 401(k)s and 403(b)s, beginning in 1978, that they have been widely used to accumulate retirement savings. The growth in DC plans has been remarkable. Assets 

totaled $500 billion in 1985; $1 trillion in 1991; $4.5 trillion in 2007. With the market crash, assets are now estimated at $3.5 trillion. The 401(k) and 403(b) plans 

dominate this total, with respective shares of 67 percent and 16 percent or 83 percent of the DC total. 

Individual Retirement Accounts. IRA assets presently total about $3.2 trillion, down from $4.7 trillion in 2007. Mutual funds (now some $1.5 trillion) continue to 

represent the largest single portion of these investments. Yet with some 47 million 

households participating in IRAs, the median balance is but $55,000, which at, say, 

a 4 percent average income yield, would provide but $2,200 per year in retirement 

income per household, a nice but far from adequate, increment. 

Focusing on 401(k) Retirement Plans 

Defined contribution pension plans, as noted above, have gradually come to dominate the private retirement savings market, and that domination seems certain to 
13 

4 I recognize that the Pension Protection Act of 2006 provided important improvements to the 

original 401(k) paradigm, as described in Appendix A, attached. 

increase. Further, there is some evidence that DC plans are poised to become a 

growing factor in the public plan market. (The federal employees’ Thrift Savings 

Plan, with assets of about $180 billion, has operated as a defined contribution plan 

since its inception in 1986.) Even as 401(k) plans have come to dominate the DC 

market, so mutual fund shares have come to dominate the 401(k) market. Assets 

of mutual funds in DC plans have grown from a mere $35 billion in 1990 (9 percent 

of the total) to an estimated $1.8 trillion in 2008 (51 percent). 

Given the plight in which our defined benefit plans find themselves, and the large 

(and, to some degree, unpredictable) bite that funding costs take out of corporate 

earnings, it is small wonder that what began as a gradual shift became a massive 

movement to defined contribution plans. (Think of General Motors, for example, as 

a huge pension plan now with perhaps $75 billion of assets—and likely even larger 

liabilities—surrounded by a far smaller automobile business, operated by a company 

with a current stock market capitalization of just $1.3 billion.) 

I would argue the shift from DB plans to DC plans is not only an inevitable move, 

but a move in the right direction in providing worker retirement security. In this 

era of global competition, U.S. corporations must compete with non-U.S. corporations with far lower labor costs. So this massive transfer of the two great risks of 

retirement plan savings—investment risk and longevity risk—from corporate balance sheets to individual households will relieve pressure on corporate earnings, 

even as it will require our families to take responsibility for their own retirement 

savings. A further benefit is that investments in DC plans can be tailored to the 

specific individual requirements of each family—reflecting its prospective wealth, its 

risk tolerance, the age of its bread-winner(s), and its other assets (including Social 

Security). DB plans, on the other hand, are inevitably focused on the average demographics and salaries of the firm’s work force in the aggregate. 

The 401(k) plan, then, is an idea whose time has come. That’s the good news. 

We’re moving our retirement savings system to a new paradigm, one that will ultimately efficiently serve both our nation’s employers—corporations and governments 

alike—and our nation’s families. Now for the bad news: our existing DC system is 

failing investors. Despite its worthy objectives, the deeply flawed implementation of 

DC plans has subtracted—and subtracted substantially—from the inherent value of 

this new system. Given the responsibility to look after their own investments, participants have acted contrary to their own best interests. Let’s think about what has 

gone wrong.4

A Deeply Flawed System 

I now present my analysis of the major flaws that continue to exist in our 401(k) 

system. We need radical reforms to mitigate these flaws, in order to give employees 

the fair shake that must be the goal if we are to serve the national public interest 

and the interest of investors. • Inadequate savings—The modest median balances so far accumulated in 401(k) 

plans make their promise a mere shadow of reality. At the end of 2008, the median 

401(k) balance is estimated at just $15,000 per participant. Indeed, even projecting 

this balance for a middle-aged employee with future growth engendered over the 

passage of time by assumed higher salaries and real investment returns, that figure 

might rise to some $300,000 at retirement age (if the assumptions are correct). 

While that hypothetical accumulation may look substantial, however, it would be 

adequate to replace less than 30 percent of pre-retirement income, a help but hardly 

a panacea. (The target suggested by most analysts is around 70 percent, including 

Social Security.) Part of the reason for today’s modest accumulations are the inadequate participant and corporate contributions made to the plans. Typically, the 

combined contribution comes to less than 10 percent of compensation, while most 

experts consider 15 percent of compensation as the appropriate target. Over a working lifetime of, say, 40 years, an average employee, contributing 15 percent of salary, receiving periodic raises, and earning a real market return of 5 percent per 

year, would accumulate $630,000. An employee contributing 10 percent would accumulate just $420,000. If those assumptions are realized, this would represent a 

handsome accumulation, but substantial obstacles—especially the flexibility given to 

participants to withdraw capital, as described below—are likely to preclude their 

achievement. 

• Excess flexibility. 401(k) plans, designed to fund retirement income, are too 

often used for purposes that subtract directly from that goal. One such subtraction 

arises from the ability of employees to borrow from their plans, and nearly 20 percent of participants do exactly that. Even when—and if—these loans are repaid, in-
14 

5These data are derived from a Research Perspective dated December 2008, published by the 

Investment Company Institute, the association that represents mutual fund management companies, collecting data, providing research, and engaging in lobbying activities. 

vestment returns (assuming that they are positive over time) would be reduced during the time that the loans are outstanding, a dead-weight loss in the substantial 

savings that might otherwise have been accumulated at retirement. 

Even worse is the dead-weight loss—in this case, largely permanent—engendered 

when participants ‘‘cash out’’ their 401(k) plans when they change jobs. The evidence suggests that 60 percent of all participants in DC plans who move from one 

job to another cash out at least a portion of their plan assets, using that money for 

purposes other than retirement savings. To understand the baneful effect of borrowings and cash-outs, just imagine in what shape our beleaguered Social Security 

System would find itself if the contributions of workers and their companies were 

reduced by borrowings and cash outs, flowing into current consumption rather than 

into future retirement pay. It is not a pretty picture to contemplate. • Inappropriate Asset Allocation. One reason that 401(k) investors have accumulated such disappointing balances is due to unfortunate decisions in the allocation 

of assets between stocks and bonds.5 While virtually all investment experts recommend a large allocation to stocks for young investors and an increasing bond allocation as participants draw closer to retirement, a large segment of 401(k) participants fails to heed that advice. 

Nearly 20 percent of 401(k) investors in their 20s own zero equities in their retirement plan, holding, instead, outsized allocations of money market and stable value 

funds, options which are unlikely to keep pace with inflation as the years go by. 

On the other end of the spectrum, more than 30 percent of 401(k) investors in their 

60s have more than 80 percent of their assets in equity funds. Such an aggressive 

allocation likely resulted in a decline of 30 percent or more in their 401(k) balances 

during the present bear market, imperiling their retirement funds precisely when 

the members of this age group are preparing to draw upon it. 

Company stock is another source of unwise asset allocation decisions, as many investors fail to observe the time-honored principle of diversification. In plans in 

which company stock is an investment option, the average participant invests more 

than 20 percent of his or her account balance in company stock, an unacceptable 

concentration of risk. • Excessive Costs. As noted earlier, excessive investment costs are the principal 

cause of the inadequate long-term returns earned by both stock funds and bond 

funds. The average equity fund carries an annual expense ratio of about 1.3 percent 

per year, or about 0.80 percent when weighted by fund assets. But that is only part 

of the cost. Mutual funds also incur substantial transaction costs, reflecting the 

rapid turnover of their investment portfolios. Last year, the average actively managed fund had a turnover rate of an astonishing 96 percent. Even if weighted by 

asset size, the turnover rate is still a shocking—if slightly less shocking—65 percent. Admittedly, the costs of this portfolio turnover cannot be measured with precision. But it is reasonable to assume that trading activity by funds adds costs of 0.5 

percent to 1.0 percent to the expense ratio. So the all-in-costs of fund investing (excluding sales loads, which are generally waived for large retirement accounts) can 

run from, say 1.5 percent to 2.3 percent per year. (By contrast, low-cost market 

index funds—which I’ll discuss later—have expense ratios as low as 0.10 percent, 

with transaction costs that are close to zero.) 

In investing, costs truly matter, and they matter even more when related to real 

(after inflation) returns. If the future real investment return on a balanced retirement account were, say, 4 percent per year (5 percent nominal return for bonds, 8 

percent for stocks, less 2.5 percent inflation), an annual cost of 2.0 percent would 

consume fully 50 percent of that annual return. Even worse, over an investment 

lifetime of, say, 50 years, those same costs would consume nearly 75 percent of the 

potential wealth accumulation. It is an ugly picture. 

Given the centrality of low costs to the accumulation of adequate retirement savings, then, costs must be disclosed to participants. But the disclosure must include 

the all-in costs of investing, not merely the expense ratios. (I confess to being skeptical about applying cost-accounting processes to the allocation of fund expenses 

among investment costs, administrative costs, marketing costs, and record-keeping 

costs. What’s important to plan participants is the amount of total costs incurred, 

not the allocation of those costs among the various functions as determined by accountants and fund managers who have vested interests in the outcome.) 

• Failure to deal with longevity risk. Even as most 401(k) plan participants have 

failed to deal adequately with investment risk, so they (and their employers and the 

fund sponsors) have also failed to deal adequately with longevity risk. It must be 
15 

obvious that at some point in an investment lifetime, most plan participants would 

be well-served by having at least some portion of their retirement savings provide 

income that they cannot outlive. But despite the fact that the 401(k) plan has now 

been around for three full decades, systematic approaches to annuitizing payments 

are rare and often too complex to implement. Further, nearly all annuities carry 

grossly excessive expenses, often because of high selling and marketing costs. Truly 

low-cost annuities remain conspicuous by their absence from DC retirement plan 

choices. (TIAA-CREF, operating at rock-bottom cost and providing ease and flexibility for clients using its annuity program, has done a good job in resolving both 

the complexity issue and the cost issue.) 

The New Defined Contribution Plans 

Given the widespread failures in the existing DC plan structure, and in 401(k) 

plans in particular, it is time for reform, reform that serves, not fund managers and 

our greedy financial system, but plan participants and their beneficiaries. We ought 

to carefully consider changes that move us to a retirement plan system that is simpler, more rational and less expensive, one that will be increasingly and inevitably 

focused on DC plans. Our Social Security System and, at least for a while, our state 

and local government systems would continue to provide the DB backup as a ‘‘safety 

net’’ for all participating U.S. citizens: 

1. Simplify the DC system. Offer a single DC plan for tax-deferred retirement savings available to all of our citizens (with a maximum annual contribution limit), consolidating today’s complex amalgam of traditional DC plans, IRAs, Roth IRAs, 

401(k) plans, 403(b) plans, the federal Thrift Savings Plan. I envision the creation 

of an independent Federal Retirement Board to oversee both the employer-sponsors 

and the plan providers, assuring that the interests of plan participants are the first 

priority. This new system would remain in the private sector (as today), with asset 

managers and recordkeepers competing in costs and in services. (But such a board 

might also create a public sector DC plan for wage-earners who were unable to 

enter the private system or whose initial assets were too modest to be acceptable 

in that system.) 

2. Get Real About Stock Market Return and Risk. Financial markets, it hardly 

need be said today, can be volatile and unpredictable. But common stocks remain 

a perfectly viable—and necessary—investment option for long-term retirement savings. Yet stock returns have been oversold by Wall Street’s salesmen and by the mutual fund industry’s giant marketing apparatus. In their own financial interests, 

they ignored the fact that the great bull market we enjoyed during the final 25 

years of the 20th century was in large part an illusion, creating what I call ‘‘phantom returns’’ that would not recur. Think about it: From 1926 to 1974, the average 

annual real (inflation-adjusted) return on stocks was 6.1 percent. But during the following quarter-century, stock returns soared, an explosion borne, not of the return 

provided by corporations in the form of dividend yields and earnings growth, but 

of soaring price-to-earnings ratios, what I define as speculative return. 

This higher market valuation reflected investor enthusiasm (and greed), and produced an extra speculative return of 5.7 percent annually, spread over 20 full years, 

an event without precedent. This speculative return almost doubled the market’s investment return (created by dividend yields and earnings growth), bringing the market’s total real return to nearly 12 percent per year. From these speculative heights, 

the market had little recourse but to return to normalcy, by providing far lower returns in subsequent years. And in fact, the real return on stocks since the turn of 

the century in 1999 has been minus 7 percent per year, composed of a negative investment return of -1 percent and a negative speculative return of another -6 percent, as price-earnings multiples retreated to (or below) historical norms. 

The message here is that investors in their ignorance, and financial sector marketers with their heavy incentives to sell, well, ‘‘products,’’ failed to make the necessary distinction between the returns earned by business (earnings and dividends) 

and the returns earned by, well, irrational exuberance and greed. Today, we realize 

that much of the value and wealth we saw reflected on our quarterly 401(k) statements was indeed phantom wealth. But as yesteryear’s stewards of our investment 

management firms became modern-day salesmen of investment products, they had 

every incentive to disregard the fact that this wealth could not be sustained. Our 

marketers (and our investors) failed to recognize that only the fundamental (investment) returns apply as time goes by. As a result, we misled ourselves about the realities that lay ahead, to say nothing of the risks associated with equity investing. 

3. Owning the Stock Market—and the Bond Market. Investors seem to largely ignore the close link between lower costs and higher returns—what I call (after Justice Brandeis) ‘‘The Relentless Rules of Humble Arithmetic.’’ Plan participants and 

employers also ignore this essential truism: As a group, we investors are all 
16 

‘‘indexers.’’ That is, all of the equity owners of U.S. stocks together own the entire 

U.S. stock market. So our collective gross return inevitably equals the return of the 

stock market itself. 

And because providers of financial services are largely smart, ambitious, aggressive, innovative, entrepreneurial, and, at least to some extent, greedy, it is in their 

own financial interest to have plan sponsors and participants ignore that reality. 

Our financial system pits one investor against another, buyer vs. seller. Each time 

a share of stock changes hands (and today’s daily volume totals some 10 billion 

shares), one investor is (relatively) enriched; the investor on the other side of the 

trade is (relatively) impoverished. 

But, as noted earlier, this is no zero-sum game. The financial system—the traders, the brokers, the investment bankers, the money managers, the middlemen, 

‘‘Wall Street,’’ as it were—takes a cut of all this frenzied activity, leaving investors 

as a group inevitably playing a loser’s game. As bets are exchanged back and forth, 

our attempts to beat the market, and the attempts of our institutional money managers to do so, then, enrich only the croupiers, a clear analogy to our racetracks, 

our gambling casinos, and our state lotteries. 

So, if we want to encourage and maximize the retirement savings of our citizens, 

we must drive the money changers—or at least most of them—out of the temples 

of finance. If we investors collectively own the markets, but individually compete to 

beat our fellow market participants, we lose. But if we abandon our inevitably futile 

attempts to obtain an edge over other market participants and all simply hold our 

share of the market portfolio, we win. (Please re-read those two sentences!) Truth 

told, it is as simple as that. So our Federal Retirement Board should not only foster 

the use of broad-market index funds in the new DC system (and offer them in its 

own ‘‘fall back’’ system described earlier) but approve only private providers who 

offer their index funds at minimum costs. 

4. Asset Allocation—Balancing Risk and Return. The balancing of returns and 

risk is the quintessential task of intelligent investing, and that task too would be 

the province of the Federal Retirement Board. If the wisest, most experienced minds 

in our investment community and our academic community believe—as they do— 

that the need for risk aversion increases with age; that market timing is a fool’s 

game (and is obviously not possible for investors as a group); and that predicting 

stock market returns has a very high margin for error, then something akin to 

roughly matching the bond index fund percentage with each participant’s age with 

the remainder committed to the stock index fund, is the strategy that most likely 

to serve most plan participants with the most effectiveness. Under extenuating— 

and very limited—circumstances participants could have the ability to opt-out of 

that allocation. 

This allocation pattern is clearly accepted by most fund industry marketers, in the 

choice of the bond/stock allocations of their increasingly popular ‘‘target retirement 

funds.’’ However, too many of these fund sponsors apparently have found it a competitive necessity to hold stock positions that are significantly higher than the pure 

age-based equivalents described earlier. I don’t believe competitive pressure should 

be allowed to establish the allocation standard, and would leave those decisions to 

the new Federal Retirement Board. 

I also don’t believe that past returns on stocks that include, from time to time, 

substantial phantom returns—borne of swings from fear to greed to hope, back and 

forth—are a sound basis for establishing appropriate asset allocations for plan participants. Our market strategists, in my view, too often deceive themselves by their 

slavish reliance on past returns, rather than focusing on what returns may lie 

ahead, based on the projected discounted future cash flows that, however far from 

certainty, represent the intrinsic values of U.S. business in the aggregate. 

Once we spread the risk of investing—and eliminate the risk of picking individual 

stocks, of picking market sectors, of picking money managers, leaving only market 

risk, which cannot be avoided—to investors as a group, we’ve accomplished the inevitably worthwhile goal: a financial system that is based on the wisdom of longterm investing, eschewing the fallacy of the short-term speculation that is so deeply 

entrenched in our markets today. Such a strategy effectively guarantees that all DC 

plan participants will garner their fair share of whatever returns our stock and 

bond markets are generous enough to bestow on us (or, for that matter, mean-spirited enough to inflict on us). Compared to today’s loser’s game, that would be a signal accomplishment. 

Under the present system, some of us will outlive our retirement savings and depend on our families. Others will go to their rewards with large savings barely yet 

tapped, benefiting their heirs. But like investment risk, longevity risk can be pooled. 

So as the years left to accumulate assets dwindle down, and as the years of living 

on the returns from those assets begin, we need to institutionalize, as it were, a 
17 

6 I’m only slightly embarrassed to be referring here to Vanguard, the firm I founded 35 years 

ago. (My modest annual retainer is unrelated to our asset size or growth.) Even a glance at Vanguard’s leadership in providing superior investment returns, in operating by far at the lowest 

costs in the field, in earning shareholder confidence, and in developing returns and positive cash 

flows into our mutual funds (even in the face of huge outflows from our rivals during 2008) suggests that such a structure has well-served its shareholders. 

planned program of conversion of our retirement plan assets into annuities. This 

could be a gradual process; it could be applied only to plan participants with assets 

above a certain level; and it could be accomplished by the availability of annuities 

created by private enterprise and offered at minimum cost, again with providers 

overseen by the proposed Federal Retirement Board (just as the federal Thrift Savings Plan has its own board and management, and operates as a private enterprise). 

5. Mutuality, Investment Risk, and Longevity Risk. The pooling of the savings of 

retirement plan investors in this new DC environment is the only way to maximize 

the returns of these investors as a group. A widely diversified, all-market strategy, 

a rational (if inevitably imperfect) asset allocation, and low costs, delivered by a private system in which investors automatically and regularly save from their own incomes, aided where possible by matching contributions of their employers, and proving an annuity-like mechanism to minimize longevity risks is the optimal system 

to assure maximum retirement plan security for our nation’s families. 

There remains the task of bypassing Wall Street’s croupiers, an essential part of 

the necessary reform. Surely our Federal Retirement Board would want to evaluate 

the possible need for the providers of DC retirement plan service to be mutual in 

structure; that is, management companies that are owned by their fund shareholders, and operated on an ‘‘at-cost’’ basis; and annuity providers that are similarly 

structured. The arithmetic is there, and the sole mutual fund firm that is organized 

under such a mutual structure has performed with remarkable effectiveness.6

Of course that’s my view! But this critical analysis of the structure of the mutual 

fund industry is not mine alone. Listen to Warren Buffett. ‘‘[Mutual fund] independent directors * * * [have] been absolutely pathetic * * * [They follow] a zombie-like process that makes a mockery of stewardship * * * ‘[I]independent’ directors, over more than six decades, have failed miserably.’’ Then, hear this from another investor, one who has not only produced one of the most impressive investment records of the modern era but who has an impeccable reputation for character 

and intellectual integrity, David F. Swensen, Chief Investment Officer of Yale University: ‘‘The fundamental market failure in the mutual fund industry involves the 

interaction between sophisticated, profit-seeking providers of financial services and 

naive, return-seeking consumers of investment products. The drive for profits by 

Wall Street and the mutual fund industry overwhelms the concept of fiduciary responsibility, leading to an all too predictable outcome: * * * the powerful financial 

services industry exploits vulnerable individual investors * * * The ownership 

structure of a fund management company plays a role in determining the likelihood 

of investor success. Mutual fund investors face the greatest challenge with investment management companies that provide returns to public shareholders or that 

funnel profits to a corporate parent—situations that place the conflict between profit 

generation and fiduciary responsibility in high relief. When a fund’s management 

subsidiary reports to a multi-line financial services company, the scope for abuse of 

investor capital broadens dramatically * * * Investors fare best with funds managed by not-for-profit organizations, because the management firm focuses exclusively on serving investor interests. No profit motive conflicts with the manager’s 

fiduciary responsibility. No profit margin interferes with investor returns. No outside corporate interest clashes with portfolio management choices. Not-for-profit 

firms place investor interests front and center * * * ultimately, a passive index 

fund managed by a not-for-profit investment management organization represents 

the combination most likely to satisfy investor aspirations.’’ 

What Would An Ideal Retirement Plan System Look Like? 

It is easy to summarize the ideal system for retirement savings that I’ve outlined 

in this Statement. 

1. Social Security would remain in its present form, offering basic retirement security for our citizens at minimum investment risk. (However, policymakers must 

promptly deal with its longer-run deficits.) 

2. For those who have the financial ability to save for retirement, there would be 

a single DC structure, dominated by low-cost—even mutual—providers, inevitably 

focused on all-market index funds investing for the long term, and overseen by a 

newly-created Federal Retirement Board that would establish sound principles of 
18 

asset allocation and diversification in order to assure appropriate investment risk 

for each participant. 

3. Longevity risk would be mitigated by creating simple low-cost annuities as a 

mandatory offering in these plans, with some portion of each participant’s balance 

going into this option upon retirement. (Participants should have the ability to optout of this alternative.) 

4. We should extend the existing ERISA requirement that plan sponsors meet a 

standard of fiduciary duty to encompass plan providers as well. (In fact, I believe 

that a federal standard of fiduciary duty for all money managers should also be enacted.) 

It may not be—indeed, it is not—a system free of flaws. But it is a radical improvement, borne of common sense and elemental arithmetic, over the present system, which is driven by the interest of Wall Street rather than Main Street. And, 

with the independent Federal Retirement Board, we have the means to correct flaws 

that may develop over time, and assure that the interests of workers and their retirement security remain paramount. 

Chairman MILLER. Mr. Baker. Dr. Baker. 

STATEMENT OF DEAN BAKER, CO–DIRECTOR, CENTER FOR 

ECONOMIC AND POLICY RESEARCH 

Mr. BAKER. Thank you very much, Mr. Chairman, for inviting me 

to speak here today. I will say a few points of emphasizing some 

of the problems, which I think are all too apparent in the current 

system, and also try to throw out some quick thoughts on potential 

solutions. 

First point, in terms of basic problems, I mean, we all know we 

have just seen a massive collapse of the stock market. And we are 

facing with a situation wherein so far as people had retirement accounts, and here I am thinking of the baby boom generation, the 

77 million baby boomers on the edge of retirement, they are overwhelmingly in the form of defined contribution accounts. Defined 

benefits accounts, whether we like them or not, are rapidly disappearing and certainly going to disappear more quickly in the 

near future as more and more companies freeze their accounts or 

end them all together. 

So we are looking at a situation where, if people had accounts, 

they had defined contribution accounts of course. And we all know 

that those have taken a very large hit. Now, on top of that, one 

of the points that I want to emphasize in my testimony is that the 

main source of wealth for most baby boomers approaching retirement is housing. And that also has taken a very large hit. And I 

think many people failed to fully appreciate the impact that this 

is likely to have on the retirement of middle-income baby boomers. 

I know that there were a number of surveys that have looked at 

baby boomers’ intentions to use the equity in their home for retirement. And I know that most of the surveys show that most don’t 

intend to do that. I would argue that, in spite of their intentions, 

I think realistically the vast majority of retirees and certainly baby 

boomer retirees will be, at least in part, dependent on the wealth 

in their home for their retirement. And there are three reasons for 

that. 

One is that if you have a paid-off mortgage, obviously you are 

much better situated in retirement, than if you have to continue to 

make payments on your mortgage long into your retirement. Secondly, many retirees do anticipate moving. And it makes a very big 

difference if you leave your house and have a large amount of eq-
19 

uity to use as a down payment or possibly even purchase outright 

the home that you expect to live in during your retirement years. 

The third reason is simply that this is fall-back money in the 

event of emergency, in the event of an unexpected medical condition or other emergency that requires money. If you have no equity 

in your home, then you obviously have much less fall-back money. 

Now, we recently analyzed the Federal Reserve for its survey of 

consumer finance. I have to confess, we didn’t get the most recent 

data that just came out last week. We will have that shortly. But 

we are working off the 2004 data. And we just made some crude 

estimate of what baby boomers can anticipate having in retirement 

based on the recent declines in the stock market and in housing 

prices. 

And our calculations show that, for younger baby boomers, those 

between the ages of 45 to 54, their total wealth, including equity 

in their home, all wealth apart from defined benefit retirement accounts, has fallen from $150,000 in 2004, which was none too generous, to just $82,000 in 2009. And just to put that $82,000 in context, this is median household, that would purchase less than half 

of the median house. 

So we are looking at a situation where half of the baby boomers, 

half of the younger baby boomers, if they took all their wealth, 

would be able to purchase less than half the median house. Alternatively, if we converted that into annuities, so they were age 65, 

that would get you an annuity of about $6,000 a year, $500 per 

month. That would not go very far in retirement, again assuming 

that you have no equity in your home in that scenario. 

If we looked at older baby boomers, those between 55 and 64, the 

situation is almost as bad. We have projected their wealth. Total 

wealth would be $142,700. That is a decline of 38 percent from 

where it stood in 2004. That would be sufficient for 80 percent of 

the purchase price of the median home. Again if you took all your 

wealth and used nothing on anything else, you would be able to 

purchase 80 percent of the median home. 

Alternatively, the annuity you can get for that would be about 

$10,000 a year, or perhaps a little more than $800 a month. And 

again, that is assuming that you have no equity in your home. 

I think, long and short, people were taking much, much greater 

risk than they realized, not only with the money that they had in 

the defined contribution 401(k)-type plan, but also in their home, 

which they were led to believe as a safe asset. 

Now, just very quick points, because I realize I don’t have very 

much times. First, and I realize this isn’t necessarily the purview 

of this committee, but I think a point that we can’t emphasize 

enough. The Federal Reserve Board must take seriously its responsibility to combat asset bubbles. 

I know the Federal Reserve Board, under Chairman Greenspan, 

did not feel that was part of their responsibility. I think there is 

absolutely nothing more important that the Federal Reserve Board 

could do than to combat asset bubbles. And I think the current situation demonstrates that clearly. They gambled with the wealth of 

the country’s homeowners. And we all lost very badly. 

Secondly in this context, I think it is very important for the Congress and president to re-affirm the commitment to Social Security 
20 

1We used the 2004 SCF, because the micro data from the 2007 is not yet available. This analysis, by my colleague David Rosnick and myself, will soon be available on the website of the 

Center for Economic and Policy Research, www.cepr.net. 2These calculations exclude wealth in defined benefit pensions. 

and Medicare. The baby boomer generation that are retired or near 

retirement have just lost on the order of $15 trillion in wealth between their houses and their stock. And we have to assure these 

people that the one thing they could count on will still be their Social Security and Medicare. 

The last point, we obviously need to do more in terms of retirement accounts. I will just say two very quick things about this. 

There have been efforts to set up state accounts that would be 

great experiments, California being the most important; Washington State also very close to setting up state-managed system accounts. These have had bipartisan support. Certainly Governor 

Schwarzenegger in California has been a big supporter of this. 

With a little assistance from Congress, I think those plans can 

make progress. They would be good models, good experiments, for 

Congress to look at. 

Last point is that, given the risk that people have taken, and 

that I think many were not willing to take, not anxious to take, I 

think the opportunity to look at some sort of defined benefit that 

the government can guarantee, a modest amount, say $1,000, per 

worker per year. I think that would be a very ripe opportunity that 

could offer a great deal security to the nation’s workers at really 

no cost to the government. 

So I realize we have lots of very big problems on our hands. I 

appreciate the committee’s interest in this. And I hope we can 

make progress on that. Thank you for hearing me. 

[The statement of Mr. Baker follows:] 

Prepared Statement of Dean Baker, Co-director, Center for Economic and 

Policy Research 

Thank you, Chairman Miller for inviting me to share my views on the problems 

of the current system of retirement income, and ways to improve it, with the committee. My name is Dean Baker and I am the co-director of the Center for Economic 

and Policy Research (CEPR). I am an economist and I have been writing about 

issues related to retirement security since 1992. 

My testimony will have three parts. The first part, which will be the bulk of the 

testimony, will explain how the current crisis has jeopardized the retirement security of tens of millions of workers. The second part will briefly reference some of 

the longstanding inadequacies of our system retirement income, reminding members 

of problems with which they are already quite familiar. The third part will outline 

some principles that may guide the committee in constructing legislation to improve 

retirement security. 

How the Current Crisis has Jeapordized Retirement Security 

The collapse of the housing bubble, coupled with the plunge in the stock market, 

has exposed the gross inadequacy of our system of retirement income. CEPR’s analysis of data from the Federal Reserve Board’s 2004 Survey of Consumer Finance 

(SCF), indicates that the median household with a person between the ages of 45 

to 54, saw their net worth fall by more than 45 percent between 2004 and 2009, 

from $150,500 in 2004, to just $82,200 in 2009 (all amounts are in 2009 dollars).1

This figure, which includes home equity, is not even sufficient to cover half of the 

value of the median house in the United States. In other words, if the median late 

baby boomer household took all of the wealth they had accumulated during their 

lifetime, they would still owe more than half of the price of a typical house in a 

mortgage and have no other asset whatsoever.2

The situation for older baby boomers is similar. The median household between 

the ages of 55 and 64 saw their wealth fall by almost 38 percent from $229,600 in 
21 

3This is based on data from the Case-Shiller 20 City index. The peak level was reached in 

May of 2006. Most data is from November of 2008. These data are based on sales prices, which 

means that they reflect contracts that were typically signed 6 to 8 weeks earlier. This means 

that the most recent data is close to 5 months out of date at present. With prices in the index 

falling at a rate of more than 2 percent monthly, house prices may already be close to 10 percent 

lower than the level indicated in the November data. 4This refers to the decline as measured by the S&P 500, which is a much broader measure 

than the Dow Jones Industrial Average. 

2004 to $142,700 in 2009. This net worth would be sufficient to allow these households, who are at the peak ages for wealth accumulation, to cover approximately 80 

percent of the cost of the median home, if they had no other asset. 

Even prior to the recent downturn, the baby boom cohorts were not well prepared 

for retirement. Most members of these cohorts had been able to save far too little 

to maintain their standard of living in retirement. They would have found it necessary to work much later into their lives than they had planned, or to accept sharp 

reductions in living standards upon reaching retirement. 

The situation of the baby boomers has been made much worse by the economic 

and financial collapse of the last two years. Ironically, the sharpest decline in 

wealth took place in an asset that many were led to believe was completely safe, 

their house. Real house prices have fallen by more than 30 percent from their peak 

in 2006 and will almost certainly fall at least another 10-15 percent before hitting 

bottom.3

The plunge in house prices has been especially devastating both because it was 

by far the largest source of wealth for most baby boomers, and also because the high 

leverage in housing. The fact that housing is highly leveraged is of course a huge 

advantage to homeowners in times when prices are rising. If a homeowner can buy 

a $200,000 house with a 20 percent down payment, and the house subsequently increases 50 percent in value, the homeowner gets a very high return, earning 

$100,000 on a down payment of just $40,000. 

However, leverage also poses enormous risks. In this case, if the home price falls 

by 20 percent, then the homeowner has lost 100 percent of her equity. This is exactly the sort of situation confronting tens of millions of baby boomers at the edge 

of retirement. They just witnessed the destruction of most or all of the equity in 

their home. Our analysis of the SCF indicates that almost one fourth of late baby 

boomers who own homes have so little equity that they will need to bring cash to 

settle their mortgage at their closing. In a somewhat more pessimistic scenario, almost 40 percent of the home owning households in this cohort will need to bring 

cash to a closing. 

The collapse in the housing equity of the baby boom cohort in the last two years 

will have enormous implications for their well-being in retirement. Instead of having 

a home largely paid off by the time they reach their retirement years, many baby 

boomers will be in the same situation as first time home buyers, looking at large 

mortgages requiring decades to pay down. Furthermore, the loss of equity in their 

current homes will make it far more difficult for baby boomers to move into homes 

that may be more suitable for their needs in retirement. Millions of middle class 

baby boomers will find it difficult to raise the money needed to make a down payment on a new home. 

While the focus of pension and retirement policy has usually been pensions and 

Social Security, it is important to recognize the role of housing wealth for two reason. First, the massive loss of housing wealth due to the collapse of the housing bubble is likely to be a factor that has an enduring impact on the living standards of 

the baby boom cohorts in their retirement years. 

The other reason why Congress should recognize the importance of housing 

wealth is that this pillar of retirement income is not as secure as it has often been 

treated. In other words, the risks associated with housing wealth have generally not 

been fully considered in evaluating the security of retirement income. While it is 

reasonable to hope that the economy will not see the same sort of nationwide housing bubble for many decades into the future, if ever, there will nonetheless be a substantial element of risk associated with homeownership, since there will always be 

substantial fluctuations in local housing markets. This means that workers who 

have much of their wealth in their home already face substantial risks to their retirement income even before considering their financial investments. 

Here also the baby boom cohort has received a very unpleasant surprise in the 

last two years as stock market has plunged by more than 40 percent from its peak 

in November of 2007.4 While the data does not yet allow us to determine exactly 

how badly the baby boom cohorts have been hit by this decline, it is virtually certain 

that they felt the biggest impact, simply because they had the most wealth to lose. 
22 

5This is taken form the Flow of Funds Table, L.118c, lines 12 plus 13, divided by line 1, available at http://www.federalreserve.gov/releases/z1/Current/z1r-6.pdf. 6 Bureau of Labor Statistics, ‘‘Employee Benefits in the United States, 2008,’’ available at 

http://www.bls.gov/news.release/pdf/ebs2.pdf. 

The Fed’s data show that at the end of 2007, more than 70 percent of the assets 

in defined contribution pension plans were held either directly or indirectly in the 

stock market.5

The baby boomers’ losses on their stockholdings will compound the losses incurred 

on their homes. Of course most baby boomers had managed to accumulate relatively 

little by way of stock wealth even prior to the market collapse of the last year and 

half. In 2004, the median household headed by someone between the ages of 55 to 

64 had accumulated less than $100,000 in financial assets of all forms, including 

holdings of stock and mutual funds. Median financial wealth for this age group had 

fallen to just over $60,000 in 2009 following the collapse of the stock market. The 

younger 45 to 54 cohort had median financial wealth of just $40,000 in 2004. This 

had fallen to less than $30,000 in 2009. 

To summarize, our system of retirement income security was completely unprepared for the sort of financial earthquake set in motion by the collapse the of the 

housing bubble and its secondary impact on the stock market. Older workers were 

already inadequately prepared for retirement even prior to these events. The events 

of the last two years now put most of the baby boom cohorts facing retirement with 

very little to depend on other than their Social Security and Medicare benefits. 

While a full picture of retirement income would also incorporate estimates of the 

income that these workers will receive from defined benefit pensions, the vast majority of workers in these age cohorts will receive little or nothing from traditional 

defined benefit pension plans. Defined benefit plans have been rapidly declining in 

importance for the last quarter century. This pace of decline is increasing with the 

downturn as many companies that still have defined benefit plans lay off workers 

and others freeze benefit levels to conserve cash. 

Other Problems with the Defined Contribution Pension System 

The prior discussion highlights the problem of risk for which the current defined 

contribution system was completely inadequate. I will just briefly note some of the 

other problems that have been frequently raised in prior years. 

Inadequate coverage—In spite of efforts to simplify the process for employers, 

most businesses still do not offer workers the opportunity to contribute to a pension 

at their workplace. Almost half of private sector workers are not currently contributing to a pension plan at their workplace. The primary reason that workers do not 

contribute because their employer does not offer the option. The Bureau of Labor 

Statistics reported a take up rate of 83 percent in their most recent survey.6

The lack of coverage is overwhelmingly a small business issue. Two thirds of the 

workers employed in firms with more than 100 workers are contributing to a pension. Just one-third of the workers in workers employing less than 50 workers are 

contributing to a pension. 

Lack of portability—In the modern economy, workers change jobs frequently either by choice or necessity. When workers leave a job with a pension, they generally 

cannot simply role over their accumulated funds into a plan operated by their new 

employer (if there is one). While recent legislation has sought to promote rollovers 

into IRAs, it is still too early to know how effective these rules will be. Until we 

have a fully portable pension system, changing jobs still provides an opportunity for 

leakage of funds from retirement accounts. 

High Fees—While some pension plans are very efficient, many plans charge annual fees in excess of 1.5 percentage points. These fees can substantially reduce retirement savings. For example, a 1.0 percentage point difference in fees can reduce 

retirement accumulations by almost 20 percent over a thirty five year period. Private insurance companies will charge between 10 percent and 20 percent of the 

value of an accumulation to convert it into an annuity. This further reduces workers’ retirement income. 

Principles for a New Pension System 

The events of the last two years have brought home the extent to which the current pension system exposes workers to risk both in the value of their pension and 

also their housing wealth. The federal government has the ability to shield workers 

from this risk, at very little cost to taxpayers. 

Before discussing principles for expanding retirement security, it is important to 

note the security that the government already does provide through Social Security 

and Medicare. With the collapse of retirement savings over the last two years, as 
23 

well as the plunge in housing equity, the baby boom cohorts will be hugely dependent on these two social welfare programs. It is therefore more essential than ever 

that Congress maintain the integrity of these programs and ensure that the baby 

boom cohorts can at least count on the benefits that they have been promised. 

The main lesson of the last two years is that, in addition to the problems stemming from inadequate coverage and high costs, the current pension system subjects 

workers to far more risk than has been generally recognized. The government can 

solve all three problems by allowing workers the option to contribute to a government run pension system that would provide a modest guaranteed rate of return. 

The system would be a universal system like Social Security, however it would 

be voluntary. To try to maintain high rates of enrollment, there can be a default 

contribution from all workers of 3 percent, up to a modest level, such as $1,000 a 

year. Workers could be allowed to contribute some additional amount, for example 

an additional $1,000 per year, that would also earn them the same guaranteed rate 

of return. 

The system should also be structured to encourage workers to take their payouts 

in the form of annuities, except in the case of life threatening illness. For example, 

a nationwide system could easily offer free annuitization, while charging a modest 

penalty (e.g. 10 percent) to workers who take their money out of the account in a 

lump sum. 

Ideally, there would be tax subsidies for low and moderate income workers that 

would make it easier for them to put aside 3.0 percent, or more, of their wages. 

However, if budget limitations make subsidies impractical, there is no reason that 

Congress could not move ahead to establish a structure and consider adding subsidies at some future date. 

The guaranteed return should be set at a level that is consistent with a long-term 

average return on a conservatively invested portfolio. Such a guarantee should pose 

little new risk to the government. As recent events have shown, in extreme cases, 

the government will step in to protect savings, as it did when it opted to guarantee 

money market funds, even where it has no legal obligation to make such a commitment. Guaranteeing a modest rate of return over a long period of time should 

present very little additional risk to the government. 

The funds in this system would be kept strictly separate from the general budget. 

The investment would be carried through by a private contractor in a manner similar to the way in which the Federal Employees Thrift Saving Plan current invests 

the savings of federal employees. 

Even a modest contribution could make a large difference in the retirement security of most workers. For example, at a 3 percent rate of return, a worker who saved 

$1,000 a year for 35 years would be able to get an annuity of $4,200 a year at age 

65. This would be 14 percent of the wage of a worker who earned $30,000 a year 

during their working lifetime. Such a sum would be a substantial supplement to 

their Social Security benefits. A contribution of $2,000 a year would be sufficient 

to provide an annuity that is almost equal to 30 percent of this worker’s earnings 

during their working career. 

The formulas for this sort of plan can be altered in any number of ways, but the 

point is that Congress can enormously increase the retirement security of tens of 

millions of workers simply by making a system with a defined rate of return available to them. This could be done at no cost to the taxpayers. 

Conclusion 

The events of the last two years have shown how exposed workers’ retirement income is to market risk. The collapse of the housing bubble has called attention to 

the fact that the value of not only their pensions, but also their homes, fluctuate 

with the market, while their homes are an even more important asset for most 

workers. 

While fully restoring the lost wealth of the baby boom cohorts may not prove feasible, Congress can take effective steps to create a better retirement system for future generations. This can be done at no cost to taxpayers, simply by having the 

government assume market risk by averaging returns over time. There are no economic or administrative obstacles to going this route, it is simple a question of political will. 

Chairman MILLER. Thank you. 

Dr. Munnell. 
24 

STATEMENT OF ALICIA MUNNELL, DIRECTOR, CENTER FOR 

RETIREMENT RESEARCH AT BOSTON COLLEGE AND PETER 

F. DRUCKER PROFESSOR OF MANAGEMENT SCIENCES 

Ms. MUNNELL. Chairman Miller, Ranking Member McKeon. 

Chairman MILLER. I am not sure your microphone is—— 

Ms. MUNNELL. I appreciate the opportunity to testify today about 

what we have learned about 401(k) plans in the wake of the financial crisis and to offer some ideas for strengthening our retirement 

security. As you indicated, I direct the Center for Retirement Research at Boston College. We look at Social Security, public and 

private pensions and also individual saving and work decisions. 

Even before the financial crisis, we were very concerned about 

the ability of 401(k) plans to serve as the sole supplement to Social 

Security. I am not here to beat up on 401(k) plans. They were just 

never intended to do this. They were meant to be supplementary 

plans on top of old-fashioned defined benefit plans. 

They left all the responsibility up to the individuals. All of us individuals make terrible decisions. As a result, balances in these 

plans were very low. The 2007 Survey of Consumer Finances indicates, for people approaching retirement, the median balance was 

$60,000. That is before the crisis. 

The Pension Protection Act has made steps to make these plans 

work more effectively. But they are not a cure-all. And we haven’t 

even considered the drawdown aspects of these plans, which are 

going to be a huge challenge. 

Now comes along this huge financial tsunami. And we see that 

people are exposed to enormous investment risk also. These balances in these accounts have declined sharply. If it was $60,000 before the financial crisis, it is about $40,000 after. 

The financial crisis has also affected the real economy. We have 

lost about 3.7 million jobs. Unemployed people cannot contribute to 

their plans. And unemployed people also feel like they have to tap 

their plans to help them over really rough times. The hardship 

withdrawal rate has ticked up. It is still quite low. But my view 

is that, if this weak economy continues, you are going to see more 

and more people taking hardship withdrawals. 

The other thing we have seen is employers have cut back on 

their employer match. They are not doing this because they are 

evil. They have to make choices. And they are probably doing this 

instead of laying people off. But it does mean, if it persists for a 

long time, that people are going to have less in the way of retirement income going forward. 

The question is what to do with all this. And I think one point 

I would like to make is that working longer is going to have to be 

an important part of the solution. Even before the financial crisis, 

we argued that working longer was important. 

We have a declining retirement income system. And yet, we have 

people living longer. Working longer avoids the actuary reduction, 

Social Security, lets your assets accumulate, and shortens the period of which you have to retire. For older people who are caught 

in this financial crisis, in fact, that is all they can do. They really 

do not have time to save a lot more money. 

The final point is that working longer can’t solve the whole problem. We need to shore up our retirement income system. And I 
25 

think that has two parts. One is restoring balance to Social Security. Social Security has really shined during this particular crisis. 

Those checks go out. They provide valuable money, modest benefits, but inflation index and go on for life. We need to make sure 

that those benefits are not cut back even further. 

There is no free lunch. We have to pay up if we are going to do 

that. But I think that is important. 

The other thing is I strongly believe that we need a new tier of 

retirement income between Social Security and 401(k) plans. I 

think this tier needs to provide benefits about equal to 20 percent 

of pre-retirement earnings. I think it needs to be on a funded basis 

in the private sector. It needs to avoid having people take money 

out while they are working. Benefits needs to be paid out as an annuity. 

It is complicated precisely how to design it, because of the tradeoff between how much you put in and rate of return. So if you can 

get high rates of return, you have low contributions; high contributions, low rate of return. So there is much work to be done there. 

Perhaps the best we can do is a model, something like the Federal 

Thrift Savings Plan. But it would be nice to think if we can do 

something more creative. 

The main message I want to leave with you is that we need more 

organized retirement savings. We have a declining Social Security 

system, even under current law, as the retirement age increases. 

And we have a very fragile system of 401(k) plans. And they are 

just together not going to be enough for future retirees. 

Thank you very much. 

[The statement of Ms. Munnell follows:] 
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Chairman MILLER. Mr. Stevens. 

STATEMENT OF PAUL SCHOTT STEVENS, PRESIDENT AND 

CEO, INVESTMENT COMPANY INSTITUTE (ICI) 

Mr. STEVENS. Thank you, Chairman Miller, Ranking Member 

McKeon and members of the committee. On behalf of the ICI and 

its members who are entrusted with the retirement savings of 46 

million U.S. households, I am pleased to testify this morning. 

Let me start out, Mr. Chairman, by joining you in your call to 

‘‘preserve and strengthen the 401(k) system.’’ Today, half of the nation’s retirement assets are invested in DC plans or IRAs. That is 

more than $8 trillion. And most of those dollars would not have 

been saved without 401(k)s. In our view, that is just one measure 
37 

of the success of the system and on the strong base upon which we 

have to build. 

True, the bear market that we are in is wider, deeper and more 

unsettling than any downturn in generations. And it has had a significant impact on retirement savings. One large record keeper reports that average balances in defined contribution accounts fell by 

27 percent in 2008. These declines are especially hard on workers 

nearing retirement. But every 401(k) saver, no matter what, takes 

a deep breath before opening an account statement these days. And 

I know I am among them. 

These declines cannot be traced to any fundamental flaw in 

401(k) plans. Balances are down, because the stock market is 

down. The S&P 500 fell by 38 percent last year. All retirement 

plans shrank in 2008, not just DC plans, but also IRAs, defined 

benefit pensions in both the private and public sectors, and the 

Federal Thrift Savings Plan. There is no shelter from this market 

storm. 

Yet despite these declining balances, working Americans strongly 

support 401(k)s. We know this, because we examined account 

records of 22 million DC participants in late 2008. They were not 

panicking. As of October, only 3 percent had stopped contributing 

to their accounts. And fewer than one in 25 had taken any withdrawals. Clearly, 401(k) savers are staying the course. 

We also surveyed 3,000 U.S. households between October and 

December. In the teeth of the worst markets in 70-plus years, our 

survey respondents affirmed their support for 401(k) plans. Almost 

three-quarters want to preserve the tax incentives of these plans. 

And more than 80 percent reject the idea that government should 

take over investment decisions for individuals’ retirement accounts. 

Now, none of this is to say that 401(k) is a flawless system. In 

fact, we believe it can and it must be improved. In my written testimony, I spell out seven proposals that ICI believes Congress 

should consider to strengthen our retirement system. 

First, we should improve disclosure, not just about fees, but also 

as the recent market developments underscore, about risks, about 

performance and more. ICI began calling for improved disclosure in 

participant-directed plans in 1976, 5 years before the 401(k) was 

even born. We have strongly advocated that the Department of 

Labor complete its comprehensive disclosure agenda. And we thank 

the leadership of this committee for bringing much-needed attention to this issue. 

Second, to help retirees manage their assets more effectively, we 

should relax the rules on required minimum distributions. The age 

for RMDs was set at 701⁄2 in 1962. And life expectancies have increased markedly since then. Our research shows that many retirees do not begin to take distributions until they are forced to by 

these rules. 

Chairman Miller and Ranking Member McKeon, among others 

on the committee, recently worked on a bipartisan basis to suspend 

these rules for this year. And we should build on that work going 

forward. 

Third, we need to make it easier for employers to diversify participants out of heavy concentrations of company stock as they near 

retirement. Workers should not have to face the double risk of los-
38 

ing both their jobs and a significant portion of their retirement savings if a single company fails. Some far-sighted employers have 

proposed plans to help their workers reduce that risk. We should 

remove the barriers in current law that block these ideas. 

Fourth, we should consider requiring all 401(k) plans to use 

automatic enrollment and automatic savings escalation. Employers 

have embraced these features rapidly since the Pension Protection 

Act was enacted in 2006. We need to watch this trend very carefully and consider whether it supports this fundamental change in 

the 401(k) system. 

Fifth, we must make it easier for employers to offer savings 

plans and for all workers, even those of very modest means, to save 

for their future. My written testimony suggests two ideas. The first 

is a greatly simplified employer plan, which could reduce some barriers for employers who want to offer retirement benefits. Second, 

we suggest a novel proposal for R Bonds, a new series of treasury 

savings bonds specifically designed to help workers save on a voluntary basis, even if they don’t have a plan at work. 

Sixth, we must redouble our efforts to provide financial and investor education to all Americans at every age. And this is a job 

for educators, government at all level, financial institutions like 

mutual funds, and for that matter, all firms that serve the retirement market. 

Lastly, as President Obama has emphasized just this week, we 

must put Social Security on a sound financial footing for the indefinite future. Social Security has been, and will continue to be, the 

primary source of retirement income for millions of workers. If 

Washington wants to bolster confidence in retirement security, it 

should fix Social Security. 

We are pleased to offer these reform proposals for your consideration. I look forward to your questions. 

Thank you, Mr. Chairman. 

[The statement of Mr. Stevens may be accessed at the following 

Internet address:] 

http://www.ici.org/statements/tmny/09—house—401k—tmny.html#TopOfPage 

[An additional submission of Mr. Stevens follows:] 
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Chairman MILLER. Thank you very much. 

And thanks to all for your testimony. 

Mr. Bogle, I am sure that I have probably been misquoting you. 

But I have suggested that you have raised the issue saying that 

the issue for investors and savers is a competition between the miracle of compounded interest and the tyranny of increasing cost. 

And that suggested to me that you believe that costs do matter in 

the long-term management of people’s retirement savings. Is that 

a fair statement. 

Mr. BOGLE. Yes, sir, Mr. Chairman. That is a very fair statement. And as far as I can tell you, there is not a single academic 
48 

study that does anything but reaffirm that point. There is not a 

single independent financial publication, say Morningstar, for example, that doesn’t affirm it in spades. It is basically universally 

true. 

What I would add is, however, of course we need better disclosure of costs for employers and employees alike, because costs are 

the reason that the returns of institutions and the returns of all 

investors as a group fall short of the returns earned by stock funds 

and bond funds, as I said in my testimony. 

What I want to emphasize, though, is that we seem to be relying 

on the fund’s expense ratio, its expenses as a portion of the asset 

as the talisman, or it is the standard of what costs are. And those 

costs run somewhere between eight-tenths of 1 percent to 1.3 percent a year. That number, Mr. Chairman, grotesquely understates 

the total amount of costs involved in mutual funds, even when you 

don’t talk about sales loads, which are largely outside of the large 

retirement plan arena, however are very tough on some of the 

smaller retirement plans. 

And the other cost, which is huge, is the substantial undisclosed 

transaction cost that mutual funds in particular incur, reflecting 

the rapid turnover of their investment portfolios. It is absolutely 

amazing, sir, how these portfolios turn over, because the mutual 

fund industry, it seems to me on the data, has become an industry 

engaged in short-term speculation rather than long-term investment. 

Chairman MILLER. This is the activity within the funds that you 

might—— 

Mr. BOGLE. Funds buying—— 

Chairman MILLER [continuing]. Invest in as your 401(k) plan in. 

You are talking about the internal management—— 

Mr. BOGLE. I am talking about the—— 

Chairman MILLER [continuing]. Of the shares within that fund. 

Mr. BOGLE. And just think about this. The average assets of actively managed funds last year were something in the realm of $4.8 

trillion. And the total transactions, just guess at what the total 

transactions, members of the committee and Chairman, might be 

in your mind. And I will tell you what it is. 

They bought and sold $7.2 trillion dollars with the securities, 

trading by and large back and forth with one another. So the elephant in the room, if you will, is the ignoring of transaction costs, 

which have a huge impact, something like half a percent to 1 percent a year in addition to that expense ratio, which is—for the fun 

of it, we will call 1 percent for the actively managed equity fund. 

So now, think about this. And an index fund, of course, goes for 

about one-twentieth of that 2 percent, because it—transaction 

costs, nor management fees, but overall expenses of about a tenth 

of 1 percent compared to 2 percent for the industry. 

Now, think about this when you get to compounding this. And 

this is the point which you quote me, sir, accurately. And that is 

the miracle of compounding investment returns turns out to be 

overwhelmed by the tyranny of compounding cost. 

Let us assume, just for the fun of it, counting a stock-and-bond 

portfolio together, that it earns over the next 10 years, let us say, 

6.5 percent. That is phenomenal return. If we assume 2.5 percent 
49 

inflation, just a guess, but probably not one with which most people 

in the room would disagree, that leaves you with a 4 percent real 

return on a balanced investment portfolio, of which costs are consuming 2 percent. Costs are taking half of the real return. 

But of course, given that formulation, it is much worse than that, 

because if you compound 2 percent and 4 percent over an investment lifetime, call it 50 years, you find that costs have consumed 

75 percent of the return of the investment. 

So you, the investor, who puts up 100 percent of the capital and 

takes 100 percent of the risk gets 25 percent of the market return. 

That just doesn’t seem right to me, sir. 

Chairman MILLER. Well, I obviously agree with you. You know, 

I have always been stunned at whenever you allocate these costs, 

and people can argue whether 1.5 percent or 2 percent or what is 

fair and all the rest. And then the internal transaction costs that 

are taking place within the investment programs that people purchase, the only source of all of that revenue is my retirement. 

You know, American families make a decision. And it is very difficult for the huge middle-class families in this country, that huge 

class of people, to make a decision after all of their other obligations, to also save. And yet, that is the source by which all of these 

trillions of dollars in transactional fees and others is from. Nobody 

else is contributing that. 

There was a while, and it was fairly common, that we shared 

that with the employer. But now the employers have figured out 

that that should be offloaded more and more onto the employees 

if they are managing the funds and on individuals. 

And so, you know, I am very jealous. I know how hard people in 

my district work to create a little bit of savings. And I know, as 

Dr. Munnell has pointed out, how small their total savings are. 

And if you combine that with what Dr. Baker said in terms of what 

they thought was going to be an equity account that they had, but 

they made choices, some good, some bad. 

We are talking about a population that is in a desperate situation. And I don’t think we can tell the next generation of savers 

that they would want to put their savings at that same risk with 

respect to cost. Somehow we have got to figure out that the idea 

of these savings makes sense to the American public to make the 

determination that they want to participate. 

But the struggle, the incredible struggle and the energy put into 

fighting against that transparency is just really quite phenomenal, 

you know, really quite phenomenal. But we will continue on down 

this path. 

I just would like to ask, if I might, Dr. Munnell, one question in 

this round of my questioning. You had mentioned that you would 

like something like the Thrift Savings Plan. But we could be more 

creative. What are you talking about? 

I will come back to you in the second round. But I just wanted 

to put that on the table. 

Ms. MUNNELL. There is enormous trade-off between the contribution people have to make and the rate of return they earn. And the 

question is can you ensure people higher returns. And so we have 

really been looking into this issue of guarantees, which is a very 

tough subject, because what you can do according to standard fi-
50 

nance theory, if the insurer has the same preference as the market, 

it is very modest. And insuring 2 percent real rates of return really 

would have done nothing over the last 84 years. 

And the question is can you somehow construct higher level of 

guarantees or different ways of risk-sharing. But it is not something you want to do casually. But it is really worth looking into. 

Chairman MILLER. I see. Okay, I just want to know what the parameters of that discussion were. 

Ms. MUNNELL. Right. 

Chairman MILLER. Thank you. 

My time has expired. I just want to know, Congressman Hare finally showed up a little late to this hearing. You would think that 

someone who just turned 60 would be here early to figure it out. 

But anyway, happy birthday. 

Mr. McKeon. 

Mr. MCKEON. We did that in lieu of singing happy birthday, I 

guess. He may not be so happy when he is done with the hearing. 

He is worried. 

I really appreciate your testimony. One of the things that, whenever we talk about this subject, one of the things that really bothers me is, I think Dr. Munnell you made the point that sometimes 

we make bad decisions. I think human nature seems to be that we 

always go for the maximum possible return, thinking that that will 

always be there. 

I remember talking to a golf pro one time. And he said every 

shot, it seems like, we hope is going to be the best shot we ever 

make. And I think sometimes we plan our future retirement on 

that basis. That is, I guess, why gambling casinos are doing so 

well. People go there always expecting to win. And in our retirements, we expect that we maybe can lose a little bit here, because 

we are always going to make it up on the big play. 

And I am wondering how much responsibility the federal government should take in protecting people from bad decisions. Do we 

have the ability, being that we are all very intelligent, smart here, 

now that we have been elected to Congress, to avoid all of those 

bad decisions. And you can see how successful we have been lately. 

Mr. Stevens, my understanding is that the mutual fund industry 

holds about half of the assets in 401(k) plans, which means about 

half of those assets are held somewhere else. Can you tell us where 

the other half are, and how those plans have suffered as a result 

of the financial downturn? How bad is how they have been affected? 

Mr. STEVENS. Thank you, Mr. McKeon. Yes, it is true. Mutual 

funds are an important component of the system. But if you look 

broadly, there are different types of retirement plans, including defined benefit plans who have been hit, as my testimony describes. 

But there are also other components of the 401(k) system and of 

individual retirement accounts, which are not mutual funds. 

We are sometimes frustrated, because we are such a large component, that we are sometimes identified as the entire system. But 

you have to consider, for example, products that are sponsored by 

insurance companies, by banks and other financial institutions that 

are part of the system as well. It is one of the reasons frankly that 

we have emphasized from the very beginning the need for a disclo-
51 

sure regime that extends to all investment options that a 401(k) 

participant might be able to invest in in their plans. 

We have lived under the regime of the Securities and Exchange 

Commission throughout our history, since 1940. And I think whatever deficiencies people might think there are, we have as comprehensive a set of disclosures on virtually every subject, more so 

than any other financial product. 

We have been saying for years that we ought to bring the other 

components of the system up to something that is comparable. And 

that has been a very important part of our public policy emphasis 

now for 33 years. It is certainly gratifying to us to think that that 

might begin to be the case. 

Certainly we are more than happy to talk about mutual funds. 

But let us not confuse mutual funds with the entire defined contribution system. 

Mr. MCKEON. Thank you. 

Dr. Baker, you mentioned something at the end of your statement about we should have another kind of a defined benefit of 

$1,000. And there would be no cost to the government. How would 

that work? 

Mr. BAKER. Well, the point here, and I think I am thinking along 

similar lines to Dr. Munnell, that if we established in effect an expanded defined benefit building on Social Security, where workers 

would contribute voluntarily, perhaps with some strong-arming by 

some automatic contributions and default—I should say, default 

contributions and perhaps subsidies for low-income workers, that 

we could have an additional amount put aside targeting, say, 

$1,000 a year, which would be a modest increment to a higher-income worker, but would be fairly large for, say, a more moderate 

income worker, where we would guarantee somewhere perhaps 3 

percent being a little more ambitious than the 2 percent we overturn, that could provide a very substantial supplement to—— 

Mr. MCKEON. Excuse me. The worker would contribute $1,000. 

Mr. BAKER. Yes, in the government-managed account, which 

would then be invested privately similar to the thrift savings plan. 

Mr. MCKEON. And who would guarantee the 3 percent? 

Mr. BAKER. The government would provide the guarantee. So the 

government would be taking some risk. But again, I would just 

contrast that to the, in effect, guarantee we have given to the bond 

holders of corporations like Bear, Stearns and AIG, where that is 

being very costly to the taxpayer. And there were certainly no commitment on the part of the government to make those bonds good 

in advance. 

Mr. MCKEON. Sometimes we go through periods of growth. Sometimes we go through periods like we are in right now, where things 

really collapse. How would the government guarantee that 3 percent without any risk to the taxpayer? 

Mr. BAKER. Well, I should not say that it is no risk. But it is a 

very, very modest risk. So if you had a portfolio that was, say, 60 

percent equities, 40 percent other, you know, bonds, mutual funds, 

that, over a long period, there would be very limited risk that you 

would—— 

Mr. MCKEON. How would that vary from Social Security? 
52 

Mr. BAKER. Well, the difference is that it would be defined contribution, that people would voluntarily be putting their money in 

there. So if they didn’t want to do it, they wouldn’t have to. 

Mr. MCKEON. Whether they put the money in, or whether the 

government puts the money in now for Social Security. 

Mr. BAKER. Well that is, as you know, that is mandated. In this 

case, it would be voluntary. 

Mr. MCKEON. I see. And then all it takes—— 

Mr. BAKER. So again—that is strongly encouraged. 

Mr. MCKEON. Why not make it mandatory if it is not—— 

Mr. BAKER. Well, again I—— 

Mr. MCKEON. Why not just increase Social Security deductions? 

Mr. BAKER. Well, that is something that I think would be reasonable to consider. But I think, in this case, it is not a tax. If you 

do not want to pay it, you don’t have to pay it. So we could have 

a default. 

Mr. MCKEON. But then don’t we get back to where we are right 

now? 

Mr. BAKER. Well, I think—— 

Mr. MCKEON. Some people are going to live forever, and are 

going to hit the big jackpot at some point. And they don’t need to 

worry about it until, you know, they get to be about 55. 

Mr. BAKER. Well, in this case, the 3 percent real return should 

be consistent with what the financial markets can give over the 

long term. When I was saying that there could be some risk, we 

could have a prolonged period, as we may have now, of a down 

stock market, in which case it would involve some modest commitment for the government. 

Mr. MCKEON. A couple of years ago, it would have been great. 

Chairman MILLER. I did. And I am—this hearing is going to end 

at 12:30. So we will try to limit going over now that Mr. McKeon 

and I have gone over. 

Mr. MCKEON. I yield back. 

Chairman MILLER. Mr. Payne. 

Mr. PAYNE. Thank you very much. It is a very important hearing. Just looking over some of the notes that the cumulative decline 

in the value of the financial assets as a result of the current economic crisis cost Americans almost $2.7 trillion in their retirement 

savings. As we remember years ago, the defined contribution plans 

were really what was in. And the defined benefit was less popular. 

Of course, when employers started to end their defined benefit 

plans, the old-type retirement that, you know, I used to hear my 

father talk about, we saw a shift, even in the 1980s. 60 percent of 

workers were covered by defined pension plans and 17 percent by 

their defined contribution 401(k)-type. However, just 20 years later, 

only 11 percent of the workers are covered by defined benefit plans. 

And 56 percent, almost 60 percent, by the defined contribution 

plans. 

Now, if we are having the problem with the market, you know, 

I guess my question, maybe Dr. Baker might take it. I don’t believe 

that policymakers ever intended that the ability of a worker to retire would depend on whether the stock market was up or down in 

a particular year. How can we modify the 401 plan, so that work-
53 

ers’ ability to retire is not dependent on the state of the stock market. 

You know, like I said, years ago you had that guarantee coming 

out. The check would come each month, like Social Security, more 

or less. But how is the future? It looks bleak right now. My colleague said that we have ups and downs. Look like this down is 

pretty down and going to be down for a while, maybe not out, but 

a nine count. And maybe like the Dempsey fight, we are trying to 

have a long count to not call 10. We don’t want the knock-out. 

So what do you think, Dr. Baker? 

Mr. BAKER. Well again, I agree with you completely that we have 

subjected workers to much greater risk than I think any of us realized and certainly that they realized. And I was making the point 

that, in addition to their retirement wealth, they also had their 

housing wealth at risk as well. 

So that is why I was thinking that, given the circumstances, I 

think it does make sense to talk about having some additional 

guaranteed benefit that could be available to workers. Again, it is 

possible you would want to look to expand Social Security. I think 

that is a reasonable thing to consider. 

But I think to allow workers the opportunity to invest voluntarily 

in an account that will give them a guaranteed return, I think 

would be something that would be of enormous value to the country’s workers at very low risk. Again, I can’t say no risk, sir, but 

very little risk to the government. I think it is a case where the 

trade-offs, I think, are very much in favor of offering that sort of 

guaranteed benefit. 

Mr. PAYNE. Thank you very much. 

Well, since the chairman is trying to rush through, I will stop 

with the one question. All right. 

Chairman MILLER. I thank the gentleman. His time has expired. 

Mr. Kline. 

Mr. KLINE. Thank you, Mr. Chairman. 

Thank you, lady and gentlemen, for being here with us today. A 

tremendously important subject, and of course now we are all looking at it, I think, much differently even than we did a year ago. 

We all, Mr. Stevens, look at our account statements with some 

trepidation now. I make my wife read them myself. It works in our 

house. 

I am a little bit intrigued. And I am tempted to get in the whole 

discussion sort of suggested by Dr. Baker. And that is doing something to kind of shore up Social Security, which I think he is suggesting an additional voluntary effort to put money in, maybe 

$1,000 that we guarantee by the government. That is a very interesting idea, and one which I certainly wouldn’t reject out of hand. 

But I am very concerned that one of our pillars here that we are 

looking at is Social Security, and it is Medicare. And by every 

measure by anybody, we are some $50 trillion or more underfunded 

in those programs. So I am just kind of reluctant to turn in that 

direction very hard. 

Because I don’t have much time, let me go to Mr. Stevens. According to the note I have here, and I remember saying this. Professor Munnell notes that, during this crisis, we have had about 2 

percent I think of 401(k) plan participants have made hardship 
54 

withdrawals from their 401(k). Can you tell me, looking at the industry from your perspective, how does that number compare historically to plan withdrawals? 

Mr. STEVENS. Thank you, Congressman. As I indicated in my testimony, when you actually look at behaviors in the major recordkeeping systems, they are very much at the norm that we would 

have predicted historically, very little increase in hardship withdrawals. People are not massively taking loans against their accounts. They seem to have an understanding that these are assets 

that are there for their retirement with some kind of mental accounting. 

In fact, I would say in general, there is a tendency to look at 

401(k) investors like their children who don’t know what they are 

doing. And in fact, if you look carefully at their behaviors, they are 

much more grown up than sometimes they are given credit for. 

Mr. KLINE. They probably let their wife do it too. The Thrift Savings Plan has been used as an example a number of times as an 

investment plan with relatively low expenses. We have talked 

about in the last Congress. I just want to sort of bring us up to 

date here. Again, going to Mr. Stevens, tell us how it is possible 

for the Thrift Savings Plan to operate at what seems to be very low 

expenses. And in general, can you speak to the performance of 

funds in the TSP during this crisis? 

Mr. STEVENS. Yes. Well, as I said, the Thrift Savings Plan’s 

funds have been hit like all others. There has been no shelter from 

the storm in the market. But the TSP really doesn’t compare to the 

private retirement system. And I think this is a very important 

point to make. 

The TSP is about seven times larger than the largest defined 

contribution plan in the United States. If memory serves, I think 

it only has about three payrolls, large payrolls, that it has got to 

process. There may be a number of other smaller ones. 

But you compare that with the literally hundreds of thousands 

of different payroll systems and therefore record-keeping requirements that exist in the private sector. You don’t get remotely the 

economies of scale. 

It is also true that virtually none of the compliance and regulatory and reporting and other burdens that exist for sponsors of 

401(k) plans exists for the federal government. Those requirements 

have been waived with respect to the Thrift Savings Plan. Not so 

with respect to any employer, no matter how small. And remember, 

most of the employers in 401(k)s have 100 employees or less. So we 

are talking about relatively small businesses. 

And then, you know, it is simply true that some of the costs of 

the Thrift Savings Plan are not apparent. I am a former federal 

employee. There are federal personnel offices up and down every 

department and agency of government who support the Thrift Savings Plan. And I have never seen an estimate for what their cost 

is. And it is not reported as an additional cost to the saving of the 

system. You could think of that as corresponding to any number of 

activities that have to take place to support 401(k) plans. 

So I think it is even more remote than comparing apples with oranges and just doesn’t provide an appropriate frame of reference in 
55 

which to think about cost factors in the 401(k) system by any 

means. 

Mr. KLINE. Thank you very much. 

Mr. Chairman, I yield back. 

Chairman MILLER. Mr. Andrews. And I want to say that the witness is not just to do on Mr. Andrews’ time. But to the extent you 

think you want to say something in response, and you can politely 

figure out how to do that, you are more than welcome to do that. 

Mr. Andrews. 

Mr. ANDREWS. Thank you. 

I thank the panel for very, very good testimony that is going to 

help this process considerably. You know, this hearing would be 

compelling under any circumstances. But it is particularly compelling when we look at the real pain and anxiety that people all 

across this country are feeling, that is subsumed in that $2.7 trillion loss of pension assets. 

But we are not here to comment on the size of that loss. We are 

here because our hypothesis here is that, because the 401(k) system, the DC system, is in need of reform, the loss is worse that it 

would have otherwise been. And when things get better, the recovery won’t be as good as it would otherwise be. So this hearing 

would be timely whether people had gained $2.7 trillion or lost $2.7 

trillion. And that is what I want to focus on, is those reforms that 

I think could make the DC system better. 

Mr. Stevens, one thing I want to ask you. On page 5, you have 

a graph, which shows declines in asset values. And it shows that 

401(k) plans have declined 10.9 percent. The S&P 500 declined 

19.3 percent. 

But I do want to understand, though, as you point out that that 

includes the contributions that were made to the 401(k) plans. Correct? 

Mr. STEVENS. Actually, Congressman, the graph on page 5 is intended to depict as of the third quarter of 2008. 

Mr. ANDREWS. Yes. 

Mr. STEVENS. The depreciation that different types of retirement 

plans—— 

Mr. ANDREWS. But that depreciation takes into account the contributions that were made to 401(k) plans. It is not simply their 

performance net of contributions. Correct? 

Mr. STEVENS. Yes, I think that is correct. 

Mr. ANDREWS. Okay. So we are really not comparing apples to 

apples when we look at the S&P return and the contribution returns. Let me ask you this question to supplement the record. If 

you could supplement for the committee what that number would 

be, if you subtracted the contributions were made and just looked 

at the performance of the fund as it exists in the prior period, we 

would appreciate that. I think that would clarify the situation. 

I notice on page 9, in footnote 19 I believe it is, I am encouraged 

by your—see, in law school, they teach you always to read the footnotes. 

Mr. STEVENS. They do indeed. 

Mr. ANDREWS. So I am encouraged by the fact that I think you 

have extended an opportunity to work with the chairman and with 

all of us and the work that we did in the last Congress when you 
56 

say: We agree with the approach taken by the bill reported out of 

the committee in the last Congress, names the bill, and similar proposals ensuring the disclosure rules apply equally to all products 

offered by 401(k) plans. 

I agree with that. And we would invite your participation as we 

try to craft good rules that make meaningful disclosure to all participants about all assets. And we appreciate you making that comment. 

Mr. Bogle, I was taken by much of what you had to say. We appreciate the tremendous contribution you have personally made in 

this area and your firm has made. Your third recommendation, 

which is the inclusion of some sort of annuity product as an option, 

are you advocating that each plan should be required to offer an 

annuity product as an option? 

Mr. BOGLE. Each plan, I think, certainly should offer it. And the 

question is to what extent one should make it mandatory. The idea 

of locking in or locking out, I guess one would say, longevity risk, 

seems to me to be a fundamentally good idea. 

Mr. ANDREWS. Do I understand your proposal correctly that what 

you are proposing is that certain participants would have a certain 

percentage of their assets put in that annuity-type plan, unless 

they opted out. Is that your proposal? 

Mr. BOGLE. That is correct. 

Mr. ANDREWS. Okay. Could you describe to us what the annuity 

product would look like and how it might be designed? 

Mr. BOGLE. Well, like the mutual fund industry, the annuity industry takes huge amounts of cost. Out of the returns, you get 

marketing cost and administrative cost and investment cost. So 

most annuities are not particularly attractive to a—so we need a 

better system. 

I would argue, I think, that—not I think, I know, that TIAACREF, for example, has one of the outstanding annuities in the 

country, very low cost. But it stands almost alone, because the annuities have to support this big marketing system. I don’t see any 

reason that some governmental or quasi-governmental agency 

couldn’t provide just an actuarial based annuity, but without all 

those costs in it. 

And the whole idea is to take the cost out, because that is so fundamental to everything we do in retirement savings. 

Mr. ANDREWS. Dr. Mussell [sic], would you care to comment on 

whether you think that there should be a fixed asset annuity-type 

option included in every plan? Do you think that should be? 

Ms. MUNNELL. I think that we are really going to face, even if 

we didn’t have this impact of this financial crisis, that we were 

going to see a crisis when people retired with 401(k) balances, because it is really hard to figure out how to drawn down that money 

over unknown lifespan. And so—— 

Mr. ANDREWS. But do you think we should require such a—— 

Ms. MUNNELL. I think it should be a default in 401(k) plans. It 

is not as obvious as automatic enrollment. But I think it is the better option to have the default be an annuity. And then people can 

back out. 
57 

Mr. ANDREWS. So I just may ask one more quick question. There 

is a subtle difference between a default position and an option that 

must be offered, right? 

Ms. MUNNELL. If you just offer it as an option, no one will take 

it. People hate annuities. So I think—— 

Mr. ANDREWS. Not everyone. 

Ms. MUNNELL. I think you put them in. You let them try. 

Mr. ANDREWS. Okay. 

Ms. MUNNELL. And then if they don’t like it, they can go to their 

HR people and get out. But that is where you put them. 

Mr. ANDREWS. Thank you very much. 

Chairman MILLER. Mr. Castle. 

Mr. BAKER. I think if I could state quickly, I think your question 

was whether it should be mandated. And I think we had agree that 

every plan should offer that at least as an option. 

Mr. ANDREWS. Okay. 

Ms. MUNNELL. No, I would say something—— 

Mr. ANDREWS. Well, I think, yes. I think the Boston College folks 

wanted to be a QDIA-type, a default, but not offered as an option 

per se. is that what you are saying? 

Ms. MUNNELL. I am saying every plan should have it. And—— 

Mr. ANDREWS. Right. 

Ms. MUNNELL [continuing]. Put everybody in it when they retire. 

And then people can say oh, this isn’t right for me. I have cancer. 

Mr. ANDREWS. So if you don’t pick a vegetable, it has to brussel 

sprouts. Okay. 

Chairman MILLER. Mr. Castle, help us. 

Mr. CASTLE. Good luck. Thank you, Mr. Chairman. 

Dr. Munnell and Mr. Stevens, you both mentioned the fact, something to the effect of we have to shore up or firm up Social Security. We in Congress say this on a daily basis in speeches we give 

or whatever. And then it gets down to the specifics of how do we 

do this? I realize that is a little beyond perhaps the context of this 

meeting. But you mentioned it. And I would be curious as to 

whether you have any specific ideas about how to so-called shore 

up Social Security. 

Ms. MUNNELL. Shore up Social Security. People say oh, we can 

do some with tax cuts, benefit cuts, and some with tax increases. 

Social Security replacement rates are going down under current 

law as the normal retirement age goes from 65 to 66 to 67. For people who continue to retire at 62, you are going to see very low levels of replacement. And they do tend to retire at 62. 

So I think that anything that cuts benefits any further is really 

dangerous and is going to put people at risk. But there is no free 

lunch. I don’t think people are going to grow ourselves out of it. So 

that means more revenues in somehow. 

And, you know, you put in the estate tax. I would change the 

COLA. I would actually index the full retirement age to longevity, 

and then maybe put in some more payroll taxes. 

But I think it is important to maintain it as the backbone of our 

retirement income system. We have seen that we really need it. 

And we should do what we have to do to fix it. 

Mr. CASTLE. Thank you. 

Mr. BAKER. If I could quickly point out the small free lunch. 
58 

Mr. STEVENS. I think that I was asked the question as well, if 

I could respond. 

Mr. BAKER. Okay. 

Mr. STEVENS. We do not have a plan to fix Social Security. I consider it a bit above our pay grade. I would say that we have never 

supported the idea of private accounts in Social Security. We believe that the Social Security system should essentially stay the 

system that our grandfathers knew and grandmothers. It is the 

best inflation-adjusted annuity that anyone will ever, ever receive. 

And it ought to be maintained as such. 

Among individuals who are over age 65 and who are no longer 

working, the bottom 50 percent ranked by income get 86 percent 

of their income from Social Security. That is not new. That has 

been the same since 1980. And it is very important to maintain 

that stability of income and replacement value for the lower income 

workers in the United States. 

Mr. CASTLE. Thank you. 

Mr. Baker, do you wish to comment on that? 

Mr. BAKER. Yes, very quickly. Just the sort of pseudo-free lunch 

I was going to refer to is that one of the problems facing the program was that we had an increasing portion of wage income going 

over the wage cap as there had been an upward redistribution of 

income over the last 30 years. 

There is early evidence thus far that that redistribution is being 

reversed. In other words, there has been a big increase in wages 

for those at middle and bottom. If that persists, then we don’t have 

enough data yet to say that will be true. If that persists, that will 

substantially reduce the projected shortfall in the program, since 

more income will be subject to the tax. A larger portion of wage income will be subject to the tax. 

We don’t know that will stay the case. But at least, thus far, it 

looks like that was one outcome of this crisis. 

Mr. CASTLE. I hope you are right. Although the crisis makes me 

nervous, perhaps that is not going to happen. But let me ask you 

another question, Mr. Baker. I think you said that the Federal Reserve should combat asset bubbles. Is that correct? And if so, how 

should the Federal Reserve combat asset bubbles? 

Mr. BAKER. Well, I did say that. And I think the Federal Reserve 

has a variety of tools that it can use. But the first tool that I would 

have used if you were going to make me Federal Reserve Board 

chair—— 

Mr. CASTLE. Yes. We will do that temporarily. 

Mr. BAKER [continuing]. Would have been to basically use the 

bully pulpit of the fed, to use their congressional testimonies, use 

their other public speaking opportunities to call attention to the 

misalignment of asset prices and the fundamental realities. 

I think it was easy to see that in the case of both the stock and 

the housing bubbles. You had very clear evidence that these prices 

were out of line. 

Yet, if Chairman Greenspan had used his public speaking opportunities as occasions to point that out, backed it up with research 

from the fed, so I don’t just mean mumbling irrational exuberance. 

I mean, pointing out here is why real estate prices are out of line 

with the fundamentals in the market, you will end badly. If he had 
59 

used his bully pulpit to do that repeatedly, I think it could have 

had a very large impact. 

Now, obviously they have regulatory authority. They could have 

prevented a lot of the bad mortgages that we saw and that contributed to this. But first and foremost, I think that bully pulpit is extremely valuable. And he wasted the opportunity to use it. 

Mr. CASTLE. Does that pertain to others, like members of Congress, chair of the committee and the president of the United 

States. I mean, it is to just the Federal Reserve in other words. It 

is—— 

Mr. BAKER. Absolutely. I mean, this was the most important 

problem, economic problem, facing the country over the last 5 or 6 

years by far. I mean, everything else that we—and I am not saying 

this in retrospect. I was saying this at the time. Everything else 

by comparison is really small change. 

Mr. CASTLE. Very quickly, Dr. Munnell, I came in the middle of 

your testimony. But I think you talked about another tier of up to 

20 percent before retirement or something of that nature. In other 

words, it sounded like a new program. And maybe it was in your 

writing, which I haven’t read. But can you briefly tell us what that 

is all about? 

Ms. MUNNELL. Yes. I firmly believe that just having 401(k) 

plans, no matter how good you try to make them, and Social Security as the only two components of our retirement income system 

is not going to provide people with enough money. I think that people at the low end, who are going to get less from Social Security 

going forward, are going to need something more. And I think that 

people with 401(k) plans are also going to need more than just 

these balances that they have now. 

And so I think we need a new tier across the income groups for 

everybody, and let the poor old 401(k) plans go back to what they 

originally were, which were sort of supplementary plans, almost 

play money, for people who had solid coverage to being with. 

They weren’t designed for this. And we keep trying to tweak 

them to make the work better. And they do work a little better. 

But they are still flawed. 

Chairman MILLER. Mrs. McCarthy. 

Mr. STEVENS. Mr. Chairman, could I—— 

Chairman MILLER. I am going to move along here. I mean, we 

will try to figure out how to get your comments here. 

Mrs. McCarthy. 

Mrs. MCCARTHY. I want to thank the panel for the information. 

It has been very helpful. One of the things that I would like to go 

into a little bit deeper. 

Mr. Stevens, I know you basically support financial literacy programs, which is something that I am trying to work on Financial 

Service Committee to get all that in. It has been a battle for a 

number of years. 

But one of the things that you spoke about was the importance 

of relaxing the required minimum distributions rules individually 

age 701⁄2. As you point out, Congress worked in a bipartisan manner to suspend the rules for 2009. And you are talking about basically making that permanent or a lock-in for the losses. 
60 

Could you elaborate why Congress should consider an extension 

of the minimum distribution or waiver or permanent raising the 

age trigger from the current 701⁄2 and anybody else that wants to 

jump in? 

Mr. STEVENS. Yes, ma’am. Thank you. The 701⁄2 age at which required minimum distributions are triggered now has been the 

standard for many, many years. In the meantime, life expectancy 

has grown. And it seems to us a very reasonable accommodation 

to Americans in retirement, who are trying to manage their assets, 

to give them more time before they are required by law to begin 

drawing down their retirement account balances. 

When we asked people about this, fully 60 percent responded 

that the only reason that they were withdrawing from their retirement accounts was because they had reached that magic age. And 

the law required them to do so. 

So obviously, there are many Americans who are in a position 

where they can husband these assets for a longer period of time. 

And given life expectancy and given other pressures on retirement 

assets, we ought to help them do so. 

Mrs. MCCARTHY. Does anybody else have an answer to that? 

Ms. MUNNELL. I would support looking at it. But the reason it 

is there in the first place is that so these aren’t estate planning 

tools. So perhaps we can make the age later. But I think that it 

would require careful study. And you definitely want some age. 

Mr. BAKER. Just very quickly, I think the concern about locking 

in losses is perhaps exaggerated, because keep in mind, you only 

have to cash out at 6 percent. It is a relatively small share. I think 

you would find very few people who will reach the age of 70, who 

are invested 100 percent in equities. In other words, almost all of 

them would have enough in bonds or money funds. But they would 

be able to meet that distribution requirement without touching 

their equities. 

Mr. STEVENS. No, my point was not their locking in losses, but 

their having to withdraw from their accounts however they are invested. 

Mrs. MCCARTHY. I will yield back the balance of my time. 

Chairman MILLER. Mr. Guthrie. 

Mr. GUTHRIE. Thank you, Mr. Chairman. And thank you for conducting this meeting. This is extremely important for people I 

know of. Now that we have changed the systems, and then they 

have changed. And people are now mostly not in defined benefits. 

They are approaching retirement age, a lot of people in that group. 

So I know this is important, and they are facing this. 

And Mr. Stevens, you were going to make a comment to Mr. Castle and didn’t have the opportunity to make. We ran out of time. 

Did you get to make that? If so, I would give you the opportunity 

to do so. 

Mr. STEVENS. I didn’t. Thank you very much. No, much of what 

you have heard this morning assumes that there was a point in 

time when the vast majority of working Americans enjoyed the 

benefit of a defined benefit plan. This is a nostalgia we have, I 

think, as a country, and understandably, for an age that never existed. 
61 

Before 401(k)s came online, and then rise of the defined contribution system, only 16 percent of Americans in retirement, 16 percent, received any payment from a private pension plan. And the 

payment in today’s dollars represented $6,000. So the golden age 

of the gold watch simply never existed. 

So the idea that somehow or other defined contribution plans 

came and displaced this wonderful paternalistic system of defined 

benefit arrangements is simply not true. 

Mr. GUTHRIE. Anybody else want to comment on that? 

Ms. MUNNELL. Can I just respond to that? I mean, there were 

a period in which everyone who had a pension did have a defined 

benefit plan. And that has changed to a situation where everyone 

has a pension has the defined contribution plan. The defined benefit plans weren’t perfect. But one has really displaced the other. 

Mr. GUTHRIE. So the comment is, if you had a pension, you had 

defined benefit. 

Ms. MUNNELL. Yes. 

Mr. GUTHRIE. But still, 16 percent had pensions, if that number 

is correct. The 16 percent is what—— 

Mr. STEVENS. Or the inverse is 84 percent had no form of pension. And you have to think of what defined contribution has done 

to enlarge some pension provision for working Americans. And that 

was my point. 

Ms. MUNNELL. Can I just add one comment? 

Mr. GUTHRIE. Sure. 

Ms. MUNNELL. If you take a snapshot of the private sector work 

force at any period of time, and this has been true from the 1970s 

right to the present, roughly half of the people have any employerprovided pension of any sort. And in the old days, 1980s, those 

were defined benefit plans. Today, they are defined contribution 

plans. 

So the percent of population with anything has not changed. But 

the nature of what they have has changed. 

Mr. GUTHRIE. Thank you. One more, and then I guess I will yield 

back after this comment. 

Mr. STEVENS. I think it is important to understand too that, in 

the traditional defined benefit system, you had to spend a long 

time at a single employer, and then retire from that employer to 

get the pension benefit. The reason defined contribution plans have 

become so popular really has to do with the fact that that is not 

the working model any longer. Individuals will have seven to eight 

different employers during the course of their lifetime. So the DC 

plan is a better fit, in our judgment at least, then the conventional 

DB plan. 

Mr. GUTHRIE. Thank you. 

Thank you, Mr. Chairman. I yield back. 

Chairman MILLER. Mr. Wu. Mr. Wu is not here. 

Marcia Fudge. No questions? 

Mr. Bishop is not here. 

Mr. Sestak, there you are. The gentleman is recognized for 5 

minutes. 

Mr. SESTAK. Thanks, Mr. Chairman. 

Mr. Bogle, if I—— 
62 

Chairman MILLER. Why don’t you see if you can use Ms. Hirono’s 

mic? 

Mr. BOGLE. Congratulations. 

Mr. SESTAK. Can you hear me now? 

Mr. BOGLE. Yes, we can. 

Chairman MILLER. No. 

Mr. BOGLE. Well, I can. 

Chairman MILLER. Yes, let us. I don’t know why the—— 

Mr. SESTAK. Can you hear me? 

Mr. BOGLE. Yes, I can. 

Mr. SESTAK [continuing]. Question has make sure that I understand it. It seems to me as though what you are most interested 

in is trying to spread the risk of investing to the entire group of 

investors. And that is kind of your bottom line that I am taking 

out of it. 

Mr. BOGLE. Correct. 

Mr. SESTAK. You don’t seem as interested or feel it is as apropos 

to getting to that overall objective by, if I read your testimony 

right, by debundling all of the various fees. That is nice. It is interesting. We would like to know, if we don’t know, that you have an 

expense ratio. But we really don’t know the 0.5 to 1 percent that 

is added on because of transaction costs. You would like to make 

that apparent. 

Further debundling is nice on the margins. What you really want 

to do is spread the risk to the market as a whole. Do I get it right? 

Mr. BOGLE. Yes. But I would say, sir, only partially right. And 

that is with respect to the equity risk, it is mathematically correct 

to spread the risk as widely as you can. And then all investors as 

a group will win. Where if they are fighting with each other in the 

marketplace, which is the way the markets work, it is like the casino or the racetrack or the lottery, they are going to lose. So yes, 

absolutely correct with respect to the equity. 

However, I don’t think we have given much attention at all here 

today to something we should give a lot of attention to. And that 

is one of the things that went wrong, is that we didn’t spend nearly 

enough time on educating investors about the risks of stocks and 

the need to have a bond component of their retirement plan. And 

for more years, more decades, maybe 30 years, I don’t know how 

many years, I have been saying investors ought to be very conscious of a balanced program. 

Now, I grew up, since 1951, with Wellington Fund, which is a 

balanced fund. And that was my first defined contribution plan investment in 1951. So I have been at it for a long, long time. And 

it has worked great. 

But the reality is that, and what I have been saying for at least 

three decades, is your bond position should have something to do 

with your age, because things happen when you get older. I don’t 

want to get into all of them at least. 

But among the things that happen are you have less time to recoup bad times. You have more money at stake. And you probably 

get a little more jumpy when we get the crazy stock markets like 

this one, which is certainly a once-in-a-generation thing. 
63 

Mr. SESTAK. So your proposal would be that your federal retirement board would mandate the shares that go towards the bond 

index as opposed to the stock index. 

Mr. BOGLE. Yes, sir, I do. And however I would, you know, not 

make it rigid; maybe a range in bonds. In other words, if you are 

65, you wouldn’t be bound to 65 percent. If you are 65 years of age, 

you wouldn’t be bound to 65 percent in bonds. But maybe somewhere between 50 and 80 percent, depending on your own requirements. 

Mr. SESTAK. And—— 

Mr. BOGLE. And just to get a little protection against these 

things that happen in this life, that we don’t expect. 

Mr. SESTAK. The last question I had, again for my edification is, 

in your great article ‘‘Black Swan,’’ you called it an expectations 

market. But I think here, in your testimony, you call it the phantom. My question is, if you really do move towards an index-type 

of an approach, hearing your testimony, you talked about between 

1999 and today, we actually had, I think, a 7 or 8 percent loss on 

the stock market when you know, in reality, rather than the 12 

percent that had gone from 1975 to 1999. 

How do you remove the, what you called the coop year from that? 

I mean, is it because everything is an index fund? Or you just let 

those that still want to go over to the non-index that you still with 

the—— 

Mr. BOGLE. Well, as a reality, and we in the financial system I 

don’t think honor that reality very well. And that reality is that 

stock returns come and go. But in the long run, the whole idea of 

investing in equities, just working on that part of the portfolio is 

to capture the returns that are developed by American businesses, 

I said in my statement the dividend yields and the earnings 

growth; because over 100 years, that is a 100 percent of the return 

that you get if you invest in stocks before those costs are taken out. 

The problem is the markets go into these crazes of speculation, 

irrational exuberance, call them what you will, where we had two 

consecutive decades, in the 1980s and 1990s, where we had the 

price earnings multiple, which is speculation, how much people will 

pay for a dollar of earnings. And it went from 10 to 20 to 40. And 

at 40, buying stocks is basically a bad joke. You can’t recover from 

that. 

So we are now coming back. Unfortunately the earnings are fading away at this moment in time. But that will take are of itself 

in time. But we have to focus on investment return and try and 

avoid getting captivated by the speculative return. And yet, in all 

the data you see from the industry, they just ignore what I would 

call the, as I did in my statement, these phantom returns that markets periodically develop and have been developing, you know, 

since—or maybe even before that, maybe since Ancient Greece as 

far as I know. 

Chairman MILLER. Mr. Polis. 

Mr. POLIS. No additional questions, Mr. Chairman. 

Chairman MILLER. Ms. Shea-Porter. 

Ms. SHEA-PORTER. There we go. I have a couple of questions. 

First, Dr. Munnell, I heard you talking about raising the age for 
64 

retirement. And if I heard that correctly, what age were you proposing? 

Ms. MUNNELL [continuing]. Going to 67. And that means that 

people retiring at 62, which is when people retire. It is not desirable. But it is when they do retire, are going to get less and less. 

And so that is just built in the cake. And it means that, when 

you look at Social Security going forward, people are going to get 

less than they think. The replacement rates are really going to be 

going down over time. So it matters enormously what is on top of 

Social Security. And I just want to repeat again and again, it is my 

view is that 401(k) plans, even fixed-up 401(k) plans, are never 

going to provide people with enough additional money. And we 

need another tier between Social Security and 401(k) plans, so people will have enough in retirement. 

Ms. SHEA-PORTER. Okay. And do you support raising the cap on 

Social Security so that people at higher incomes pay on the dollars 

like those in the lower incomes do? 

Ms. MUNNELL. Oh, I think you can raise the cap somewhat. But 

I think that it is really important that there is some link between 

contributions and benefits. I think it really strengthens political 

support for the program. So do it. Yes, it can go up somewhat. But 

do it cautiously. 

Ms. SHEA-PORTER. Okay, so raising the ages is the direction you 

are looking at. I also wanted to ask you about this new plan. Why 

not put everybody into the TSP? Would that work, if you want this 

new layer there, then everybody gets enrolled in the same plan 

that we use? 

Ms. MUNNELL. I think there are just two issues that are important here. I think that, for this additional tier, I think it is important that it is basically a private sector activity. I think we have 

got Social Security, which will provide a good base. It is pay as you 

go. It is publicly run. 

I think you want to diversify your risk. Pay-as-you-go systems 

have demographic risks. Funded systems have capital risks. And I 

think you want some of each. 

And so I think the TSP is a good model in terms of index funds, 

low-cost. But I think that any private sector firm that could meet 

those should be able to compete for the available monies. 

Ms. SHEA-PORTER. Okay, thank you. 

And Dr. Baker, I heard you talking about the housing bubble. Is 

there anything else you wanted to add about your testimony that 

you hadn’t been asked before? 

Mr. BAKER. Well, I guess I would just emphasize the point that, 

for most middle-income Americans, most of their wealth in retirement is going to be reflected in their house. And I think we had 

wrongly led many people to believe that that was a secure asset. 

And I think it is very apparent to people today that it is not, 

which to my mind raises the argument to increase the strength of 

the argument for providing some sort of defined benefit plan in addition to Social Security, because people do need some security in 

retirement. And not only are they risking it with their 401(k) accounts, but they were also risking it with their house as well. 

Ms. SHEA-PORTER. So looking 15 or 20 years out for a couple who 

is just buying a home, your message to them would be plan to live 
65 

in your house and enjoy your house. But make sure that you have 

something else that it is not going to be the traditional cash cow 

that it was at the end. 

Mr. BAKER. Well, simply that there is risk, yes. I mean, certainly 

we hope that housing values will, you know, eventually stabilize 

and that they will at least rise in step with the inflation as they 

have done historically. But people have to recognize that there is 

a big element of risk there. We can’t guarantee that your house 

price will appreciate. And clearly, there always was that regionally. 

So many people, even during normal market times, took a big hit 

on their home values. 

But certainly you can have very erratic movement, as we see in 

house prices. So it is not the rock bed of your retirement. 

Ms. SHEA-PORTER. Okay, thank you. And I yield back. 

Chairman MILLER. Thank you. 

Mr. Altmire. 

Mr. ALTMIRE. Thank you, Mr. Chairman. 

I want to ask Mr. Stevens to get specific about a couple things. 

One is you outlined a number of proposals to improve the 401(k) 

system. And you have mentioned specifically in your testimony increasing automatic features into plans, increasing investor education, ensuring Social Security is on sound footing, as we have discussed, and others. And I want to ask you, can you prioritize some 

of those for us? 

Mr. STEVENS. Well, it seems to me that, since Social Security is 

the bedrock upon which all retirement planning in the United 

States has got to rest, that as a confidence-building measure in 

Americans’ ultimate retirement security, that is a good place to 

start. 

I would say that there are very specific things that we can do 

about the 401(k) system. And as I indicated, we strongly support 

the chairman’s leadership on improved disclosure and do want to 

work with the committee as you continue to consider those issues 

in this Congress. It is important, at long last, that 401(k) participants get the kinds of disclosures that will help them in their investment decision making. 

That in a sense is a step towards improved education, information and the like that is a broader national priority. I would think, 

in light of the downturn in the markets, that a similar step that 

we could take now has to do with required minimum distributions. 

Undoubtedly, there are people who are reaching the age of 701⁄2

or thereabouts who are saying, boy, I would like these assets to be 

with me a bit longer. But I have got to take them out of my account. And so just as we did in sympathy to their plight in 2009, 

we ought to look at what more we can do. 

I think that the committee has the opportunity to seriously consider the rapid acceptance of these auto features that were characteristic of a pension protection act. But I think universally are 

now acclaimed as having, not only gotten many more people covered by 401(k)s, but increased the level of their contributions. The 

behavioral economics behind them, it seems to me, are demonstrating their validity. 

And at some point, perhaps in the not-too-distant future, it is 

worth considering that we essentially make a plan that is offered 
66 

by an employer an opt-out, not an opt-in arrangement. That could 

cover many more people. 

And then finally the toughest thing, Congressman, is how you 

get more of those 50 percent who aren’t covered by a plan in their 

workplace into the system. That raises many, many larger and 

more difficult considerations. But that certainly is something that 

the Congress ought to work on, because there clearly are people 

who do not have the opportunities we would like them to, to invest 

and to save whatever they are able to for retirement. 

Mr. ALTMIRE. And similar to that, you mentioned in your testimony and again in the Q and A, that 401(k) plan is so successful 

in your opinion, because it integrates both consistent contributions 

and long-term investing, which is what you said in your testimony. 

Can you elaborate on that? And are you trying to make the point 

that savers should take advantage of the benefits of dollar cost 

averaging, which means acquiring more shares during market 

downturns, like we are in now? 

Mr. STEVENS. Yes, thank you. And it is actually the point I was 

trying to make in response to the question from Congressman Andrews. On page 6 of my written testimony, you have a depiction of 

what happens in a market downturn for consistent participants in 

401(k) accounts. 

Yes, their account balances do dip. But because 401(k) combines 

the power both of consistent savings and potential returns on investing, what you see is that the participants’ accounts continue to 

climb at a faster rate than the stock market. 

It is evidence to us, and this is in the context of a market downturn in recent years that was reasonably significant, that if you 

stay the course dollar cost average and continue to save, and realize the investment potential when the market recovers, that that 

is a very, very powerful mechanism for increasing your retirement 

wealth. And the demonstration of that is for us in the chart in that 

page of my testimony. 

Mr. ALTMIRE. Thank you. 

No further questions, Mr. Chairman. 

Chairman MILLER. Mr. Price. 

Dr. PRICE. Thank you, Mr. Chairman. And I appreciate the panel’s discussion. I apologize for being late and having a conflict. I 

have heard some of the testimony back in my office and read much 

of it. 

Clearly there is an attractiveness to certain returns. If we remove risk completely, however, we remove reward. I think all 

would agree with that. I wonder, Mr. Stevens, if you might comment on one of my great concerns has been the role of the federal 

government, and how the federal government can, I believe, step 

over a line that varies, but step over a line, and then result in decreasing return on investment to all folks and specifically in 401(k) 

plans. 

For example, the great discussion that has been going on over 

the past couple of weeks about the nationalization of banks. And 

you see bank stocks decreasing significantly, I believe, because of 

that discussion. Do you have any thoughts as it relates to 401(k) 

plans and the intrusion of the federal government in roles like 

that? 
67 

Mr. STEVENS. Thank you, Congressman. Let me just give one example. And it is the issue that concerns us all about the 

decumulation phase. It is people who are now in retirement. They 

have a stock of retirement assets. And how should they be managed? 

This is certainly an issue that both public policy makers like 

yourselves, people who are outside experts, like my colleagues here, 

participants in the financial community and individuals are wrestling with. My concern is that if government says we have the solution that is ‘‘it is this, it is nothing but this,’’ what happens in the 

marketplace is all other experimentation and all other, if you will, 

innovation, competition, et cetera, essentially stops. 

We spend a lot of time thinking about these things. And what 

I believe is that there is no one right solution for everyone at the 

point of retirement. Some of my colleagues here think that we can’t 

trust Americans with their retirement savings. And we need to 

force them to do something, so there is no more risk in their portfolio for the balance of their life. 

We talked to the American people in December. Again, markets 

were pretty bad. And they told us, overwhelmingly, we don’t want 

Washington telling us what to do with our investments. 

There is tremendous competition and innovation in the market 

by annuity providers, by asset managers, by the two working in 

tandem to try to give people tools to manage that longevity risk. 

I think we ought to encourage that kind of innovation in the market. It is what has created the strengths of the 401(k) system to 

date. 

And so I would think there are conditions in which competitors 

ought to be encouraged to meet in the marketplace. And government has an important role there. Accountability to the investors, 

transparency in the system. But let us not straightjacket it, because ultimately the participants in these plans and American retirees are going to be the losers. 

Dr. PRICE. Yes. No, there may be some merit to the American 

public’s concern about the advisability of federal government control of whatever they can do with their retirement savings. One of 

the other lines, I think, that we can pass as a nation is to increase 

regulatory burdens so much, that we stifle any flexibility or ingenuity within the market of pension planning, 401(k) planning. 

Do you believe that there is a—what would the consequences be, 

I guess, to employees or employers who would voluntarily choose 

not to participate, if the regulatory burden increases to such an extent that they believe that it is a hurdle over which they can’t go? 

Mr. STEVENS. Well, it is important to remember that this is a 

voluntary system. Employers are not required to have 401(k) plans. 

They are a benefit that they elect to have and to provide to their 

employees. And I think that one of the persistent problems about 

moving beyond the 50 percent who are covered now into smaller 

and smaller workplaces are the kinds of burdens that employers 

have to bear. 

It is one of the reasons that a lot of the thinking in the, sort of, 

expert community has been dedicated towards simplifying 401(k)s, 

making them less burdensome, more manageable for smaller em-
68 

ployers, so that they would have the wherewithal to adopt a plan 

and make it available to their employees. 

And I think that is an important objective. It is one of the specific recommendations that we made in our written statement. 

Dr. PRICE. Are there specific activities that you believe that Congress ought to avoid in terms of regulatory imposition on 401(k) 

plan? 

Mr. STEVENS. I think mandating specific investment options is 

one important one, attempting to manage from Washington all of 

the risk return characteristics that exist in these funds, and essentially substituting your judgment for the judgment of the employer 

who sponsors the plan. 

The design of the system was a judgment by Congress that the 

employer, as a conscientious fiduciary, held to very high standards, 

is in the best position to make those decisions for his or her work 

force. And that system has had a lot of success. And despite the 

market downturn, we see no reason why it should be overturned. 

Chairman MILLER. Mr. Hare. 

Dr. PRICE. I thank you for your responses. 

Thank you, Mr. Chairman. 

Chairman MILLER. Mr. Hare. 

Mr. HARE. Mr. Bogle, I apologize. I missed your testimony. So if 

I am going over something you have already talked about, I hope 

you will bear with me here. It also goes to being 60 years old, evidently. 

In your testimony, you called our financial system greedy. And 

you pointed out the imbalance between corporations and hedge 

fund managers and the investor who feeds at the bottom of the 

costly food chain of investing. So I have about three questions here. 

And then I will be happy to hear what you have to say. 

What can be done to change this? Do workers have any means 

at all to defend themselves, particularly when they reach their retirement age, and they see that their 401(k) plans are losing half 

their value, or find out that their employer cannot pay out the 

promises that he or she made? And then finally, what protections 

do they need, do you think, from us? 

Mr. BOGLE. Okay, well, let us start off with that. A great advantage of 401(k)s compared to defined benefit plans, and that is you 

are not at the risk of your employer’s financial security or stability 

and the risk of bankruptcy. 

And if you just take a look, for example, General Motors, you can 

describe that as a corporation with a $75 billion pension plan, surrounded by a few automobiles. And the few automobiles happen to 

have a market capitalization of something in the range of $1.5 billion. Once you get these huge disparities in the system of competitive capitalism and creative destruction. 

So you could, and I think should, say the decline of the defined 

benefit plan in favor of the defined contribution plan is a plus. 

Now, the pluses for defined contribution are you can take it with 

you when you move jobs. That is very important. You don’t run the 

risk of corporate failure. That is very important. 

You can make your own asset allocations, something I have 

talked about a couple of times here. And that the typical corporate 

plan used to be defined benefit plan, around 60 percent stocks was 
69 

the convention and 40 percent bonds. But that applied and affected 

the youngest workers and the oldest workers. It was a package. 

In the defined contribution plan, you can set your own allocation, 

gradually building up the bond allocation as you grow older. And 

that is a big plus. The big minus to get back to the first part of 

your question, the big minus in the defined contribution plan is it 

costs about two times or three times or four times as much as the 

defined benefit plan, because we are all paying individually for 

those services, instead of collectively. 

So how do you get away from that? How do you get a better system? Well, there are really just two ways. One, wake up the investor to his own economic interest. This is what we can call the invisible hand solution. 

Now, if we each will just operate in our own best interest, in our 

own economic interest, we will gradually move to a very low-cost, 

certainly an index system over time. And that is the way the market has moved over two or three decades now, first very slowly, and 

then decently rapidly in recent years. So the investor has to be 

aware of owning the market and of keeping costs down. And that 

is a very important part of it. 

The other solution, and I come back to this, and I mentioned it 

in the testimony, is the institutional investors out there, including 

the mutual fund managers, really have not done a very good job 

of protecting the interest of their shareholders. Where were all our 

financial analysts in this industry when Enron went down. Did 

they not know what was going on there? And how about when 

Citibank and AIG went down? 

I don’t think our security analysts, our institutional—I know 

what they are paid all that money for. But they don’t delve very 

deeply. Why aren’t they challenging the corporations out there, 

where are you going to get that 8.5 percent return a year ago? And 

now, it has got to be, obviously, a lot more than that to make up 

for what was lost in that year. 

So the institutional investor is, when you think about it—and 

this is pretty much known. I mean, read brokerage reports on 

money managers that are publicly held. Institutional investing has 

become a game of gathering assets. Why? Because the more assets 

you have, the bigger your fees are. This is not a complicated mathematical equation. 

And therefore, and I almost hate to stomp on innovation. But 

having said that, I would like to stomp on innovation. How much 

innovation can we handle? Do we need more securitization? Do we 

need more credit default swaps? Do we need more collateralized 

debt obligations? Do we need more severing the link between lenders and mortgage lenders and mortgage borrowers? 

Have those innovations helped us? No, but they sure as heck 

have helped the financial system, which has made billions and billions of dollars out of all those innovations. 

So I think, you know, it sounds kind of funny. I am all for technology, innovation. I am all for mechanical innovation. I am all for 

engineering innovation. I am all for building a better world through 

innovation. But they ought to take innovation a little bit lightly 

when the idea of innovation in the financial business is to enrich 

the providers rather than enrich the beneficiary. 
70 

Mr. HARE. Thank you, sir. 

Thank you, Mr. Chairman. 

Chairman MILLER. Mr. Scott. 

Mr. SCOTT. Thank you. Thank you, Mr. Chairman. 

Mr. Bogle, you have indicated one of the advantages of the defined contribution plan is it is separated from the financial ups and 

downs of the corporation. Why can’t the employee buy a defined 

benefit and still have the separation? Why can’t that be in a separate set-aside account? 

Mr. BOGLE. I am not sure it is possible, actually, to set up a defined benefit plan individual by individual. You are dealing with 

the overall wage profile, future retirement, the future demands on 

the company’s assets. You are dealing with a pool of assets. I just, 

honestly, I haven’t thought about it, sir. 

Mr. SCOTT. Do you think—— 

Mr. BOGLE. I don’t see how you can have an individual defined 

benefit plan. 

Mr. SCOTT. You could buy as you go an annuity that kicks in 

when you are 65 and buy shares or something in an annuity and 

make the individual calculations. 

Mr. BOGLE. Well, you can do that, of course, sir. But you have 

to realize, particularly in these days of tremors and toxic assets in 

the financial business, that there is no guarantee that annuity provider is going to be there when it comes time for your annuity. So 

I think one has to approach a single person taking a single risk 

very differently than, kind of, collectively dealing with longevity 

risk and investment risk. 

Mr. SCOTT. Well, so—— 

Mr. BAKER. Very quick though, just say I think the public sector 

could have a role there, if you so chose. So you could provide a 

backdrop either to private issuers or to offer it directly. 

Mr. SCOTT. And this goes to Mr. Bogle’s original point. We are 

kind of all in this together. If you take it all together, it is a lot 

cheaper. We kind of share, spread the wealth. And if you had a 

government backup insurance requiring the insurance companies 

to be solvent, so that the government isn’t taking that much risk, 

but we spread that risk, you could end up with a defined benefit, 

which I think a lot of people like. 

You know what you are going to get. The stock market isn’t 

going to up and down. You don’t have to care. 

We heard that, on average, market goes up and down, drops 20 

points on average, we are still okay. Well, that is fine, unless you 

are a couple of years from retirement. If you are 15 years from retirement, you know, up and down 20 percent, actually the lower it 

gets, the cheaper you are buying in. So that works out fine. 

But one of the things that people like about Social Security is 

they know what they are going to get. They don’t have to worry 

about the finances. They don’t have to worry about the company 

going up and down. They know what they are going to get. 

And when we talk about trying to invent this thing right above 

Social Security, again, isn’t there some way where we can take advantage of the fact that we are all together and improve Social Security rather than what they say reform Social Security, which 

means when you get down to it, cut it. You are either going to in-
71 

crease the retirement age, or you are going to reduce the COLA. 

You somehow reduce benefits. Can we improve Social Security so 

that we get a little more rather than trying to reinvent the wheel? 

Mr. BOGLE. My own opinion is that your ideas about improving 

Social Security are the correct ideas. And Social Security, as other 

speakers have said, is indeed the bedrock of our system, a defined 

benefit plan that we all know and love—I think love. 

The reality is that, when you go beyond that and start making 

contributory retirement plans, such as 401(k), the possibility any 

defined contribution plan is going to be limited to a certain portion 

of the population. To pick a number out of the air, I don’t think 

more than half of our U.S. population can add significantly to their 

retirement income with something that goes on in additional to Social Security. 

It is very hard to save money when you are making an inflationadjusted $18,000 a year, which I think is about the number, the 

total of the average income adjusted for 1980 dollars today. You 

know, families just can’t do that or perceive they can’t do it. And 

yet, in that group, unfortunately, according to David Brooks, they 

are spending 13 percent of their income on the lottery. And that 

is not what we want. We don’t want to go there today. 

Chairman MILLER. Mr. Scott, if I might, I hate to—I told the witnesses we would be out of there at 12:30. I have Ms. Woolsey, Mr. 

Kucinich, Ms. Hirono yet to ask questions. And I would like to trim 

everybody down here to 3 minutes, because we are leaving at 

12:30. So you can take 3 minutes or no minutes or whatever you 

want to do. 

Mr. SCOTT. Can I forward a question and not get an answer 

and—— 

Chairman MILLER. Yes. 

Mr. SCOTT [continuing]. Maybe they could respond in writing. 

The present taxation of dividends and capital gains is at a historic 

low. If you put your money into a tax-sheltered account, when you 

pull out the profits, you are paying regular income. Could you 

make some comments about how valuable the tax-deferred accounts are when actually your tax rate on the profits might go up. 

Chairman MILLER. We are going to take those off the air, as they 

say. We will submit those questions to you in writing. If you could 

get back to the committee, I would appreciate that. 

Mr. BOGLE. I would be happy to do that. 

Chairman MILLER. Ms. Woolsey. 

Ms. WOOLSEY. Thank you, Mr. Chairman. 

Chairman MILLER. For 3 minutes. 

Ms. WOOLSEY. Aren’t we glad that Social Security was not 

privatized and invested in the stock market right now. 

Mr. BOGLE. That is an innovation we didn’t need. 

Ms. WOOLSEY. That wasn’t. 

Ms. MUNNELL. Exactly. 

Ms. WOOLSEY. You are absolutely right. But Social Security, to 

me, was intended, from what I understand, to be a floor, a safety 

net that people could count on. But they can’t live on it. Who can 

live on Social Security? And the—who are forced to live on Social 

Security, and look how they have to live. 
72 

So I am sorry that I missed your testimony. Has there been a 

thread among the four of you that is common between all four of 

you that would set us in a better direction, so that we can have 

our Social Security, and then have a life beyond it? 

Ms. MUNNELL. I think there is a general consensus that we need 

to restore balance to Social Security. I would like to think there is 

a general consensus that we shouldn’t cut back on Social Security 

benefits, so that means putting more resources into the program. 

I think where this panel really divides is that can we have 

401(k)s as the only supplement to Social Security? Some people 

think yes. I think absolutely not. Even if we fix them up, make 

them more automatic, we hear all these good things about what a 

success the system has been. But we also have really, really good 

data on how much money people have in these plans. And the Federal Reserve just released a new survey showing that people approaching retirement have $60,000 in these plans. 

Now, the system hasn’t been in forever. But that is not a lot of 

money. And even if you take into account the money that is rolled 

over into IRAs, the figure is only a little bit higher. So there just 

hasn’t been a lot of money in these plans. I don’t think these plans 

are ever going to be adequate. And I think we need more retirement saving, a new system. 

Ms. WOOLSEY. Dr. Baker. 

Mr. BAKER. I would agree with Dr. Munnell that I think we need 

some additional account. And I was arguing the case for having 

some sort of guaranteed benefit that would be offered on a voluntary basis by the government, a contributory account. I was giving $1,000 per worker per year as sort of the target that we would 

be looking to as a modest supplement to Social Security. 

Ms. WOOLSEY. Okay. 

Mr. Stevens. 

Mr. STEVENS. Yes, and just to clarify, we do in fact think that 

the 401(k) system can work to contribute an enormous amount of 

pre-retirement income. And it is absolutely true, as Dr. Munnell 

said, the people that we are talking about today, with that $60,000 

account, or whatever its balance is, have not been in the 401(k) 

system by and large through their working life. That figure also 

doesn’t take into account what other financial resources they may 

have, by the way. 

When we modeled based upon the EBRI/ICI database, which is 

the largest database of actual 401(k) accounts that is subject to research in the United States. And we asked on the basis of normal 

behaviors, not optimal behaviors—— 

Chairman MILLER. Mr. Stevens, we are going to wrap up here. 

We are going to take you—— 

Mr. STEVENS. I will, Mr. Chairman. Normal behaviors over a 

working life, you can get a very substantial replacement of your 

pre-retirement income, which with Social Security, will mean retirement adequacy. 

Chairman MILLER. Ms. Hirono for 3 minutes. 

Ms. HIRONO. Thank you, Mr. Chairman. 

I like the idea that we are going to need another tier besides Social Security and the 401(k)s. And so obviously I like Dr. Baker’s 

idea. And I was curious to know, Ms. Munnell, why you thought 
73 

that this tier that Dr. Baker talked about should be done by the 

private sector, since part of the attraction of what Dr. Baker is suggesting is that there would be a guaranteed return. And would the 

private sector be able to guarantee a return? 

Ms. MUNNELL. I think we would all like to have a guaranteed return. 

Ms. HIRONO. A modest return. 

Ms. MUNNELL. It would be very nice to have 20 percent that you 

knew that you were going to get for sure. The concept of guarantees is very hard. You really need a very high guarantee of return 

to make it worthwhile. If we had had a guaranteed return of 2 or 

3 percent, it would never have kicked in once during the last 84 

years. And so it would not have had any impact. 

To have had any impact, you really need this very huge guaranteed return. And the financial literature says you can’t do it, unless 

you can figure out some way to argue that government has a different set of preferences than individuals. 

So I think guarantees would be wonderful. Risk-sharing of some 

sort, like it may be the Netherlands or in Canada, would be good. 

But I think we need a second tier above Social Security that is substantial, that is reliable, that maybe is not absolutely guaranteed, 

but is more secure than what people have in 401(k) plans. 

Ms. HIRONO. Well, I am not an—but I just don’t think that in 

this environment, that people are looking for a guarantee of a 20 

percent. You know, if you can get a guarantee of—— 

Ms. MUNNELL. No, I was talking six. 

Ms. HIRONO. Six, okay. Or even six, I think that sounds like a 

lot to me. I think there are a lot of employees who would want to 

be able to contribute in a voluntary way to a modest addition to 

their Social Security. These are not the folks that are going to get 

into 401(k)s, et cetera. So, you know, if the major concern you have 

is what is the level of guarantee that will induce people to participate in a voluntary tier program like this, a second tier program, 

then I guess, you know, we can go somewhere with this idea. So 

thank you. 

Chairman MILLER. Mr. Kucinich, 3 minutes. 

Mr. KUCINICH. Thank you. 

I would like to address these remarks to the panelists. But particularly I would be interested to see what Mr. Bogle and Mr. 

Baker would have to say about these observations. 

I heard your testimony. I have re-read it. And with the decline 

in house values, the decline in the value of defined pension plans, 

decline in the value of 401(k)s, workers losing jobs and health care 

benefits connected with that, and with the understanding that we 

have an aging work force, more and more elderly are in—you know, 

the work force is aging more other than work force, and also comprising more of the jobless. 

Are we looking at our baby boomer generation, which is going to 

be driven into poverty unless we come up with some corrections in 

our health care, protecting Social Security and some kind of annual 

benefit that is guaranteed? Mr. Bogle, Mr. Baker. 

Mr. BOGLE. Okay, let me start by saying that I don’t think we 

are looking at a benefits-less, poverty kind of a situation. I know 

that the markets are kind of unusual. When they are going up, we 
74 

think they are going to go up forever. And now that they are going 

down, we think they are going to go down forever. That is not the 

case. 

I mean, value gets created when stocks drop by 55 percent. Dividend yields are higher. Price earnings multiples are lower. The 

ratio of the price of the stock to its tangible book value, all that 

plant and equipment, technology, all those things, get much more 

attractive. 

So having had two great decades for stocks, too great, that was 

the phantom return I talked about in my testimony. And then a 

terrible decade, which should not surprise anybody. I mean, this 

was predictable. I mean, I have speeches I gave at the beginning 

of the—not saying that it was going to be this bad, but saying you 

can be looking for 2 or 3 percent return on stocks. 

Mr. KUCINICH. Mr. Baker, does what goes down must come up? 

Mr. BAKER. Well, it depends what level you are looking at. I 

think in many cases, we were correcting from exaggerated heights. 

Certainly that was the case in housing markets. I wouldn’t make 

any bets on the housing market rising more rapidly than inflation 

over, you know, some time to come. In fact, I hope it would not, 

because I am not in favor of an unaffordable housing policy. 

In terms of the stock market, I think market stock prices are depressed. But the fact is, most of the baby boomer cohort doesn’t 

have very much by way of stock. And they are not going to be able 

to accumulate very much in the years they have left in the work 

force. 

Mr. KUCINICH. Unless we make corrections? Are we looking at a 

lot of baby boomers put in poverty? That is what I am—— 

Mr. BAKER. I would say yes. And in particular, you have a lot 

of people running around this town who want to further cut the 

benefits that baby boomers have in the name of generational equity, which is rather perverse to me. 

Mr. KUCINICH. Okay. 

Thank you, Mr. Chairman. 

Chairman MILLER. Thank you very much. 

Let me again thank the panel for all of your insights here in answering the questions of the members of the committee. I think 

this has been a great kickoff to this continued inquiry on pension 

security by the committee that will be led by Congressman Andrews. 

I would like to, without objection, submit for the record the following documents for this hearing, one by the Investment Company 

Institution on 10 Myths about 401(k)s, a statement for the record 

by Matthew Hutchison, an independent pension fiduciary, a statement from the American Society of Pension Professionals and Actuaries, and a statement from the Profit-Sharing Council of America 

to be included in the record, if there is no objection. Hearing none, 

so ordered. 

[The information follows:] 

10 Myths About 401(k)s—And the Facts 

401(K)S AND THE FINANCIAL CRISIS

MYTH No. 1: Thanks to the financial crisis, Americans are bailing out of their 

401(k) plans. 
75 

FACT: Americans are not abandoning their 401(k)s. 

True, 401(k) accounts have been hard-hit by the broad economic downturn. One 

large recordkeeper reports that the average balance in accounts it administers 

dropped 27 percent in 2008. 

But these losses are not driving Americans out of their 401(k)s. ICI’s study of 22.5 

million defined-contribution (DC) accounts shows that only 3 percent of plan participants had stopped making contributions through October 2008. Only 3.7 percent of 

plan participants had taken withdrawals from their participant-directed retirement 

plans, including 1.2 percent who had taken hardship withdrawals. This level of 

withdrawal activity is in line with past years’ experiences. Recent loan activity is 

also in line with historical experience: in 2008, 15 percent of participants had outstanding loans, compared to 13 to 17 percent with loans in annual studies since 

1996. Most loans tended to be small, amounting in 2007 to 12 percent of the remaining account balance, on average. 

Retirement-saving assets are down—in all forms of accounts—because the stock 

market is down, not because of any fundamental flaw in 401(k)s. In fact, thanks to 

diversification and ongoing contributions, the average account fared better in 2008 

than the S&P 500, which was down 38 percent. 

MYTH No. 2: Americans have lost confidence in the 401(k) system. 

FACT: Americans of all income groups support 401(k)s. 

A comprehensive survey of 3,000 American households, conducted by ICI from October to December 2008, shows that Americans of all income groups support 401(k)s. 

Even among households that don’t currently own DC plans or Individual Retirement 

Accounts, large majorities support the tax incentives for these retirement savings 

plans. More than 80 percent of DC-owning households agreed that the ‘‘immediate 

tax savings from my retirement plan are a big incentive to contribute.’’ More than 

half of the lowest-income households—those making less than $30,000—say they 

probably would not invest for retirement at all if they didn’t have a plan at work. 

MYTH No. 3: 401(k) savers have suffered much greater losses than other retirement 

investors. 

FACT: There is no shelter from the market storm: All retirement plans have seen 

their assets fall. 

All retirement plans—DC plans, defined benefit (DB) plans, state and local government retirement plans, and IRAs—are long-term savings vehicles and invest a 

large share of their assets in equities. Thus, they all have suffered in the market 

turmoil. The latest data available, from the first three quarters of 2008, show that 

the assets of private-sector and state and local government DB plans were down 14 

percent, and IRA assets were down 13 percent. Assets of 401(k) plans fell somewhat 

less, by about 11 percent, and 403(b) plan assets were down 10 percent over the 

first three quarters of 2008. Over the same period, the S&P 500 total return index 

was down 19 percent. 

401(K)S’ ROLE IN RETIREMENT

MYTH No. 4: Before 401(k)s, most workers had defined benefit plans offering guaranteed, risk-free benefits. 

FACT: Defined benefit pensions never were universal or risk-free. 

In 1981, before the creation of 401(k)s, not one in five retirees received any benefits from a private-sector pension. For those who did, their median benefit was 

$6,000 a year in today’s dollars. The golden age of the golden watch never existed. 

MYTH No. 5: DB plans are fairer to workers and would protect them from the 

market turmoil. 

FACT: Today’s lower-income workers get better coverage—and more portable benefits—thanks to DC plans. 

Today, lower-income workers are more likely to be covered by 401(k) or other DC 

plans than by DB plans: 19 percent of working age households earning less than 

$25,000 have a DC plan, versus only 7 percent with a DB plan. For working age 

households earning $25,000 to $34,999, 42 percent have DC plans, versus 17 percent 

with DB plans. 

Although defined benefit plans will and should continue to be an important component of the private-sector retirement plan system, they are not the answer to the 

insecurity created by today’s markets. As noted, DB plan assets have fallen along 

with all other retirement assets. And DB plans expose workers to other forms of 

risk, such as the risk that the sponsor will freeze workers’ benefits (by freezing the 

plan, terminating the plan, or going out of business) or that a worker will lose or 

change jobs without accruing significant DB benefits. For today’s typical worker— 

who will hold seven or more jobs in his or her career—DB plans can be a poor fit. 
76 

401(K)S AND FEES

MYTH No. 6: Participants in 401(k) plans pay exorbitant fees, up to 5 percent of 

assets. 

FACT: The numbers bandied about by critics of the 401(k) system vastly exaggerate the fees that most plans charge. 

In fact, the fees that employers and participants pay are very reasonable. ICI and 

Deloitte Consulting LLP recently compiled a detailed survey of fees paid by 130 

plans of various sizes, and using various recordkeeping models. The survey found 

that the median all-in fee—covering investment, recordkeeping, administration and 

plan sponsor and participant service expenses—was 0.72 percent of total assets in 

2008. In dollar terms, based on the average account size, the median fee per participant was $346 a year. While fees vary across the market, 90 percent of all plans 

surveyed had an all-in fee of 1.72 percent or less. 

Half of all 401(k) assets are invested in mutual funds. ICI research shows that 

401(k) investors concentrate their assets in low-cost mutual funds. The average 

asset-weighted total expense ratio incurred by 401(k) investors in stock mutual 

funds was 0.74 percent in 2007, substantially less than the industry-wide assetweighted average of 0.86 percent. 

MYTH No. 7: The cost of 401(k)s invested in mutual funds is substantially understated because funds don’t disclose trading costs—a hidden and excessive fee. 

FACT: Funds follow SEC rules on disclosing trading costs—and fund managers 

have strong legal and market incentives to minimize those costs. 

All investment products—commingled trusts, separate accounts, exchange-traded 

funds (ETFs), mutual funds, and others—incur both explicit and implicit costs in 

buying, holding, and selling portfolio securities. Brokerage commissions are the 

most obvious and easily calculated trading cost. Other trading costs—market impact 

costs and opportunity costs—cannot be measured as easily or accurately. 

The Investment Advisers Act of 1940 requires all mutual fund managers to seek 

‘‘best execution’’ of trades, a standard that requires close attention to total trading 

costs. Further, trading costs directly affect a fund’s performance—the most important consideration that most investors use to judge funds. So fund managers have 

strong legal and market incentives to minimize these costs. 

The SEC has examined disclosure of trading costs repeatedly and has concluded 

that the portfolio turnover rate, which measures how often a fund ‘‘turns over’’ its 

securities holdings, is the best proxy for trading costs. Recent changes to mutual 

fund disclosure rules make the disclosure of portfolio turnover more prominent in 

fund prospectuses. Mutual funds also make available to investors, including retirement plans, detailed information on their total brokerage commissions and trading 

policies. 

ICI research shows that 401(k) investors in mutual funds tend to own funds with 

low turnover rates. The asset-weighted turnover rate experienced in stock mutual 

funds held in 401(k) accounts was 44 percent in 2007, compared to 51 percent for 

all stock funds. 

MYTH No. 8: The mutual fund industry opposes disclosure of 401(k) fees. 

FACT: Mutual funds have more comprehensive disclosure than any other investment option available in 401(k) plans, and have strongly supported improved disclosure. 

Under the securities laws, mutual funds must and do provide robust disclosure 

of fees and other information of importance to their investors. ICI and its member 

funds have advocated for better disclosure in retirement plans for more than 30 

years. In 1976—at the dawn of the ERISA era and before 401(k) plans even existed—ICI sent a letter to the Department of Labor arguing that participants in participant-directed plans should receive ‘‘complete, up-to-date information about plan 

investment options.’’ ICI has continued to advocate that participants in all plans receive key information—not just on fees, but also including data on investment objectives, risks, and historical performance—for all products offered in 401(k) plans. ICI 

strongly supports the comprehensive fee disclosure agenda the Department of Labor 

is pursuing. 

401(K)S AND SMART INVESTING

MYTH No. 9: Participants should base their choices among investment options in 

their 401(k) plan solely on the options’ fees. 

FACT: Fees are only one factor participants should weigh in meeting their savings 

goals. 
77 

The most important task for a 401(k) participant is to construct a diversified account with an asset allocation appropriate for the participant’s savings goals. Fees 

and expenses are only one piece of necessary information and should always be considered along with other key information, including investment objectives, historical 

performance, and risks. The lowest-fee options in many plans often are those with 

relatively low long-term returns (for example, a money market fund) or higher risk 

(such as employer stock). Most employees will fare poorly if they invest solely in 

these low-fee options without regard to the risks or historical performance. 

Participants must be told that fees are only one factor in making prudent investment decisions—and must be shown the importance of other factors by presenting 

fees in context. For example, any disclosure associated with employer stock also 

should describe the risks of failing to diversify and concentrating retirement assets 

in shares of a single company (especially when that company is also the source of 

an employee’s earned income). 

MYTH No. 10: 401(k) savers should only invest in index funds because they are 

always superior to actively managed funds. 

FACT: Index funds are a good option—but aren’t necessarily a ‘‘one-stop’’ solution. 

Mutual funds were the first to make index investing broadly available to individual investors more than three decades ago, and today there are hundreds of 

index mutual funds available in the market. Index funds are innovative investments 

that are appropriate for many investors in many situations. 

But index funds are not necessarily a ‘‘one-stop’’ solution for retirement investing. 

Index funds vary widely in their choice of index, which leads to widely varying risks 

and returns. No one index fund is right for all investors in all markets. 

Index funds are hardly immune from market downturns. One of the largest indexed investments, the Federal Thrift Savings Plan’s C Fund, which attempts to 

track the S&P 500 index, was down 37 percent in 2008. The TSP’s indexed I Fund, 

which attempts to track the Morgan Stanley Capital International EAFE Index, was 

down 42 percent. 

Actively managed funds, like index funds, can be excellent investments. The returns that investors receive on either kind of fund will depend heavily on the mix 

of actively managed and index funds that is considered, as well as the period over 

which returns are measured. For example, ICI examined the top 10 mutual funds 

(in terms of 401(k) assets) in 1997, which included some actively managed funds 

and some index funds. Over the 10-year period to 2007, an investment made at 

year-end 1997 in those actively managed funds would have earned a higher return 

(6.82 percent, net of fees) than a comparable investment made in the index funds 

(5.83 percent, again net of fees). 

Employers recognize the benefits of both forms of investing when they select 

menus of investment options for 401(k) plans. A survey by the Profit Sharing/401k 

Council of America found that 70 percent of plans offered a domestic equity index 

investment option in 2007. These are decisions properly left to plan sponsors—fiduciaries who are held to ERISA’s stringent standards. 

Prepared Statement of Matthew D. Hutcheson, Independent Pension 

Fiduciary 

FIVE STEPS TO RESTORING TRUST IN THE 401(K) SYSTEM

Introduction 

It is widely accepted that 401(k) and similar arrangements are the way most 

Americans will invest for retirement. Therefore, it is incumbent upon us all to be 

absolutely certain there are no unnecessary obstacles (whether intentional or unintentional) to its long-term success. 

The 401(k) concept is excellent. It has always had great potential, but that potential was sacrificed on Wall Street’s altar of greed, corruption, and the 401(k) industry’s harmful business model. It is not too late for the 401(k), but that will require 

a complete and unequivocal shift in public thinking. In other words, the public— 

including elected representatives, and regulators—must cast off the marketing-induced stupor that has befallen them. 

It is with a deeply felt commitment to the success of our private retirement system that this statement is shared with the Committee. There are reasons the 401(k) 

is failing. If those reasons are understood and acted upon, the 401(k) can be saved. 

This statement will explain those reasons and what is required to correct and restore the viability of the 401(k) for generations to come. If all six of the steps described herein are not implemented, the 401(k) system will be doomed to mediocrity—and, more likely, continuing failure. 
78 

1 Attributed to Dale Carnegie 

2 Chicago-Kent Law Review. ERISA Section 404(c) and investment advice: What is an Employer or Plan Sponsor to do? Stefanie Kastrinsky. Page 3 May 16, 2005. 

Step 1: Elevate stature of 401(k) to the original level contemplated by statute 

‘‘Give a dog a good name and he’ll live up to it.’’ 1

While the 401(k) as a concept is excellent, the way the plan has been interpreted, 

marketed, delivered, implemented and operated is not. The 401(k) is suffering because many people inside and outside of the 401(k) and financial services industry 

view its purpose incorrectly. It is seen as a financial product, not a delicate retirement-incomegenerating system deserving of fiduciary protections and care. 

Many believe that 401(k) plans are nothing more than financial planning or simple savings tools. That is incorrect. 401(k) plans are true retirement plans, with all 

the attendant obligations and implications. They must be viewed and operated as 

such for the system to begin to restore the public trust. 

From a statutory perspective, a 401(k) plan is as much a retirement plan as a 

traditional pension plan. Until the 401(k) plan, and the system that it operates 

within is elevated to the intended stature of a ‘‘pension benefit plan’’ under ERISA 

section 3(3) (which is why 401(k) plans are reported as a pension benefit plan on 

form 5500), society and the 401(k) and financial services industry will continue to 

view the 401(k) as being of ‘‘lesser’’ importance and stature. Behavior and attitudes 

toward the 401(k) will follow accordingly. 

The 401(k) needs a fine reputation to live up to, and that can only happen if all 

Americans begin viewing it not as just another financial product, more like E*Trade 

than ERISA, but as an income-producing mechanism, as correctly stated under 

ERISA, with the ability to financially undergird society as it ages. 

Step 2: Create the right types of safe harbors and incentives 

‘‘Faced with this statutory and regulatory riddle, the Department of Labor 

(‘‘DOL’’) and now, Congress, support various investment advice schemes that allow 

plan sponsors to seek fiduciary relief under ERISA section 404(c). Although these 

schemes have the potential to resolve the ERISA section 404(c) dilemma, their 

structural flaws only create more problems—for example, they allow investment advisors to self-deal and operate despite conflicts of interest. And so the riddle of 

ERISA section 404(c) continues.’’ 2

The conventional 401(k) system is not founded solely upon principles that will 

yield favorable results for participants and beneficiaries. Ironically, there are regulatory incentives to produce mediocre or poor results. Nothing has produced more 

chaos and confusion in the 401(k) system than Department of Labor section 

2550.404c-1, commonly referred to as ‘‘404(c).’’ 404(c) is not just one of many problems with the 401(k) system. It’s the problem. 

We wouldn’t let our loved ones get on an airplane that does not strictly adhere 

to principles of aeronautical science and physics. And we certainly wouldn’t knowingly let our loved ones ride in an airplane with a missing wing or a visibly cracked 

fuselage. That airplane will surely fall short of its destination; and that fact would 

be obvious long before takeoff. Yet we have a system that permits our loved ones 

to do just that with 401(k) plans operating within the meaning of Department of 

Labor regulation 404(c). In many cases, participants merely guess about which 

funds to invest in, and they often guess wrong. It is commonplace for incomplete 

or sub-optimal portfolios to be randomly selected. Without even realizing it, participants choose the wrong funds, or the wrong combination of funds, or the most expensive funds—thereby unnecessarily sacrificing years of potential retirement income. To continue the analogy, they choose a portfolio that is not ‘‘flight-worthy.’’ 

Sadly, they will discover that reality far too late in life, and find that their only option is to work harder and longer—perhaps well into their 70’s or even beyond. 

Section 404(c) was not originally meant for 401(k) plans anyway. It was intended 

for Defined Benefit Plans with after-tax mandatory employee contribution requirements or the precursor to the 401(k)—the Thrift Savings plans that some employers 

sponsored in addition to a traditional Defined Benefit Plan. Since the benefits provided under a traditional Defined Benefit Plan were protected by employer funding 

and the PBGC, it mattered far less if a participant made poor decisions with their 

after-tax mandatory or Thrift Savings account. The number of participants affected 

by 404(c) prior to the creation of the 401(k) is not known—but likely insignificant. 

Perhaps most 401(k) participants today participate in a plan with a section 404(c) 

provision. The drafters of ERISA could not have foreseen how 404(c) would damage 

a system that did not yet exist. ERISA section 404(c) existed prior to the 401(k), 

and its corrosive effects could not have been known. 
79 

3Dave Mastio, ‘‘Lessons our 401(k)s Taught us. How much do Americans know about investing for retirement? What investors don’t know.’’ http://www.hoover.org/publications/ 

policyreview/3552047.html 4 Ibid 

In 1991, final regulations under 404(c) were issued by the Department of Labor 

as a provision that 401(k) plans could utilize. That regulation was ill-conceived. By 

issuing those regulations, the Department of Labor consigned the 401(k) to mediocrity or worse. It should have been clear that 404(c) should be the exception, not the 

rule—as there were pre-existing laws in place that gave participants the right to 

a well diversified, prudent portfolio. 

The application of 404(c) to 401(k) plans opened the floodgates to the chaos in 

speculation and deviation from sound economic and financial principles—placing the 

burden of ‘‘flight-worthiness’’ on the passenger and taking it away from trained professionals at the airline or the FAA, as it were. 

If trust in the 401(k) system is to be restored, the strangle-hold of 404(c) must 

be broken. That will prevent participants from making incorrect decisions based on 

emotion, ignorance, greed, or all of the above. It will place investment decision-making back where it belongs—with prudent fiduciaries. 

If 404(c) is allowed to remain, it should require a beneficiary waiver before a participant may choose to disregard the portfolios put in place by professional fiduciaries because the result will almost certainly be less favorable for both the participant and the beneficiary. If both agree, so be it. However, a prudent portfolio constructed by an investment fiduciary should be the standard established by law, and 

it should be accompanied by a safe harbor. 

Congress should consider clarifying for the courts that complying with 404(c) requires affirmative proof that all of its requirements have been satisfied. That of 

course is impossible, because there is no way to determine whether plan participants are ‘‘informed.’’ It is the ‘‘informed’’ requirement that gives 404(c) legitimacy, 

not the offering of a broad selection of funds. The Courts have missed that point 

entirely. Since it is impossible to know who is truly informed and who is not, even 

after extensive efforts to provide investor education, 404(c) is simply not viable in 

a system where the overwhelming population of American workers persists in its 

failure to grasp the elementary differences between a stock and a bond.3 Again, 

404(c) could perhaps be the exception, but it is a mistake of massive proportions to 

have permitted it to become the rule. 

‘‘Many Americans, alas, know little about stocks, bonds, and retirement. This is 

the conclusion reached by none other than the companies and organizations that 

would benefit most from a system of private accounts. The Vanguard Group, the National Association of Securities Dealers, the Securities Industry Association, the Investment Protection Trust, Merrill Lynch, Money magazine, and the Securities and 

Exchange Commission have all done studies or issued reports that reach the same 

general conclusion. To make matters worse, much of the research over the past five 

years has focused on the knowledge of individuals who already own stock and are 

thus presumably more familiar with the workings of financial markets; the research 

has still found severe financial illiteracy.’’ 4

Beyond the requirement that participants be ‘‘informed,’’ virtually everyone in the 

401(k) industry knows that only a tiny fraction of any plan actually complies with 

the long list of requirements. Section 404(c) is a waste of time, money, and it is also 

the cause of many billions of dollars wasted each year that otherwise would have 

been legitimately earned by professionally constructed and managed portfolios. 

When employers see a safer route (less fiduciary risk) that also has the promise of 

better results, the system will begin to heal and public trust will be restored. 

An employer that sponsors a 401(k) plan should be assured by a clear, unequivocal statutory safe harbor for appointing a professional independent fiduciary, acting 

pursuant to sections 3(21) or 3(38) of ERISA, or both. That will do more to protect 

the plan sponsor from fiduciary risk than anything else, and it is consistent with 

the duty of loyalty in a way that participants do not currently enjoy. Such a safe 

harbor would reduce or eliminate conflicts of interest. Results would improve 

through professional application of sound economic and financial principles. No 

longer would America’s employers have to wear two hats and grapple with divided 

loyalties to their shareholders and their 401(k) plan participants. Such a safe harbor 

would restore order to the system. 

Creating better safe harbors and other incentives that give plan sponsors confidence and a sense of security for having done the right thing the right way will 

wean the 401(k) from concepts that have only confused and frustrated an otherwise 

excellent program with potential for long-term success. 
80 

5 ‘‘Investment Risk vs. Unprincipled Speculation’’ Journal of Pension Benefits (c)Wolters 

Kluwer Law and Business. Volume 16, Number 2, Winter 2009. Page 76. 

Step 3: Participants have a right to know the expected return of their portfolio 

‘‘If [investment] returns could not be expected from the investment of scarce capital, all investment would immediately cease, and corporations would no longer be 

able to produce their sellable goods and services. The truth is that we invest, not 

with an eye to making speculative gains, but because we have an expectation of a 

specific return over time.’’ 5

Every week, thousands of enrollment meetings are held in the lunch-rooms of corporate America. Those enrollment meetings seek to explain to participants why they 

should enroll in their company’s 401(k), and which investment options are available 

to them. 

That is fine, with one exception. Most of the paperwork and enrollment materials 

will provide participants with useless information about the type of investor they 

are. Participants will take a 5 minute quiz, and that quiz will tell the participant 

that they are a ‘‘conservative’’ investor, or a ‘‘moderate’’ investor, or perhaps an ‘‘aggressive’’ investor. Perhaps a particular list of funds with suggested ratios for which 

to allocate new contribution dollars will be associated with each investor type. 

There are two fundamental flaws with that approach. 

First, whether a participant has a conservative or an aggressive investor profile 

is dependent on emotion; how much market volatility they can stomach. A participant’s tolerance for market turbulence is not static. It can change day-to-day. For 

example, if a participant with an aggressive profile gets in a car accident, their profile may immediately switch to conservative. That is an emotional profile that does 

not tie well to the economics of prudent, long-term investing. 

Second, the emotion of identifying an investor profile does not help the participant 

understand the interplay between new funding (ongoing contributions/deposits to 

the plan) and future retirement income streams that can be expected (not to be misunderstood as ‘‘guaranteed.’’) 

Therefore, the most important thing a participant needs to know is not their emotionally determined ability to endure market turbulence, but rather the long-term 

economic output of the participant’s portfolio. This is called the ‘‘expected return.’’ 

Knowing that, a participant cannot truly understand how much money they should 

be contributing to the plan, when coupled with any employer generosity, if any, to 

achieve a future income-replacement goal. 

The expected return is the most fundamental concept of investing because if those 

with capital to invest could not expect a return, that capital would be invested elsewhere—or not at all. The concept of expected return is perplexingly absent in the 

current 401(k) system and is not understood by participants or fiduciaries. That 

misunderstanding can easily be corrected. 

It should be mandated by law that all participants be told what the expected return is for the actual portfolio they are in. That way, the one thing that participants 

can control—the amount they contribute to the plan—is a decision made in light of 

the expected return of the portfolio they will invest in so their decision is both informed and founded upon a process that is likely to yield favorable results. 

Participants may not be able to afford what they wish they could contribute based 

on the expected return of their portfolio. For example their portfolio may have an 

expected return of 5%, and to comfortably retire they may learn that they will need 

to contribute twice as much as they can afford in order to get there. That is an understood reality of life that many face each day when purchasing goods and services. 

However, participants should at a minimum know the economic characteristics of 

their portfolio so they can choose to get more education in order to earn more, work 

longer, spend less on other things, or a combination thereof. 

Consider how different things would be if we stopped inducing emotional decisions 

in participants and began given them solid, reliable information based on modern 

principles of economics and finance. 

Step 4: Transparency 

Our retirement savings system and its participants deserve protection. The bedrock of any mechanism as delicate as the 401(k) should be clarity and transparency. 

The debate over whether the cost of a 401(k) plan is reasonable is pointless without standardized transparency. Can something be determined reasonable if it cannot first be seen and understood in a comparative context? 

In the case of plans with known economic impact to participants, perhaps all fees 

and costs are deemed reasonable when compared to the industry as a whole, yet 

simultaneously excessive in light of the quality or value of services rendered to a 

specific plan. In other words, all 401(k) plans could eventually have fees that some-
81 

6See 9th Meigs question for further explanation about the relationship between ‘‘reasonable’’ 

and ‘‘excessive’’ fees and expenses. http://www.401khelpcenter.com/401k/meigs—mdh—interview.html 7See ‘‘Gross-to-Net’’ proposed fee and expense disclosure reporting grid. http://www.dol.gov/ 

ebsa/pdf/IF408b2.pdf. See also http://advisor.morningstar.com/articles/article.asp?s=0&docId=15714&pgNo=2 

one deems reasonable, but those same fees may be genuinely excessive at the same 

time—therefore it is not an either-or scenario.6 That conundrum cannot be resolved 

in an environment of opacity. Given the seriousness of the crisis we face, where an estimated $1 trillion in 

401(k) assets has been lost in the past few months, we cannot accept anything less 

than full and absolute transparency—even if fees and other charges become very 

low by today’s standard. In other words, there may come a time when fees are reasonable, non-excessive, and absolutely transparent. It is in times such as those, 

transparency will be no less important or necessary for the purpose of protecting 

trust in the system. 

Passage of HR 3185 or a fundamentally similar Bill will begin the process of restoring broken trust. Distilling disclosure of expenses into an understandable format 

will deliver value to participants, beneficiaries, and employers. The gross-to-net 

methodology, which means clearly showing gross returns on the investments in a 

401(k) account and also showing the net returns that the participant gets to keep, 

makes the most sense. It reveals total investment returns, the net return to each 

participant, and by simple subtraction, the actual costs of delivering those net returns to each participant.7 Any other method obscures both returns and costs from 

the view of the participants, plan sponsors, and regulators alike. Gross-to-net disclosure establishes true transparency, a pre-requisite to restoring trust in the 401(k). 

Transparency should also be required for new financial products that are developed in the future, such as fund-of-funds, lifestyle, and target date funds. Some of 

those may be well constructed. Some of them are not. Transparency is required to 

ensure fiduciaries and plan participants understand the difference. 

Step 5: Retire-ability measurements 

As stated earlier, the 401(k) has not been managed to produce future retirement 

income. Rather, it has been managed like merely another of an array of ordinary 

financial products. Thus, the ability of conventional 401(k) plans to produce financially secure retirees is not a primary discussion item of fiduciaries and committee 

members in their meetings. 

Many factors go into creating a successful program, each having differing importance and weight at different stages of a participant’s progression from entry into 

the workforce to retirement. Also, participants at different ages are affected differently by plan provisions or economic conditions. 

For example, younger participants with smaller account balances are most affected by matching or other employer contributions. Older participants with larger 

account balances are most impacted by fees and other charges. Employers and fiduciaries must understand what helps participants, what hurts them, and when those 

effects are most likely. 

If 401(k) plans are to thrive, employers and fiduciary committees must engage in 

regular proactive and thoughtful assessments of the ‘‘retire-ability’’ qualities of their 

plan, while taking into account the demographics of the plan participants as a 

whole. 

Society requires more that ever a more astute body of fiduciaries who understand 

that improved future retirement income for individuals also enables an improved future economy for all. Higher retirement incomes can help stabilize the economy, sustain tax revenues necessary to deliver essential government services and provide 

economic opportunity for the rising generation. 

Employers must not fear the question, and then answer honestly, ‘‘Will our employees be able to retire at their chosen time? If not, what can we do to improve 

their chances?’’ 

Summary 

1 Return to Roots—Congress can make it unequivocally clear that plan sponsors 

need to understand 401(k) plans must not as mere financial planning tools, but 

rather the a pension benefit mechanism that produces retirement income that will 

be the financial undergirding mechanism of society. 

2 Safe Harbors & Incentives—Congress can create meaningful safe harbors and 

incentives that give employers confidence to proceed in managing their 401(k) plans 

in accordance with modern principles of economics and finance—thus improving results. Congress can remove or suppress harmful elements of the conventional sys-
82 

tem, such as Department of Labor regulation 404(c). That regulation, 404(c), is the 

lead in the paint, the salmonella in the peanuts, the goose in the jet engine of the 

retirement system. Fix it, and you will fix the root cause of the problems that 

plague the 401(k). 

3 Expected Returns—Congress can require that participants be given the expected 

return (economic characteristic) of the portfolio in which their funds are invested. 

Unlike knowing the expected return of a portfolio, the emotional risk profile most 

401(k) participants are given to help them choose investments is not useful in calculating future retirement income nor is it helpful in making appropriate portfolio 

changes. The expected return is already required by case law to be known and understood by fiduciaries. That same information should also be made known to participants. 

4 Pass HR 3185—Congress can pass HR 3185 or its fundamental equivalent to 

clarify plan expenses by a simple gross-to-net calculation in order to help employers 

and plan participants make better decisions, and also to restore trust and confidence 

in the system. No system as important as the 401(k) should have any lingering 

questions about fee or expense transparency. Thus, the passage of HR 3185 or its 

equivalent is at a minimum, urgent. 

5 Retire-Ability Measures—Congress can encourage employers to look beyond the 

robotic fund selecting process that has become synonymous with being a 401(k) committee member and to look more deeply at how their plans are designed to produce 

financially secure retirees. And participants can be provided tools to assess their 

projected retirement dates and expected income levels. 

Conclusion 

There are problems with how the 401(k) has been delivered; that goes without 

saying. That does not mean we need to accept what has not worked and protect the 

status quo. No one is suggesting that employers guarantee benefits. It is proposed, 

rather, that 401(k) plans be managed like the retirement-income-producing mechanism they were always intended to be. It is because the benefits delivered by a 

401(k) are not guaranteed that we should demonstrate particular care and compassion. Participants are entirely vulnerable, and deserve better protections. Protecting 

the interests of participants will require a sweeping shift in thinking toward a system that enables (1) A fiduciary level of care; (2) Improved safe harbors and incentives; (3) Disclosure of expected investment returns; (4) Transparency via actual 

gross-to-net disclosure; and (5) Measurements of each participant’s ability to retire 

at targeted dates and income levels. The benefits of these five reforms to the 401(k) 

system will reach more than fifty million working Americans. Without this shift in 

thinking and behavior, including abandoning the misused 404(c) provisions, the 

401(k) will fail to deliver on its original promise. There is hope for the 401(k) to 

rebuild savings and regain the trust of American workers, but it must be operated 

as ERISA originally contemplated; like a ‘‘pension benefit’’ plan. 
83 
84 
85 
86 
87 
88 

Prepared Statement of the Profit Sharing/401k Council of America (PSCA) 

The Profit Sharing / 401k Council of America (PSCA), commends Chairman Miller 

for convening a series of hearing to examine the employer provided retirement plan 

system. PSCA, a national non-profit association of 1,200 companies and their six 

million employees, advocates increased retirement security through profit sharing, 

401(k), and related defined contribution programs to federal policymakers. It makes 

practical assistance available to its members on profit sharing and 401(k) plan design, administration, investment, compliance, and communication issues. Established in 1947, PSCA is based on the principle that defined contribution partnership 

in the workplace fits today’s reality. PSCA’s services are tailored to meet the needs 

of both large and small companies, with members ranging in size from Fortune 100 

firms to small entrepreneurial businesses. 
89 

The market crisis must be addressed 

401(k) plan participants, working in partnership with employers, can successfully 

manage normal market risks and cycles and accumulate ample assets for retirement. However, they cannot succeed without efficient and transparent capital markets. 

The drop in 401(k) account balances in 2008 was not caused by a defect in the 

401(k) system or by ignorant participants. These plans are caught in the same financial crisis that has paralyzed business and financial organizations throughout 

the world. 401(k) participants have suffered along with everyone else. Inadequate 

enforcement, misguided policy, reckless conduct, and unethical behavior in the capital markets are the problem, not 401(k) plans. We urge the Committee, and Congress, to direct their efforts to ensuring that a similar market collapse never again 

occurs. 401(k) participants, as well as all other investors, will then be able to move 

confidently forward, knowing that saving and investing for the long term will pay 

off as expected. 

The Department of Labor reports that in 2006, the latest year available, participants and employers contributed over $250 billion to 401(k) type plans. The plans 

continue to improve, benefitting from a regulatory structure that permits flexible 

plan design and innovation. Automatic enrollment and target date funds were rare 

five years ago, but they are quickly becoming dominant plan design features. PSCA 

urges Congress to fix the markets and continue to work together with plan sponsors 

and providers to continually improve the very successful 401(k) system 

Contrary to several published reports, real current data indicates that 401(k) participants are remaining resolute. They are not stopping contributions or increasing 

their loan activity. Hardship withdrawals have increased slightly, but the percentage of participants taking a hardship distribution remains well below two percent.1

Defined contribution plans work for employees, employers, and America 

Employers offer either a defined benefit or defined contribution, and sometimes 

both types, of retirement plan to their workers, depending on their own business 

needs. According to the Investment Company Institute, Americans held $15.9 trillion in retirement assets as of September 30, 2008, the latest available date.2 On 

June 30, 2008, retirement assets totaled $16.9 trillion and they were $18 trillion on 

September 30, 2007. Government plans held $3.9 trillion. Private sector defined 

benefit plans held $2.3 trillion. Defined contribution plans held $4.0 trillion in employment based defined contribution plans, including $2.7 trillion in 401(k) plans, 

and $4.1 trillion in IRAs. Employer-based savings are the source of half of IRA assets. Ninety-five percent of new IRA contributions are rollovers, overwhelmingly 

from employer plans. Annuities held $1.5 trillion. 

There are questions about the ability of the defined contribution system to 

produce adequate savings as it becomes the dominant form of employer provided retirement plan. Some claim America is facing a retirement savings crisis. To answer 

this question, a baseline for comparison is required. The Congressional Research 

Service reports that in 2007, 22.8% of individuals age 65 and older received any income from a private sector retirement plan. The median annual income from this 

source was $7,200.3 This income stream represents a lump-sum value of $90,000, 

assuming the purchase of a single-life annuity at an 8% discount rate. Individuals 

age 65-69 had higher median annual income from a private sector retirement plan, 

$9,700 ($121,250 lump sum value), but only 19.6% of those age 65 or older received 

any income from this source. Overall, however, the elderly are not impoverished. In 

2007, 9.7% of Americans 65 and older had family incomes below the federal poverty 

rate, the lowest rate for any population group. How will the next generation of retirees fare compared to current retirees? 

We hear about a negative savings rate in America, with some noting that Americans are saving less now than during the Great Depression. Intuitively, something 

must be wrong with this statistic as the total amount set aside for retirement has 

almost tripled in 12 years.4 A 2005 analysis by the Center for Retirement Research 

sheds considerable light on the matter. They discovered that the NIPA (National Income and Products Account) personal savings rate for the working-age population 

was significantly higher than the overall rate, which was then 1.8%. Working-age 

Americans were saving 4.4% of income, consisting almost exclusively of savings in 

employment-based plans. This does not include business savings, which, of course, 

are owned by individuals. Those 65 and older were ‘‘dissaving’’ at negative 12% because they were spending their retirement assets, which are not considered income. 

The report accurately predicted that, as baby-boomers begin to retire, they will consume more than their income and the savings rate as currently defined would go 

even lower.5
90 

A recent paper from the AARP Public Policy Institute includes the following finding: 

‘‘While the personal saving rate has declined steadily for the past 20 years, aggregate household net worth, including pension, 401(k), IRA, and housing wealth have 

increased dramatically. As an indicator of the adequacy of retirement assets, the 

personal savings rate, despite being cited regularly in the media, is not very useful 

because it excludes capital gains, which are far more important to changes in net 

worth than annual personal saving. The change in household net worth, and not the 

saving rate, should be used to indicate changes in retirement preparation.’’ 6

The Congressional Research Service reports that married households in which the 

head or spouse was employed and the head was age 45-54 held median retirement 

account assets of $103,200 in 2004. Similar unmarried households held $32,000. An 

identical married household headed by an individual age 55 and older held median 

retirement account assets of $119,500 in 2004.7

While some workers have enjoyed a full working career under a defined contribution plan such a as profit sharing plan, 401(k)-type plans in which the employee decides how much to save have existed for only slightly over twenty years, and most 

participants have participated in them for a much shorter period of time. The typical participant in 2000 had only participated in the plan for a little over seven 

years.8 Policymakers must be wary of statistics citing average 401(k) balances and 

balances of those approaching retirement because they have not saved over their 

full working career and some balances belong to brand new participants. For example, a recent Investment Company Institute report stated that at the end of 2006, 

the average 401(k) balance was $61,346 and the median balance was $18,986.9 The 

median age of the participants in the study was 44 and the median tenure in their 

current 401(k) plan was eight years. But when the study looked at individuals who 

were active participants in a 401(k) plan from 1999 to 2006 (including one of the 

worst bear markets since the Depression) the average 401(k) balance at the end of 

2006 was $121,202 and the median balance was $66,650. Long-tenured (30 years 

with the same employer) individuals in their sixties who participated in a 401(k) 

plan during the 1999-2006 period had an average account balance of $193,701 at 

the end of 2006. The study does not reflect that many individuals and households 

have multiple 401(k)-type accounts or assets rolled over into an IRA. 

In their April 2007 paper, The Rise of 401(k) Plans, Lifetime Earnings, and 

Wealth at Retirement, James Poterba, Steven Venti, and David A. Wise reported 

the following: 

‘‘Our projections suggest that the average (over all persons) present value of real DB benefits at age 65 achieved a maximum in 2003, when this value was $72,637 

(in year 2000 dollars), and then began to decline. The projections also suggest that 

by 2010 the average level of 401(k) assets at age 65 will exceed the average present 

value of DB benefits at age 65. Thereafter the value of 401(k) assets grows rapidly, 

attaining levels much greater than the historical maximum present value of DB 

benefits. If equity returns between 2006 and 2040 are comparable to those observed 

historically, by 2040 average projected 401(k) assets of all persons age 65 will be 

over six times larger than the maximum level of DB benefits for a 65 year old 

achieved in 2003 (in year 2000 dollars). 

Even if equity returns average 300 basis points below their historical value, we 

project that average 401(k) assets in 2040 would be 3.7 times as large as the value 

of DB benefits in 2003. These analyses consider changes in the aggregate level of 

pension assets. Although the projections indicate that the average level of retirement assets will grow very substantially over the next three or four decades, it is 

also clear that the accumulation of assets in 401(k)-like plans will vary across 

households. Whether a person has a 401(k) plan is strongly related to income. Lowincome employees are much less likely than higher-income employees to be covered 

by a 401(k) or similar type of tax-deferred personal account plan.’’ 

The Congressional Research Service estimates that a married household that contributes ten percent of earnings to a retirement plan for 30 years will be able to 

replace fifty-three percent of pre-retirement income. If they save for forty years, 

they will replace ninety-two percent of income.10 A ten percent savings rate is realistic given average contribution rates of seven percent and average employer contributions of three percent. These estimates do not consider Social Security payments 

The lesson is clear—long-term participation in a 401(k) plan will result in the accumulation of assets adequate to provide a secure retirement. 

These statistics mean little if a worker is not saving for retirement. One fact is 

abundantly clear—whether a worker saves for retirement is overwhelmingly determined by whether or not a worker is offered a retirement plan at work. In 2008, 

sixty-one percent of private sector workers had access to a retirement plan at work 
91 

and fifty-one percent participated. Seventy-one percent of full-time workers had access and sixty percent participated. Seventy-nine percent of workers in establishments employing 100 or more workers had access and sixty-seven percent participated. Only forty-five percent of workers in establishments of less than 100 workers 

had access to a plan and thirty-seven percent participated, but for establishments 

with between 50 and 100 workers, fifty-eight percent had access and 45 percent participated.11 These participation rates are at a single point in time. They are not indicative of whether or not a non-participant or their household will choose to participate in a 401(k) plan for a substantial period of a working career. 

DB and DC plans—understanding the risks and rewards 

Defined benefit plans and defined contribution plans are very different, and each 

plan has strengths and weaknesses. A traditional defined benefit plan pays a benefit 

at retirement that is based on a formula that considers years of service and compensation, (usually compensation in the last few years of employment). The employer assumes the investment risk for funding the plan and, accordingly, benefits 

from high investment returns. 

In a defined contribution plan, the employer commits to a certain contribution 

level and the employee is impacted by investment gains and losses. Proper investment strategies, such as diversification and age-based asset allocations, can greatly 

reduce investment risk. Target date funds and managed accounts permit a participant to delegate these actions to experts. A risk-averse participant can usually invest in a very conservative, but low-yielding investment. All DC plan participants 

can independently annuitize their retirement assets if they wish to do so. 

Many observers view the different impact of investment risk to claim, incorrectly, 

that DB plans are risk-free. DB plans are ‘‘back-loaded’’—the final benefit is strongly determined by earnings in the final years of employment and years of service. 

Older employees and long-term employees benefit most under a DB plan. Individuals who are involuntarily separated, and those who leave voluntarily, loose a major 

portion of their future benefit. Traditional DB plans are not portable to a new employer. A second major risk is that the employer will decide to terminate the plan. 

In both cases, the employee is left only with their accrued vested benefit, usually 

payable many years in the future. If the sponsoring employer becomes bankrupt, 

benefits may be further reduced to the PBGC guaranty level. Some defined benefit 

plans limit payments to a fixed annual amount, resulting in default and inflation 

risk. Finally, a DB plan benefit ends when the participant (or perhaps a spouse) 

dies. Those who die early subsidize long-lived participants and there is no opportunity to pass on wealth. 

Both types of plans have risks for participants. The primary difference is that in 

the DC plan system the individual can take responsibility for managing risk. In DB 

plans, most of the risk is beyond the control of the individual. 

Opportunities for improvement 

What does all these data tell us? First, the employer provided defined contribution 

system has demonstrated that it can provide asset accumulation adequate for a secure retirement for participants at all income levels. The participation rate when 

offered a plan is encouraging, but can be improved. There are two areas in which 

to concentrate our efforts—lower-paid workers and small business plan coverage. 

We also need to increase participation by African-Americans and some ethnic 

groups, as revealed by some recent studies. Small business owners need simplicity 

and meaningful benefits for themselves to compensate for the costs of providing a 

plan to their workers. 

The growth of automatic enrollment plans will substantially increase retirement 

plan participation by lower and middle-income workers that are most likely to be 

induced to save by this type of plan design. Ninety percent of workers that are automatically enrolled choose not to opt out of the plan.12 A 2005 ICI/EBRI study 

projects that a lowest quartile worker reaching age 65 between 2030 and 2039 who 

participates in an automatic enrollment program with a 6% salary deferral (with no 

regard for an employer match) and investment in a life-cycle fund will have 401(k) 

assets adequate for 52% income replacement at retirement, not including social security that provides another 52% income replacement under today’s structure.13

The important automatic enrollment provisions in the Pension Protection Act are 

already producing results. In the latest PSCA survey of 2006 plan year experience, 

35.6% of plans have automatic enrollment, compared to 23.6% in 2006, 16.9% in 

2005, 10.5% in 2004, and 8.4% in 2003. 53.2% of plans with 5,000 or more participants reported utilizing automatic enrollment in our survey. A Hewitt survey indicated that 36% of respondents offered automatic enrollment in 2007, up from 24% 

in 2006. Fifty-five percent of the other respondents are ‘‘very likely or somewhat 
92 

likely’’ to offer automatic enrollment in 2007.14 More than 300 Vanguard plans had 

adopted automatic enrollment by year-end 2007, triple the number of plans that had 

the feature in 2005. Large plans have been more likely to implement automatic enrollment designs. In 2007, Vanguard plans with automatic enrollment accounted for 

15% of plans but one-third of total participants. In the aftermath of the PPA, twothirds of automatic enrollment plans have implemented automatic annual savings 

rate increases, up from just one-third in 2005.15

401(k) fees in the erisa framework 

Numerous aspects of ERISA (the Employee Retirement Income Security Act of 

1974) safeguard participants’ interests and 401(k) assets. Plan assets must generally be held in a trust that is separate from the employer’s assets. The fiduciary 

of the trust (normally the employer or committee within the employer) must operate 

the trust for the exclusive purpose of providing benefits to participants and their 

beneficiaries and defraying reasonable expenses of administering the plan. In other 

words, the fiduciary has a duty under ERISA to ensure that any expenses of operating the plan, to the extent they are paid with plan assets, are reasonable. 

To comply with ERISA, plan administrators must ensure that the price of services 

is reasonable at the time the plan contracts for the services and over time. For example, asset-based fees should be monitored as plan assets grow to ensure that fee 

levels continue to be reasonable for services with relatively fixed costs such as plan 

administration and per-participant recordkeeping. The plan administrator should be 

fully informed of all the services included in a bundled arrangement to make this 

assessment. 

Many plan administrators prefer reviewing costs in an aggregate or ‘‘bundled’’ 

manner. As long as they are fully informed of the services being provided, they can 

compare and evaluate whether the overall fees are reasonable without being required to analyze each fee on an itemized basis. For example, if a person buys a 

car, they don’t need to know the price of the engine if it were sold separately. They 

do need to know the horsepower and warranty. Small business in particular may 

prefer the simplicity of a bundled fee arrangement. 

It is important to understand the realities of fees in 401(k) plans. There are significant recordkeeping, administrative, and compliance costs related to an employer 

provided plan that do not exist for individual retail investors. Nevertheless, because 

of economies of scale and the fiduciary’s role in selecting investments and monitoring fees, the vast majority of participants in ERISA plans have access to capital 

markets at lower cost through their plans than the participants could obtain in the 

retail markets. 

The Investment Company Institute reports that the average overall investment 

fee for stock mutual funds is 1.5% and that 401(k) investors pay half that amount.16

The level of fees paid among all ERISA plan participants will vary considerably, 

however, based on variables that include plan size (in dollars invested and/or number of participants), average participant account balances, asset mix, and the types 

of investments and the level of services being provided. Larger, older plans typically 

experience the lowest cost. Employer provided plans are often the only avenue of 

mutual fund investment available to lower-paid individuals who have great difficulty accumulating the minimum amounts necessary to begin investing in a mutual fund or to make subsequent investments. Finally, to the degree an employer 

provides a matching contribution, and most plans do, the plan participant is receiving an extraordinarily high rate of return on their investment that a retail product 

does not provide. 

A study by CEM Benchmarking Inc. of 88 US defined contribution plans with 

total assets of $512 billion (ranging from $4 million to over $10 billion per plan) and 

8.3 million participants (ranging from fewer than 1,000 to over 100,000 per plan) 

found that total costs ranged from 6 to 154 basis points (bps) or 0.06 to 1.54 percent 

of plan assets in 2005. Total costs varied with overall plan size. Plans with assets 

in excess of $10 billion averaged 28 bps while plans between $0.5 billion and $2.0 

billion averaged 52 bps. In a separate analysis conducted for PSCA, CEM reported 

that, in 2005, its private sector corporate plans had total average costs of 33.4 bps 

and median costs of 29.8 bps. 

Other surveys have found similar costs. HR Investment Consultants is a consulting firm providing a wide range of services to employers offering participant-directed retirement plans. It publishes the 401(k) Averages Book that contains plan 

fee benchmarking data. The 2008 Ninth Edition of the book reveals that average 

total plan costs ranged from 161 bps for plans with 25 participants to 96 bps for 

plans with 5,000 participants. The Committee on the Investment of Employee Benefit Assets (CEIBA), whose more than 120 members manage $1.5 trillion in defined 

benefit and defined contribution plan assets on behalf of 16 million (defined benefit 
93 

and defined contribution) plan participants and beneficiaries, found in a 2005 survey of members that plan costs paid by defined contribution plan participants averaged 29 bps. 

Principles of reform 

PSCA supports effective and efficient disclosure efforts. The following principles 

should be embodied in any effort to enhance fee disclosure in employer-provided retirement plans. 

• Sponsors and Participants’ Information Needs Are Markedly Different. Any new 

disclosure regime must recognize that plan sponsors (employers) and plan participants (employees) have markedly different disclosure needs. 

• Overloading Participants with Unduly Detailed Information Can Be Counterproductive. Overly detailed and voluminous information may impair rather than enhance a participant’s decision-making. 

• New Disclosure Requirements Will Carry Costs for Participants and So Must 

Be Fully Justified. Participants will likely bear the costs of any new disclosure requirements so such new requirements must be justified in terms of providing a material benefit to plan participants’ participation and investment decisions. 

• New Disclosure Requirements Should Not Require the Disclosure of Component 

Costs That Are Costly to Determine, Largely Arbitrary, and Unnecessary to Determine Overall Fee Reasonableness. Bundled service providers should disclose the included services in detail. However, a requirement to ‘‘unbundle’’ bundled services 

and provide individual costs in many detailed categories would be arbitrary and is 

not particularly helpful and would lead to information that is not meaningful. It 

also raises significant concerns as to how a service provider would disclose component costs for services if they were not offered outside a bundled contract. These 

costs will ultimately be passed on to plan participants through higher administrative fees. The increased burden for small businesses could inhibit new plan growth. 

• Information About Fees Must Be Provided Along with Other Information Participants Need to Make Sound Investment Decisions. Participants need to know 

about fees and other costs associated with investing in the plan, but not in isolation. 

Fee information should appear in context with other key facts that participants 

should consider in making sound investment decisions. These facts include each 

plan investment option’s historical performance, relative risks, investment objectives, and the identity of its adviser or manager. 

• Disclosure Should Facilitate Comparison But Sponsors Need Flexibility Regarding Format. Disclosure should facilitate comparison among investment options, although employers should retain flexibility as to the appropriate format for workers. 

• Participants Should Receive Information at Enrollment and Have Ongoing Access. Participants should receive fee and other key investment option information 

at enrollment and be informed periodically about fees. 

HR 3185 

PSCA supports legislation that will effectively improve fee transparency for sponsors and participants. HR 3185, as reported by the Committee on April 16, 2008, 

reflects many of our principles and is a significant improvement over the original 

legislation. In addition to numerous minor adjustments to ensure that HR 3185 reflects the complexity of the retirement plan system, PSCA recommends three key 

changes. First, the legislation needs to include a ‘‘matching proposal’’ that specifies 

that the fiduciary duty to determine that fees are reasonable is limited in scope to 

the fees required to be disclosed under the legislation. The Committee agreed to examine this issue when Representative Kline offered and withdrew an implementing 

amendment during the 2008 mark-up. Second, Congress should abandon the 

‘‘unbundling’ requirement in the bill and permit both models to compete in the marketplace. Bundled providers should provide a detailed description of the services 

they offer so that plan fiduciaries can determine that the aggregate fee is reasonable. Finally, the index fund requirement in the revised bill remains problematic. 

ENDNOTES

1Fidelity Reports on 2008 Trends in 401(k) Plans, Fidelity Investments, January 28, 2009, 

and Update on Participant Activity Amid Market Volatility, Vanguard Center for Retirement 

Research, February 19, 2009. 2The U.S. Retirement Market, Third Quarter 2008, Investment Company Institute, February 

2009. 3 Income and Poverty Among Older Americans in 2007, Congressional Research Service, October 3, 2008. 4The U.S. Retirement Market, Second Quarter 2008, Investment Company Institute, December 2008. 
94 

5 How Much are Workers Saving?, Alicia Munnell, Francesca Golub-Sass, and Andrew Varani, 

Center for Retirement Research at Boston College, October 2005. 6 A New Perspective on ‘‘Saving’’ for Retirement, AARP Public Policy Institute, February 2009. 

7 Retirement Savings: How Much Will Workers Have When They Retire?, CRS Report For 

Congress, January 29, 2007. 8 Rise of 401(k) Plans, Lifetime Earnings and Wealth at Retirement, James Poterba, Steven 

F. Venti, and David A. Wise, NBER Working Paper 13091, May 2007. 9 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2006, Investment Company Institute, August, 2007. 10 Retirement Savings: How Much Will Workers Have When They Retire?, CRS Report For 

Congress, January 29, 2007. 11 Employee Benefits in the United States, March 2008, Bureau of Labor Statistics, August 

7, 2008. 12 Hewitt Study Reveals Impact of Automatic Enrollment on Employees’ Retirement Savings 

Habits, Hewitt Associates, October 25, 2006. 13The Influence of Automatic Enrollment, Catch-Up, and IRA Contributions on 401(k) Accumulations at Retirement, EBRI Issue Brief no. 238, July 2005. 14Survey Findings: Hot Topics in Retirement 2007, Hewitt Associates 15 How America Saves 2008, Vanguard 16The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2006, Investment 

Company Institute, September 2007. 

Ms. MUNNELL. Mr. Chairman, could I also ask that an article 

that we had on guarantees be included. 

Chairman MILLER. It is on the level? 

Ms. MUNNELL. Yes. 

Chairman MILLER. Okay, without objection. 

[The information follows:] 
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Chairman MILLER. Thank you, again, very much for—oh. And as 

previously ordered, members will have 14 days to submit additional materials for the hearing. And as somebody submitted—Mr. 

Scott submitted a question to ask for Mr. Bogle to follow up on. 

And we will send that forward. And with that, the hearing stands 

adjourned. Thank you. 

[Additional submissions by Mr. Miller follow:] 

[Internet addresses to the Ariel/Schwab Black Investor Survey 

follow:] 
109 

http://www.arielinvestments.com/content/view/560/1173/ 

http://www.arielinvestments.com/content/view/354/1228/ 

Prepared Statement of Mellody Hobson, President, Ariel Investments, LLC 

and Chairman, Ariel 

Chairman Miller, Ranking Member McKeon, distinguished Members, thank you 

for the opportunity to submit this statement for the hearing ‘‘Strengthening Worker 

Retirement Security.’’ My name is Mellody Hobson and I am the President of Ariel 

Investments, LLC, a privately owned Chicago-based money management firm with 

more than $4.4 billion in assets under management, founded in 1983 by John W. 

Rogers, Jr. In addition to managing separate accounts for corporate, public, union 

and non-profit organizations, Ariel Investments also serves as the investment adviser to the publicly-traded, no-load Ariel Mutual Funds. 

Patience serves as the core of our investment philosophy. Ariel Investments was 

built around the belief that patient investors will be rewarded—that wealth can be 

created by investing in great companies, selling at excellent prices whose true value 

would be realized over time. As such, we believe our long-term performance is driven by our disciplined and focused approach, our stock selection across industries 

where Ariel has proven expertise, our exhaustive investigative research process and 

our commitment to investing in quality businesses that are typically undervalued 

or ignored. 

With the largest generation in American history set to begin retiring, the country 

is facing a retirement crisis. Almost half of Americans today have little or nothing 

saved. The vast majority have far short of what they will need. Fewer and fewer 

Americans today have jobs offering guaranteed pensions and many public and private pension systems are underfunded. Many pensions affiliated with financially 

troubled companies are also at risk of collapse, and the federal agency set up to insure them is severely underfunded. 

By most estimates, Social Security is in need of supplement and even under the 

best of circumstances is inadequate to funding a secure retirement for working 

Americans. The typical retiree lives for 17 years after retiring at 65. The typical retired couple spends more than $200,000 on health care in their old age. Defined contribution plans (401(k), 403(b), and 453) were never intended to replace traditional 

pensions (defined benefit plans) but for more and more people today, they are the 

only way of saving for retirement. The problem, however, is that most people do not 

save nearly enough and do not manage well the money they have. 

These problems are even more extreme among minorities, who have less firsthand experience with money management than society as a whole. I have provided 

the results of the 2008 Ariel-Schwab Black Investor Survey and the Ariel-Schwab 

Black Paper. At Ariel we have learned that for middle-class African-Americans, the 

march toward financial security has been an uphill journey marked by half steps, 

pauses and, for some, retreat. Over the last decade, Ariel Investments and The 

Charles Schwab Corporation have commissioned annual research comparing the 

saving and investing habits of middle- and upper-income Black and White Americans. The results consistently reveal that Blacks save less than Whites of similar 

income levels and are less comfortable with stock investing which impedes wealth 

building across generations and contributes to the growing retirement crisis. 

The 11th Annual Black Investor Survey shows White Americans have more than 

twice as much saved for retirement as Blacks, but finds employers well positioned 

to make a difference. African-Americans are on equal footing with Whites when it 

comes to accessing and enrolling in employer-sponsored defined contribution plans, 

but save far less each month and have a considerably smaller nest egg than their 

White counterparts, according to the 11th annual Ariel/Schwab Black Investor Survey. The survey also found that with some help from employers, all employees, but 

particularly African-Americans, would be likely to ramp up their monthly 401(k) 

savings 

This year’s survey found that for many younger African-Americans, saving for retirement is more of a dream than a priority. Both Ariel and Schwab have made a 

major investment in financial education for youth. Through Ariel’s foundation, the 

Ariel Education Initiative, the company supports the Ariel Community Academy, a 

Chicago public school that integrates financial literacy into the school’s curriculum. 

Charles Schwab Foundation funds Money Matters: Make it Count, an after-school 

financial literacy program with Boys & Girls Clubs of America. 

I thank the Committee again for taking up this important issue, and welcome any 

questions or comments you may have. 
110 

Prepared Statement of the American Benefits Council 

Employer-sponsored 401(k) and other defined contribution retirement plans are a 

core element of our nation’s retirement system and successfully assist tens of millions of families in accumulating retirement savings. While individuals have understandable retirement income concerns resulting from the recent market and economic downturns—concerns fully shared by the American Benefits Council—it is 

critical to acknowledge the vital role defined contribution plans play in creating personal financial security. 

Congress has adopted rules that facilitate employer sponsorship of these plans, 

encourage employee participation, promote prudent investing, allow operation at 

reasonable cost, and safeguard participant interests through strict fiduciary obligations. As a result 401(k) plans are valued by workers who participate in them as 

important resources for delivering retirement benefits. Nevertheless, improvements 

to the system can certainly be made. Helping workers to manage market risk and 

to translate their defined contribution plan savings into retirement income are areas 

that would benefit from additional policy deliberations. An additional area in which 

reform would be particularly constructive is increasing the number of Americans 

who have access to a defined contribution or other workplace retirement plan. 

The goal should be a 401(k) system that functions in a transparent manner and 

provides meaningful benefits at a fair price. At the same time, we all must bear in 

mind that unnecessary burdens and cost imposed on these plans will slow their 

growth and reduce participants’ benefits, thus undermining the very purpose of the 

plans. It is important to understand the facts relating to these plans. The Council 

believes the following principles are critical in evaluating any reform measures in 

this area: 

• Defined Contribution Plans Reach Tens of Millions of Workers and Provide an 

Important Source of Retirement Savings. There are now more than 630,000 privatesector defined contribution plans covering more than 75 million active and retired 

workers, with another 10 million employees covered by tax-exempt and governmental defined contribution plans. 

• Employers Make Significant Contributions Into Defined Contribution Plans. 

Many employers make matching, non-elective, and profit-sharing contributions to 

complement employee deferrals and share the responsibility for financing retirement. Recent surveys of defined contribution plan sponsors found that at least 95% 

make some form of employer contribution. 

• Employer Sponsorship Offers Advantages to Employees. Employer sponsors of 

defined contribution plans must adhere to strict fiduciary obligations established by 

Congress to protect the interests of plan participants. Employers exercise oversight 

through selection of plan investment options, educational materials and workshops 

about saving and investing and professional investment advice. 

• Defined Contribution Plan Coverage and Participation Rates Are Increasing. 

The number of employees participating in these plans grew from 11.5 million in 

1975 to more than 75 million in 2005, and 65% of full-time employees in private 

industry had access to a defined contribution plan in 2008. 

• Defined Contribution Plan Rules Promote Benefit Fairness. Congress has established detailed rules to ensure that benefits in defined contribution plans are delivered across all income groups. Extensive coverage, nondiscrimination and top-heavy 

rules promote fairness regarding which employees are covered by a defined contribution plan and the contributions made to these plans. 

• 401(k) Plans Have Evolved in Ways That Benefit Workers. Both Congress and 

private innovation have enhanced 401(k) plans, aiding their evolution from barebones savings plans into retirement plans. Among these enhancements have been 

incentives for plan creation, catch-up contributions for older workers, accelerated 

vesting schedules, tax credits, automatic contribution escalation, single-fund investment solutions and investment education programs. 

• Recent Enhancements to the Defined Contribution System Are Working. The 

Pension Protection Act of 2006 (PPA) encourages automatic enrollment and automatic contribution escalation. PPA also provided new rights to diversify contributions made in company stock, accelerating existing trends toward greater diversification of 401(k) assets. 

• Defined Contribution Plan Savings is an Important Source of Investment Capital. With more than $4 trillion in combined assets as of March 2008, these plans 

represent ownership of a significant share of the total pool of stocks and bonds, provide an important and ready source of American investment capital. 

• Defined Contribution Plans Should Not Be Judged on Short-Term Market Conditions. 
111 

Workers and retirees are naturally concerned about the impact of the recent market turmoil. It is important, however, for policymakers and participants to judge defined contribution plans based on whether they serve workers’ retirement interests 

over the long term. 

• Inquiries About Risk Are Appropriate But No Retirement Plan Design is Immune from Risk. The recent market downturn has spawned questions about whether defined contribution plan participants may be subject to undue investment risk. 

Yet it is difficult to imagine any retirement plan design that does not have some 

kinds of risk. Any efforts to mitigate risk should focus on refinements to the existing 

successful employer-sponsored retirement plan system and shoring up the Social Security safety net. 

The Council has prepared the attached white paper to more fully develop these 

principles. We encourage a full and vigorous debate over ways to improve retirement security for American workers. At the same time, it is critical that the debate 

not serve to undermine retirement security by inadvertently increasing the costs to 

participants or discouraging plan sponsorship. 

February 5, 2009. 

DEFINED CONTRIBUTION PLANS: A SUCCESSFUL CORNERSTONE OF OUR NATION’S

RETIREMENT SYSTEM

Introduction 

Employer-sponsored 401(k) and other defined contribution retirement plans are a 

core element of our nation’s retirement system, playing a critical role along with Social Security, personal savings and employer-sponsored defined benefit plans. Defined contribution plans successfully assist tens of millions of American families in 

accumulating retirement savings. Congress has adopted rules for defined contribution plans that: 

• facilitate employer sponsorship of plans, 

• encourage employee participation, 

• promote prudent investing by plan participants, 

• allow operation of plans at reasonable cost, and 

• safeguard plan assets and participant interests through strict fiduciary obligations and intensive regulatory oversight. 

While individuals have understandable retirement income concerns resulting from 

the recent market and economic downturns—concerns fully shared by the American 

Benefits Council—it is critical to acknowledge the vital role defined contribution 

plans play in building personal financial security. 

Defined Contribution Plans Reach Tens of Millions of Workers and Provide an Important Source of Retirement Savings 

Over the past three decades, 401(k) and other defined contribution plans have increased dramatically in number, asset value, and employee participation. As of June 

30, 2008, defined contribution plans (including 401(k), 403(b) and 457 plans) held 

$4.3 trillion in assets, and assets in individual retirement accounts (a significant 

share of which is attributable to amounts rolled over from employer-sponsored retirement plans, including defined contribution plans) stood at $4.5 trillion.1 Of 

course, assets have declined significantly since then due to the downturn in the financial markets. Assets in 401(k) plans are projected to have declined from $2.9 trillion on June 30, 2008 to $2.4 trillion on December 31, 2008,2 and the average 401(k) 

account balance is down 27% in 2008 relative to 2007.3 Nonetheless, 401(k) account 

balances are up 140% when compared to levels as of January 1, 2000.4 Thus, even 

in the face of the recent downturn (which of course has also affected workers’ nonretirement investments and home values), employees have seen a net increase in 

workplace retirement savings. This has been facilitated by our robust and expanding defined contribution plan system. As discussed more fully below, employees have 

also remained committed to this system despite the current market conditions, with 

the vast majority continuing to contribute to their plans. 

In terms of the growth in plans and participating employees, the most recent statistics reveal that there are more than 630,000 defined contribution plans covering 

more than 75 million active and retired workers with more than 55 million current 

workers now participating in these plans.5 Together with Social Security, defined 

contribution plan accumulations can enable retirees to replace a significant percentage of pre-retirement income (and many workers, of course, will also have income 

from defined benefit plans).6
112 

Employers Make Significant Contributions Into Defined Contribution Plans 

When discussing defined contribution plans, the focus is often solely on employee 

deferrals into 401(k) plans. However, contributions consist of more than employee 

deferrals. Employers make matching, non-elective, and profit-sharing contributions 

to defined contribution plans to complement employee deferrals and share with employees the responsibility for funding retirement. Indeed, a recent survey of 401(k) 

plan sponsors with more than 1,000 employees found that 98% make some form of 

employer contribution.7 Another recent study of employers of all sizes indicated that 

62% of defined contribution sponsors made matching contributions, 28% made both 

matching and profit-sharing contributions, and 5% made profit-sharing contributions only.8 While certain employers have reduced or suspended matching contributions as a result of current economic conditions, the vast majority have not.9 Those 

that have are often doing so as a direct result of substantially increased required 

contributions to their defined benefit plans or institution of a series of cost-cutting 

measures to preserve jobs. As intended, matching contributions play a strong role 

in encouraging employee participation in defined contribution plans.10

The Defined Contribution System is More Than 401(k) Plans 

The defined contribution system also includes many individuals beyond those who 

participate in the 401(k) and other defined contribution plans offered by private-sector employers. More than 7 million employees of tax-exempt and educational institutions participate in 403(b) arrangements,11 which held more than $700 billion in assets as of earlier this year.12 Millions of employees of state and local governments 

participate in 457 plans, which held more than $160 billion in assets as of earlier 

this year.13 Finally, 3.9 million individuals participate in the federal government’s 

defined contribution plan (the Thrift Savings Plan), which held $226 billion in assets as of June 30, 2008.14

401(k) Plans Have Evolved in Ways That Benefit Workers 

Even when focusing on 401(k) plans, it is important to keep in mind that these 

plans have evolved significantly from the bare-bones employee savings plans that 

came into being in the early 1980s. As discussed more fully below, employers have 

enhanced these arrangements in numerous ways, aiding their evolution into robust 

retirement plans. Congress has likewise enacted numerous enhancements to 401(k) 

plans, making major improvements to the 401(k) system in the Small Business Job 

Protection Act of 1996, the Taxpayer Relief Act of 1997, the Economic Growth and 

Tax Relief Reconciliation Act of 2001, and the Pension Protection Act of 2006. 

Among the many positive results have been incentives for plan creation, promotion 

of automatic enrollment, catch-up contributions for workers 50 and older, safe harbor 401(k) designs, accelerated vesting schedules, greater benefit portability, tax 

credits for retirement savings, and enhanced rights to diversify company stock contributions. 

There also has been tremendous innovation in the 401(k) marketplace, with employer plan sponsors and plan service providers independently developing and 

adopting many features that have assisted employees. For example, both automatic 

enrollment and automatic contribution escalation were first developed in the private 

sector. Intense competition among service providers has helped spur this innovation 

and has driven down costs. Among the market innovations that have greatly enhanced defined contribution plans for participants are: 

• on-line and telephonic access to participant accounts and plan services, 

• extensive financial planning, investment education and investment advice offerings, 

• single-fund investment solutions such as retirement target date funds and riskbased lifestyle funds, and 

• in-plan annuity options and guaranteed withdrawal features that allow workers 

to replicate attributes of defined benefit plans. 

These legislative changes and market innovations have resulted in more employers wanting to sponsor 401(k) plans and have—together with employer enhancements to plan design—improved both employee participation rates and employee 

outcomes. 

Long-Term Retirement Plans Should Not Be Judged on Short-Term Market Conditions 

Workers and retirees are naturally concerned about the impact of the recent market turmoil. It is important, however, for policymakers and participants to evaluate 

defined contribution plans based on whether they serve workers’ retirement interests over the long term rather than over a period of months. Defined contribution 

plans and the investments they offer employees are designed to weather changes in 
113 

economic conditions—even conditions as anxiety-provoking as the ones we are experiencing today. (Market declines and volatility are, of course, affecting all types of 

retirement plans and investment vehicles, not just defined contribution plans.) Although it is difficult to predict short-run market returns, over the long run stock 

market returns are linked to the growth of the economy and this upward trend will 

aid 401(k) investors. Indeed, one of the benefits for employees of participating in a 

defined contribution plan through regular payroll deduction is that those who select 

equity vehicles purchase these investments at varying prices as markets rise and 

fall, achieving effective dollar cost averaging. If historical trends continue, defined 

contribution plan participants who remain in the system can expect their plan account balances to rebound and grow significantly over time.15 That being said, the 

American Benefits Council favors development of policy ideas (and market innovations) to help those defined contribution plan participants nearing retirement improve their retirement security and generate adequate retirement income. 

It is important to note that in the face of the current economic crisis and market 

decline, plan participants remain committed to retirement savings and few are reducing their contributions. Rather, the large majority of participants continue to 

contribute at significant rates and remain in appropriately diversified investments. 

One leading 401(k) provider saw only 2% of participants decrease contribution levels 

in October 2008 (1% actually increased contributions) despite the stock market decline and volatility experienced during that month.16 Another leading provider 

found that 96% of 401(k) participants who contributed to plans in the third quarter 

of 2008 continued to contribute in the fourth quarter.17 Research from the prior bear 

market confirms that employees tend to hold steady in the face of declining stock 

prices, remaining appropriately focused on their long-term retirement savings and 

investment goals.18

Demonstrating the importance of defined contribution plans to employees, a recent survey found that defined contribution plans are the second-most important 

benefit to employees behind health insurance.19 The same survey found that 9% of 

employees viewed greater deferrals to their defined contribution plan as one of their 

top priorities for 2009.20

Defined Contribution Plan Coverage and Participation Rates Are Increasing 

Participation in employer-sponsored defined contribution plans has grown from 

11.5 million in 1975 to more than 75 million in 2005.21 This substantial increase 

is a result of many more employers making defined contribution plans available to 

their workforces. Today, the vast majority of large employers offer a defined contribution plan,22 and the number of small employers offering such plans to their employees has been increasing modestly as well.23 In total, 65% of full-time employees 

in private industry had access to a defined contribution plan at work in 2008 (of 

which 78% participated).24 Small businesses that do not offer a 401(k) or profitsharing plan are increasingly offering workers a SIMPLE IRA, which provides both 

a saving opportunity and employer contributions.25 Indeed, as of 2007, 2.2 million 

workers at eligible small businesses participated in a SIMPLE IRA.26

The rate of employee participation in defined contribution plans offered by employers also has increased modestly over time 27—with further increases anticipated 

as a result of automatic enrollment adoption. Moreover, participating employees are 

generally saving at significant levels—levels that have risen over time.28 Younger 

workers, in particular, increasingly look to defined contribution plans as a primary 

source of retirement income.29

There are understandable economic impediments that keep some small employers, 

particularly the smallest firms, from offering plans. The uncertainty of revenues is 

the leading reason given by small businesses for not offering a plan, while cost, administrative challenges, and lack of employee demand are other impediments cited 

by small business.30 Indeed, research reveals that employees at small companies 

place less priority on retirement benefits relative to salary than their counterparts 

at large companies.31 As firms expand and grow, the likelihood that they will offer 

a retirement plan increases.32 Congress can and should consider additional incentives and reforms to assist small businesses in offering retirement plans, but some 

small firms will simply not have the economic stability to do so. Mandates on small 

business to offer or contribute to plans will only serve to exacerbate the economic 

challenges they face, reducing the odds of success for the enterprise, hampering job 

creation and reducing wages. 

Some have understandably focused on the number of Americans who do not currently have access to an employer-sponsored defined contribution plan. Certainly expanding plan coverage to more Americans is a universally shared goal. Yet statistics 

about retirement plan coverage rates must be viewed in the appropriate context. 

Statistics about the percentage of workers with access to an employer retirement 
114 

plan provide only a snapshot of coverage at any one moment in time. Given job mobility and the fact that growing employers sometimes initiate plan sponsorship during an employee’s tenure, a significantly higher percentage of workers have access 

to a plan for a substantial portion of their careers.33 This coverage provides individuals with the opportunity to add defined contribution plan savings to other sources 

of retirement income. It is likewise important to note that individuals’ savings behavior tends to evolve over the course of a working life. Younger workers typically 

earn less and therefore save less. What younger workers do save is often directed 

to non-retirement goals such as their own continuing education, the education of 

their children or the purchase of a home.34 As they age and earn more, employees 

prioritize retirement savings and are increasingly likely to work for employers offering retirement plans.35

Defined Contribution Plan Rules Promote Benefit Fairness 

The rules that Congress has established to govern the defined contribution plan 

system ensure that retirement benefits in these plans are delivered across all income groups. Indeed, the Internal Revenue Code contains a variety of rules to promote fairness regarding which employees are covered by a defined contribution plan 

and the contributions made to these plans. These requirements include coverage 

rules to ensure that a fair cross-section of employees (including sufficient numbers 

of non-highly compensated workers) are covered by the defined contribution plan 

and nondiscrimination rules to make certain that both voluntary employee contributions and employer contributions for non-highly compensated employees are being 

made at a rate that is not dissimilar to the rate for highly compensated workers.36

There are also top-heavy rules that require minimum contributions to non-highly 

compensated employees’ accounts when the plan delivers significant benefits to top 

employees. 

Congress has also imposed various vesting requirements with respect to contributions made to defined contribution plans. These requirements specify the timetable 

by which employer contributions become the property of employees. Employees are 

always 100% vested in their own contributions, and employer contributions made 

to employee accounts must vest according to a specified schedule (either all at once 

after three years of service or in 20% increments between the second and sixth 

years of service).37 In addition, the two 401(k) safe harbor designs that Congress 

has adopted—the original safe harbor enacted in 1996 and the automatic enrollment 

safe harbor enacted in 2006—require vesting of employer contributions on an even 

more accelerated schedule.38

Employer Sponsorship of Defined Contribution Plans Offers Advantages to Employees 

As plan sponsors, employers must adhere to strict fiduciary obligations established by Congress to protect the interests of plan participants. ERISA imposes, 

among other things, duties of prudence and loyalty upon plan fiduciaries. ERISA 

also requires that plan fiduciaries discharge their duties ‘‘solely in the interest of 

the participants and beneficiaries’’ and for the ‘‘exclusive purpose’’ of providing participants and beneficiaries with benefits.39 These exceedingly demanding fiduciary 

obligations (which are enforced through both civil and criminal penalties) offer investor protections not typically associated with savings vehicles individuals might 

use outside the workplace. 

One area in which employers exercise oversight is through selection and monitoring of the investment options made available in the plan. Through use of their 

often considerable bargaining power, employers select high-quality, reasonablypriced investment options and monitor these options on an ongoing basis to ensure 

they remain high-quality and reasonably-priced. Large plans also benefit from 

economies of scale that help to reduce costs. Illustrating the value of this employer 

involvement, the mutual funds that 401(k) participants invest in are, on average, 

of lower cost than those that retail investors use.40 Recognizing these benefits, an 

increasing number of retirees are leaving their savings in defined contribution plans 

after retirement, managing their money using the plan’s investment options and 

taking periodic distributions. With the investment oversight they bring to bear, employers are providing a valuable service that employees would not be able easily or 

inexpensively to replicate on their own outside the plan. 

Employers also typically provide educational materials about retirement saving, 

investing and planning, and in many instances also provide access to investment advice services.41 To supplement educational materials and on-line resources, well over 

half of 401(k) plan sponsors offer in-person seminars and workshops for employees 

to learn more about retirement investing, and more than 40% provide communications to employees that are targeted to the workers’ individual situations.42 Surveys 
115 

reveal that a significant percentage of plan participants utilize employer-provided 

investment education and advice tools.43 Although participants can obtain such information outside of the workplace, it can be costly or require significant effort to 

do so, yielding yet another advantage to participation in an employer-sponsored defined contribution plan. 

Recent Enhancements to the Defined Contribution System Are Working 

Recent legislative reforms are improving outcomes for defined contribution plan 

participants. The Pension Protection Act of 2006 (‘‘PPA’’), in particular, included 

several landmark changes to the defined contribution system that are already beginning to assist employees in their retirement savings efforts. 

Employee participation rates are beginning to increase thanks to PPA’s provisions 

encouraging the adoption of automatic enrollment. This plan design, under which 

workers must opt out of plan participation rather than opt in, has been demonstrated to increase participation rates significantly, helping to move toward the 

universal employee coverage typically associated with defined benefit plans.44 And 

more employers are adopting this design in the wake of PPA, in numbers that are 

particularly notable given that the IRS’s implementing regulations have not yet 

been finalized and the Department of Labor’s regulations were not finalized until 

more than a year after PPA’s enactment.45 One leading defined contribution plan 

service provider saw a tripling in the number of its clients adopting automatic enrollment between year-end 2005 and year-end 2007,46 and other industry surveys 

show a similarly rapid increase in adoption by employers.47 Moreover, many employers that have not yet adopted automatic enrollment are seriously considering 

doing so.48

Employers are also beginning to increase the default savings rate at which workers are automatically enrolled,49 which is important to ensuring that workers have 

saved enough to generate meaningful income in retirement. Studies show that automatic enrollment has a particularly notable impact on the participation rates of 

lower-income, younger, and minority workers because these groups are typically less 

likely to participate in a 401(k) plan where affirmative elections are required.50

Thus, PPA’s encouragement of auto enrollment is helping to improve retirement security for these often vulnerable groups. 

PPA also encouraged the use of automatic escalation designs that automatically 

increase an employee’s rate of savings into the plan over time, typically on a yearly 

basis. This approach is critical in helping workers save at levels sufficient to generate meaningful retirement income and can be useful in ensuring that employees 

save at the levels required to earn the full employer matching contribution.51 Employers are increasingly adopting automatic escalation features.52

In PPA, Congress also directed the Department of Labor (DOL) to develop guidance providing for qualified default investment alternatives, or QDIAs—investments 

into which employers could automatically enroll workers and receive a measure of 

fiduciary protection. QDIAs are diversified, professionally managed investment vehicles and can be retirement target date or life-cycle funds, managed account services 

or funds balanced between stocks and bonds. There has been widespread adoption 

of QDIAs by employers and this has helped improve the diversification of employee 

investments in 401(k) and other defined contribution plans.53 Congress also directed 

DOL in PPA to reform the fiduciary standards governing selection of annuity distribution options for defined contribution plans, and the DOL has recently issued 

final regulations on this topic.54 As a result, fiduciaries now have a clearer road 

map for the addition of an annuity payout option to their plan, which can give participants another tool for translating their retirement savings into lifelong retirement income. 

Defined Contribution Plans Provide Employees with the Tools to Make Sound Investments 

As a result of legislative reform and employer practices, employees in defined contribution plans have a robust set of tools to assist them in pursuing sound, diversified investment strategies. As noted above, employers provide educational materials 

on key investing principles such as asset classes and asset allocation, diversification, 

risk tolerance and time horizons. Employers also provide the opportunity for sound 

investing by selecting a menu of high-quality investments from diverse asset classes 

that, as discussed above, often reflect lower prices relative to retail investment options.55 Moreover, the vast majority of employers operate their defined contribution 

plans pursuant to ERISA section 404(c),56 which imposes a legal obligation to offer 

a ‘‘broad range of investment alternatives’’ including at least three options, each of 

which is diversified and has materially different risk and return characteristics. 
116 

The development and greater use by employers of investment options that in one 

menu choice provide a diversified, professionally managed asset mix that grows 

more conservative as workers age (retirement target date funds, life-cycle funds, 

managed account services) has been extremely significant and has helped employees 

seeking to maintain age-appropriate diversified investments.57 As mentioned above, 

the use of such options has accelerated pursuant to the qualified default investment 

alternatives guidance issued under PPA.58 These investment options typically retain 

some exposure to equities for workers as they approach retirement age. Given that 

many such workers are likely to live decades beyond retirement and through numerous economic cycles, some continued investment in stocks is desirable for most individuals in order to protect against inflation risk.59

One potential challenge when considering the diversification of employee defined 

contribution plan savings is the role of company stock. Traditionally, company stock 

has been a popular investment option in a number of defined contribution plans, 

and employers sometimes make matching contributions in the form of company 

stock. Congress and employers have responded to encourage diversification of company stock contributions. PPA contained provisions requiring defined contribution 

plans (other than employee stock ownership plans) to permit participants to immediately diversify their own employee contributions, and for those who have completed at least three years of service, to diversify employer contributions made in 

the form of company stock.60 And today, fewer employers (23%) make their matching contributions in the form of company stock, down from 45% in 2001.61 Moreover, 

more employers that do so are permitting employees to diversify these matching 

contributions immediately (67%), up from 24% that permitted such immediate diversification in 2004.62

The result has been greater diversification of 401(k) assets. In 2006, a total of 

11.1% of all 401(k) assets were held in company stock.63 This is a significant reduction from 1999, when 19.1% of all 401(k) assets were held in company stock.64

New Proposals for Early Access Would Upset the Balance Between Liquidity and 

Asset Preservation 

The rules of the defined contribution system strike a balance between offering 

limited access to retirement savings and restricting such saving for retirement purposes. Some degree of access is necessary in order to encourage participation as certain workers would not contribute to a plan if they were unable under any circumstances (e.g., health emergency, higher education needs, first-home purchase) to 

access their savings prior to retirement.65 Congress has recognized this relationship 

between some measure of liquidity and plan participation rates and has permitted 

pre-retirement access to plan savings in some circumstances. For example, the law 

permits employers to offer workers the ability to take loans from their plan accounts 

and/or receive so-called hardship distributions in times of pressing financial need.66

However, a low percentage of plan participants actually use these provisions, and 

loans and hardship distributions do not appear to have increased markedly as a result of the current economic situation.67 To prevent undue access, Congress has limited the circumstances in which employees may take pre-retirement distributions 

and has imposed a 10% penalty tax on most such distributions.68

In 2001, as part of the Economic Growth and Tax Relief Reconciliation Act 

(EGTRRA), Congress took further steps to ease portability of defined contribution 

plan savings and combat leakage of retirement savings. EGTRRA required automatic rollovers into IRAs for forced distributions of balances of between $1,000 and 

$5,000 and allowed individuals to roll savings over between and among 401(k), 

403(b), 457 and IRA arrangements at the time of job change.69

As a result of changes like these, leakage from the retirement system at the time 

of job change has been declining modestly over time—although leakage is certainly 

an issue worthy of additional attention.70 Participants, particularly those at or near 

retirement, are generally quite responsible in handling the distributions they take 

from their plans when they leave a company, with the vast majority leaving their 

money in the plan, taking partial withdrawals, annuitizing the balance or reinvesting their lump sum distributions.71 In sum, policymakers should acknowledge 

the careful balance between liquidity and preservation of assets and should be wary 

of proposals that would provide additional ways to tap into retirement savings early. 

Defined Contribution Plan Savings is an Important Source of Investment Capital 

The amounts held in defined contribution plans have an economic impact that extends well beyond the retirement security of the individual workers who save in 

these plans. Retirement plans held approximately $16.9 trillion in assets as of June 

30, 2008.72 As noted earlier, amounts in defined contribution plans accounted for 

approximately $4.3 trillion of this amount, and amounts in IRAs represented ap-
117 

proximately $4.5 trillion (much of which is attributable to rollovers from employersponsored plans, including defined contribution plans).73 Indeed, defined contribution plans and IRAs hold nearly 20% of corporate equities.74 These trillions of dollars in assets, representing ownership of a significant share of the total pool of 

stocks and bonds, provide an important and ready source of investment capital for 

American businesses. This capital permits greater production of goods and services 

and makes possible additional productivity-enhancing investments. These investments thereby help companies grow, add jobs to their payrolls and raise employee 

wages. 

Inquiries About Risk Are Appropriate But No Retirement Plan Design is Immune 

from Risk 

The recent market downturn has generated reasonable inquiries about whether 

participants in defined contribution plans may be subject to undue investment risk. 

As noted above, the American Benefits Council favors development of policy proposals and market innovations that seek to address these concerns. Yet it is difficult 

to imagine any retirement plan design that does not have some kind or degree of 

risk. Defined benefit pensions, for example, are extremely valuable retirement plans 

that serve millions of Americans. However, employees may not stay with a firm long 

enough to accrue a meaningful benefit, benefits are often not portable, required contributions can impose financial burdens on employers that can constrain pay levels 

or job growth, and companies on occasion enter bankruptcy (in which case not all 

benefits may be guaranteed). 

Some have suggested that a new federal governmental retirement system would 

be the best way to protect workers against risk. Certain of these proposals would 

promise governmentally guaranteed investment returns, which would entail a massive expansion of government and taxpayer liabilities at a time of already unprecedented federal budget deficits. Other proposals would establish governmental clearinghouses or agencies to oversee retirement plan investments and administration. 

Such approaches would likewise have significant costs to taxpayers and would unnecessarily and unwisely displace the activities of the private sector. Under these 

approaches, the federal government also would typically regulate the investment 

style and fee levels of retirement plan investments. These invasive proposals would 

constrain the investment choices and flexibility that defined contribution plan participants enjoy today and would establish the federal government as an unprecedented rate-setter for many retirement investments. 

Rather than focusing on new governmental guarantees or systems, any efforts to 

mitigate risk should instead focus on refinements to the existing successful employer-sponsored retirement plan system and shoring up the Social Security safety 

net. 

The Strong Defined Contribution System Can Still Be Improved 

While today’s defined contribution plan system is proving remarkably successful 

at assisting workers in achieving retirement security, refinements and improvements to the system can certainly be made. Helping workers to manage market risk 

and to translate their defined contribution plan savings into retirement income are 

areas that would benefit from additional policy deliberations. An additional area in 

which reform would be particularly constructive is increasing the number of Americans who have access to a defined contribution or other workplace retirement plan. 

The American Benefits Council will soon issue a set of policy recommendations as 

to how this goal of expanded coverage can be achieved. We believe coverage can best 

be expanded through adoption of a multi-faceted set of reforms that will build on 

the successful employer-sponsored retirement system and encourage more employers 

to facilitate workplace savings by their employees. This multi-faceted agenda will 

include improvements to the current rules governing defined contribution and defined benefit plans, expansion of default systems such as automatic enrollment and 

automatic escalation, new simplified retirement plan designs, expanded retirement 

tax incentives for individuals and employers, greater use of workplace IRA arrangements (such as SIMPLE IRAs and discretionary payroll deduction IRAs), more effective promotion of existing retirement plan options, and efforts to enhance Americans’ financial literacy. 

ENDNOTES

1Peter Brady & Sarah Holden, The U.S. Retirement Market, Second Quarter 2008, INVESTMENT COMPANY INST. FUNDAMENTALS 17, no. 3-Q2, Dec. 2008. This paper reveals that, 

as of June 30, 2008, total U.S. retirement accumulations were $16.9 trillion, a 13.4% increase 

over 2005 and a 59.4% increase over 2002. As noted above, these asset figures have decreased 

in light of recent market declines although assets held in defined contribution plans and individual retirement accounts still make up more than half of total U.S. retirement assets. See 
118 

Brian Reid & Sarah Holden, Retirement Saving in Wake of Financial Market Volatility, INVESTMENT COMPANY INST., Dec. 2008. 2 2007 Account Balances: Tabulations from EBRI/ICI Participant-Directed Retirement Plan 

Data Collection Project; 2008 Account Balances: Estimates from Jack VanDerhei, EBRI. 3Press Release, Fidelity Investments, Fidelity Reports on 2008 Trends in 401(k) Plans (Jan. 

28, 2009). 4 1999 and 2006 Account Balances: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; 2007 and 2008 Account Balances: Estimates from Jack 

VanDerhei, EBRI. The analysis is based on a consistent sample of 2.2 million participants with 

account balances at the end of each year from 1999 through 2006 and compares account balances on January 1, 2000 and November 26, 2008. See also Jack VanDerhei, Research Director, 

Employee Benefit Research Institute, What Is Left of Our Retirement Assets?, PowerPoint Presentation at Urban Institute (Feb. 3, 2009). 5 According to the Department of Labor, there were 103,346 defined benefit plans and 207,748 

defined contribution plans in 1975. In 2005, there were 47,614 defined benefit plans and 631,481 

defined contribution plans. U.S. Department of Labor, Employee Benefits Security Administration, Private Pension Plan Bulletin Historical Tables (Feb. 2008). See also Sarah Holden, Peter 

Brady, & Michael Hadley, 401(k) Plans: A 25-Year Retrospective, INVESTMENT COMPANY 

INST. PERSPECTIVE 12, no. 2, Nov. 2006. 6 A joint ICI and EBRI study projected that 401(k) participants in their late 20s in 2000 who 

are continuously employed, continuously covered by a 401(k) plan, and earned historical financial market returns could replace significant amounts of their pre-retirement income (103% for 

the top income quartile; 85% for the lowest income quartile) with their 401(k) accumulations 

at retirement. Sarah Holden & Jack VanDerhei, Can 401(k) Accumulations Generate Significant 

Income for Future Retirees?, INVESTMENT COMPANY INST. PERSPECTIVE 8, no. 3, Nov. 

2002. 7 Report on Retirement Plans—2007, Diversified Investment Advisors (Nov. 2007). 

8 401(k) Benchmarking Survey—2008 Edition, Deloitte Consulting LLP (2008). 

9 In an October 2008 survey, only 2% of employers reported having reduced their 401(k)/403(b) 

matching contribution and only 4% said they planned to do so in the upcoming 12 months. 

WATSON WYATT WORLDWIDE, EFFECT OF THE ECONOMIC CRISIS ON HR PROGRAMS 

4 (2008). 10 According to one study, defined contribution plans with matching contributions have a participation rate of 73% compared with 44% for plans that do not offer matching contributions. 

Retirement Plan Trends in Today’s Healthcare Market—2008, American Hospital Association & 

Diversified Investment Advisors (2008). Some have wondered whether employers would reduce 

matching contributions as they adopt automatic enrollment since automatic enrollment is proving successful in raising participation rates. Current data suggest this is not occurring. For example, from 2005 to 2007 the number of Vanguard plans offering automatic enrollment tripled. 

During the same period, the percentage of Vanguard plans offering employer matching contributions increased by 4%. How America Saves 2008: A Report on Vanguard 2007 Defined Contribution Plan Data, The Vanguard Group, Inc. (2008); How America Saves 2006: A Report on Vanguard 2005 Defined Contribution Plan Data, The Vanguard Group, Inc. (2006). 11W. Scott Simon, Fiduciary Focus, Morningstar Advisor, Apr. 5, 2007. 12 Brady & Holden (Dec. 2008), supra note 1. 13 Brady & Holden (Dec. 2008), supra note 1. 14Gregory T. Long, Executive Dir., Fed. Ret. Thrift Inv. Fund, Statement Before the House 

Subcommittee on Federal Workforce, Postal Service, and the District of Columbia (July 10, 

2008). 15The average 401(k) account balance increased at an annual rate of 8.7% from 1999 to 2006, 

despite the fact that this period included one of the worst bear markets since the Great Depression. Sarah Holden, Jack VanDerhei, Luis Alonso, & Craig Copeland, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2006, INVESTMENT COMPANY INST. PERSPECTIVE 13, no. 1/EMPLOYEE BENEFIT RESEARCH INST. ISSUE BRIEF, no. 308, Aug. 

2007. 16 Jilian Mincer, 401(k) Plans Face Disparity Issue, WALL ST. J., Nov. 6, 2008, at D9. 17Fidelity Investments (Jan. 28, 2009), supra note 3. See also Reid & Holden (Dec. 2008), 

supra note 1 (noting that only 3% of defined contribution plan participants ceased contributions 

in 2008); The Principal Financial Well-Being Index Summary—Fourth Quarter 2008, Principal 

Financial Group (2008) (finding that, in the six months leading up to its October 2008 survey, 

11% of employees increased 401(k) contributions, while only 4% decreased contributions and 

only 1% ceased contributions entirely); Retirement Outlook and Policy Priorities, Transamerica 

Center for Retirement Studies (Oct. 2008) (finding that participation rates are holding steady 

among full-time workers who have access to a 401(k) or similar employer-sponsored plan, with 

77% currently participating; 31% of participants have increased their contribution rates into 

their retirement plans in the last twelve months; only 11% have decreased their contribution 

rates or stopped contributing); Press Release, Hewitt Associates, Hewitt Data Shows Americans 

Continue to Save in 401(k) Plans Despite Economic Woes (Nov. 24, 2008) (finding, in a November analysis, that average savings rates in 401(k) plans have only dipped by 0.2%, from 8.0% 

in 2007 to 7.8% in 2008). 18See Sarah Holden & Jack VanDerhei, Contribution Behavior of 401(k) Plan Participants 

During Bull and Bear Markets, NAT’L TAX ASS’N 44 (2004) (citing a number of studies which 

indicate little variation in before-tax contributions and a slight decrease in employer contributions as a percentage of participant pay during the 1999-2002 bear market). 19Principal Financial Group (2008), supra note 17. 20 Id. 21Private Pension Plan Bulletin Historical Tables (Feb. 2008), supra note 5. 
119 

22 In 2007, 82% of employers with 500 or more employees offered 401(k) plans to their employees, and 19% of these employers offered a defined contribution plan other than a 401(k) plan 

to their employees. 9th Annual Retirement Survey, Transamerica Center for Retirement Studies 

(2008). 23 59% of employers with between 10 and 499 employees offered their employees 401(k) plans 

in 2007, as compared with 56% in 2006. Transamerica Center for Retirement Studies (2008), 

supra note 22; 8th Annual Retirement Survey, Transamerica Center for Retirement Studies 

(2007). 24 U.S. DEP’T OF LABOR & U.S. BUREAU OF LABOR STATISTICS, BULL. NO. 2715, NATIONAL COMPENSATION SURVEY: EMPLOYEE BENEFITS IN THE UNITED STATES, 

MARCH 2008, tbl. 2 (Sept. 2008). 25 As of December 2007, there were more than 500,000 SIMPLE IRAs. At the end of 2007, $61 billion was held in SIMPLE IRAs. See Brady & Holden (Dec. 2008), supra note 1; Peter 

Brady & Stephen Sigrist, Who Gets Retirement Plans and Why, INVESTMENT COMPANY 

INST. PERSPECTIVE 14, no. 2, Sept. 2008. 26 Brady & Sigrist (Sept. 2008), supra note 25. See also U.S. DEP’T OF LABOR & U.S. BUREAU OF LABOR STATISTICS, BULL. NO. 2589, NATIONAL COMPENSATION SURVEY: 

EMPLOYEE BENEFITS IN PRIVATE INDUSTRY IN THE UNITED STATES, 2005 (May 2007) 

(indicating 8% of private-sector workers at eligible small businesses participated in a SIMPLE 

IRA). 27 Among all full-time, full-year wage and salary workers ages 21 to 64, 55.3% participated 

in a retirement plan in 2007. This is up from approximately 53% in 2006. Craig Copeland, Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2007, EMPLOYEE BENEFIT RESEARCH INST. ISSUE BRIEF, no. 322, Oct. 2008 (examining the U.S. 

Census Bureau’s March 2008 Current Population Survey). See also The Vanguard Group, Inc. 

(2008), supra note 10 (noting that, out of all employees in Vanguard-administered plans, 66% 

of eligible employees participated in their employer’s defined contribution plan); 51st Annual 

Survey of Profit Sharing and 401(k) Plans, Profit Sharing/401(k) Council of America (Sept. 2008) 

(noting that 81.9% of eligible employees currently have a balance in their 401(k) plans). 28Participants in plans administered by Vanguard saved 7.3% of income in their employer’s 

defined contribution plan in 2007. The Vanguard Group, Inc. (2008), supra note 10. Among nonhighly compensated employees, the level of pre-tax deferrals into 401(k) plans has risen from 

4.2% of salary in 1991 to 5.6% in 2007. Profit Sharing/401(k) Council of America (Sept. 2008), 

supra note 27. 29See Transamerica Center for Retirement Studies (Oct. 2008), supra note 17 (finding that 

35% of Echo Boomers, 34% of Generation X, 28% of Baby Boomers, and 7% of Matures consider 

employer-sponsored defined contribution plans as their primary source of retirement income). 30 Jack VanDerhei, Findings from the 2003 Small Employer Retirement Survey, EMPLOYEE 

BENEFIT RESEARCH INST. ISSUE NOTES 24, no. 9, Sept. 2003. 31 Both small employers and workers in small businesses consider salary to be a greater priority than retirement benefits, but the inverse is true for the majority of larger employers and 

workers in larger businesses. See Transamerica Center for Retirement Studies (2008), supra 

note 22 (finding that 56% of employees in larger businesses consider retirement benefits to be 

a greater priority, where 54% of employees in smaller companies rank salary as a priority over 

retirement benefits). See also Brady & Sigrist (Sept. 2008), supra note 25. 32For example, one survey found that more than half of small business respondents would 

be ‘‘much more likely’’ to consider offering a retirement plan if company profits increased. 

VanDerhei (Sept. 2003), supra note 30. See also Transamerica Center for Retirement Studies 

(2008), supra note 22 (finding that large companies are more likely than smaller companies to 

offer 401(k) plans (82% large, 59% small)). 33 It should also be remembered that those without employer plan coverage may be building 

retirement savings through non-workplace tax-preferred vehicles such as individual retirement 

accounts or deferred annuities. 34See Brady & Sigrist (Sept. 2008), supra note 25. 35 Based on an analysis of the Bureau of Labor Statistics’ Current Population Survey, March 

Supplement (2007), of those most likely to want to save for retirement in a given year, almost 

75% had access to a retirement plan through their employer or their spouse’s employer, and 92% 

of those with access participated. Brady & Sigrist (Sept. 2008), supra note 25. 36 Voluntary pre-tax and Roth after-tax contributions must satisfy the Actual Deferral Percentage test (‘‘ADP test’’). The ADP test compares the elective contributions made by highly 

compensated employees and non-highly compensated employees. Each eligible employee’s elective contributions are expressed as a percentage of his or her compensation. The numbers are 

then averaged for (i) all eligible highly compensated employees, and (ii) all other eligible employees (each resulting in a number, an ‘‘average ADP’’). The ADP test is satisfied if (i) the average 

ADP for the eligible highly compensated employees for a plan year is no greater than 125% of 

the average ADP for all other eligible employees in the preceding plan year, or (ii) the average 

ADP for the eligible highly compensated employees for a plan year does not exceed the average 

ADP for the other eligible employees in the preceding plan year by more than 2% and the average ADP for the eligible highly compensated employees for a plan year is not more than twice 

the average ADP for all other eligible employees in the preceding plan year. Treas. Reg. § 

1.401(k)-2. Employer matching contributions and employee after-tax contributions (other than 

Roth contributions) must satisfy the Actual Contribution Percentage test (‘‘ACP test’’). The ACP 

test compares the employee and matching contributions made by highly compensated employees 

and non-highly compensated employees. Each eligible employee’s elective and matching contributions are expressed as a percentage of his or her compensation, and the resulting numbers 

are averaged for (i) all eligible highly compensated employees, and (ii) all other eligible employees (each resulting in a number, an ‘‘average ACP’’). The ACP test utilizes the same percentage 

testing criteria as the ADP test. Treas. Reg. § 1.401(m)-2. 
120 

37 A trust shall not constitute a qualified trust under 401(a) unless the plan of which such 

trust is a part satisfies the requirements of section 411 (relating to minimum vesting standards). 

See I.R.C. § 401(a)(7). 38See I.R.C. §§ 401(k)(12) and (13). 39 ERISA § 404. I.R.C. § 401(a) also requires that a qualified trust be organized for the exclusive benefit of employees and their beneficiaries. 40Sarah Holden & Michael Hadley, The Economics of Providing 401(k) Plans: Services, Fees, 

and Expenses, 2007, INVESTMENT COMPANY INST. PERSPECTIVE 17, no. 5, Dec. 2008. 41See Transamerica Center for Retirement Studies (2008), supra note 22 (finding that, regardless of company size, almost two-thirds of employers offer investment guidance or advice as part 

of their retirement plan; of those who do not currently offer guidance or advice, 18% of large 

employers and 7% of small employers plan to offer advice in the future); Deloitte Consulting 

LLP (2008), supra note 8 (51% of 401(k) sponsors surveyed offer employees access to individualized financial counseling or investment advice services (whether paid for by employees or by the 

employer)); Trends and Experience in 401(k) Plans 2007—Survey Highlights, Hewitt Associates 

LLC (June 2008) (40% of employers offer outside investment advisory services to employees). 42Profit Sharing/401(k) Council of America (Sept. 2008), supra note 27. 43 46% of plan participants consulted materials, tools, or services provided by their employers. 

John Sabelhaus, Michael Bogdan, & Sarah Holden, Defined Contribution Plan Distribution 

Choices at Retirement: A Survey of Employees Retiring Between 2002 and 2007, INVESTMENT 

COMPANY INST. RESEARCH SERIES, Fall 2008. 44See, e.g., Measuring the Effectiveness of Automatic Enrollment, Vanguard Center for Retirement Research (Dec. 2007) (stating that ‘‘[a]n analysis of about 50 plans adopting automatic 

enrollment confirms that the feature does improve participation rates, particularly among lowincome and younger employees’’); Deloitte Consulting LLP (2008), supra note 8 (stating that ‘‘[a] 

full 82% of survey respondents reported that auto-enrollment had increased participation 

rates’’); Building Futures Volume VIII: A Report on Corporate Defined Contribution Plans, Fidelity Investments (2007) (stating that in 2006 overall participation rates were 28% higher for 

automatic enrollment-eligible employees than for eligible employees in plans that did not offer 

automatic enrollment; overall, automatic enrollment eligible employees had an average participation rate of 81%). 45 A recently-surveyed panel of experts expects automatic enrollment to be offered in 73% of 

defined contribution plans by 2013. Prescience 2013: Expert Opinions on the Future of Retirement Plans, Diversified Investment Advisors (Nov. 2008). 46See The Vanguard Group, Inc. (2008), supra note 10. 47See Deloitte Consulting LLP (2008), supra note 8 (42% of surveyed employers have an automatic enrollment feature compared with 23% in last survey); Hewitt Associates LLC (June 

2008), supra note 41 (34% of surveyed employers have an automatic enrollment feature compared with 19% in 2005); Profit Sharing/401(k) Council of America (Sept. 2008), supra note 27 

(more than half of large plans use automatic enrollment and usage by small plans has doubled). 48See Deloitte Consulting LLP (2008), supra note 8 (stating that 26% of respondents reported 

they are considering adding an auto-enrollment feature). 49One leading provider has noted an upward shift since 2005 in the percentage of sponsors 

that use a default deferral rate of 3% or higher, and a corresponding decrease in the percentage 

of sponsors that use a default deferral rate of 1% or 2%. The Vanguard Group, Inc. (2008), supra 

note 10. 50See, e.g., Copeland (Oct. 2008), supra note 27 (noting that Hispanic workers were significantly less likely than both black and white workers to participate in a retirement plan); Jack 

VanDerhei & Craig Copeland, The Impact of PPA on Retirement Savings for 401(k) Participants, EMPLOYEE BENEFIT RESEARCH INST. ISSUE BRIEF, no. 318 (June 2008) (noting 

that industry studies have shown relatively low participation rates among young and low-income workers); Fidelity Investments (2007), supra note 44 (stating that, in 2006, among employees earning less than $20,000, the participation boost from automatic enrollment was approximately 50%); U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-08-8, PRIVATE PENSIONS: LOW 

DEFINED CONTRIBUTION PLAN SAVINGS MAY POSE CHALLENGES TO RETIREMENT 

SECURITY, ESPECIALLY FOR MANY LOW-INCOME WORKERS (Nov. 2007); Daniel Sorid, 

Employers Discover a Troubling Racial Split in 401(k) Plans, WASH. POST, Oct. 14, 2007, at 

F6. 51See Fidelity Investments (2007), supra note 44 (noting that, in 2006, the average deferral 

rate for participants in automatic escalation programs was 8.3%, as compared to 7.1% in 2005). 52See The Vanguard Group, Inc. (2008), supra note 10 (post-PPA, two-thirds of Vanguard’s 

automatic enrollment plans implemented automatic annual savings increases, compared with 

one-third of its plans in 2005); Hewitt Associates LLC (June 2008), supra note 41 (35% of employers offer automatic contribution escalation, compared with 9% of employers in 2005); Transamerica Center for Retirement Studies (2008), supra note 22 (26% of employers with automatic 

enrollment automatically increase the contribution rate based on their employees’ anniversary 

date of hire). 53 A leading provider states that ‘‘QDIA investments are often more broadly diversified than 

portfolios constructed by participants. Increased reliance on QDIA investments should enhance 

portfolio diversification.’’ The Vanguard Group, Inc. (2008), supra note 10. See also Fidelity Investments (2007), supra note 44 (where a lifecycle fund was the plan default option, overall participant asset allocation to that option was 19.4% in 2006; where the lifecycle fund was offered 

but not as the default option, overall participant asset allocation to that option was only 9.8%). 54Selection of Annuity Providers: Safe Harbor for Individual Account Plans, 73 Fed. Reg. 

58,447 (Oct. 7, 2008) (to be codified at 29 C.F.R. pt. 2550). 55See Holden & Hadley (Dec. 2008), supra note 40. 56One survey found that 92% of companies surveyed stated that their plan is intended to comply with ERISA section 404(c). Deloitte Consulting LLP (2008), supra note 8. 
121 

57 In 2006, the percentage of single investment option holders who invested in lifecycle 

funds—‘‘blended’’ investment options—was 24%. 42% of plan participants invested some portion 

of their assets in lifecycle funds. The average number of investment options held by participants 

was 3.8 options in 2006. Fidelity Investments (2007), supra note 44. 58 In 2007, 77% of employers offered lifecycle funds as an investment option, compared with 

63% in 2005. Hewitt Associates LLC (June 2008), supra note 41. See also Fidelity Investments 

(2007), supra note 44 (noting that, in 2006, 19% of participant assets were invested in a lifecycle 

fund in plans that offered the lifecycle fund as the default investment option, compared with 

10% of participant assets in plans that did not offer the lifecycle fund as the default investment 

option). 59See Target-Date Funds: Still the Right Rationale for Investors, The Vanguard Group, Inc. 

(Nov. 28, 2008) (noting that ‘‘even investors entering and in retirement need a significant equity 

allocation’’ and citing the 17- to 20-year life expectancy for retirees who are age 65). See also 

Fidelity Investments (2007), supra note 44 (‘‘In general * * * the average percentage of assets 

invested in equities decreased appropriately with age * * * to a low of 45% for those in their 

70s.’’). 60 I.R.C. § 401(a)(35); ERISA § 204(j). 61 Hewitt Associates LLC (June 2008), supra note 41. 62 Hewitt Associates LLC (June 2008), supra note 41. 63 Holden, VanDerhei, Alonso, & Copeland (Aug. 2007), supra note 15. See also Fidelity Investments (Jan. 28, 2009), supra note 3 (noting that, at year-end 2008, company stock made 

up approximately 10% of Fidelity’s overall assets in workplace savings accounts, compared with 

20% in early 2000). 64 Holden, VanDerhei, Alonso, & Copeland (Aug. 2007), supra note 15. See also William J. 

Wiatrowski, 401(k) Plans Move Away from Employer Stock as an Investment Vehicle, MONTHLY LAB. REV., Nov. 2008, at 3, 6 (stating that (i) in 2005, 23% of 401(k) participants permitted 

to choose their investments could pick company stock as an investment option for their employee 

contributions, compared to 63% in 1985, and (ii) in 2005, 14% of 401(k) participants permitted 

to choose their investments could pick company stock as an investment option for employer 

matching contributions, compared to 29% in 1985). 65See U.S. GOV’T ACCOUNTABILITY OFFICE, GAO/HEHS-98-2, 401(K) PENSION PLANS: 

LOAN PROVISIONS ENHANCE PARTICIPATION BUT MAY AFFECT INCOME SECURITY 

FOR SOME (Oct. 1997) (noting that plans that allow borrowing tend to have a somewhat higher 

proportion of employees participating than other plans). 66See I.R.C. §§ 72(p) and 401(k)(2)(B). 67See, e.g., Reid & Holden (Dec. 2008), supra note 1 (stating that, in 2008, 1.2% of defined 

contribution plan participants took a hardship withdrawal and 15% had a loan outstanding); Fidelity Investments (Jan. 28, 2009), supra note 3 (noting that only 2.2% of its participant base 

initiated a loan during the fourth quarter of 2008, compared with 2.8% during the fourth quarter of 2007, and 0.7% of its participant base took a hardship distribution during the fourth quarter of 2008, compared with 0.6% during the fourth quarter of 2007); Holden, VanDerhei, Alonso, 

& Copeland (Aug. 2007), supra note 15 (noting that most eligible participants do not take loans); 

Fidelity Investments (2007), supra note 44 (noting that only 20% of active participants had one 

or more loans outstanding at the end of 2006). Most participants who take loans repay them. 

See Transamerica Center for Retirement Studies (2008), supra note 22 (only 18% of participants 

have loans outstanding, and almost all participants repay their loans). 68 I.R.C. § 72(t). 69See I.R.C. § 402(c)(4). 70 In 2007, among participants eligible for a distribution due to a 

separation of service, 70% chose to preserve their retirement savings by rolling assets to an IRA 

or by remaining in their former employer’s plan, compared with only 60% in 2001. The Vanguard Group, Inc. (2008), supra note 10; How America Saves 2002: A Report on Vanguard Defined Contribution Plans, The Vanguard Group, Inc. (2002). 71See Sabelhaus, Bogdan, & Holden (Fall 2008), supra note 43 (stating that retirees make 

prudent choices at retirement regarding their defined contribution plan balances: 18% 

annuitized their entire balance, 6% elected to receive installment payments, 16% deferred distribution of their entire balance, 34% took a lump sum and reinvested the entire amount, 11% 

took a lump sum and reinvested part of the amount, 7% took a lump sum and spent all of the 

amount, and 9% elected multiple dispositions; additionally, only about 3% of accumulated defined contribution account assets were spent immediately at retirement). 72 Brady & Holden (Dec. 2008), supra note 1. 73 Id. It is highly doubtful that Americans would have saved at these levels in the absence 

of defined contribution plans given the powerful combination of pre-tax treatment, payroll deduction, automatic enrollment and matching contributions. 74See BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, FEDERAL RESERVE STATISTICAL RELEASE Z.1, FLOW OF FUNDS ACCOUNTS OF THE UNITED 

STATES (December 11, 2008); Brady & Holden (Dec. 2008), supra note 1. 
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[Questions for the record sent:] 

U.S. CONGRESS, 

[VIA EMAIL], 

Washington, DC, February 26, 2009. 

Mr. JACK BOGLE, Founder, 

Vanguard Group, Malvern, PA. 

DEAR MR. BOGLE: Thank you for testifying at the Tuesday, February 24, 2009, 

Committee on Education and Labor hearing on ‘‘Strengthening Worker Retirement 

Security.’’ 

One of our Committee Members had additional questions for which he would like 

written responses from you for the hearing record. 

Congressman Scott asks the following questions: 

1. Could you please comment on the long-term implications of tax-sheltered accounts? 
135 

2. Also, how are retirees being affected by the decision to either pay income taxes 

on funds once they are withdrawn from a tax-sheltered account or to pay capital 

gains taxes during the life of their investments? 

Please send your written response to the Committee on Education and Labor by 

COB on Tuesday, March 10, 2009—the date on which the hearing record will close. 

If you have any questions, please contact the committe. Once again, we greatly appreciate your testimony at this hearing. 

Sincerely, 

GEORGE MILLER, Chairman. 

U.S. CONGRESS, 

[VIA EMAIL], 

Washington, DC, February 26, 2009. 

Dr. DEAN BAKER, Co-Director, 

Center for Economic and Policy Research, Washington, DC. 

DEAR DR. BAKER: Thank you for testifying at the Tuesday, February 24, 2009, 

Committee on Education and Labor hearing on ‘‘Strengthening Worker Retirement 

Security.’’ 

One of our Committee Members had additional questions for which he would like 

written responses from you for the hearing record. 

Congressman Scott asks the following questions: 

1. Could you please comment on the long-term implications of tax-sheltered accounts? 

2. Also, how are retirees being affected by the decision to either pay income taxes 

on funds once they are withdrawn from a tax-sheltered account or to pay capital 

gains taxes during the life of their investments? 

Please send your written response to the Committee on Education and Labor by 

COB on Tuesday, March 10, 2009—the date on which the hearing record will close. 

If you have any questions, please contact the committe. Once again, we greatly appreciate your testimony at this hearing. 

Sincerely, 

GEORGE MILLER, Chairman. 

U.S. CONGRESS, 

[VIA EMAIL], 

Washington, DC, February 26, 2009. 

Dr. ALICIA H. MUNNELL, Director, 

Center for Retirement Research at Boston College, Chestnut Hill, MA. 

DEAR DR. MUNNELL: Thank you for testifying at the Tuesday, February 24, 2009, 

Committee on Education and Labor hearing on ‘‘Strengthening Worker Retirement 

Security.’’ 

One of our Committee Members had additional questions for which he would like 

written responses from you for the hearing record. 

Congressman Scott asks the following questions: 

1. Could you please comment on the long-term implications of tax-sheltered accounts? 

2. Also, how are retirees being affected by the decision to either pay income taxes 

on funds once they are withdrawn from a tax-sheltered account or to pay capital 

gains taxes during the life of their investments? 

Please send your written response to the Committee on Education and Labor by 

COB on Tuesday, March 10, 2009—the date on which the hearing record will close. 

If you have any questions, please contact the committe. Once again, we greatly appreciate your testimony at this hearing. 

Sincerely, 

GEORGE MILLER, Chairman. 
136 

U.S. CONGRESS, 

[VIA EMAIL], 

Washington, DC, February 26, 2009. 

Mr. PAUL SCHOTT STEVENS, President and CEO, 

Investment Company Institute, Washington, DC. 

DEAR MR. STEVENS: Thank you for testifying at the Tuesday, February 24, 2009, 

Committee on Education and Labor hearing on ‘‘Strengthening Worker Retirement 

Security.’’ 

One of our Committee Members had additional questions for which he would like 

written responses from you for the hearing record. 

Congressman Scott asks the following questions: 

1. Could you please comment on the long-term implications of tax-sheltered accounts? 

2. Also, how are retirees being affected by the decision to either pay income taxes 

on funds once they are withdrawn from a tax-sheltered account or to pay capital 

gains taxes during the life of their investments? 

Please send your written response to the Committee on Education and Labor by 

COB on Tuesday, March 10, 2009—the date on which the hearing record will close. 

If you have any questions, please contact the committe. Once again, we greatly appreciate your testimony at this hearing. 

Sincerely, 

GEORGE MILLER, Chairman. 

U.S. CONGRESS, 

[VIA EMAIL], 

Washington, DC, March 3, 2009. 

Mr. JACK BOGLE, Founder, 

Vanguard Group, Malvern, PA. 

DEAR MR. BOGLE: Thank you for testifying at the Tuesday, February 24, 2009, 

Committee on Education and Labor hearing on ‘‘Strengthening Worker Retirement 

Security.’’ 

Two Republican Committee members, Senior Ranking Member McKeon and Congresswoman McMorris Rodgers, have additional submitted questions for which they 

would like written responses from you for the hearing record. 

Senior Republican Member McKeon asks the following question: 

1. You testified before the Committee regarding the trading costs of mutual funds. 

As we heard at the hearing, approximately half of 401(k) assets are invested in mutual funds. The remainder is invested in other products, such as separately managed accounts, commingled trusts, insurance contracts, and exchange-traded funds. 

Given that research has demonstrated that a significant driver of trading costs is 

the cost of buying and selling securities to accommodate investor contributions and 

withdrawals, do not these investments incur the same types of trading costs as 

those incurred by mutual funds? Are you able to provide the Committee with data 

regarding the trading costs of these other investments? 

Congresswoman McMorris Rodgers asks the following questions: 

1. On page 15 of your testimony you outline a new defined contribution retirement 

system. Tell me if we had this system in place five years ago could such a board 

know about the home mortgage collapse? If we were discussing the safety of mortgage backed securities five years ago would you have testified that they are a high 

risk or low risk 

investment? Would it not follow that there are real risks even for what may be 

considered today to be a conservative investment? 

2. On page 15 of your testimony you state ‘‘For those who have the financial ability to save for retirement, there would be a single DC structure, dominated * * *’’ 

What about those who are unable to save for retirement? 

3. Are you proposing that 401(k)s, IRAs, the government TSP program, and any 

retirement saving plans with tax incentives be abolished for this single Federal retirement system under this Federal Retirement Board? 

4. If one can save for retirement, would the only way to do so that would get tax 

benefit would be through this new Federal Retirement System under the proposal 

you are advocating? 

5. It seems that you are making the argument that since some people can make 

the wrong investment decisions for retirement that no one should be able to have 

a real control over how their money should be invested in the future. Is that correct? 

6. You propose a Federal Retirement Board; I would imagine that such a board 

would have control over trillions of dollars for investment. What could be done to 
137 

ensure that these savings would not be invested to further any political agenda and 

only ensure a decent return for the potential retiree? 

Please send your written response to the Committee on Education and Labor by 

COB on Tuesday, March 10, 2009—the date on which the hearing record will close. 

If you have any questions, please contact the committe. Once again, we greatly appreciate your testimony at this hearing. 

Sincerely, 

GEORGE MILLER, Chairman. 

U.S. CONGRESS, 

[VIA EMAIL], 

Washington, DC, March 3, 2009. 

Dr. DEAN BAKER, Co-Director, 

Center for Economic and Policy Research, Washington, DC. 

DEAR DR. BAKER: Thank you for testifying at the Tuesday, February 24, 2009, 

Committee on Education and Labor hearing on ‘‘Strengthening Worker Retirement 

Security.’’ 

Republican Committee member, Congresswoman McMorris Rodgers, has submitted a question for which she would like a written response from you for the hearing record. 

Congresswoman McMorris Rodgers asks the following question: 

1. On page five of your testimony you describe your proposal modeled on the 

Thrift Savings Plan as voluntary and on page six give examples of the benefits that 

can be received. Dr. Munnell’s testimony describes how low the balances of 401(k)s 

are today for folks near retirement. Tell me how many people making the $30,000 

you give in your example do you believe will volunteer to have contributions taken 

out of their paychecks even if the government could afford a small match to the contribution? 

Please send your written response to the Committee on Education and Labor by 

COB on Tuesday, March 10, 2009—the date on which the hearing record will close. 

If you have any questions, please contact the committe. Once again, we greatly appreciate your testimony at this hearing. 

Sincerely, 

GEORGE MILLER, Chairman. 

U.S. CONGRESS, 

[VIA EMAIL], 

Washington, DC, March 3, 2009. 

Dr. ALICIA H. MUNNELL, Director, 

Center for Retirement Research at Boston College, Chestnut Hill, MA. 

DEAR DR. MUNNELL: Thank you for testifying at the Tuesday, February 24, 2009, 

Committee on Education and Labor hearing on ‘‘Strengthening Worker Retirement 

Security.’’ 

Republican Committee Member, Congresswoman McMorris Rodgers, has submitted questions for which she would like written responses from you for the hearing record. 

Congresswoman McMorris Rodgers asks the following questions: 

1. On page four of your testimony you advocate for an additional tier of retirement 

savings to support 20 percent of a retiree’s income. You suggest that this be modeled 

after the Thrift Savings Plan (TSP) that all federal workers, all Members of Congress and their staff are in. Furthermore you state ‘‘participation should be mandatory; participants should have no access to [the] money before retirement.’’ Could 

you tell the Committee where the money would come for these new accounts? Does 

the government fund it or does the individual make contributions? 

2. If it is the individual who makes the contributions, can you tell me where they 

are supposed to come up with this extra money? In 2006, the average per capita 

income in Washington State was $38,067. Please tell the Committee how much you 

believe should someone in Washington State making $38,067 be required to contribute? 

3. Or if it is the government, do you have any estimates for how much this will 

cost the taxpayer? What are your recommendations for Congress for where we 

should raise this funding? 

4. You advocate for a mandatory TSP program for all. Now I can tell you that 

my TSP account has taken a similar hit in the last year along the lines of what 

you describe for 401(k)s. If we could go back in time and make your proposal law 
138 

how would we be any better off today, other than folks having less money in their 

paychecks for these mandatory contributions? If yes, please quantify how much 

more money a contributor would have in an account invested in a Vanguard 401(k) 

S&P 500 fund and the government’s S&P 500 ‘‘C’’ fund? 

Please send your written response to the Committee on Education and Labor by 

COB on Tuesday, March 10, 2009—the date on which the hearing record will close. 

If you have any questions, please contact the committe. Once again, we greatly appreciate your testimony at this hearing. 

Sincerely, 

GEORGE MILLER, Chairman. 

[Responses to questions submitted follow:] 

Mr. Baker’s Responses to Questions for the Record 

Follow-up Questions from Congressman Robert C. ‘‘Bobby’’ Scott 

1. Could you please comment on the long-term implications of tax-sheltered accounts? 

There will be some change in the timing of tax receipts as a result of the accumulations in these accounts. The government is collecting somewhat less in revenue 

than would otherwise be the case at present because workers have the opportunity 

to shelter a portion of their income in these accounts. 

However, this is being reversed as the baby boom cohort is reaching ages at which 

they can withdraw funds from these accounts. This effect is not likely to be very 

large, primarily because the accumulations in these accounts has fallen sharply due 

to the recent decline in the stock market. It is unlikely that the withdrawals even 

in the years where the peak effects of the baby boomers’ retirement is being felt 

(2020-2035)will have very much impact on the overall budget. Of course, the net effect will depend on the extent of new tax exempt contributions. Insofar as policy encourages more retirement savings in future decades, then we will feel even less of 

a boost from the baby boomers drawing down of their accounts and paying taxes 

on their accumulations. 

2. Also, how are retirees being affected by the decision to either pay income taxes on funds once they are withdrawn from a tax-sheltered account 

or to pay capital gains taxes during the life of their investments? 

Retirees would obviously benefit from not having their withdrawals subject to tax. 

If this policy was made as a trade-off for paying capital gains on investments while 

they were tax sheltered, then savers would presumably opt for investments that 

paid interest or dividends rather than capital gains. This would allow their accumulations to increase during their working lifetimes without being taxed, and then 

allow them to withdraw their money tax free in retirement. I assume that this is 

not the intention of this switch, but it can be assumed that many savers will try 

to game any changes in order to get the most benefit from it. 

Mr. Bogle’s Responses to Questions for the Record 

From Senior Republican Member Howard P. ‘‘Buck’’ McKeon 

1. You testified before the Committee regarding the trading costs of mutual funds. 

As we heard at the hearing, approximately half of 401(k) assets are invested in mutual funds. The remainder is invested in other products, such as separately managed 

accounts, commingled trusts, insurance contracts, and exchange-traded funds. Given 

that research has demonstrated that a significant driver of trading costs is the cost 

of buying and selling securities to accommodate investor contributions and withdrawals, do not these investments incur the same types of trading costs as those incurred by mutual funds? Are you able to provide the Committee with data regarding 

the trading costs of these other investments? 

You are correct that approximately half of 401(k) assets are held in investment 

products other than mutual funds. While data on these other products are more difficult to find, it would be shocking to find that their turnover rates are materially 

different than the rates reported by actively managed mutual funds, primarily because many, if not most, asset managers manage these other accounts as well. 

Morningstar data, for instance, show that the average actively managed equity insurance fund has a turnover rate of 83 percent—not far from the 96 percent rate 

of the average actively managed equity mutual fund. (Unsurprisingly, because they 
139 

are index funds, the average exchange-traded fund has a much lower turnover rate 

of 37 percent.) 

I also agree that some portion of portfolio transactions (in all investment products) is attributable to contributions and withdrawals from investors. However, the 

record is crystal-clear that this activity plays only a minor role in the staggering 

degree of portfolio turnover we see today. 

Examining net cash flow to equity funds and common stock purchases by equity 

funds provides a crude if revealing estimate of just how much of this activity is attributable to investor cash flow. In 1991, net cash flow to equity funds of $40 billion 

accounted for only 9 percent of common stock purchases of $224 billion. By 2007, 

that share had fallen to 2.6 percent, as net cash flow of $93 billion was dwarfed 

by $3.6 trillion of stock purchases by equity funds. Just last year, stock purchases 

and sales by equity funds totaled $6.9 trillion, compared to average equity fund assets of $5.1 trillion. 

The simple fact is that portfolio turnover has risen dramatically. In my first twenty years in this business, annual turnover averaged 21 percent; in the last twenty 

years, it has averaged 91 percent. As I wrote in my statement, the problem with 

this stunning rise lies in this mathematical reality: investors as a group earn the 

market’s return, minus the expenses they incur. Thus, mutual funds trading stocks 

back and forth with one another at a furious rate, incurring transaction costs, does 

two things: 1) it reduces, by definition, the returns of investors as a group; 2) it enriches the intermediaries who earn commissions on each sale and purchase, expenses that detract, dollar for dollar, from the returns earned by mutual fund investors. 

From Congresswoman Cathy McMorris Rodgers 

1. On page 15 of your testimony you outline a new defined contribution retirement 

system. Tell me if we had this system in place five years ago could such a board 

know about the home mortgage collapse? If we were discussing the safety of mortgage 

backed securities five years ago would you have testified that they are a high risk 

or low risk investment? Would it not follow that there are real risks even for what 

may be considered today to be a conservative investment? 

The purpose of the Federal Retirement Board I described would not to be to predict what will happen in our financial markets and our economy, were that even 

possible. Nor would it be to protect plan participants from the inevitable bear markets they will encounter. Rather, its purpose would be to oversee our nation’s private retirement savings market, requiring, for instance, that employer-sponsored 

plans have the following features: • Automatic enrollment of all employees • Automatic annual increases of participant deferral rates • The use of age-appropriate target retirement funds as default investment options 

• Strict limits on loans and withdrawals during the participant’s career 

• The inclusion of low-cost, broadly diversified total stock and bond market index 

funds among the plan’s investment options 

• A low-cost annuity option for participants reaching retirement age 

• Full disclosure of all plan-related expenses 

Such a system would set plan participants, by default, on the path toward funding 

a secure retirement. As I noted in my statement, such a plan would be far from perfect, but would represent a vast improvement over the system we have in place 

today. 

2. On page 15 of your testimony you state ‘‘For those who have the financial ability 

to save for retirement, there would be a single DC structure, dominated * * *’’ What 

about those who are unable to save for retirement? 

As I wrote on page ten of my statement, the Federal Retirement Board I envision 

might create a public defined contribution plan. Using both tax incentives and 

matching contributions from the federal government, such a plan might enable investors who are currently unable to save for retirement to set aside a relatively 

nominal amount (perhaps $1,000 per year). Invested prudently, at low costs, and 

with strict limitations on access during the participant’s working years, such an account would provide a healthy supplement to Social Security in retirement. 

3. Are you proposing that 401(k)s, IRAs, the government TSP program, and any 

retirement saving plans with tax incentives be abolished for this single Federal retirement system under this Federal Retirement Board? 

I am not. Our current retirement system is an amalgam of plans—each with its 

own tax incentives, contribution limits, and eligibility requirements—that makes 

saving for retirement needlessly complex. What I suggest is simplifying this system, 
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creating one universal retirement plan structure, with one set of contribution limits 

and eligibility requirements. 

An example to clarify the benefits of such a change: In 2009 participants in 401(k) 

plans can contribute $16,500; individual retirement accounts (IRAs) limit contributions to $5,000. Thus a worker whose employer does not offer a retirement plan can 

save only fraction of the amount that an employee with access to an employer-sponsored plan can. Doing away with the needless and seemingly arbitrary distinctions 

between retirement plans would seem to be a painless and common sense step toward enhancing the ability of all workers to save for retirement. 

4. If one can save for retirement, would the only way to do so that would get tax 

benefit would be through this new Federal Retirement System under the proposal you 

are advocating? 

I believe I covered this in the answers above, but to summarize, the Federal Retirement Board I envision would simplify our nation’s retirement system, establishing a single plan structure with high limits on contributions and universal eligibility requirements. It would also establish certain minimum standards for all employer-sponsored plans, as described in my answer to the first question. 

5. It seems that you are making the argument that since some people can make 

the wrong investment decisions for retirement that no one should be able to have a 

real control over how their money should be invested in the future. Is that correct? 

That is not correct. I have never and would never take the position that no one 

should have any control over how their money should be invested, for retirement 

or otherwise. 

In examining our nation’s retirement system, there are a few undeniable facts: 

• Most workers do not participate in an employer-sponsored retirement plan 

• The median balance of those who do participate—approximately $15,000 currently—is, by any definition, insufficient to make even a moderate contribution to 

retirement funding 

• A large number of participants make decisions that are detrimental to their 

wealth: most cash out their plans when they change jobs; most contribute far too 

little to their plans; many have asset allocations that are highly questionable, either 

investing too heavily in stocks as they near retirement age, or investing too conservatively at a young age. 

If left unaddressed, the inadequacy of our nation’s retirement savings will become 

a crisis. The crisis, in fact, is not that these workers will be unable to retire, in that 

retirement implies a voluntary separation from the workforce. Rather, the crisis will 

be that a large segment of our population will have insufficient savings to maintain 

even a basic standard of living as they become unable—not unwilling—to work. 

Such a crisis would undoubtedly have enormous social and economic costs. 

The plan I have outlined would make relatively minor changes to our existing system, changes that would use the typical participant’s inertia in their favor by setting them, by default, on a path toward accumulating the assets necessary to support them in retirement. It would change our system from one based on the assumption that the average employee has the interest and ability to take charge of their 

retirement savings—assumptions that have left millions of workers behind—to one 

based on the assumption that the average employee does not posses those traits, 

and takes a number of decisions out of their hands by default. 

6. You propose a Federal Retirement Board; I would imagine that such a board 

would have control over trillions of dollars for investment. What could be done to 

ensure that these savings would not be invested to further any political agenda and 

only ensure a decent return for the potential retiree? 

The Federal Retirement Board I envision would neither control any investment 

dollars nor be charged with ensuring a decent return for potential retirees. Rather, 

such a Board would oversee a retirement system that, as I state on page ten of my 

statement, would remain in the private sector. As I indicated in my answer to the 

first question, such a Board would establish minimum standards for all employersponsored plans. 

Additionally, I would like to see the Federal Retirement Board do away with the 

confusing myriad of retirement savings plans we currently have and establish a universal retirement savings structure. I would also like such a Board to consider using 

tax incentives and nominal government-matching contributions to establish a private sector-based system that would cover the millions of employees who cannot currently afford to save for retirement. 
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ADDITIONAL FOLLOW-UP QUESTIONS

1. Could you please comment on the long-term implications of tax-sheltered accounts? 

It’s hard to overemphasize the benefits of investing in a tax-sheltered account. 

Aside from costs, deferring taxes represents the single best way to maximize portfolio growth over the long term. Morningstar data show that over the past 15 years, 

the average domestic equity fund has earned 5.2 percent annually on a pre-tax 

basis. After adjusting for taxes, the return of the average fund tumbles to 3.5 percent—a difference of 1.7 percent per year. 

Compounded over an investment lifetime of 40 years, $1 would grow by $6.60 at 

5.2 percent annually, while a 3.5 percent return would grow $1 by $2.96. In this 

scenario, the ability to defer taxes would provide the investor with a 123 percent 

increase in wealth. 

Amazingly, the mutual fund industry, by and large, seems to ignore the role of 

taxes. Managers turn their portfolios over at rates that often exceed 100 percent, 

generating tremendous tax consequences for shareholders who hold their funds in 

taxable accounts. Tax-deferred accounts, then, provide the protection our industry 

fails to. 

What is not clear is that tax-sheltered accounts actually add to national savings. 

A given portion of the money in such accounts would doubtless have been saved 

anyway, just as it was before the huge growth of defined contribution pension plans. 

2. Also, how are retirees being affected by the decision to either pay income taxes 

on funds once they are withdrawn from a tax-sheltered account or to pay capital 

gains taxes during the life of their investments? 

All else equal, most advisors would recommend that their clients hold a highly 

tax-efficient equity fund (such as a total stock market index fund) in a taxable account, and hold their bond allocation in a tax-deferred account. Such a strategy 

would allow the owner to benefit from the current lower tax rates on long-term capital gains and dividends, while deferring taxes on the interest income earned on 

their bond investments. 

But while such a practice might make sense in theory, it is of little use for the 

large segment of investors whose retirement accounts—containing stocks and 

bonds—represent the overwhelming majority, if not the entirety, of their investment 

portfolio. 

And while it is currently inefficient, from a tax perspective, for investors to pay 

income tax rates on earnings that would otherwise be taxed at now-lower long-term 

capital gains rates, a few facts remain: 

• Tax policy is ever-changing, and there is no guarantee that today’s comparatively low tax rates on long-term capital gains will continue into the future. 

• Investors who own equities in tax-deferred accounts are, by and large, able to 

control the timing and amount of their tax liability. Investors in actively managed 

equity funds, on the other hand, lack such control, and are at the mercy of the 

fund’s manager. 

• It is likely that a retiree taking a distribution from a tax-deferred retirement 

plan will be in a lower marginal tax bracket than he or she was prior to retirement, 

thus lowering the tax liability on any distributions. 

In sum, I doubt that a large segment of the investor population spends a great 

deal of time worrying structuring their portfolios to achieve the maximum tax efficiency, partly because of a lack of understanding, partly because it’s an ever-moving 

target, and partly because restrictions on access and tax considerations prevent assets from moving from tax-deferred accounts to taxable accounts and back again as 

tax policies change. 

Ms. Munnell’s Responses to Questions for the Record 

1. Could you please comment on the long-term implications of tax-sheltered accounts? 

Retirement saving conducted through typical employer plans—both defined benefit pension and 401(k) plans—is tax advantaged because the government taxes neither the original contribution nor the investment returns on those contributions 

until they are withdrawn as benefits at retirement. If the saving were done outside 

a plan, the individual would first be required to pay tax on their earnings and then 

on the returns from the portion of those earnings invested. Deferring taxes on the 

original contribution and on the investment earnings is equivalent to receiving an 

interest-free loan from the Treasury for the amount of taxes due, allowing the indi-
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1For taxpayers in the 10-percent and 15-percent tax bracket, the tax rate on capital gains 

is 5 percent. 

vidual to accumulate returns on money that they would otherwise have paid to the 

government. 

Tax benefits are designed to encourage retirement saving. Tax benefits are clearly 

not the only reason why employers sponsor retirement income plans. At the end of 

the nineteenth century, long before the enactment of the Federal Personal Income 

Tax in 1916, a handful of very large employers, such as governments, railroads, utilities, universities, and business corporations, had put in place defined benefit pension plans. They did so because the pension was a valuable tool for managing their 

workforce. 

The transition from defined benefit to 401(k) plans, which began in the early 

1980s, has enhanced the importance of the advantageous tax treatment of pensions. 

The 401(k) plan is essentially a savings account. It is much harder to argue that 

this form of pension, as opposed to traditional defined benefit plans, is a key personnel management tool to retain skilled workers and encourage the retirement of 

older employees whose productivity is less than their wage. Once vested, workers 

do not forfeit any benefits when they change employers. Nor do 401(k) plans contain 

the incentives to retire at specific ages that employers embed in defined benefit 

plans. The tax preferences afforded pensions, as a result, have become the major 

advantage of employer-sponsored 401(k) plans. 

The bottom line is that the tax advantage costs the government money because 

it defers the date when taxes are due. This deferral is equivalent to an interestfree loan. It is useful to question whether the foregone revenues are effective in 

achieving the goal of more retirement saving and whether the incentives are being 

offered to the right people. 

2. Also, how are retirees being affected by the decision to either pay income taxes 

on funds once they are withdrawn from a tax-sheltered account or to pay capital 

gains taxes during the life of their investments? 

One often hears the lament that people taking their money out of 401(k) plans 

are taxed at ordinary income rates, while those investing in equities outside of 

401(k) plans only have to pay capital gains rates. The lament implies that people 

with 401(k) plans are bearing a greater burden. This implication is not correct. 

Of course, the value of the preferred tax treatment depends on the taxation of investments outside of 401(k)s. And the taxation of capital gains and dividends has 

been reduced dramatically—particularly in recent years—making saving outside of 

401(k) plans relatively more attractive and lowering the value of the tax preference. 

But saving through a 401(k) is still advantageous from a tax perspective. 

The intuition is clearest when considering stock investments inside and outside 

of a Roth 401(k). (And although a conventional 401(k) and a Roth 401(k) may sound 

quite different, in fact they offer identical tax benefits.) Assume the tax rate on capital gains and dividends is set at zero. In both cases, the investor pays taxes on his 

earnings and puts after-tax money into an account. In the Roth 401(k) plan, he pays 

no taxes on capital gains as they accrue over time and takes his money out tax free 

at retirement. In the taxable account, he pays no tax on the dividends and capital 

gains as they accrue and takes the money out tax free at retirement. In short, the 

total tax paid under the Roth and the taxable account arrangement is identical. 

How close is the assumption of a ‘‘zero’’ tax rate to the real world? Table 1 summarizes the maximum tax rates applied to capital gains and dividends since 1988. 

The 1986 tax reform legislation set the tax rate on realized capital gains equal to 

that on ordinary income. The capital gains tax rate became preferential in 1991- 

1996, not because it changed but because the rates of taxation of ordinary income 

increased. Subsequently, Congress explicitly reduced the tax rate on capital gains 

to 20 percent effective in 1997 and to 15 percent effective in 2003.1 Dividends, with 

the exclusion of $100 or $200, traditionally have been taxed at the rate of ordinary 

income. That pattern was changed effective in 2003 when the rate on dividend taxation was reduced to 15 percent. 

TABLE 1.—TOP RATES ON ORDINARY INCOME, CAPITAL GAINS, AND DIVIDENDS, 1988–2005 

Year Top rate on ordinary income Top rate on ‘‘realized’’ capital gains Top rate on dividends 

1988-1990a ........................... 28 percent 28 percent 28 percent 

1991-1992 ............................. 31 percent 28 percent 31 percent 

1993-1996 ............................. 39.6 percent 28 percent 39.6 percent 

1997-2000 ............................. 39.6 percent 20 percent 39.6 percent 
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TABLE 1.—TOP RATES ON ORDINARY INCOME, CAPITAL GAINS, AND DIVIDENDS, 1988–2005— 

Continued 

Year Top rate on ordinary income Top rate on ‘‘realized’’ capital gains Top rate on dividends 

2001 ...................................... 39.1 percent 20 percent 39.1 percent 

2002 ...................................... 38.6 percent 20 percent 38.6 percent 

2003-2008 ............................. 35 percent 15 percent 15 percent 

a In 1988-1990, the top rate on regular income over $31,050 and under $75,050 was 28 percent. Income over $75,050 and under $155,780 

was taxed at 33 percent. And any income over $155,780 was taxed at 28 percent. 

Source: Citizens for Tax Justice (2004). 

Table 2 shows the difference in return between saving through a 401(k) plan and 

through a taxable account, taking all personal income taxes into account. The calculations are based on the following assumptions: 1) the worker earns $100 and 

wants to save the proceeds; 2) the proceeds are invested for 30 years in equities 

with a 6-percent rate—2 percent paid out in dividends and 4 percent in the appreciation of the value of the stock; 3) the worker is in the maximum tax bracket; and 

4) the worker does not trade the stock during his working years, so capital gains 

taxes are due only when gains are realized at retirement. The bottom line is that 

while the difference between saving inside and outside a 401(k) has narrowed, 

401(k) saving still produces higher after-tax returns. 

TABLE 2.—NET AFTER-TAX RETURNS FOR TAXPAYERS FACING MAXIMUM TAX RATE IN TAXABLE 

ACCOUNTa

[Percentage] 

Year 

Rate of return Difference between 401(k) and taxable 

account Taxable account Conventional/Roth 401(k) Plan 

1988-1990 ............................. 3.7 4.8 1.1 

1991-1992 ............................. 3.5 4.7 1.2 

1993-1996 ............................. 2.8 4.2 1.4 

1997-2000 ............................. 3.0 4.2 1.2 

2001 ...................................... 3.1 4.3 1.2 

2002 ...................................... 3.1 4.3 1.2 

2003-2008 ............................. 3.9 4.5 0.6 

a Assumes appreciation of 6 percent per year—2 percent from dividends and 4 percent from increase in the price of the equities. 

Source: Author’s calculations based on rates in Table 1 and assumptions described in the text. 

Ms. Munnell’s Additional Responses to Questions for the Record 

1. On page four of your testimony you advocated for an additional tier of retirement savings to support 20 percent of a retiree’s income. You suggested that this be 

modeled after the Thrift Savings Plan (TSP) that all federal workers, all Members 

of Congress and their staff are in. Furthermore you state ‘‘participation should be 

mandatory; participants should have no access to [the] money before retirement.’’ 

Could you tell the Committee where the money would come for these new accounts? 

Does the government fund it or does the individual make contributions? 

The intent of the proposal is to help insure that people after a lifetime in the 

labor market have an adequate income in retirement. Social Security is scheduled 

to pay benefits at age 62 to the typical worker, who earns roughly $40,000 at retirement, a benefit equal to 29 percent of previous earnings. That level of benefit will 

not be adequate for tomorrow’s workers to maintain their standard of living once 

they stop working. If the typical individual can hold off until Social Security’s Full 

Retirement Age (66 today rising to 67), the replacement rate increases to 41 percent. 

Even this higher level of replacement will not be enough. 

Increasingly, the only source of additional retirement income will come from employer-sponsored 401(k) plans. (People simply do not save on their own—with the 

exception of building up equity in their house.) As of 2007, median 401(k) holdings 

for individuals 55-64 were $60,000. After the collapse of the stock market, these balances average about $40,000. These balances will not provide enough supplementary 

income for people to maintain their standard of living over 20 years of retirement. 

Hence, tomorrow’s workers need an additional tier of retirement income. 

There is no free money. To have more in retirement, people will have to save more 

during their working life. Under my plan, the new tier would generally be funded 
144 

by the employee. The precise contribution rate depends on the expected rates of return earned on the invested assets, but assume a contribution rate of 5 percent. 

Middle-income individuals would be expected to make the contribution; low-income 

individuals would need help from the government. Again, nothing is free, so lowincome support would require additional tax revenues. 

While making people put aside more for retirement is unpleasant, the alternative—ending up with inadequate income in old age—could be disastrous. 

2. If it is the individual who makes the contributions, can you tell me where they 

are supposed to come up with the extra money? In 2006, the average per capita income in Washington State was $38,067. Please tell the Committee how much you believe should someone in Washington State making $38,067 be required to contribute? 

As suggested in the response above, the contribution rate might be, say, 5 percent. 

If you and others believe that people need less than an additional 20-percent replacement rate in retirement, the contribution rate could be lower. The key point 

is that if the typical person in Washington State does not save more, or work much 

longer than they do currently, they will be at risk in retirement. 

3. Or if it is the government, do you have any estimates for how much this will 

cost the taxpayer? What are your recommendations for Congress for where we should 

raise this funding? 

The cost to the government would be the contributions for low-income individuals. 

The precise cost would depend on how the government contribution was structured. 

If the government paid the full contribution for everyone earning less than $20,000, 

the annual cost would be about $25 billion. That should probably be viewed as an 

upper bound, since some type of matching arrangement would be more appropriate 

and would reduce the cost. 

4. You advocate for a mandatory TSP program for all. Now I can tell you that 

my TSP account had taken a similar hit in the last year along the lines of what you 

describe for 401(k)s. If we could go back in time and make your proposal law how 

would we be any better off today, other then folks having less money in their paychecks for these mandatory contributions? If yes, please quantify how much more 

money a contributor would have in an account invested in a Vanguard 401(k) S&P 

500 fund and the government S&P 500 ‘‘C’’ fund? 

As I indicated in my testimony, it would be nice if we could structure a second 

tier that provides some type of guarantee. The problem is that low rates of guarantee—2 percent or 3 percent inflation-adjusted—would have done nothing to protect workers over the last 84 years. The reason is that no retiring cohort would have 

earned less than 3.8 percent on a portfolio of equities, so low guarantees would 

never have kicked in. Only high guarantees—like 6 percent—would have had any 

impact, but standard finance theory says such guarantees are not possible, as long 

as the guarantor shares the market’s aversion to risk. But it would be nice to think 

a little more about guarantees and risk sharing. 

In the absence of an answer on how to provide guarantees, I conclude in my testimony that perhaps the best we can do is a tier modeled on the Federal Thrift Savings Plan. The advantage is that the investment options would include only index 

funds and the structure could be target date funds. This arrangement does not 

eliminate risk, but target date funds would at least insure that those approaching 

retirement do not have two-thirds their assets in equities as they approach retirement, as was the case in 401(k)s, and that index funds would keep costs down. 

My sense is that it may be possible to design a risk-sharing arrangement that 

would offer more security, but it would require careful thought. 

In any case, the message that I wanted to emphasize is that we need more organized retirement saving. A declining Social Security system and fragile 401(k) plans 

will not be enough for future retirees. We need a new tier of retirement saving, but 

I certainly do not have all the answers on how that tier should be designed. 
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[The statement of Mrs. Mcmorris Rodgers follows:] 

Prepared Statement of Hon. Cathy McMorris Rodgers, a Representative in 

Congress from the State of Washington 

Thank you Chairman Miller and Ranking Member McKeon for holding a hearing 

on such an important issue. I want to also thank our witnesses for being here today 

to share their perspectives of how the current economic crisis impacted on workers’ 

retirement savings. 

Right now, our economy faces challenges that many of us haven’t seen before in 

our lifetime. The current downturn in our financial markets has brought considerable uncertainty, particularly for those workers nearing retirement. A recently released poll said they worry they will have to work longer because the value of their 

retirement savings has declined. Particularly for those workers whose savings were 
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held in a risky portfolio and also for those who were not well-diversified, these are 

difficult times. 

America also faces a crisis with our current defined benefit pension system. As 

Rodger Lowenstein points out in his recent book ‘‘While America Aged,’’ today we 

have approximately 38 million senior citizens. It is predicted that in a generation 

this number will almost double to 72 million and that by 2030 one in five Americans 

will be over 65. Over 60 million Americans have been promised pensions; however 

this number is shrinking. Another concern is that over one third of the workforce 

has no savings for retirement or pension at all. Still another concern is that in the 

private sector the available pension plans are underfunded cumulatively by 350 billion dollars. Many employers, like IBM, Sears and Verizon have frozen their pension 

plans to keep their obligations from growing further. Unfortunately, some did not 

act quickly enough and have been forced to declare bankruptcy while others, like 

the U.S. auto industry teeter on the brink with only enormous government subsidies 

keeping them alive. 

The Pension Benefit Guarantee Corporation (PBGC) created by the ERISA law in 

1974 is currently responsible for the pensions of 1.3 million people whose pension 

plans have failed. With 94 of these plans failing in 2006 alone, the PBGC is deeply 

in the red with a taxpayer bailout increasingly likely. Even worse the states and 

localities that have promised pensions to first responders, teachers, transit workers 

and others are hundreds of billions of dollars behind on their promises to state pension funds. This is money owed by the taxpayer, and under the state constitutions 

this debt is required to be paid. Pensions can never be defaulted upon and this 

growing obligation has all the markings of the next financial crisis since these pensions are the longest enduring promises that exist. 

One General Motors retiree recently passed in 2006 at the age of 111. He had 

been collecting pension and retiree benefits for 48 years. When he started work in 

1926, there was little thought given to what they would pay him 80 years later. 

Pensions have always been the way to over promise future obligations that would 

have little effect on the company or municipality today. I find it ironic that the federal government was one of the first entities to get out of the pension business in 

1984 as part of a solution then to save the Social Security system. 

At the same time, millions of Americans rely on investments in planning for retirement. Because of this, a downturn in our financial markets can have a real impact on workers’ retirement security. An increasing number of workers rely on 

401(k)-type savings plans and a smaller share of workers participate in defined-benefit plans. Today, 630,000 private-sector defined contribution plans cover 75 million 

active and retired workers. In addition, there are more than 10 million employees 

of tax-exempt and governmental workers who participate in other plans such as 

403(b), 427 and the Thrift Savings Program (TSP). 

The financial crisis has also had an impact on defined contribution assets and this 

is a great concern to workers and retirees. Assets have declined from $2.9 trillion 

on June 30, 2008 to $2.4 trillion on December 31, 2008. The average 401(k) balance 

decreased 27 percent in 2008. However, 401(k) balances are still up 140 percent 

since January 1, 2000. If historical trends continue, plan participants who remain 

in the system can expect their plan assets to rebound significantly over time. A vast 

majority of these participants have remained committed to their defined contribution plans. 

Congress has made progress in this effort. For instance, we made sweeping reforms of defined contribution plans in the Pension Protection Act of 2006 including 

enhanced pension plan financial disclosure requirements to participants. However, 

much more remains to be done. 

I had the opportunity to review the testimony from our witnesses and I am greatly concerned that may of them are advocating for a new federal retirement system 

in addition to Social Security modeled on the federal TSP that covers all federal 

workers. It is alarming to see calls for such a dramatic change due to losses incurred under our current system. A government retirement savings board that may 

or may not require all employees to contribute will lower choices for workers and 

create a huge new bureaucracy in Washington, D.C. courtesy of the American worker. 

Employer-sponsored 401(k) plans play a vital role in the retirement security of 

tens of millions of Americans. Although the recent economic downturn represents 

an historic challenge, it should not be used as an excuse to tear down or radically 

overhaul the 401(k) retirement system. I believe Congress should approve legislation 

that gives plan sponsors (typically employers) greater incentives to offer pension 

plans that match individual’s contributions, offer many options for investment and 

give the individuals greater incentives to participate, not create a one size fits all 

government program with limited investment options and mandatory contributions. 
149 

I look forward to hearing the thoughts and perspectives of our witnesses regarding our nation’s defined contribution plans. 

[The statement of Ms. Titus follows:] 

Prepared Statement of Hon. Dina Titus, a Representative in Congress from 

the State of Nevada 

Chairman Miller, Ranking Chairman McKeon, esteemed witnesses, and fellow 

Committee members—thank you for coming together today to examine the challenges workers face as they prepare for retirement. I’m honored to be a Member of 

this Committee and I look forward to hearing the testimony of the esteemed panel 

of witnesses joining us. Panelists—thank you for your time and input today. 

We all know about the sad state of our nation’s economy. The people of Southern 

Nevada and the Third Congressional District have been particularly hard hit by the 

economic downturn. Unemployment is nearing 10 percent—the highest it has been 

in 25 years—and it is expected to get worse. Sadly, Nevada also leads the nation 

in foreclosure and bankruptcy rates. These numbers are a stark reminder that we 

must take action, and we must take action soon to create reforms that will help restore savings for Nevadans nearing retirement, that will help Nevadans save for a 

secure retirement, and that will safeguard Nevadans’ savings against any future 

economic crises that may befall us. 

We will hear today from witnesses that will address numerous problems in today’s 

defined contribution plans, and specifically 401(k) plans. Some of the witness testimony faults the market, some faults individuals for not saving adequately or for 

taking out hardship loans, some faults greed of financial management corporations, 

some faults companies that offer limited plans or cease to match employer contributions when times are tough. Ladies and gentleman of the Committee, and esteemed 

witnesses, I firmly believe that this cannot be a blame game. We must study in a 

bi-partisan fashion—bridging the gap between ‘‘labor’’ and ‘‘business’’—to find reforms that can benefit all parties. I do not see these as competing interests and I 

don’t believe anyone on this Committee, on the panel, or in Nevada can afford to 

see them as such. 

I am eager to hear the testimony of today’s witnesses and to continue discussions 

with my fellow Committee members on our best path forward as Members of Congress and the role we can play as Members of the House Education and Labor Committee. 

[A submission by Mr. Andrews follows:] 
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[Whereupon, at 12:33 p.m., the committee was adjourned.] 

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